<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MAXXAM GROUP HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3334 76-0518669
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
5847 SAN FELIPE, SUITE 2600 ANTHONY R. PIERNO
HOUSTON, TEXAS 77057-3010 VICE PRESIDENT AND GENERAL COUNSEL
(713) 975-7600 MAXXAM GROUP HOLDINGS INC.
(Address, including zip code, and telephone 5847 SAN FELIPE, SUITE 2600
number, including area code, of HOUSTON, TEXAS 77057-3010
registrant's principal executive offices) (713) 975-7600
(Name, address including zip code, and
telephone number, including area code,
of agent for service)
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SEE TABLE OF ADDITIONAL REGISTRANT
---------------------
Copies of all communications to:
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BERNARD L. BIRKEL HOWARD A. SOBEL, ESQ.
SENIOR CORPORATE COUNSEL KRAMER, LEVIN, NAFTALIS & FRANKEL
MAXXAM GROUP HOLDINGS INC. 919 THIRD AVENUE
5847 SAN FELIPE, SUITE 2600 NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77057 (212) 715-9100
(713) 267-3669
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the registration statement becomes effective and all other
conditions to the exchange offer described in the enclosed Prospectus have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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================================================================================================
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
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12% Series B Senior
Secured Notes due
2003.................. $130,000,000 100%(1) $130,000,000(1) $39,393.94
- ------------------------------------------------------------------------------------------------
Guarantees of the 12%
Series B Senior
Secured Notes due
2003.................. $130,000,000 -- (2) -- --
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(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate
consideration is payable for the Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
ADDITIONAL REGISTRANT
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<CAPTION>
PRIMARY
EXACT NAME STATE OR OTHER STANDARD ADDRESS, INCLUDING ZIP CODE, AND
OF REGISTRANT JURISDICTION OF INDUSTRIAL IRS EMPLOYER TELEPHONE NUMBER, INCLUDING AREA
AS SPECIFIED IN CORPORATION OR CLASSIFICATION IDENTIFICATION CODE, OF REGISTRANT'S PRINCIPAL
ITS CHARTER ORGANIZATION CODE NUMBER NUMBER EXECUTIVE OFFICES
- --------------- -------------- --------------- ------------ --------------------------------
<S> <C> <C> <C> <C>
MAXXAM Inc. Delaware 3334 95-2078752 5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
(713) 975-7600
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1996
PROSPECTUS
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ANY AND ALL OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
($130,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 12% SERIES B SENIOR SECURED NOTES DUE 2003
GUARANTEED BY MAXXAM INC.
The Exchange Offer (defined below) and withdrawal rights will expire at
5:00 p.m., New York City time, on , 1997 (as such date may be
extended, the "Expiration Date").
MAXXAM Group Holdings Inc. (the "Company") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of its 12% Series B Senior
Secured Notes due 2003 (the "New Notes") for each $1,000 in principal amount of
its outstanding 12% Senior Secured Notes due 2003 (the "Old Notes") (the Old
Notes and the New Notes are sometimes collectively referred to herein as the
"Notes") held by Eligible Holders (defined below). An aggregate principal amount
of $130.0 million of Old Notes is outstanding. See "The Exchange Offer." For
purposes of the Exchange Offer, "Eligible Holder" shall mean the registered
owner of any Old Notes that remain Registrable Securities (defined below) as
reflected on the records of First Bank National Association, as registrar for
the Old Notes (in such capacity, the "Registrar"), or any person whose Old Notes
are held of record by the depository of the Old Notes. For purposes of the
Exchange Offer, "Registrable Securities" means each Old Note until the earliest
to occur of (i) the date on which such Old Note has been exchanged for a New
Note in the Exchange Offer and is thereafter freely tradeable by the holder
thereof not an affiliate of the Company or MAXXAM Inc. ("MAXXAM" or the
"Guarantor"), (ii) the date on which such Old Note is registered under the
Securities Act of 1933, as amended (the "Securities Act"), and disposed of in
accordance with a registration statement, (iii) the date on which such Old Note
is distributed to the public pursuant to Rule 144 under the Securities Act, or
(iv) the date on which such Old Note shall have ceased to be outstanding.
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived by the Company, and to the terms and provisions of the Registration
Rights Agreement, dated as of December 23, 1996 (the "Registration Rights
Agreement") among the Company, the Guarantor (which has guaranteed the Old Notes
and has agreed to guarantee the New Notes), and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation (collectively, the "Initial
Purchasers"). The Old Notes may be tendered only in multiples of $1,000. See
"The Exchange Offer."
(continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 19 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1997.
<PAGE> 4
The Old Notes were issued in a transaction (the "Offering") pursuant to
which the Company issued an aggregate of $130,000,000 principal amount of the
Old Notes to the Initial Purchasers on December 23, 1996 (the "Closing Date")
pursuant to a purchase agreement, dated December 17, 1996 (the "Purchase
Agreement"), among the Company, the Guarantor, and the Initial Purchasers. The
Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act and certain other exemptions under the Securities Act.
The Company, the Guarantor, and the Initial Purchasers also entered into the
Registration Rights Agreement, pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
The Old Notes were issued under an indenture, dated as of December 23, 1996
(the "Indenture"), among the Company, the Guarantor, and First Bank National
Association, as trustee (in such capacity, the "Trustee"). The New Notes will be
issued under the Indenture as it relates to the New Notes. The form and terms of
the New Notes will be identical in all material respects to the form and terms
of the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of New Notes will
not be entitled to Additional Interest (as defined in the Registration Rights
Agreement) otherwise payable under the terms of the Registration Rights
Agreement in respect of Old Notes held by such holders during any period in
which a Registration Default (as defined in the Registration Rights Agreement)
is continuing, and (iii) holders of New Notes will not be, and upon the
consummation of the Exchange Offer Eligible Holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the delivery by the Company to the Registrar under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of
Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description of
New Notes."
The New Notes will bear interest at a rate equal to 12% per annum from and
including their date of issuance. Interest on the New Notes is payable
semi-annually on February 1 and August 1 of each year (each, an "Interest
Payment Date"). Eligible Holders whose Old Notes are accepted for exchange will
have the right to receive interest accrued thereon from the date of their
original issuance or the last Interest Payment Date, as applicable, to, but not
including, the date of issuance of the New Notes, such interest to be payable
with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue on the day prior to the issuance of
the New Notes. The New Notes will mature on August 1, 2003. See "Description of
New Notes."
The New Notes are redeemable at the option of the Company, in whole or in
part, on or after August 1, 2000, at the redemption prices set forth herein,
plus accrued and unpaid interest, or at the Make-Whole Price (as defined
herein), plus accrued and unpaid interest, if redeemed prior to August 1, 2000.
Upon the first occurrence of a Change of Control (as defined herein), the
Company will be required to make an offer to purchase from each holder all or
any part of the holder's Notes for which a Change of Control Purchase Notice (as
defined herein) shall have been delivered as provided in the Indenture and not
withdrawn at 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. See "Description of New
Notes -- Offer to Purchase the Notes."
The New Notes will be secured by a pledge of all of the capital stock of
the Company's wholly owned subsidiary, MAXXAM Group Inc. ("MGI"). In addition,
concurrently with the consummation of the Offering, MAXXAM transferred to the
Company 27,938,250 shares of the common stock (the "Kaiser Shares") of Kaiser
Aluminum Corporation ("Kaiser"). The Kaiser Shares are pledged to secure the
$225.7 million aggregate principal amount of public indebtedness of MGI. The
Company has agreed that if any Kaiser Shares are released as security for MGI's
public indebtedness by reason of early retirement of such indebtedness (other
than by reason of a refinancing of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the Notes. The Notes will be
guaranteed on a senior unsecured basis by MAXXAM.
2
<PAGE> 5
The New Notes will be senior indebtedness of the Company and will rank pari
passu in right and priority of payment with any future senior indebtedness of
the Company. The Notes will be effectively subordinated to liabilities of the
Company's subsidiaries, including trade payables. As of September 30, 1996, the
outstanding indebtedness of such subsidiaries was $772.9 million and the other
outstanding liabilities of such subsidiaries, including trade payables and
accrued expenses, was $65.0 million. See "Risk Factors -- Substantial
Indebtedness; Structural Subordination and Asset Encumbrances -- The Company"
and "Description of New Notes." See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Company -- Financial
Condition and Investing and Financing Activities." The Indenture permits the
Company and its subsidiaries to incur additional Indebtedness, including
additional secured Indebtedness, subject to certain limitations. See
"Description of New Notes."
Based on positions of the staff of the Securities and Exchange Commission
(the "Commission") enunciated in Morgan Stanley & Co., Incorporated (available
June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988),
and interpreted in the Commission's letters to Shearman & Sterling (available
July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and
similar no-action or interpretive letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange Offer to an Eligible
Holder in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such Eligible Holder, other than as set forth below, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Eligible Holder is not an affiliate of the
Company or the Guarantor within the meaning of Rule 405 under the Securities
Act, is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Eligible Holders wishing to
accept the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that acquired Old Notes
directly from the Company and that receives New Notes for its own account
pursuant to the Exchange Offer must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction (unless an exemption from registration is otherwise
available). See "The Exchange Offer -- Resales of the New Notes." Each
broker-dealer that receives New Notes in exchange for Old Notes that were
acquired by such broker-dealer as a result of market-making or other trading
activities must, in connection with any resale of such New Notes, comply with
the prospectus delivery requirements of the Securities Act and must acknowledge
that it will deliver a prospectus in connection with any such resale. The
Company has agreed that, for a period of 180 days after the effective date of
this Prospectus, it will make this Prospectus, as it may be amended or
supplemented from time to time, available for use by any broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities.
As of , 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of $
million aggregate principal amount of the Old Notes and held such Old Notes for
of its participants. The Company believes that no such participant is an
affiliate (as such term is defined in Rule 405 of the Securities Act) of the
Company or the Guarantor. There has previously been only a limited secondary
market, and no public market, for the Old Notes. The Old Notes are eligible for
trading in the Private Offering, Resales and Trading through Automatic Linkages
("PORTAL") market. There can be no assurance as to the liquidity of the trading
market for either the New Notes or the Old Notes. The New Notes constitute
securities for which there is no established trading market, and the Company
does not currently intend to list the New Notes on any securities exchange. If
such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors -- Absence of Public Market for the New
Notes."
3
<PAGE> 6
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear all
expenses incident to the Company's consummation of the Exchange Offer and
compliance with the Registration Rights Agreement.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
$124,750,000 aggregate principal amount of the Old Notes were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, DTC, as the initial depository with respect to
the Old Notes (in such capacity, the "Depository"). The Global Old Note is
registered in the name of Cede, as nominee of DTC, and beneficial interests in
the Global Old Note are shown on, and transfers thereof are effected only
through, records maintained by the Depository and its participants. The use of
the Global Old Note to represent certain of the Old Notes permits the
Depository's participants, and anyone holding a beneficial interest in an Old
Note registered in the name of such a participant, to transfer interests in the
Old Notes electronically in accordance with the Depository's established
procedures without the need to transfer a physical certificate. Except as
provided below, the New Notes will also be issued initially as a note in global
form (the "Global New Note", and together with the Global Old Note, the "Global
Notes") and deposited with, or on behalf of, the Depository. Notwithstanding the
foregoing, holders of Old Notes that are held, at any time, by a person that is
not a qualified institutional buyer under Rule 144A under the Securities Act (a
"Qualified Institutional Buyer"), and any Eligible Holder that is not a
Qualified Institutional Buyer that exchanges Old Notes in the Exchange Offer,
will receive the New Notes in certificated form and is not, and will not be,
able to trade such securities through the Depository unless the New Notes are
resold to a Qualified Institutional Buyer. After the initial issuance of the
Global New Note, New Notes in certificated form will be issued in exchange for a
holder's proportionate interest in the Global New Note only as set forth in the
Indenture.
TABLE OF CONTENTS
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PAGE
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Available Information................................................................. 5
Prospectus Summary.................................................................... 6
Risk Factors.......................................................................... 19
The Exchange Offer.................................................................... 33
Capitalization of the Company......................................................... 41
Capitalization of MAXXAM.............................................................. 42
Selected Historical and Pro Forma Consolidated Financial Data of the Company.......... 44
Selected Historical and Pro Forma Consolidated Financial Data of MAXXAM............... 50
Management's Discussion and Analysis of Financial Condition and Results of Operations
of the Company...................................................................... 56
Management's Discussion and Analysis of Financial Condition and Results of Operations
of MAXXAM........................................................................... 67
Business of the Company............................................................... 86
Business of MAXXAM.................................................................... 97
Legal Proceedings..................................................................... 116
Management............................................................................ 125
Executive Compensation................................................................ 131
Certain Transactions.................................................................. 138
Description of Principal Indebtedness................................................. 142
Description of New Notes.............................................................. 150
Certain Federal Income Tax Consequences............................................... 190
Plan of Distribution.................................................................. 192
Incorporation of Certain Documents By Reference....................................... 193
Legal Matters......................................................................... 193
Experts............................................................................... 193
Index to Consolidated Financial Statements............................................ F-1
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4
<PAGE> 7
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
(the "Registration Statement") with respect to the securities offered by this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Each statement made in this Prospectus referring to a document filed as an
exhibit or schedule to the Registration Statement is not necessarily complete
and is qualified in its entirety by reference to the exhibit or schedule for a
complete statement of its terms and conditions. In addition, the Guarantor is
subject to, and upon the effectiveness of the Registration Statement the Company
will become subject to, the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, the Company and the Guarantor will file periodic reports and other
information with the Commission relating to its business, financial statements
and other matters. Any interested parties may inspect and/or copy the
Registration Statement, its schedules and exhibits, and the periodic reports and
other information filed in connection therewith, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained at prescribed rates by
addressing written requests for such copies to the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a site on
the World Wide Web, the address of which is http://www.sec.gov, that contains
reports, proxy and information statements and other information regarding
issuers, such as the Company, that file electronically with the Commission. The
obligations of the Company under the Exchange Act to file periodic reports and
other information with the Commission may, to the extent that such obligations
arise from the registration of the New Notes, be suspended, under certain
circumstances, if the New Notes are held of record by fewer than 300 holders at
the beginning of any fiscal year and are not listed on a national securities
exchange. The Company and the Guarantor have agreed that, whether or not it is
required to do so by the rules and regulations of the Commission, for so long as
any of the Notes remain outstanding, they will (i) furnish to the holders of the
Notes and file with the Commission (unless the Commission will not accept such a
filing) all annual, quarterly and current reports that the Company is or would
be required to file with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act and (ii) furnish to the holders of the Notes and to securities
analysts and prospective investors, upon request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE COMPANY,
INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR
BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT
CHARGE FROM MAXXAM GROUP HOLDINGS INC., 5847 SAN FELIPE, SUITE 2600, HOUSTON,
TEXAS 77057, ATTENTION: GENERAL COUNSEL. TELEPHONE REQUESTS MAY BE DIRECTED TO
THE COMPANY AT (713) 975-7600. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY , 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
5
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the Notes thereto) appearing
elsewhere in this Prospectus. MAXXAM Group Holdings Inc. (the "Company") is a
newly formed holding company and a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM"). The Company engages in forest products operations through its wholly
owned subsidiary, MAXXAM Group Inc. ("MGI"), and MGI's wholly owned
subsidiaries, The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber
Co., Inc. ("Britt"). Pacific Lumber's principal wholly owned subsidiaries are
Scotia Pacific Holding Company ("Scotia Pacific") and Salmon Creek Corporation
("Salmon Creek"). As used herein, the terms "Company," "MGI," "MAXXAM," "Pacific
Lumber" and "Kaiser" refer to the respective companies and their subsidiaries,
unless otherwise noted or the context otherwise requires. For example, reference
to "MAXXAM" in connection with the guaranty of the Notes, the issuance, pledge
of and payments with respect to the Intercompany Note (as defined herein), and
the transfer of Kaiser shares to the Company are references to MAXXAM Inc.
THE COMPANY
The Company's operations are conducted principally by Pacific Lumber and
Britt. Pacific Lumber, which has been in continuous operation for over 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. Pacific Lumber is the largest producer of redwood lumber in
the world, including upper grade redwood lumber. Pacific Lumber owns and manages
approximately 192,000 acres of commercial timberlands and other real property in
northern California. Approximately 75% of Pacific Lumber's timber consists of
redwood, with the balance consisting substantially of Douglas fir. Redwood
lumber, particularly in the upper (defect-free) grades, is a premium wood
product that generally commands higher prices and has been more resistant to
cyclical demand and price fluctuations than most other lumber products. Old
growth redwood trees (trees which have been growing for approximately 200 years
or longer) currently constitute a principal source of upper grade redwood
lumber. The industry-wide inventory of commercially harvestable old growth
redwood trees has been decreasing due to the expansion of national and state
redwood parks, increasing restrictions on timber harvesting on publicly and
privately owned lands and harvesting by the industry. The Company believes that
Pacific Lumber owns more old growth redwood timber than any of its competitors.
Pacific Lumber's timberlands are virtually contiguous, are located in close
proximity to its mills and contain an extensive network of roads. These factors
significantly reduce harvesting costs and facilitate the implementation of
Pacific Lumber's forest management techniques, including its extensive program
of replanting redwood and Douglas-fir seedlings to supplement natural forest
regeneration. Pacific Lumber believes that its timberlands have an average
volume per acre (on a gross board foot basis) approximately twice that of the
composite average volume of all other privately and publicly held timber
properties in California. Pacific Lumber believes that the relatively large
amount of timber on its timberlands is principally attributable to the species
mix, favorable soil and climate conditions along the northern California coast
and the forest stewardship techniques which Pacific Lumber has historically
employed.
Pacific Lumber owns and operates four sawmills which are supplied almost
entirely by Pacific Lumber's own timberlands and contain highly mechanized log
and lumber milling systems. In addition, Pacific Lumber owns and operates 34
kilns which dry certain of its lumber, a finishing plant, an end and edge glue
facility which manufactures longer, wider and more valuable lumber from short
and narrow boards, a lumber remanufacturing facility, and a highly modernized
cogeneration power plant which is fueled almost entirely by residue from Pacific
Lumber's milling and production operations and generates a substantial portion
of Pacific Lumber's energy requirements. In a continuing effort to increase the
efficiency of its operations, improve the yield from harvested trees and enhance
the value of its lumber products, Pacific Lumber has invested over $132.3
million in capital expenditures during the past ten years.
On September 28, 1996, Pacific Lumber and MAXXAM (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for acquisition by the United States
6
<PAGE> 9
of America ("United States") and the State of California ("California") of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands consist of
"virgin old growth" timberlands (those which have never been harvested). The
Headwaters Agreement provides that the Headwaters Timberlands would be
transferred to the government in exchange for (a) property or other
consideration (possibly including cash) from the United States and California
having an aggregate fair market value of $300 million and (b) approximately
7,775 acres of adjacent timberlands (the "Elk River Timberlands") to be acquired
by the United States and California from a third party. The Pacific Lumber
Parties have agreed not to conduct logging operations (including salvage
logging) on the Headwaters Timberlands while the Headwaters Agreement is in
effect.
The Headwaters Agreement requires the United States and/or California to
furnish Pacific Lumber a list of property interests owned or controlled by the
United States and/or California with a good faith estimated fair market value
equal to or in excess of $300 million which are available and acceptable to
Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity counties in California, and surplus acreage next to a federal building
in Laguna Niguel, California. The California list contained a variety of
properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available," as legislative action would be required for the exchange of certain
of the properties.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon a multi-species habitat conservation plan ("Multi-Species HCP") which
is to cover all of Pacific Lumber's existing timber properties and any timber
properties acquired as a result of the Headwaters Agreement. The agreement also
requires expedited processing by California of a Sustained Yield Plan ("SYP").
The Company expects that receipt of the Permit would expedite the approval time
and reduce the costs associated with its timber harvesting plans ("THPs"). The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions over a ten month period. The parties to the
Headwaters Agreement are working to satisfy these conditions; however, there can
be no assurance that the Headwaters Agreement will be consummated. See "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- The Headwaters Agreement"
and "Business of the Company -- Pacific Lumber Operations -- Headwaters
Agreement."
Britt is a leading producer of redwood fence stock and is located in
Arcata, California, approximately 45 miles north of Pacific Lumber's
headquarters in Scotia, California. Britt manufactures a variety of fencing and
decking products principally from small diameter redwood logs purchased from
Pacific Lumber and other timberland owners. Britt processes logs at its mill
into a variety of different fencing products, including "dog-eared" 1" X 6"
fence stock, 4" X 4" fence posts and other fencing products. In 1995, Britt sold
approximately 78 million board feet of lumber products to approximately 100
different customers in California, Arizona, Colorado and Hawaii. Britt's
manufacturing operations are conducted in a 46,000 square foot mill constructed
in 1980.
Concurrent with the consummation of the Offering on December 23, 1996,
MAXXAM transferred to the Company 27,938,250 shares (the "Kaiser Shares") of the
common stock of Kaiser. The Kaiser Shares are pledged to secure the $225.7
million aggregate principal amount of public indebtedness of MGI, consisting of
$100.0 million principal amount of 11 1/2% Senior Secured Notes (the "MGI Senior
Notes") and $125.7 million principal amount of 12 1/2% Senior Secured Discount
Notes (the "MGI Discount Notes," and together with the MGI Senior Notes, the
"MGI Notes"). The Company has agreed that if any Kaiser Shares are released as
security for MGI's public indebtedness by reason of early retirement of such
indebtedness (other
7
<PAGE> 10
than by reason of a refinancing of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the Notes. See "Description of New
Notes -- Security."
The Company beneficially owns 34.7% of Kaiser's common equity (after giving
pro forma effect to the conversion of each share of Kaiser's outstanding 8.255%
PRIDES, Convertible Preferred Stock, par value $.05 per share (the "PRIDES"),
into one share of Kaiser's common stock (the "Kaiser Common Stock")). The
Company does not expect its investment in the Kaiser Shares will provide a
significant source of cash dividends during the next several years.
The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz
and a wholly owned subsidiary of Federated Development Company ("Federated")
collectively own 61.1% of the aggregate voting power of MAXXAM. Mr. Hurwitz is
Chairman of the Board, Chief Executive Officer and President of the Company and
of MAXXAM. Federated is a New York business trust of which Mr. Hurwitz is
Chairman of the Board and Chief Executive Officer and which is wholly owned by
Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof.
The principal executive offices of the Company are located at 5847 San
Felipe, Suite 2600, Houston, Texas 77057. The telephone number of the Company is
(713) 975-7600.
THE GUARANTOR
The New Notes will be guaranteed on a senior unsecured basis by MAXXAM.
MAXXAM engages in aluminum operations through Kaiser, forest products operations
through the Company, real estate operations principally through various wholly
owned subsidiaries, and other operations, including operation of the Sam Houston
Race Park horse racing facility in Houston, Texas.
KAISER ALUMINUM
Concurrently with the consummation of the Offering, MAXXAM transferred to
the Company 27,938,250 shares of the common stock of Kaiser. As a result of the
contribution of the Kaiser Shares, MAXXAM owns directly 22,061,750 shares of
Kaiser Common Stock, and as a result of the Company's ownership of the Kaiser
Shares, MAXXAM beneficially owns 62% of Kaiser's common equity (after giving pro
forma effect to the conversion of each share of Kaiser's outstanding PRIDES,
into one share of Kaiser's Common Stock). Kaiser accounts for a substantial
portion of MAXXAM's revenues and operating results.
Kaiser, through its wholly owned subsidiary Kaiser Aluminum & Chemical
Corporation ("KACC"), engages in all principal aspects of the aluminum
industry -- the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum and the manufacture of fabricated and semi-fabricated aluminum
products. Kaiser is one of the largest U.S. aluminum producers in terms of
primary smelting capacity and is the Western world's second largest
producer/seller of alumina, accounting for approximately 7% of the Western
world's alumina capacity in 1995. Kaiser's production levels of alumina and
primary aluminum exceed its internal processing needs, which allows it to be a
major net seller of alumina (approximately 2.0 million tons in 1995 or 72% of
production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of
production). See "Business of MAXXAM -- Aluminum Operations." Kaiser is also a
major domestic supplier of fabricated aluminum products, shipping approximately
6% of domestic tonnage of such products in 1995 (approximately 368,200 tons).
REAL ESTATE AND OTHER OPERATIONS
MAXXAM, principally through its wholly owned subsidiaries, is also engaged
in the business of residential and commercial real estate investment and
development, primarily in Arizona, California, Texas and Puerto Rico. MAXXAM
derives revenue and cash flow from the sale of its real estate properties,
rental income and payments received on real estate receivables. As of September
30, 1996, MAXXAM's real estate subsidiaries had a combined net worth of
approximately $122.3 million. See "Business of MAXXAM -- Real Estate and Other
Operations." MAXXAM, through wholly owned subsidiaries, is also the general
partner of
8
<PAGE> 11
and holds directly or indirectly approximately 78.8% of the equity in Sam
Houston Race Park, Ltd. ("SHRP, Ltd."). SHRP, Ltd. is the owner and operator of
Sam Houston Race Park, a Texas Class 1 horse racing facility located in Houston,
Texas. See "Business of MAXXAM -- Real Estate and Other Operations -- Sam
Houston Race Park."
CORPORATE ORGANIZATION
Organizational Chart showing that (i) Maxxam Inc. owns 100% of its real
estate operations, 78.8% of Sam Houston Race Park, Ltd., 100% of the Company,
and 27.3% of Kaiser, (ii) the Company owns 100% of MGI, (iii) MGI owns 100% of
Britt and Pacific Lumber, and (iv) Pacific Lumber owns 100% of Scotia Pacific
and Salmon Creek.
- ---------------
(1) Reflects fully diluted ownership assuming conversion of each share of
Kaiser's PRIDES into one share of Kaiser Common Sock. Also gives effect to
the transfer of the Kaiser Shares to the Company by MAXXAM.
ISSUANCE OF THE OLD NOTES
$130.0 million principal amount of the Old Notes were sold by the Company
to the Initial Purchasers on the Closing Date pursuant to a Purchase Agreement.
The Initial Purchasers subsequently resold the Old Notes in reliance on Rule
144A under the Securities Act and other available exemptions under the
Securities Act. The Company also entered into the Registration Rights Agreement,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes. Under the Registration Rights
Agreement, the Company agreed, for the benefit of the holders of the Old Notes
that it would, at its own cost, (i) within 60 days after the Closing Date file a
registration statement with the Commission with respect to a registered offer to
exchange the Old Notes for New Notes, which will have terms substantially
identical to the Old Notes and (ii) use its reasonable best efforts to cause
such registration statement to be declared effective under the Securities Act
within 150 days after the Closing Date. If the Company is unable to effect such
an Exchange Offer or if for any other reason the Exchange Offer is not
consummated within 180 days after the Closing Date, the Company is obligated
under the Registration Rights Agreement to file a shelf registration statement
with the Commission covering resales of the Old Notes. If the Company defaults
with respect to its obligations under the Registration Rights Agreement (as
defined herein, a "Registration Default"), the Company will be obligated to pay
Additional Interest of 0.25% per annum for the first 90-day period and an
additional 0.25% per annum for each subsequent 90-day period (up to a maximum
aggregate of
9
<PAGE> 12
1.00% per annum) until all Registration Defaults have been cured. The Exchange
Offer is intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement with respect to the Old Notes. See "-- The
Exchange Offer" and "The Exchange Offer -- Purpose and Effect."
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering, upon the terms and subject
to the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal
amount of the New Notes, for each $1,000 in
principal amount of the outstanding Old Notes (the
"Exchange Offer"). As of the date of this
Prospectus, $130.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all Notes.
As of , 1997, there were registered
holders of the Old Notes, including Cede which held
$ million aggregate principal amount of the Old
Notes for of its participants. See "The Exchange
Offer -- Terms of the Exchange Offer."
Expiration Date............ 5:00 p.m., New York City time, on ,
1997, as the same may be extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer
is subject to the condition that it does not
violate any applicable law or interpretation of the
staff of the Commission. See "The Exchange
Offer -- Conditions of the Exchange Offer."
Termination of Certain
Rights................... Pursuant to the Registration Rights Agreement and
the Old Notes, Eligible Holders of Old Notes (i)
have rights to receive the Additional Interest and
(ii) have certain rights intended for the holders
of unregistered securities. "Additional Interest"
means the increase in the interest rate borne by
Registrable Securities during the period in which a
Registration Default is continuing pursuant to the
terms of the Registration Rights Agreement (in
general, one-quarter of one percent (0.25%) per
annum for the first 90-day period immediately after
the first such Registration Default and an
additional one-quarter of one percent (0.25%) per
annum for each subsequent 90-day period until all
Registration Defaults have been cured, provided
that the aggregate increase in such interest rate
shall not exceed one percent (1.00%) per annum).
Holders of New Notes generally will not be and,
upon consummation of the Exchange Offer, Eligible
Holders of Old Notes will generally no longer be,
entitled to (i) the right to receive the Additional
Interest, except in certain limited circumstances,
and (ii) certain other rights under the
Registration Rights Agreement intended for holders
of unregistered securities. See "The Exchange
Offer -- Termination of Certain Rights" and
"-- Procedures for Tendering Old Notes."
Accrued Interest on the Old
Notes.................... The New Notes will bear interest at a rate equal to
12% per annum from and including their date of
issuance. Eligible Holders whose Old Notes are
accepted for exchange will have the right to
receive interest accrued thereon from the date of
original issuance of the Old Notes or the last
Interest Payment Date, as applicable, to, but not
including, the date of
10
<PAGE> 13
issuance of the New Notes, such interest to be
payable with the first interest payment on the New
Notes. Interest on the Old Notes accepted for
exchange, which accrues at the rate of 12% per
annum, will cease to accrue on the day prior to the
issuance of the New Notes.
Procedures for Tendering
Old Notes................ Unless a tender of Old Notes is effected pursuant
to the procedures for book-entry transfer as
provided herein, each Eligible Holder desiring to
accept the Exchange Offer must complete and sign
the Letter of Transmittal, have the signature
thereon guaranteed if required by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company
and who wishes to tender Old Notes in the Exchange
Offer, should instruct such entity or person to
promptly tender on such Beneficial Owner's behalf.
See "The Exchange Offer -- Procedures for Tendering
Old Notes." By tendering Old Notes for exchange,
each registered holder will represent to the
Company that, among other things, (i) neither the
Eligible Holder nor any Beneficial Owner is an
affiliate of the Company or the Guarantor within
the meaning of Rule 405 under the Securities Act,
(ii) any New Notes to be received by the Eligible
Holder or any Beneficial Owner are being acquired
in the ordinary course of business, (iii) neither
the Eligible Holder nor any Beneficial Owner has an
arrangement or understanding with any person to
participate in the distribution of the New Notes,
and (iv) if the Eligible Holder or Beneficial
Owner, as applicable, is a broker-dealer that
acquired Old Notes for its own account as a result
of market making or other trading activities, such
Eligible Holder or Beneficial Owner must comply
with the prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the New Notes acquired by
such person and must agree that it will deliver a
prospectus in connection with any such resale.
Guaranteed Delivery
Procedures............... Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely
basis), may tender their Old Notes according to the
guaranteed delivery procedures set forth in the
Letter of Transmittal. See "The Exchange Offer --
Procedures for Tendering Old Notes -- Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes.... Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the
11
<PAGE> 14
Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. See
"The Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
Certain Federal Income Tax
Considerations........... Generally, the exchange pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Consequences -- The Exchange Offer."
The Exchange Agent......... First Bank National Association is the exchange
agent (in such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- The
Exchange Agent; Assistance."
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. See "The Exchange Offer -- Solicitation of
Tenders; Fees and Expenses."
Resales of the New Notes... Based on positions of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings
Corporation (available May 13, 1988), and
interpreted in the Commission's letters to Shearman
& Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14,
1993), and similar no-action or interpretive
letters issued to third parties, the Company
believes that New Notes issued pursuant to the
Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by such Eligible Holder
(other than (i) a broker-dealer who purchased the
Old Notes directly from the Company for resale
pursuant to Rule 144A under the Securities Act or
any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the
Company or the Guarantor within the meaning of Rule
405 under the Securities Act), without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that the
Eligible Holder is acquiring the New Notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. If any Eligible
Holder acquires New Notes in the Exchange Offer for
the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder
cannot rely on the position of the staff of the
Commission set forth in the above no-action and
interpretive letters and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with a
secondary resale transaction, unless an exemption
from registration is otherwise available. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old
Notes were acquired by such broker as a result of
market making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer -- Resales of the New Notes"
and "Plan of Distribution."
12
<PAGE> 15
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes, except
in limited circumstances, will not be entitled to Additional Interest, and (iii)
holders of the New Notes will not be, and upon consummation of the Exchange
Offer, Eligible Holders of the Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for the holders of
unregistered securities. See "Exchange Offer -- Termination of Certain Rights."
The Exchange Offer shall be deemed consummated upon the occurrence of the
delivery by the Company to the Registrar under the Indenture of New Notes in the
same aggregate principal amount as the aggregate principal amount of Old Notes
that are validly tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for
Tendering Old Notes" and "Description of New Notes."
Maturity................... August 1, 2003.
Interest................... 12% payable in cash semi-annually in arrears, from
, 1997, calculated on the basis of a
360-day year consisting of twelve 30-day months.
Interest Payment Dates..... February 1 and August 1, commencing on February 1,
1997.
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, on or after
August 1, 2000, upon not less than 15 or more than
60 days notice, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the redemption date, or at the Make-Whole Price,
plus accrued and unpaid interest, if any, to the
redemption date if redeemed prior to August 1,
2000. In addition, until August 1, 2000, upon any
Public Equity Offering (as defined) with respect to
the Company or MGI, the New Notes may be redeemed
at the option of the Company, in part, with cash in
the amount of the proceeds of such Public Equity
Offering, at the Call Price (110% of the principal
amount of the New Notes), plus accrued and unpaid
interest, if any, to the redemption date; provided,
however, that after any such redemption the
aggregate principal amount of Notes outstanding
must be equal to at least 65% of such principal
amount upon consummation of the Offering. See
"Description of New Notes -- Optional Redemption."
MAXXAM Guaranty............ The New Notes will be guaranteed on a senior
unsecured basis by MAXXAM.
Security................... The Notes will be secured by a pledge of all of the
capital stock of MGI. In addition, concurrently
with the closing of the Offering, MAXXAM
transferred to the Company the 27,938,250 Kaiser
Shares. The Kaiser Shares are pledged to secure the
$225.7 million aggregate principal amount of the
MGI Notes. The Company has agreed that if any
Kaiser Shares are released as security for the MGI
Notes by reason of early retirement of such
indebtedness (other than by reason of a refinancing
of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the
Notes.
Ranking.................... The New Notes will be senior indebtedness of the
Company and will rank pari passu in right and
priority of payment with any future senior
indebtedness of the Company. The New Notes will be
effectively subordinated to liabilities of the
Company's subsidiaries, including trade payables.
As of September 30, 1996, the outstanding
indebtedness of such subsidiaries was $772.9
million and the other outstanding liabilities
13
<PAGE> 16
of such subsidiaries, including trade payables and
accrued expenses, were $65.0 million. The Company's
consolidated cash flow has historically been
utilized in substantial part to service the
indebtedness of these subsidiaries, and the Company
therefore expects that its ability to service the
New Notes will be largely dependent on cash
interest payments received from MAXXAM pursuant to
an intercompany note payable by MAXXAM to the
Company (the "Intercompany Note") and, to a
considerably lesser extent, dividends received from
MGI and capital contributions from MAXXAM. See
"Risk Factors -- Ability to Service Indebtedness."
Change of Control.......... In the event of a Change of Control (as defined),
the holders of the New Notes will have the right to
require the Company to purchase their New Notes at
a price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. See
"Description of New Notes -- Change of Control."
Principal Covenants........ The Indenture restricts, among other things, the
ability of the Company and its Restricted
Subsidiaries (as defined) to (a) incur additional
Indebtedness (as defined), (b) grant Liens (as
defined) on their assets, (c) make distributions on
and repurchases of the Company's capital stock, (d)
redeem or repurchase Indebtedness of the Company
subordinate to the New Notes which is scheduled to
mature subsequent to the final maturity date of the
New Notes, (e) make Investments (as defined) in
Unrestricted Subsidiaries (as defined), (f) engage
in transactions with Affiliates (as defined) of the
Company, (g) make Asset Sales (as defined), (h)
merge or consolidate with, or transfer all or
substantially all of its assets to, another entity,
(i) make Restricted Investments (as defined), and
(j) issue or otherwise dispose of any Capital Stock
or Redeemable Stock (each as defined) or assets of
any Restricted Subsidiary, except under certain
circumstances.
Absence of a Public Market
for the New Notes.......... The New Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchasers
have advised the Company that they currently intend
to make a market in the New Notes. However, none of
the Initial Purchasers is obligated to do so, and
any market making with respect to the New Notes may
be discontinued at any time without notice. The
Company does not intend to apply for listing of the
New Notes on a securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE
"RISK FACTORS."
14
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following summary of historical consolidated financial data for the nine
months ended September 30, 1996 and 1995 and each of the years in the three year
period ended December 31, 1995 are derived from the Selected Historical and Pro
Forma Consolidated Financial Data of the Company appearing elsewhere in this
Prospectus, and should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company" appearing elsewhere herein. The Company was formed on
November 4, 1996 to facilitate the offering of the Old Notes. Subsequent to its
formation, the Company received from MAXXAM, as a capital contribution, 100% of
the capital stock of MGI. Concurrently with the consummation of the Offering,
MAXXAM transferred the Kaiser Shares to the Company as an additional capital
contribution. The contribution of MGI's capital stock has been accounted for as
a reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to all of MGI's historical
operations. The contribution of the Kaiser Shares has been reflected in the
following consolidated financial information of the Company as if such
contribution occurred as of January 1, 1991 (the beginning of the earliest
period presented) at MAXXAM's historical cost using the equity method of
accounting. The following historical consolidated financial information of the
Company reflects the historical operating results of MGI, the equity in earnings
(losses) attributable to its investment in the Kaiser Shares and MAXXAM's
purchase accounting adjustments attributable to MGI's timber and depreciable
assets for each period presented. The purchase accounting adjustments arose from
MAXXAM's acquisition of MGI in May 1988. The following consolidated pro forma
operating data for the nine months ended September 30, 1996 and for the year
ended December 31, 1995 give effect to the issuance of the Old Notes and the
loan of the net proceeds therefrom to MAXXAM (collectively the "Transactions")
as if they occurred on January 1, 1995. The consolidated pro forma balance sheet
data gives effect to the Transactions as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ -------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Historical Operating Data:
Net sales................................................................. $199.6 $180.9 $242.6 $249.6 $ 233.4
Cost of sales (exclusive of depreciation and depletion)................... 114.6 96.0 127.1 129.6 134.6
Gross profit.............................................................. 85.0 84.9 115.5 120.0 98.8
Selling, general and administrative expenses.............................. 11.3 12.2 15.9 16.3 20.1
Depreciation and depletion................................................ 20.2 19.0 25.3 24.7 24.5
Operating income.......................................................... 53.4 53.7 74.3 79.1 54.2
Investment, interest and other income (expense)........................... 8.4 6.8 9.4 14.4 10.0
Interest expense.......................................................... 58.4 58.2 77.8 77.4 81.9
Interest expense, net of earnings on invested cash, cash equivalents and
marketable securities................................................... 51.2 51.9 69.0 72.6 72.5
Income (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of changes in accounting
principles.............................................................. 3.4 2.3 5.9 16.1 (17.7)
Income (loss) from continuing operations before extraordinary items and
cumulative effect of changes in accounting principles................... 4.5 1.6 4.2 19.2 (286.1)
Net income (loss)(1)(2)(3)................................................ 4.5 1.6 4.2 4.4 (538.0)
Other Historical Data:
Fixed charge coverage deficiency.......................................... -- -- -- -- 17.7
Ratio of earnings to fixed charges........................................ 1.1x 1.0x 1.1x 1.2x --
Capital expenditures...................................................... 9.0 6.6 9.9 11.3 11.1
Summary of cash flow information(4):
Cash provided by operating activities................................... 30.7 18.0 25.4 34.9 19.3
Cash provided (used) by investing activities............................ (8.9) (4.1) (7.3) (10.2) (22.6)
Cash provided (used) by financing activities............................ (17.1) (18.5) (18.2) (15.2) (12.0)
EBITDA(4)(5).............................................................. 73.6 72.7 99.6 103.8 78.7
Pro Forma Operating Data(6):
Investment, interest and other income (expense)........................... 18.7 23.2
Interest expense.......................................................... 70.7 94.2
Interest expense, net of earnings on the Intercompany Note, invested cash,
cash equivalents and marketable securities.............................. 53.2 71.6
Income from continuing operations before income taxes, extraordinary items
and cumulative effect of changes in accounting principles............... 1.3 3.2
Ratio of earnings to fixed charges........................................ 1.0x 1.0x
EBITDA(4)(5).............................................................. 73.5 99.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
---------------------- ---------------------------
ACTUAL PRO FORMA(6) 1995 1994 1993
------- ------------ ------- ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities(7)............. $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8
Working capital................................................. 126.6 126.6 126.2 104.5 83.9
Total assets.................................................... 713.3 843.3 740.9 744.5 743.0
Total indebtedness.............................................. 772.9 902.9 778.5 782.5 788.4
Stockholder's deficit(3)........................................ (125.9) (125.9) (126.5) (125.9) (130.3)
</TABLE>
(footnotes are on the following page)
15
<PAGE> 18
- ---------------
(1) In August 1993, MGI executed a number of transactions (the "Forest Products
Group Formation") pursuant to which substantially all of its non-forest
products related assets and liabilities were transferred to MAXXAM. The
Forest Products Group Formation required MGI to restate its financial
statements to present the historical results of operations relating to the
net assets transferred to MAXXAM in a manner similar to that which would be
presented as if MGI had discontinued the operations relating to such net
assets. See Note 1 to the Company's Audited Consolidated Financial
Statements for a description of the transactions referred to as the Forest
Products Group Formation.
(2) The extraordinary loss for 1994 of $14.9 million (net of tax benefits of
$6.3 million), relates to the settlement of litigation which arose from
MGI's acquisition of Pacific Lumber in February 1986. The extraordinary loss
for 1993 of $31.5 million (net of tax benefits of $16.2 million), arose from
the early extinguishment of debt for both MGI and Pacific Lumber. See Notes
6 and 10 to the Company's Audited Consolidated Financial Statements for a
description of these transactions.
(3) As of January 1, 1993, the Company adopted SFAS 109 and SFAS 106 as more
fully described in Notes 7 and 8 to the Company's Audited Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased results of operations by
$22.8 million. The cumulative effect of the change in accounting principle
for the adoption of SFAS 106 reduced results of operations by $2.3 million,
net of related benefits for income taxes of $1.6 million. The accounting
standards had no effect on the Company's cash outlays for postretirement and
postemployment benefits, nor did the cumulative effect of the changes in
accounting principles affect the Company's compliance with its debt
covenants. The Company recorded aggregate charges of $204.8 million, net of
related income taxes and minority interests as of January 1, 1993,
attributable to the net assets transferred to MAXXAM resulting from the
adoption of the new accounting standards described above. Additionally, as a
result of the contribution of the Kaiser Shares, the Company incurred
charges of $240.9 million as of January 1, 1993 in respect of its equity
investment in Kaiser resulting from the adoption of the new accounting
standards. See Notes 2 and 5 to the Company's Audited Consolidated Financial
Statements.
(4) Reference is made to the Statement of Cash Flows contained in the Company's
Consolidated Financial Statements contained elsewhere in this Prospectus for
a complete presentation of cash flows from operating, investing and
financing activities prepared in accordance with generally accepted
accounting principles. EBITDA means operating income plus depreciation and
depletion. EBITDA is not intended to represent cash flow, an alternative to
net income or any other measure of performance in accordance with generally
accepted accounting principles; it is included because the Company believes
that certain investors find it a useful tool for measuring the ability of
the Company to service its consolidated debt. This definition of EBITDA
differs from the definition of EBITDA contained in the Indenture. See
"Description of New Notes -- Certain Definitions."
(5) Because the Company operates through subsidiaries and limits exist on
dividends payable by such subsidiaries to the Company, earnings and cash
flows of such subsidiaries would generally not be available to service the
Company's obligations on the Notes. The Company's ability to service its
indebtedness will be largely dependent on cash interest payments received
from MAXXAM pursuant to the terms of the Intercompany Note and, to a
considerably lesser extent, dividends received from MGI and capital
contributions from MAXXAM. See "Risk Factors -- Ability to Service
Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Financial Condition
and Investing and Financing Activities."
(6) The pro forma information for the Company reflects the issuance of $130.0
million aggregate principal amount of Notes, and that the net proceeds from
the Offering of approximately $125.0 million were loaned to MAXXAM. MAXXAM
will use approximately $42.6 million of the proceeds of such loan to repay
approximately $17.6 million aggregate principal amount of its 12 1/2%
Subordinated Debentures due December 15, 1999 (the "Subordinated
Debentures") and approximately $25.0 million aggregate principal amount of
its 14% Senior Subordinated Reset Notes due May 20, 2000 (the "Reset Notes,"
and together with the Subordinated Debentures, the "Old MAXXAM Notes"),
together with accrued interest thereon through the date of redemption and
the remaining net proceeds will be used for general corporate purposes
including possible repurchases of its common stock. The pro forma operating
data for: (a) the nine months ended September 30, 1996 reflects (i) the
incurrence of $11.7 million of interest expense on the Notes and $0.6
million of amortization related to deferred financing costs associated with
the Offering, and (ii) interest income from the Intercompany Note of $10.3
million, and (b) the year ended December 31, 1995 reflects (i) the
incurrence of $15.6 million of interest expense on the Notes and $0.8
million of amortization related to deferred financing costs associated with
the Offering, and (ii) interest income from the Intercompany Note of $13.8
million. The pro forma balance sheet data reflects that: (a) the net
proceeds from the Offering of approximately $125.0 million was loaned to
MAXXAM pursuant to the Intercompany Note, and (b) the $5.0 million of
estimated costs associated with the Offering will be capitalized.
(7) Cash, cash equivalents and marketable securities of the Company at September
30, 1996 includes the following amounts held by each of the following
subsidiaries of the Company in the amounts indicated: MGI -- $72.5 million;
Scotia Pacific -- $6.8 million; Pacific Lumber -- $5.5 million; and
Britt -- $0.2 million. Further, Scotia Pacific had $30.5 million of
restricted cash deposits held for the benefit of its 7.95% Timber
Collateralized Notes (the "Timber Notes") which is classified as a
noncurrent asset in the Company's Consolidated Financial Statements. Cash
held by the Company's subsidiaries is generally not available to service the
obligations on the Notes. See "Risk Factors -- Ability to Service
Indebtedness."
16
<PAGE> 19
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF MAXXAM
The following summary historical consolidated financial data for the nine
months ended September 30, 1996 and 1995 and each of the years in the three year
period ended December 31, 1995 are derived from the Selected Historical and Pro
Forma Consolidated Financial Data of MAXXAM appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of MAXXAM and the Notes thereto (including the unconsolidated Parent
only, condensed financial information of MAXXAM) and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM" appearing elsewhere herein. The following consolidated pro
forma operating data for the nine months ended September 30, 1996 and for the
year ended December 31, 1995 give effect to the Transactions and KACC's issuance
of $175.0 million aggregate principal amount of 10 7/8% Senior Notes due 2006
(the "KACC New Senior Notes") and $50.0 million aggregate principal amount of
10 7/8% Series C Senior Notes due 2006 ("KACC New Series C Senior Notes" and
together with the KACC New Senior Notes, the "KACC New Notes") and the
application of the net proceeds therefrom, as if they occurred on January 1,
1995. The consolidated pro forma balance sheet data gives effect to the
Transactions and the issuance of the KACC New Notes and the application of the
net proceeds therefrom as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Historical Operating Data:
Net sales.................................................. $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1
Cost of sales (exclusive of depreciation and depletion).... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6
Gross profit............................................... 354.6 418.4 574.3 297.8 243.5
Selling, general and administrative expenses............... 152.9 140.5 195.8 169.4 183.0
Depreciation and depletion................................. 92.9 91.0 120.9 121.1 120.8
Operating income (loss).................................... 108.8 186.9 257.6 7.3 (96.1)
Investment, interest and other income (expense)............ 35.1 8.7 18.2 (2.2) 69.8
Interest expense........................................... 135.5 136.1 181.3 176.9 185.1
Interest expense, net of earnings on invested cash, cash
equivalents and marketable securities.................... 125.1 125.1 166.3 166.5 174.0
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles.................................... 8.4 59.5 94.5 (171.8) (211.4)
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles............... 28.0 35.1 57.5 (116.7) (131.9)
Net income (loss)(1)(2).................................... 28.0 35.1 57.5 (122.1) (600.2)
Other Historical Data:
Fixed charge coverage deficiency........................... 5.6 -- -- 213.1 225.8
Ratio of earnings to fixed charges......................... -- 1.1x 1.2x -- --
Capital expenditures....................................... 108.0 54.9 97.7 89.3 86.2
Summary of cash flow information(3):
Cash provided by operating activities.................... 13.5 53.0 137.9 4.5 52.1
Cash provided (used) by investing activities............. (75.4) (39.7) (75.4) (67.9) 44.6
Cash provided (used) by financing activities............. 78.2 2.3 (42.9) 64.1 (94.7)
EBITDA(3)(4)............................................... 201.7 277.9 378.5 128.4 24.7
Pro Forma Operating Data(5):
Investment, interest and other income (expense)............ 35.1 16.3
Interest expense........................................... 157.6 211.7
Interest expense, net of earnings on invested cash, cash
equivalent and marketable securities..................... 147.2 196.7
Income (loss) from continuing operations before
extraordinary item and cumulative effect of changes in
accounting principles.................................... (13.7) 62.2
Fixed charge coverage deficiency........................... 27.7 --
Ratio of earnings to fixed charges......................... -- 1.1x
EBITDA(3)(4)............................................... 201.7 378.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
------------------------- ---------------------------------
ACTUAL PRO FORMA(5) 1995 1994 1993
-------- ------------ -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities(6).... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6
Working capital........................................ 624.5 794.0 546.8 413.5 414.3
Total assets........................................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0
Long-term debt, less current portion................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9
Minority interests..................................... 217.9 217.9 223.2 344.3 224.3
Total stockholders' equity (deficit)(2)................ (55.2) (55.8) (83.8) (275.3) (167.9)
</TABLE>
(footnotes are on the following page)
17
<PAGE> 20
- ---------------
(1) The extraordinary loss for 1994 of $5.4 million (net of tax benefits of $2.9
million), arose from the early extinguishment of debt for Kaiser. The
extraordinary loss for 1993 of $50.6 million (net of minority interests and
tax benefits of $2.8 million and $27.5 million, respectively), arose from
the early extinguishment of debt for Kaiser, MGI and Pacific Lumber. See
Note 4 to MAXXAM's Audited Consolidated Financial Statements for a
description of these transactions.
(2) As of January 1, 1993, MAXXAM adopted SFAS 109, SFAS 106 and SFAS 112 as
more fully described in Notes 5 and 6 to MAXXAM's Audited 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. These accounting standards
had no effect on MAXXAM's cash outlays for postretirement and postemployment
benefits, nor does the cumulative effect of the changes in accounting
principles affect MAXXAM's compliance with its existing debt covenants.
(3) Reference is made to the Statement of Cash Flows contained in MAXXAM's
Consolidated Financial Statements contained elsewhere in this Prospectus for
a complete presentation of cash flows from operating, investing and
financing activities prepared in accordance with generally accepted
accounting principles. EBITDA means operating income plus depreciation and
depletion. EBITDA is not intended to represent cash flow, an alternative to
net income or any other measure of performance in accordance with generally
accepted accounting principles; it is included because MAXXAM believes that
certain investors find it a useful tool for measuring the ability to service
debt. This definition of EBITDA differs from the definition of EBITDA
contained in the Indenture. See "Description of New Notes -- Certain
Definitions."
(4) Because MAXXAM operates through subsidiaries and limits exist on dividends
payable by the Company and Kaiser to MAXXAM, earnings and cash flows of such
subsidiaries will generally not be available to service MAXXAM's obligations
on the Intercompany Note and its guaranty. See "Risk Factors -- Ability to
Service Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of MAXXAM -- Financial Condition and
Investing and Financing Activities." See MAXXAM's parent only financial
statements included elsewhere herein.
(5) The pro forma information for MAXXAM reflects: (a) the issuance of $130.0
million aggregate principal amount of the Notes, (b) the net proceeds from
the Offering, of approximately $125.0 million, were loaned to MAXXAM, and
(c) the issuance of Kaiser's $225.0 million aggregate principal amount of
the KACC New Notes and the application of the net proceeds therefrom. MAXXAM
will use approximately $42.6 million of the proceeds of the loan from the
Company to repay the Old MAXXAM Notes, together with accrued interest
thereon through the date of redemption and the remaining net proceeds will
be used for general corporate purposes including possible repurchases of
MAXXAM's common stock. The pro forma operating data for: (a) the nine months
ended September 30, 1996 reflects, (i) the incurrence of $11.7 million of
interest expense on the Notes and $0.7 million of amortization related to
deferred financing costs associated with the Notes and the consent fee paid
by MAXXAM in connection with an amendment to the Indenture governing the MGI
Notes, which amendment was related to the Offering (the "Consent Fee"), (ii)
the incurrence of $18.4 million of interest expense and $0.5 million of
amortization related to deferred financing costs associated with the KACC
New Notes, (iii) the elimination of $4.4 million of interest expense
associated with the Old MAXXAM Notes, and (iv) the elimination of $4.8
million of interest expense associated with the reduction of outstanding
borrowings under the 1994 KACC Credit Agreement (as amended, the "1994 KACC
Credit Agreement"), and (b) for the year ended December 31, 1995 reflects
(i) the incurrence of $15.6 million of interest expense on the Notes and
$0.9 million of amortization related to deferred financing costs associated
with the Notes and the Consent Fee paid by MAXXAM, (ii) the incurrence of
$24.3 million of interest expense and $0.7 million of amortization related
to deferred financing costs associated with the KACC New Notes, (iii) the
elimination of $6.0 million of interest expense associated with the Old
MAXXAM Notes, (iv) the elimination of $5.1 million of interest expense
associated with the reduction of outstanding borrowing under the 1994 KACC
Credit Agreement and, (v) the write off of $1.7 million of debt discount and
$0.2 million of unamortized deferred financing costs attributable to the Old
MAXXAM Notes. The pro forma balance sheet data reflects that: (a) the
estimated net proceeds from the Offering, of approximately $125.0 million,
were loaned to MAXXAM pursuant to the Intercompany Note and the estimated
costs associated with the Offering of $5.0 million and the Consent Fee of
approximately $1.0 million paid by MAXXAM will be capitalized, and reflects:
(i) the redemption of $42.6 million aggregate principal amount of the Old
MAXXAM Notes, (ii) the payment of $1.9 million of accrued interest thereon,
and, (iii) the write off of approximately $0.9 million of debt discount and
$0.1 million of unamortized deferred financing costs, net of estimated
income tax benefits of $0.4 million, attributable to the Old MAXXAM Notes
and, (b) the sale of the KACC New Notes which reflects: (i) the receipt of
$219.3 million of net proceeds, (ii) the repayment of borrowings outstanding
under the 1994 KACC Credit Agreement, and (iii) the capitalization of
approximately $6.6 million of costs related to that transaction. MAXXAM did
not receive any of the net proceeds from the sale of the KACC New Notes.
(6) Cash, cash equivalents and marketable securities of MAXXAM at September 30,
1996, excluding cash, cash equivalents and marketable securities held by
subsidiaries, was $56.6 million.
18
<PAGE> 21
RISK FACTORS
Holders of the Notes should carefully consider the following risk factors,
as well as the other information contained in, and incorporated by reference in,
this Prospectus, before making an investment in the New Notes. Information
contained or incorporated by reference in this Prospectus contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of MAXXAM," "Business of the Company," "Business of
MAXXAM" and "Legal Proceedings." No assurance can be given that the future
results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
SUBSTANTIAL INDEBTEDNESS; STRUCTURAL SUBORDINATION AND ASSET ENCUMBRANCES
The Company
The Company is a newly formed holding company with no business operations
or source of income of its own, and conducts all of its operations through its
subsidiaries. As of September 30, 1996, the Company's assets, on a pro forma
basis after giving effect to (i) the formation of the Company, (ii) the transfer
of the capital stock of MGI and the Kaiser Shares to the Company, and (iii) the
consummation of the Offering, consist solely of the capital stock of MGI (which
are pledged as collateral for the Notes), the 27,938,250 Kaiser Shares (subject
to a pledge securing the MGI Notes) and the Intercompany Note. The Notes will
not be obligations of, or guaranteed by, any of the Company's subsidiaries.
Accordingly, in the event of a default under the Indenture, only the assets of
the Company and MAXXAM (to the extent available after satisfaction of the
obligations of MAXXAM's other subsidiaries and creditors as discussed below)
will be available to satisfy the Company's obligations under the Notes and
MAXXAM's obligations under its guaranty and the Intercompany Note, respectively.
The holders of the Notes will not have claims as creditors of the Company's
subsidiaries.
Any indebtedness of the Company's subsidiaries, including but not limited
to indebtedness evidenced by the MGI Notes, Pacific Lumber's 10 1/2% Senior
Notes (the "Pacific Lumber Senior Notes"), Pacific Lumber's credit agreement
(the "Pacific Lumber Credit Agreement") and Scotia Pacific's Timber Notes, will
be effectively senior to the claims of the holders of the Notes with respect to
the assets of such subsidiaries, and the rights of the Company and its
creditors, including holders of the Notes, to realize upon the assets of any
subsidiary upon such subsidiary's liquidation or reorganization (and the
consequent right of holders of the Notes to participate in those assets) will be
subject to the prior claims of such subsidiary's creditors, except to the extent
that the Company may itself be a creditor with recognized claims against such
subsidiary. In such case, the Company's claims would still be subordinate to any
security interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to the claims of the Company.
As of September 30, 1996, and after giving effect to the Offering, the
indebtedness of the Company and its subsidiaries reflected on the Company's
consolidated balance sheet (the "Company's Consolidated Indebtedness") would
have been approximately $902.9 million, of which approximately $772.9 million
consists of indebtedness of subsidiaries of the Company. Approximately $391.8
million aggregate principal amount of such indebtedness is scheduled to mature
prior to the maturity of the Notes, assuming the Timber Notes are paid in
accordance with Scheduled Amortization (see "Description of Principal
Indebtedness -- The Company -- Timber Notes"). Approximately $286.9 million
aggregate principal amount of such indebtedness is scheduled to mature prior to
the maturity of the Notes assuming the Timber Notes are paid in accordance with
Rated Amortization (see "Description of Principal Indebtedness -- The Company --
Timber Notes"). The $225.7 million aggregate principal amount of the MGI Notes
is scheduled to mature
19
<PAGE> 22
contemporaneously with the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Financial
Condition and Investing and Financing Activities." The MGI Notes aggregated
approximately $201.0 million as of September 30, 1996, and are scheduled to
accrete to approximately $225.7 million aggregate principal amount at August 1,
1998. A substantial majority of the Company's consolidated assets are owned by
MGI, substantially all of MGI's consolidated assets are owned by Pacific Lumber,
and a significant portion of Pacific Lumber's assets are owned by Scotia
Pacific. As of September 30, 1996, Pacific Lumber had outstanding $235.0 million
of Pacific Lumber Senior Notes and Scotia Pacific had outstanding approximately
$336.1 million aggregate principal amount of Timber Notes. The Timber Notes are
senior secured obligations of Scotia Pacific, secured by a pledge of Scotia
Pacific's timberlands (subject to certain harvesting rights by Pacific Lumber)
and other property, which constitutes substantially all of Scotia Pacific's
assets. See "Description of Principal Indebtedness -- The Company -- Timber
Notes." In addition, the Pacific Lumber Credit Agreement is secured by Pacific
Lumber's trade accounts receivable and inventories. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Company -- Financial Condition and Investing and Financing Activities" and Note
6 to the Company's Audited Consolidated Financial Statements.
Concurrently with the closing of the Offering, MAXXAM transferred to the
Company the 27,938,250 Kaiser Shares. The Kaiser Shares were previously pledged,
and after the transfer continue to be pledged, as security for the MGI Notes.
The Company has agreed that if any Kaiser Shares are released as security for
the MGI Notes by reason of early retirement of such indebtedness (other than by
reason of a refinancing of such indebtedness), it will pledge up to 16,055,000
of such shares as security for the Notes. There can be no assurance that any
Kaiser Shares will be released from the lien of the indenture governing the MGI
Notes (the "MGI Indenture") or will be pledged as collateral to secure the Notes
at any time. Further, in order for the maximum amount of Kaiser Shares to be
pledged as collateral for the Notes, all of the MGI Notes would have to be
repaid (other than by means of a refinancing) prior to scheduled maturity. The
MGI Notes mature concurrently with the Notes, and there can be no assurance that
any MGI Notes will be retired early. See "Description of Principal
Indebtedness -- The Company -- MGI Notes."
The Guarantor
MAXXAM also conducts substantially all of its operations through its
subsidiaries. As of September 30, 1996, MAXXAM's assets (exclusive of deferred
income tax assets and other miscellaneous assets) consisted of (i) $56.6 million
in cash, cash equivalents and marketable securities, excluding amounts
attributable to subsidiaries, (ii) 50,000,000 shares of Kaiser Common Stock,
27,938,250 of which are pledged to secure the MGI Notes and were transferred to
the Company concurrently with the closing of the Offering, (iii) the capital
stock of the Company, (iv) the capital stock of certain other direct wholly
owned subsidiaries engaged in real estate operations (the "Real Estate
Subsidiaries"), and (v) the interests in SHRP, Ltd. held by wholly owned
subsidiaries of MAXXAM. See "Business of MAXXAM."
Any indebtedness of MAXXAM's subsidiaries will be effectively senior to the
claims of the holders of the Notes with respect to the assets of such
subsidiaries, and the rights of MAXXAM and its creditors, including holders of
the Notes, to realize upon the assets of any subsidiary upon such subsidiary's
liquidation or reorganization (and the consequent right of holders of the Notes
to participate in those assets) will be subject to the prior claims of such
subsidiary's creditors and of the holders of certain minority interests, except
to the extent that MAXXAM may itself be a creditor with recognized claims
against such subsidiary. In such case, MAXXAM's claims would still be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to the claims of MAXXAM.
As of September 30, 1996, the indebtedness of MAXXAM and its subsidiaries
reflected on MAXXAM's consolidated balance sheet was approximately $1,710.3
million, of which approximately $1,668.6 million consisted of indebtedness of
the subsidiaries of MAXXAM, and minority interests were approximately $217.9
million. Additionally, at September 30, 1996, Kaiser was unconditionally
obligated for $93.3 million of indebtedness of a foreign joint venture.
Approximately $774.6 million of such indebtedness of MAXXAM's subsidiaries is
secured. The Kaiser Shares and the capital stock of Pacific Lumber and Britt are
pledged as security for the MGI Notes pursuant to the MGI Indenture. In
addition, MAXXAM has guaranteed a $14.0
20
<PAGE> 23
million credit facility of one of its real estate subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities."
MAXXAM and its subsidiaries frequently review acquisition and investment
opportunities, some of which may be material. MAXXAM and/or its subsidiaries
could, in connection with such opportunities or otherwise, incur additional
indebtedness, which indebtedness could be material in amount. Indebtedness
incurred by MAXXAM could rank pari passu in right and priority of payment with
the Intercompany Note and MAXXAM's guaranty of the Notes, and could also be
secured by assets of MAXXAM (including approximately 22 million unpledged shares
of Kaiser Common Stock). Any such secured indebtedness would effectively rank
senior to the Intercompany Note and MAXXAM's guaranty of the Notes.
ABILITY TO SERVICE INDEBTEDNESS
The Company's ability to service its indebtedness will be largely dependent
on cash interest payments received from MAXXAM pursuant to the terms of the
Intercompany Note and, to a considerably lesser extent, dividends received from
MGI and capital contributions from MAXXAM. The MGI Indenture contains various
covenants which, among other things, limit the payment of dividends and restrict
transactions between MGI and its affiliates. Under the MGI Indenture, MGI was
permitted to pay no dividends in respect of the period from August 31, 1993 to
December 31, 1993, $4.9 million of dividends in respect of the 1994 fiscal year,
$1.8 million of dividends in respect of the 1995 fiscal year, and $2.0 million
of dividends in respect of the nine months ended September 30, 1996. MGI did not
pay any dividends from August 1993 to December 31, 1994. MGI paid dividends of
$4.8 million during 1995 and an additional $3.9 million during the nine months
ended September 30, 1996. As of September 30, 1996, no additional dividends
could be paid by MGI. The Company does not expect to receive a significant
amount of cash dividends from MGI for the next several years. Moreover, MGI is
itself a holding company and is dependent upon dividends distributed to it from
its subsidiaries, Pacific Lumber and Britt.
Pacific Lumber is restricted by the terms of the indenture governing the
Pacific Lumber Senior Notes (the "Pacific Lumber Indenture") and the Pacific
Lumber Credit Agreement as to the amount of funds that can be paid in the form
of dividends or loans to MGI. Pacific Lumber is dependent upon its principal
subsidiary, Scotia Pacific, for the log requirements from which Pacific Lumber
generates a substantial portion of its operating cash flow. Pacific Lumber
harvests and purchases logs from Scotia Pacific's timberlands at prices
established pursuant to a Master Purchase Agreement (see "Business of the
Company -- Pacific Lumber Operations -- Relationships with Scotia Pacific and
Britt"). Under the terms of the indenture governing the Timber Notes (the
"Timber Note Indenture"), Scotia Pacific will not have cash available for
distribution to Pacific Lumber unless Scotia Pacific'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.
Once Scotia Pacific has made appropriate provision for expenditures for
operating and capital costs and current debt service, as provided in the Timber
Note Indenture, and in the absence of certain Trapping Events (as described in
the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture
does not limit monthly distributions of available cash from Scotia Pacific to
Pacific Lumber. However, in the event Scotia Pacific'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, to service its other
indebtedness and to pay dividends to MGI would be materially impaired, and
therefore MGI's ability to pay interest on the MGI Notes and to pay dividends to
the Company would also be materially impaired. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company -- Financial Condition and Investing and Financing Activities" and
"Description of Principal Indebtedness -- The Company." The operating
performance of Pacific Lumber and Scotia Pacific are also subject to certain
regulatory developments that could adversely affect such performance. See "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and
Environmental Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Trends."
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Cash flows from operations of the Company and its subsidiaries are unlikely
to be sufficient to pay principal on the Notes. The ability of the Company and
its subsidiaries to refinance their respective indebtedness at or prior to the
respective maturities thereof will depend on a number of factors, including
their respective financial condition, results of operations and cash flows, and
then-prevailing interest rates and market conditions. There can be no assurance
that such refinancing will be available, or available on reasonable terms. The
failure of any of the Company's subsidiaries to refinance their indebtedness
could materially adversely affect the ability of the Company to satisfy its
obligations under the Notes.
MAXXAM is also a holding company and its ability to satisfy its financial
obligations will be largely dependent on dividends distributed to MAXXAM from
its real estate subsidiaries (the "Real Estate Subsidiaries") and the sale of
assets. The debt agreements of Kaiser contain significant restrictions on the
amounts of funds that could be paid as dividends from Kaiser to MAXXAM or the
Company. The KACC 1994 Credit Agreement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial
Condition and Investing and Financing Activities -- Aluminum Operations") does
not permit Kaiser to pay any dividends on its common stock. In addition, the
indentures governing the KACC New Senior Notes, KACC's 9 7/8% Senior Notes due
2002 (the "KACC Senior Notes") and KACC's 12 3/4% Senior Subordinated Notes due
2003 (the "KACC Senior Subordinated Notes" and, together with the KACC New Notes
and the KACC Senior Notes, the "KACC Notes") contain covenants which, among
other things, limit KACC's ability to pay cash dividends and restrict
transactions between KACC and its affiliates. In addition, under certain
circumstances, dividends paid by Kaiser will be required to remain pledged as
security for the MGI Notes. See "Description of Principal Indebtedness -- The
Company -- MGI Notes." Kaiser has paid no dividends on the Kaiser Common Stock
since 1992 and is not certain when or if Kaiser will resume the payment of
dividends in respect of its common stock.
Because the substantial portion of MAXXAM's consolidated results of
operations and cash flows are attributable to the operations of Kaiser and MGI,
the substantial portion of MAXXAM's consolidated results of operations and cash
flows are generally not available to the Company or MAXXAM (and therefore are
generally unavailable to service MAXXAM's obligations to the Company under the
Intercompany Note or MAXXAM's guaranty of the Notes). As of September 30, 1996,
MAXXAM (excluding its subsidiaries) had cash, cash equivalents and marketable
securities of approximately $56.6 million and approximately $12.1 million
available from its subsidiaries. Based upon the limited amount of cash that
MAXXAM expects will be available to the Company from MGI on an annual basis,
MAXXAM anticipates that it will be required to make cash interest payments on
the Intercompany Note of approximately $13.8 million per year for the next
several years. There can be no assurance that MAXXAM's cash resources, together
with the cash proceeds from the sale of assets, distributions from its
subsidiaries and other sources of financing, will be sufficient for such
purposes or that MAXXAM would be able to refinance or pay at maturity the
aggregate principal amount of the Intercompany Note.
During the three years ended December 31, 1995, MAXXAM's corporate general
and administrative expenses, net of cost reimbursements from its subsidiaries,
have ranged between $11.0 million and $19.0 million per year. During the nine
months ended September 30, 1996, MAXXAM's corporate general and administrative
expenses were $28.8 million, of which $21.9 million represented an accrual for
certain legal contingencies of which a substantial portion relates to legal fees
and expenses that MAXXAM may incur in connection with matters related to (i) a
civil action filed by the Federal Deposit Insurance Corporation (the "FDIC")
against Mr. Charles Hurwitz seeking damages in excess of $250.0 million based on
the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of United Savings Association of Texas ("USAT"), and was
involved in certain decisions which contributed to the insolvency of USAT and
(ii) formal administrative proceedings initiated by the United States Department
of Treasury's Office of Thrift Supervision (the "OTS") against MAXXAM and others
alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and the other respondents
with respect to the failure of USAT. The OTS seeks, among other things,
unspecified damages in excess of $138.0 million from MAXXAM and Federated and
civil penalties. See "Legal Proceedings -- USAT Matters." Although MAXXAM cannot
predict when or whether the expenses represented by such accrual will be
incurred, there can be no assurance that such accrual will be adequate or that
MAXXAM's recurring corporate general and administrative expenses will not
increase. Any
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<PAGE> 25
adverse outcome of this litigation could materially adversely affect MAXXAM's
ability to make payments under the Intercompany Note and satisfy its obligations
under its guaranty. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of MAXXAM -- Results of Operations."
MAXXAM expects that for at least the next two to three years, the Real
Estate Subsidiaries will continue to constitute the primary source of dividends
to MAXXAM. As of September 30, 1996, the Real Estate Subsidiaries had
approximately $11.0 million available for borrowing under a credit agreement.
All of such amount could be distributed to MAXXAM. As of September 30, 1996, the
Real Estate Subsidiaries had total assets of approximately $173.1 million, total
liabilities of approximately $50.8 million (including total indebtedness of
approximately $12.5 million) and combined net worth of approximately $122.3
million. The Real Estate Subsidiaries had significant operating losses in each
of the last several years; however the ability of the Real Estate Subsidiaries
to distribute dividends to MAXXAM is not currently dependent upon their ability
to generate any specified level of income or cash flows from operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Real Estate and Other Operations." In June 1991, a wholly owned
subsidiary of MAXXAM purchased from the Resolution Trust Corporation ("RTC") at
an auction, for approximately $122.3 million, the RTC portfolio, which consisted
of 27 parcels of income producing real property and 28 loans secured by real
property. MAXXAM has realized a substantial portion of its cash flow over the
last several years from the sale of properties by the Real Estate Subsidiaries
and the sale or repayment of loans and the sale of properties from its RTC
portfolio, as described under "Business of MAXXAM -- Real Estate and Other
Operations." The remaining assets in the RTC Portfolio consist of two loans and
eight properties with an aggregate net book value of $18.2 million.
Consequently, MAXXAM does not expect the Real Estate Subsidiaries will be able
to generate cash flow distributable to MAXXAM at or near recent historical
levels.
SECURITY FOR THE NEW NOTES
The New Notes will be, and the Old Notes are, secured, among other things,
by a first priority pledge (subject only to a lien in favor of the Trustee) of:
(i) all outstanding shares of capital stock of MGI, (ii) all dividends
distributed with respect to and property received in exchange for any of the
Pledged MGI Shares (other than distributions in respect of Salmon Creek's
property), provided that, in the absence of certain defaults, the Company will
be entitled to receive and retain certain distributions on Pledged MGI Shares,
and (iii) the Intercompany Note. There can be no assurance that the proceeds
from the sale of all of the Pledged MGI Shares or any other collateral would be
sufficient to satisfy the amounts due on the Notes in the event of a default
under the Indenture. Although the Trustee may require the Company to use its
best efforts to register the Pledged MGI Shares in the event of foreclosure,
currently there is no market for the Pledged MGI Shares.
The Indenture provides that the proceeds of sales of Pledged MGI Shares
(and the proceeds that are distributed to the Company of issuances of shares by
MGI) and any dividends constituting Extraordinary Distributions (as defined)
will be released from the lien of the Indenture if an offer to purchase the
Notes is made, in accordance with the terms of the Indenture, at a price of 110%
of the principal amount of the Notes, plus accrued and unpaid interest, if any,
to (but not including) the date of purchase. The proceeds of such a sale (or
issuance) may also be released from the lien of the Indenture to the extent such
proceeds are actually utilized to purchase Notes in an offer that is made at a
price of at least 101% of the principal amount of the Notes, plus accrued and
unpaid interest, if any, or, in certain circumstances, to purchase or redeem
Notes. See "Description of New Notes -- Security -- Offers to Purchase Notes
with Certain Proceeds of Collateral."
If the Trustee were to foreclose upon, or obtain voting rights with respect
to, the Pledged MGI Shares, such foreclosure, or the obtaining of such voting
rights, would constitute a change of control under instruments governing certain
indebtedness of MGI and Pacific Lumber. Such occurrence would enable the holders
of such indebtedness to require the issuer to repurchase such indebtedness.
There can be no assurance that the assets of MGI and Pacific Lumber would be
sufficient to enable them to effect such a repurchase. In such event, there is a
substantial risk that assets of MGI would not be available to the holders of the
Notes and the
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value of the Collateral represented by the Pledged MGI Shares would be
substantially diminished or eliminated.
As discussed above, the Kaiser Shares are pledged to secure the payment of
the MGI Notes, and the holders of the Notes will have no security interest
therein, unless and until the Kaiser Shares are released from the lien of the
MGI Indenture by reason of early retirement of MGI's public indebtedness (other
than by reason of a refinancing of such indebtedness). There can be no assurance
that any Kaiser Shares will be released from the lien of the MGI Indenture, or
will become collateral securing the Notes at any time. Any early retirement of
the MGI Notes will be at the option of MGI. The MGI Notes mature
contemporaneously with the Notes, and holders of the Notes should be aware that
the Kaiser Shares may never be pledged to secure the Notes at any time. See
"Description of Principal Indebtedness -- The Company -- MGI Notes."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The net proceeds received by the Company from the sale of the Old Notes in
the Offering were utilized to make an intercompany loan to MAXXAM (the
"Intercompany Loan"), which proceeds MAXXAM will use to retire existing
indebtedness and for general corporate purposes, including possible repurchases
of its common stock. Under applicable provisions of the United States Bankruptcy
Code (the "Bankruptcy Code") or comparable provisions of state law, if, at the
time the Company incurs indebtedness from the sale of the Old Notes in the
Offering and/or makes the Intercompany Loan to MAXXAM, the Company (a) does so
with the intent of hindering, delaying or defrauding current or future creditors
or (b) receives less than reasonably equivalent value or fair consideration
therefor and either (i) is or is rendered insolvent by reason thereof, (ii) is
engaged in a business or transaction for which the assets remaining with the
Company constitute unreasonably small capital or (iii) intends to incur, or
believes that it would incur, debts beyond its ability to pay such debts as they
mature, then some or all of the Notes, payments of principal and interest
thereon and/or pledges securing the Notes could be either avoided or
subordinated to the claims of future creditors of the Company.
Similarly, if after giving effect to the transfer of the 27,938,250 Kaiser
Shares to the Company, the borrowing from the Company evidenced by the
Intercompany Note and MAXXAM's use of the proceeds of such borrowing, including
possible repurchases of its common stock, (a) MAXXAM either (i) is or is
rendered insolvent by reason thereof, (ii) is engaged in a business or
transaction for which the assets remaining with MAXXAM constitute unreasonably
small capital or (iii) intends to incur, or believes that it would incur debts
beyond its ability to pay such debts as they mature or (b) MAXXAM has effected
such transactions with the intent of hindering, delaying or defrauding current
or future creditors, then some or all of MAXXAM's obligations under the
Intercompany Note, its guaranty of the Notes and/or payments of such obligations
could be either avoided or subordinated to the claims of future creditors of
MAXXAM.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company or MAXXAM
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation or if the
present fair saleable value of its assets was less than the amount that would be
required to pay the probable liability on its existing debts, including
contingent liabilities, as they may become absolute and mature. In addition, an
entity may be presumed insolvent under some fraudulent transfer laws if it is
not generally paying its debts as they become due.
The Company and MAXXAM believe that the indebtedness represented by the Old
Notes and the Intercompany Note and MAXXAM's guaranty of the Old Notes were
incurred for proper purposes and in good faith. The Company and MAXXAM also
believe that neither MAXXAM nor the Company was, at the time of or as a result
of the incurrence of indebtedness represented by the Old Notes or the use of the
proceeds thereof, insolvent, that neither MAXXAM nor the Company was at such
time engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, and that neither MAXXAM nor the Company
at such time intended to or believed that it would incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however,
that a court passing on such questions would agree with the above.
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PREFERENCE CONSIDERATIONS
Since the holders of the Notes will not, at the time the Notes are issued,
possess any lien upon the Kaiser Shares, any subsequent pledge of the Released
Kaiser Shares to secure the Notes may be subject to avoidance as a "preference"
pursuant to Section 547 of the Bankruptcy Code. Under Section 547(b) of the
Bankruptcy Code, the granting of a lien upon property of a debtor to or for the
benefit of a creditor for or on account of an antecedent debt owed by the debtor
before such transfer was made is avoidable to the extent that it is: (i) made
while the debtor was insolvent, (ii) made on or within 90 days (one year if the
creditor was an insider at the time of the transfer) before the date of the
filing of the debtor's bankruptcy petition, and (iii) enables such creditor to
receive more than such creditor would receive if (a) the case were a case under
Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made and (c)
such creditor received payment of such debt to the extent provided by the
provisions of the Bankruptcy Code.
RISK FACTORS RELATING TO PACIFIC LUMBER
Leverage
Pacific Lumber is the Company's principal operating subsidiary. Pacific
Lumber is highly leveraged, with total consolidated indebtedness of $571.9
million and stockholder's deficit of $15.2 million at September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company." As a result, Pacific Lumber will be more sensitive
than less leveraged companies to factors affecting its operations, including
governmental regulations and litigation affecting its timber harvesting
practices, increased competition from other lumber producers or alternative
building products and general economic conditions.
Pacific Lumber's high leverage could have important consequences,
including: impairment of Pacific Lumber's ability to obtain additional financing
in the future for working capital, capital expenditures or general corporate
purposes; restrictions on Pacific Lumber's flexibility in responding to changing
business and economic conditions; and a requirement that Pacific Lumber dedicate
a significant portion of its cash flow from operations to the payment of the
principal of and interest on its indebtedness (including the monthly reservation
by Scotia Pacific of funds to make required semiannual principal amortization
payments on the Timber Notes). In addition, due to the dividend restrictions
contained in Pacific Lumber's indebtedness, such consequences could further
limit the availability of cash flow to MGI, and consequently to the Company,
from Pacific Lumber's operations.
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 federal laws and regulations dealing
with timber harvesting, endangered species and critical habitat, 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 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. The ability of Pacific Lumber to
harvest timber depends upon its ability to obtain regulatory approval of its
THPs. THPs are required to be developed by registered professional foresters and
must be filed with, and approved by, the California Department of Forestry (the
"CDF") prior to the harvesting of timber. The CDF's evaluation of proposed THPs
incorporates review and analysis of such THPs by several California and federal
agencies and public comments received with respect to such THPs. Pacific Lumber
regularly operates under numerous THPs governing various timber parcels and
applies for new THPs on a continuous basis.
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Pacific Lumber is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future legislation, government regulations or judicial or
administrative decisions would not materially adversely affect the Company.
In March 1992, the marbled murrelet (a sea bird that nests in coastal
timberlands) was approved for listing as endangered under the CESA. In October
1992, the United States Fish and Wildlife Service (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. Pacific Lumber has
incorporated, and will continue to incorporate as required, mitigation measures
into its THPs to protect and maintain habitat for the marbled murrelet on its
timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled
murrelet surveys to provide certain site specific mitigations in connection with
THPs covering virgin old growth timber and unusually dense stands of residual
old growth timber. Such surveys can only be conducted during a portion of the
murrelet's nesting and breeding season, which extends from April through
mid-September. Accordingly, such surveys are expected to delay the review and
approval process with respect to certain of the THPs filed by Pacific Lumber.
The results of such surveys to date (based upon current survey protocols) have
indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled
murrelet habitat. A substantial portion of this land contains virgin and
residual old growth timber and the bulk of it falls within the areas designated
as critical habitat for the marbled murrelet (see below). Pacific Lumber is
unable to predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published the final designation of critical habitat
for the marbled murrelet (the "Final Designation"), designating over four
million acres as critical habitat for the marbled murrelet. Although nearly all
of the designated habitat is public land, approximately 33,000 acres of the
Company's timberlands are included in the Final Designation, the substantial
portion of such acreage being young growth timber. In order to mitigate the
impact of the Final Designation, particularly with respect to timberlands
occupied by the marbled murrelet, Pacific Lumber over the last few years has
attempted to develop a habitat conservation plan for the marbled murrelet (the
"Murrelet HCP"). Due to, among other things, the unfavorable response of the
USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation
(see, "Legal Proceedings -- Pacific Lumber" for a description of the Takings
Litigation, which is currently stayed pursuant to the Headwaters Agreement). It
is impossible to determine the potential adverse effect of the Final Designation
on the Company's consolidated financial position, results of operations or
liquidity until such time as the material regulatory and legal issues are
resolved; however, if Pacific Lumber is unable to harvest, or is severely
limited in harvesting, on timberlands designated as critical habitat for the
marbled murrelet, such effect could be materially adverse. There continue to be
other regulatory actions and lawsuits seeking to have various other species
listed as threatened or endangered under the ESA and/or the CESA and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by Pacific Lumber. It
is uncertain what impact, if any, such listings and/or designations of critical
habitat would have on the Company's consolidated financial position, results of
operations or liquidity. See also "Legal Proceedings -- Pacific Lumber
Litigation" for a description of the pending Marbled Murrelet action.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish a long-term sustained yield ("LTSY") harvest level
that takes into account environmental and economic considerations. The SYP must
demonstrate that the average annual harvest over any rolling ten-year period
will not exceed the LTSY harvest level and that Pacific Lumber's projected
timber inventory is capable of sustaining the LTSY harvest level in the last
decade of the
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100-year planning period. On December 17, 1996, Pacific Lumber submitted a
proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest over
the last five years. The proposed SYP also indicates that Pacific Lumber's
average annual timber harvest during the first decade of the SYP would
approximate the LTSY harvest level. During the second decade of the proposed
SYP, Pacific Lumber's average annual timber harvest would be approximately 8%
less than that proposed for the first decade. The SYP, when approved, will be
valid for ten years. Thereafter, revised SYPs will be prepared every decade that
will address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources. The proposed SYP assumes that
the transactions contemplated by the Headwaters Agreement will be consummated
and that the Multi-Species HCP will permit Pacific Lumber to harvest its
timberlands (including over the next two decades a substantial portion of its
old growth timberlands not transferred pursuant to the Headwaters Agreement) to
achieve maximum sustained yield. The SYP is subject to review and approval by
the CDF, and there can be no assurance that the SYP will be approved in its
proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable
to predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and submitting
corresponding amendments to its SYP; however, there can be no assurance that it
would be able to do so and the amount of such acquisitions would be limited by
Pacific Lumber's available financial resources. The Company is unable to predict
the ultimate impact the sustained yield regulations will have on its future
financial position, results of operations or liquidity.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of Pacific Lumber's THPs and other timber harvesting operations, and
Pacific Lumber expects that such groups and individuals will continue to file
such objections. In addition, lawsuits are pending or threatened which seek to
prevent Pacific Lumber from implementing certain of its approved THPs or which
challenge other operations by Pacific Lumber. These challenges have severely
restricted Pacific Lumber's ability to harvest old growth timber on its
property. To date, challenges with respect to Pacific Lumber's THPs relating to
young growth timber have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its timber harvesting operations are
likely to occur in the future, particularly with respect to virgin and residual
old growth timber. Although such challenges have delayed or prevented Pacific
Lumber from conducting a portion of its operations, they have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. Nevertheless, it is impossible to predict the future
nature or degree of such challenges or their ultimate impact on the consolidated
operating results, financial position or liquidity of the Company. See also
"Legal Proceedings -- Pacific Lumber Litigation" for a description of the
pending Marbled Murrelet action.
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. From time to time, bills are introduced in the
California legislature and the U.S. Congress which relate to the business of
Pacific Lumber. It is impossible to predict the content of any such bills, the
likelihood of any of the bills passing or the impact of any of these bills on
the future liquidity, consolidated financial position or operating results of
the Company. See also "Business of the Company -- Pacific Lumber
Operations -- Regulatory and Environmental Factors."
Risk of Loss from Earthquakes, Fire or Other Casualties
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. A large
number of kilns used to dry upper grade redwood lumber and one of Pacific
Lumber's sawmills were not operational for a period of approximately six weeks.
In order to recover some of this lost production time, Pacific Lumber initiated
additional shifts at two of its other sawmills. Although certain of Pacific
Lumber's production facilities were temporarily idled as a result of such
earthquake, standing timber
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on Pacific Lumber's timberlands suffered virtually no damage. Pacific Lumber
believes that it possesses adequate insurance coverage relating to damage to its
facilities and equipment and the disruption of its business from earthquakes.
Consistent with the past practices of Pacific Lumber and the owners of most
other timber tracts in the United States, Pacific Lumber does not intend to
maintain earthquake insurance in respect of standing timber. See "Business of
the Company -- Pacific Lumber Operations -- Production Facilities."
Pacific Lumber assumes substantially all risks of loss from fire and other
casualties on its timberlands, similar to the risks currently assumed by the
owners of most other timber tracts in the United States. The risk of forest fire
damage to Pacific Lumber's timberlands is relatively low as a result of the
foggy climate along the northern California coast and the natural fire
resistance of redwood timber. Pacific Lumber is a participant with the CDF and
other timberland owners in cooperative fire fighting and aerial fire
surveillance programs. The extensive roads on Pacific Lumber's timberlands also
serve as fire breaks and facilitate implementation of fire control techniques
and utilization of fire fighting equipment. The last forest fire of any
significance affecting Pacific Lumber's timberlands occurred in 1990 and
resulted in damage to approximately 2,000 acres, which were salvaged during 1992
with minimal loss and the area has been replanted. Consistent with the past
practices of Pacific Lumber and the owners of most other timber tracts in the
United States, Pacific Lumber does not intend to acquire fire insurance in
respect of standing timber.
Industry Conditions
The demand for lumber products is influenced by conditions in the housing,
construction and remodeling industries. The housing, construction and remodeling
industries are highly cyclical and are affected by numerous factors, including
real estate prices, interest rates, credit availability, property taxes, federal
and state income tax policy, energy costs and general economic conditions, all
of which are beyond the control of the Company.
Headwaters Agreement
MAXXAM and Pacific Lumber have entered into the Headwaters Agreement (see
"Business of the Company -- Pacific Lumber Operations -- Headwaters Agreement").
A substantial portion of the timberlands which would be transferred to the
government pursuant to the Headwaters Agreement are part of the timberlands
owned by Salmon Creek (the "Salmon Creek Property"). The Pacific Lumber
Indenture permits Pacific Lumber to distribute to MGI the proceeds of any sale
or other disposition of the Salmon Creek Property; however, the MGI Indenture
contains limitations on the ability of MGI to distribute any such proceeds to
the Company (generally, 50% of the proceeds in excess of $62 million received as
distributions in respect of the Salmon Creek Property, except in connection with
the harvesting of timber located on the Salmon Creek Property). The Indenture
will permit the Company to distribute to MAXXAM approximately 50% of such
distributions from MGI in respect of the Salmon Creek Property. See "Description
of New Notes -- Limitations on Restricted Payments." If consummated, the
Headwaters Agreement could expedite the approval time and reduce the costs
associated with Pacific Lumber's THPs. There can be no assurance that the
Headwaters Agreement will be consummated.
LITIGATION
MAXXAM and certain of its subsidiaries, affiliates, directors and officers
(the "MAXXAM Parties") are defendants (or threatened defendants) in a variety of
pending or threatened actions, including, but not limited to (a) actions by and
on behalf of the federal government relating to the insolvency of USAT (see
"-- Ability to Service Indebtedness"), (b) actions with respect to certain
transactions between certain Real Estate Subsidiaries and Federated, a principal
shareholder of MAXXAM, (c) lawsuits relating to Pacific Lumber's THPs and other
timber harvesting operations (see "-- Risk Factors Relating to Pacific Lumber --
Regulatory and Environmental Factors"), (d) environmental and asbestos
litigation involving Kaiser (see "-- Risk Factors Relating to
Kaiser -- Environmental Matters and Litigation"), and (e) federal antitrust
investigations with respect to Kaiser. Certain of these actions make claims for
substantial damages against the MAXXAM Parties, including subsidiaries of the
Company. Adverse determinations and/or unfavorable settlements with respect to
one or more of such actions in respect of the Company's subsidiaries could
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materially impair the Company's ability to satisfy its obligations under the
Notes. Adverse determinations and/or unfavorable settlements with respect to one
or more of such actions in respect of MAXXAM itself could materially and
adversely affect the financial condition, results of operations and liquidity of
MAXXAM and MAXXAM's ability to pay principal and interest on the Intercompany
Note and to honor its guaranty of the Notes. See "-- Ability to Service
Indebtedness." For information concerning these litigation matters, see "Legal
Proceedings" and Notes 9 and 7 to the Audited and Unaudited Consolidated
Financial Statements of MAXXAM, respectively.
RISK FACTORS RELATING TO KAISER
Sensitivity to Prices
Kaiser accounts for the substantial portion of MAXXAM's revenues and
operating results. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Trends -- Aluminum Operations -- Sensitivity to Prices
and Hedging Programs," "-- Recent Trends and Developments," and "-- Fourth
Quarter Results," and "Business of MAXXAM -- Aluminum Operations -- Industry
Overview."
Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the period January 1, 1993 through December
13, 1996, the average Midwest U.S. transaction price (the "AMT Price") for
primary aluminum has ranged from approximately $.50 to $1.00 per pound. For the
week ended December 13, 1996, the AMT Price for primary aluminum was
approximately $.72 per pound. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag behind
primary aluminum.
Leverage
Kaiser is highly leveraged, with total consolidated indebtedness of $867.3
million and stockholders' equity of $63.4 million at September 30, 1996. On a
pro forma basis, as of September 30, 1996, after giving effect to the issuance
of the KACC New Senior Notes (on October 23, 1996) and the issuance of the KACC
New Series C Senior Notes (on December 23, 1996) and the application of the
proceeds therefrom, Kaiser would have had total consolidated indebtedness of
$962.0 million. Kaiser's ability to generate sufficient cash to meet its debt
service obligations is subject to many factors, certain of which are beyond its
control, including economic conditions, aluminum prices, and competition. While
Kaiser believes that, based on current levels of operations, its cash generated
from operations, together with other sources of liquidity, will be adequate to
meet such obligations, there can be no assurance that such sources of funds will
in fact be sufficient to service such obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations." Kaiser's leverage is substantially greater than the leverage of
most of its North American competitors, which generally have greater financial
resources than Kaiser. Due to its highly leveraged condition, Kaiser is more
sensitive than less leveraged companies to factors affecting its operations,
including changes in the prices for its products, the rates charged for power at
its various facilities, and general economic conditions.
Environmental Matters and Litigation
Kaiser and KACC are subject to a wide variety of international, federal,
state and local environmental laws and regulations (the "Environmental Laws").
From time to time, Kaiser and KACC are subject, with respect to their current
and former operations, 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 and Reauthorization Act of 1986 ("CERCLA"). Under
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CERCLA and other related laws, past disposal of wastes, whether on-site or at
other locations, may result in the imposition of clean-up obligations by federal
or state regulatory authorities. KACC's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. In addition, KACC, along
with numerous 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. In certain instances, KACC may be exposed to joint and several
liability for remedial action or damages to natural resources, which could
effectively expose KACC to liability for all costs associated with any such
remedial actions irrespective of its degree of culpability for the environmental
damages related thereto. Further, future environmental regulations are expected
to impose stricter compliance requirements on the aluminum industry. For a
discussion of certain KACC environmental litigation and other environmental
matters, including the reserves established with respect thereto, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," "Business of MAXXAM -- Aluminum
Operations -- Environmental Matters" and "Legal Proceedings -- Kaiser
Litigation -- Environmental Litigation" and Notes 9 and 7, respectively, to the
Audited and Unaudited Consolidated Financial Statements of MAXXAM.
In addition, KACC is subject to a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced or
sold by KACC (which products have generally not been manufactured by KACC for at
least 15 years). While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the actual costs
that ultimately may be incurred and insurance recoveries that will be received,
Kaiser currently believes that, based on the factors discussed below under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on KACC's
consolidated financial position, results of operations, or liquidity. For a
discussion of KACC's asbestos related litigation, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations" Financial Condition and Investing and Financing
Activities -- Aluminum Operations" and Notes 9 and 7, respectively, of the Notes
to the Audited and Unaudited Consolidated Financial Statements of MAXXAM.
Power Supply
Electric power represents an important production cost for KACC at its
aluminum smelters. In 1995, KACC successfully restructured electric power
purchase agreements for its smelting facilities in the Pacific Northwest, which
has resulted in significantly lower electric power costs in 1996 for the Mead
and Tacoma, Washington, smelters compared with 1995 electric power costs. A
number of lawsuits challenging the restructuring have been filed and the effect,
if any, of such lawsuits on KACC's power purchase and transmission arrangements
is not known at the current time. In addition, while KACC has entered into long
term arrangements with respect to the power supply for its 90%-owned Volta
Aluminium Company Limited ("Valco") smelter in Ghana, there can be no assurance
that the requisite power supply will be available. For a discussion of KACC's
power supply arrangements, see "Business of MAXXAM -- Aluminum Operations --
Production Operations."
Foreign Activities
Kaiser's operations are located in many foreign countries, including
Australia, Canada, China, Ghana, Jamaica and the United Kingdom. Foreign
operations in general may be more vulnerable than domestic operations due to a
variety of political and other risks. See "Business of MAXXAM -- Aluminum
Operations -- Production Operations" and "-- International Business
Development."
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CONTROL OF THE COMPANY
The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz,
the Chairman of the Board, Chief Executive Officer and President of MAXXAM,
together with Federated Development Inc. ("FDI"), collectively own 2,735,219
shares of MAXXAM's common stock and 680,574 shares of MAXXAM's Class A $.05
Non-Cumulative Participating Convertible Preferred Stock (the "Preferred
Stock"), which has ten votes per share, aggregating approximately 61.1% of the
aggregate voting power of MAXXAM. FDI is a wholly owned subsidiary of Federated,
a New York business trust of which Mr. Hurwitz is Chairman of the Board and
Chief Executive Officer and which is wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof. Accordingly, Mr. Hurwitz
will be able to control the election of the directors of the Company and to
determine the corporate and management policies of the Company, including
decisions relating to any merger or acquisition of the Company, the sale of
substantially all of the assets of the Company and other significant corporate
transactions.
HIGHLY LEVERAGED TRANSACTIONS
The Indenture does not contain any provisions specifically intended to
protect holders of the Notes in the event of a future highly leveraged
transaction involving the Company. The Indenture will limit the Company's
ability to incur additional Indebtedness and to grant liens on its assets to
secure Indebtedness, limit the Company from selling its assets under certain
circumstances, restrict transactions with Affiliates and require the Company to
make a Change of Control Offer (as defined), each under certain circumstances
described herein. These provisions could limit the ability of the Company to
engage in a highly leveraged transaction (including a leveraged buyout initiated
or supported by the Company, the management of the Company or an affiliate of
the Company or its management). These provisions may not be waived or amended
without the consent of a majority in aggregate principal amount of the Notes.
See "Description of the New Notes -- Change of Control" and "-- Certain
Covenants."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company or the Guarantor within the
meaning of Rule 405 under the Securities Act and other than any broker-dealer
who purchased Old Notes directly from the Company for resale pursuant to Rule
144A under the Securities Act or any other available exemption under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Each broker-dealer that acquired Old Notes for its own account as a
result of market making or other trading activities and that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that, by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the effective date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, to comply with the securities laws of
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<PAGE> 34
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions or
an exemption from registration or qualification is available and is complied
with. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
will be adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are a new issue of securities, have no established trading
market, and may not be widely distributed. The Company does not intend to list
the New Notes on any national securities exchange or the Nasdaq Stock Market or
to seek the admission thereof to trading on any automated quotation system. No
assurance can be given that an active public or other market will develop for
the New Notes or as to the liquidity of or the trading market for the New Notes.
If a trading market does not develop or is not maintained, holders of the New
Notes may experience difficulty in reselling the New Notes or may be unable to
sell them at all. If a market for the New Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the New Notes,
future trading prices of the New Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities, and the price at which the
holders of New Notes will be able to sell such New Notes is not assured and the
New Notes could trade at a premium or discount to their purchase price or face
value. Depending on prevailing interest rates, the market for similar securities
and other facts, including the financial condition of the Company, the New Notes
may trade at a discount from their principal amount.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on
December 23, 1996, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to February 21, 1997, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its reasonable best efforts to cause such registration statement
to be declared effective by the Commission on or prior to May 22, 1997, and
(iii) to cause the Exchange Offer to remain open for a period of not less than
30 days. This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the conditions, terms
and provisions of the Registration Rights Agreement. The form and terms of the
New Notes will be identical in all material respects to the form and terms of
the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of New Notes will
not be entitled to Additional Interest, and (iii) holders of New Notes will not
be, and upon consummation of the Exchange Offer, Eligible Holders of Old Notes
will no longer be, entitled to certain rights under the Registration Rights
Agreement intended for holders of unregistered securities. See "-- Conditions of
the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $130.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of , 1997, there were registered
holders of the Old Notes, including Cede, which held $ million of aggregate
principal amount of the Old Notes for of its participants. Solely for
reasons of administration (and for no other purpose), the Company has fixed the
close of business on , 1997, as the record date (the "Record Date")
for purposes of determining the persons to whom this Prospectus and the Letter
of Transmittal will be mailed initially. Only an Eligible Holder of the Old
Notes (or such Eligible Holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Eligible Holders of the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
such Eligible Holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company or of the Guarantor.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
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If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1997 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will, in accordance with applicable law, file a post-effective
amendment to the Registration Statement (a "Post-effective Amendment") and
resolicit the registered holders of the Old Notes. If the Company files a
Post-effective Amendment, it will notify the Exchange Agent of an extension of
the Exchange Offer by oral or written notice, and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the effectiveness of such Post-effective Amendment. Such
notice and public announcement shall set forth the new Expiration Date, which
new Expiration Date shall be no less than five days after the then applicable
Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, notwithstanding any other
provisions of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue the New Notes in exchange for, any Old Notes, if the
Exchange Offer violates any applicable law or interpretation of the staff of the
Commission. The Company expects that the foregoing conditions will be satisfied.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), Eligible
Holders of Old Notes are entitled to receive Additional Interest. Additional
Interest means the increase in the interest rate borne by Registrable Securities
during the period in which a Registration Default is continuing pursuant to the
terms of the Registration Rights Agreement (in general, one-quarter of one
percent (0.25%) per annum for the first 90-day period immediately after the
first such Registration Default and an additional one-quarter of one percent
(0.25%) per annum for each subsequent 90-day period until all Registration
Defaults have been cured, provided that the aggregate increase in such interest
rate shall not exceed one percent (1.00%) per annum). A "Registration Default"
with respect to the Exchange Offer shall generally occur if: (i) the
registration statement concerning the exchange offer (the "Registration
Statement") has not been filed with the Commission on or prior to February 21,
1997; (ii) the Registration Statement is not declared effective on or prior to
May 22, 1997, or (iii) the Exchange Offer is not consummated on or prior to June
21, 1997. Holders of New Notes will not be and, upon consummation of the
Exchange Offer, Holders of Old Notes will no longer be, entitled to (i) the
right to receive Additional Interest, except in certain limited circumstances,
and (ii) certain other rights under the Registration Rights Agreement intended
for holders of Registrable Securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the
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Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer.
ACCRUED INTEREST ON THE OLD NOTES
The New Notes will bear interest at a rate equal to 12% per annum from and
including their date of issuance. Eligible Holders whose Old Notes are accepted
for exchange will have the right to receive interest accrued thereon from the
date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange, which interest accrued at the
rate of 12% per annum, will cease to accrue on the day prior to the issuance of
the New Notes. See "Description of New Notes -- General."
PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by
an Eligible Institution (as defined below). In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm which is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
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(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes
are being acquired by the Eligible Holder and each Beneficial Owner in the
ordinary course of business of the Eligible Holder and each Beneficial Owner,
(ii) the Eligible Holder and each Beneficial Owner are not participating, do not
intend to participate, and have no arrangement or understanding with any person
to participate, in the distribution of the New Notes, (iii) the Eligible Holder
and each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and
Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in
the Commission's letters to Shearman & Sterling (available July 2, 1993) and
K-III Communications Corporation (available May 14, 1993), and similar no-action
or interpretive letters issued to third parties, (iv) that if the Eligible
Holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the Eligible Holder and
each Beneficial Owner understand that a secondary resale transaction described
in clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company or the Guarantor except as otherwise disclosed to the
Company in writing. In connection with a book-entry transfer, each participant
will confirm that it makes the representations and warranties contained in the
Letter of Transmittal.
Guaranteed Delivery Procedures. Eligible Holders who wish to tender their
Old Notes and (i) whose Old Notes are not immediately available or (ii) who
cannot deliver their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Eligible Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing
36
<PAGE> 39
that, within three (3) business days after the date of delivery of the Notice of
Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of
Transmittal and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) such properly completed and
executed documents required by the Letter of Transmittal and the tendered Old
Notes in proper form for transfer (or confirmation of a book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC) must be received by the
Exchange Agent within three (3) business days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
Book-Entry Delivery. The Exchange Agent will establish an account with
respect to the Old Notes at DTC (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing such
facility to transfer Old Notes into the Exchange Agent's account in accordance
with such facility's procedure for such transfer. Even though delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or a manually signed facsimile thereof), with
any required signature guarantees, or an Agent's Message (as defined below) in
connection with a book-entry transfer, and other documents required by the
Letter of Transmittal, must, in any case, be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover of this
Prospectus before the Expiration Date, or the guaranteed delivery procedure set
forth above must be followed. Delivery of the Letter of Transmittal and any
other required documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. The term "Agent's Message" means a message
transmitted by the Book-Entry Transfer Facility to, and received by, the
Exchange Agent and forming a part of a book-entry confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Transfer Facility tendering the Old
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and that the Company may enforce such agreement
against such participant.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes,
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Eligible Holder in the same manner as the original signature on the
Letter of Transmittal by
37
<PAGE> 40
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by a bond power in the name of the person withdrawing the
tender, in satisfactory form as determined by the Company in its sole
discretion, duly executed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution together with the other documents required
by the Indenture upon transfer, and (iv) specify the name in which such Old
Notes are to be re-registered, if different from the Depositor, pursuant to such
documents of transfer. Any questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
in its sole discretion. The Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are withdrawn will be
returned to the Eligible Holder thereof without cost to such Eligible Holder as
soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer -- Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
First Bank National Association is the Exchange Agent. All tendered Old
Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand/Overnight Express: Facsimile
First Bank National Association First Bank National Association Transmission:
180 E. 5th Street 180 E. 5th Street (612) 244-0711
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Rick Prokosch Attention: Rick Prokosch To confirm receipt:
Trust Officer Trust Officer (612) 244-0721
</TABLE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will offers be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction permissible and extend the Exchange Offer to holders of
Old Notes in such jurisdiction.
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing copies of the Prospectus), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and the Guarantor, (v) fees and disbursements of
independent certified public accountants, (vi) rating agency fees, (vii)
internal expenses of the Company and the Guarantor (including, without
limitation, all salaries and expenses of officers and employees of the Company
and the Guarantor performing legal or accounting duties), and (ix) fees and
expenses incurred in connection with the listing, if any, of the New Notes on a
securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company,
38
<PAGE> 41
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on interpretations by the staff of the Commission enunciated in
Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), and interpreted in the
Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14, 1993), and similar no-action or
interpretive letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
such Eligible Holder (other than (i) a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company or the Guarantors within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the Eligible
Holder is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. The Company has not requested
or obtained an interpretive letter from the Commission staff with respect to
this Exchange Offer, and the Company and the Eligible Holders are not entitled
to rely on interpretive advice provided by the staff to other persons, which
advice was based on the facts and conditions represented in such letters.
However, the Exchange Offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in such letters. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Company has agreed that for a period of
180 days after the effective date of this Prospectus, it will make this
Prospectus, as amended and supplemented, available to any broker-dealer who
receives New Notes in the Exchange Offer for use in connection with any such
resale. See "Plan of Distribution."
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exception from, or in a transaction not subject to, the
Securities Act and applicable states securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors -- Consequences of Failure to Exchange."
39
<PAGE> 42
OTHER
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisers in making their own decisions
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights, and limitations applicable thereto, under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. See "Description of New Notes." All untendered Old Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
40
<PAGE> 43
CAPITALIZATION OF THE COMPANY
The following table summarizes the unaudited consolidated capitalization of
the Company at September 30, 1996, and as adjusted to give effect to the
Offering and the application of the proceeds therefrom. This table should be
read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1).................... $ 85.0 $ 85.0
======= =======
SHORT-TERM DEBT:
Current maturities of long-term debt(2).............................. $ 16.3 $ 16.3
------- -------
LONG-TERM DEBT:
12% MAXXAM Group Holdings Inc. Senior Secured Notes due
August 1, 2003.................................................... -- 130.0
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015... 320.0 320.0
10 1/2% Pacific Lumber Senior Notes due March 1, 2003................ 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003.................. 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of
discount(3)....................................................... 101.0 101.0
Other................................................................ .6 .6
------- -------
Total long-term debt.............................................. 756.6 886.6
------- -------
STOCKHOLDER'S DEFICIT:
Common stock......................................................... -- --
Additional capital................................................... 89.8 89.8
Accumulated deficit(4)............................................... (215.7) (215.7)
------- -------
Total Stockholder's Deficit....................................... (125.9) (125.9)
------- -------
Total Capitalization......................................... $ 647.0 $ 777.0
======= =======
</TABLE>
- ---------------
(1) Cash, cash equivalents and marketable securities of the Company includes the
following amounts held by each of the following subsidiaries of the Company
in the amounts indicated: MGI -- $72.5 million; Scotia Pacific -- $6.8
million; Pacific Lumber -- $5.5 million; and Britt -- $0.2 million. Further,
Scotia Pacific had $30.5 million of restricted cash deposits held for the
benefit of the Timber Notes which is classified as a noncurrent asset in the
Company's Consolidated Financial Statements. Cash held by the Company's
subsidiaries is generally not available to service its obligations on the
Notes. See "Risk Factors -- Ability to Service Indebtedness."
(2) Reflects current maturities of $16.1 million relating to the Timber Notes
and $0.2 million of other debt of Pacific Lumber.
(3) Net of discount of $24.7 million. The MGI Discount Notes will accrete to an
aggregate principal amount of $125.7 million on August 1, 1998, and for
periods thereafter MGI will be required to make cash interest payments of
approximately $7.7 million in respect of this indebtedness each February 1
and August 1 thereafter.
(4) Stockholder's deficit reflects aggregate one time charges (recorded in 1993)
relating to the implementation of SFAS 106 and SFAS 109. See Note 2 to the
Summary Historical and Pro Forma Consolidated Financial Data of the Company.
41
<PAGE> 44
CAPITALIZATION OF MAXXAM
The following table summarizes the unaudited consolidated capitalization of
MAXXAM at September 30, 1996, and as adjusted to give effect to the retirement
of the Old MAXXAM Notes (the "Retirement"), the issuance of the Notes
(collectively with the Retirement, the "Refinancing"), the issuance of $225.0
million aggregate principal amount of the KACC New Notes, and the application of
the net proceeds therefrom. (See Note 6 to the Summary Historical and Pro Forma
Financial Data of MAXXAM). This table should be read in conjunction with the
Consolidated Financial Statements of MAXXAM and the Notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1)..................................... $ 171.1 $ 338.7
======== ========
SHORT-TERM DEBT:
Current maturities of long-term debt(2)............................................... $ 26.4 $ 26.4
-------- --------
LONG-TERM DEBT:
MAXXAM:
Old MAXXAM Notes:
14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000......................... 25.0 --
12 1/2% MAXXAM Subordinated Debentures due December 15, 1999(3)..................... 16.7 --
Aluminum Operations:
1994 KACC Credit Agreement.......................................................... 131.2 --
9 7/8% KACC Senior Notes due February 15, 2002(4)................................... 224.0 224.0
10 7/8% KACC New Notes due October 15, 2006(5)...................................... -- 225.9
Alpart CARIFA Loan.................................................................. 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003......................... 400.0 400.0
Other............................................................................... 43.2 43.2
Forest Products Operations:
12% MAXXAM Group Holdings Inc. Senior Secured Notes due
August 1, 2003.................................................................... -- 130.0
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015.................. 320.0 320.0
10 1/2% Pacific Lumber Senior Notes due March 1, 2003............................... 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003................................. 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount....... 101.0 101.0
Other............................................................................... .6 .6
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due
September 1, 2001, net of discount................................................ 15.6 15.6
RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3%........ 3.8 3.8
Other notes and contracts, secured by receivables, buildings, real estate and
equipment.......................................................................... 7.8 7.8
-------- --------
Total long-term debt.............................................................. 1,683.9 1,866.9
-------- --------
MINORITY INTERESTS...................................................................... 217.9 217.9
STOCKHOLDERS' DEFICIT:
Preferred stock....................................................................... $ .3 $ .3
Common stock.......................................................................... 5.0 5.0
Additional capital.................................................................... 155.6 155.6
Accumulated deficit(6)................................................................ (180.5) (181.1)(7)
Pension liability adjustment.......................................................... (16.1) (16.1)
Treasury stock........................................................................ (19.5) (19.5)
-------- --------
Total Stockholders' Deficit....................................................... (55.2) (55.8)
-------- --------
Total Capitalization............................................................ $1,873.0 $ 2,055.4
======== ========
</TABLE>
- ---------------
(footnotes are on the following page)
42
<PAGE> 45
- ---------------
(1) Cash, cash equivalents and marketable securities held by MAXXAM, excluding
amounts held by subsidiaries, was $56.6 million and, on a pro forma basis
$136.1 million after the retirement of the Old MAXXAM Notes but prior to
any other use of proceeds from the Offering.
(2) Reflects current maturities of approximately $8.9 million, $16.3 million and
$1.2 million, relating to the Company's aluminum operations, forest
products operations, and real estate and other operations, respectively.
(3) Net of discount of $0.9 million.
(4) Net of discount of $1.0 million.
(5) The KACC New Notes include the KACC New Senior Notes of $175.0 million
aggregate principal amount, net of discount of $0.9 million, and the KACC
New Series C Senior Notes of $50.0 million aggregate principal amount
including a premium of $1.8 million. The net proceeds from the sale of the
KACC New Notes were used to repay the outstanding borrowings under the 1994
KACC Credit Agreement. The remaining net proceeds are held by KACC for
general corporate purposes. MAXXAM did not receive any proceeds from the
sale of the KACC New Notes.
(6) Stockholders' deficit reflects aggregate one time charges (recorded in 1993)
of approximately $417.7 million relating to the implementation of SFAS 106,
SFAS 109 and SFAS 112. See Note 1 to the Summary Historical and Pro Forma
Financial Data of MAXXAM.
(7) Assumes the write-off of approximately $0.9 million of unamortized discount
and $0.1 million of deferred financing costs attributable to the Old MAXXAM
Notes, net of an estimated income tax benefit of $0.4 million.
43
<PAGE> 46
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected historical consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company"
appearing elsewhere in this Prospectus. The Company was formed on November 4,
1996 to facilitate the offering of the Old Notes. Subsequent to its formation,
the Company received from MAXXAM, as a capital contribution, 100% of the capital
stock of MGI. Further, concurrently with the consummation of the Offering,
MAXXAM transferred to the Company the Kaiser Shares as an additional capital
contribution. The contribution of MGI's capital stock has been accounted for as
a reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to all of MGI's historical
operations. The contribution of the Kaiser Shares has been reflected in the
following consolidated financial information of the Company as if such
contribution occurred as of January 1, 1991 (the beginning of the earliest
period presented) at MAXXAM's historical cost using the equity method of
accounting. The following historical consolidated financial information of the
Company reflects the historical operating results of MGI, the equity in earnings
(losses) attributable to its investment in the Kaiser Shares and MAXXAM's
purchase accounting adjustments (principally relating to MGI's timber and
depreciable assets) for each accounting period presented. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
selected historical consolidated financial data as of and for the five years
ended December 31, 1995 are derived from the Consolidated Financial Statements
of the Company which have been audited by independent public accountants. The
selected historical consolidated financial data as of and for the nine months
ended September 30, 1996 and 1995 has not been audited, but in the opinion of
management contain all adjustments (including those of a normal recurring
nature) necessary to present fairly the financial position and results of
operations of the Company as of such dates and for such periods. The following
consolidated pro forma operating data for the nine months ended September 30,
1996 and for the year ended December 31, 1995 give effect to the Transactions as
if they occurred on January 1, 1995. The consolidated pro forma balance sheet
data gives effect to the Transactions as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------- ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING DATA:
Net sales..................................... $199.6 $180.9 $242.6 $249.6 $ 233.4 $223.3 $205.7
Cost of sales (exclusive of depreciation and
depletion).................................. 114.6 96.0 127.1 129.6 134.6 113.8 103.3
Gross profit.................................. 85.0 84.9 115.5 120.0 98.8 109.5 102.4
Selling, general and administrative
expenses.................................... 11.3 12.2 15.9 16.3 20.1 17.1 16.6
Depreciation and depletion.................... 20.2 19.0 25.3 24.7 24.5 28.4 30.4
Operating income.............................. 53.4 53.7 74.3 79.1 54.2 64.1 55.3
Investment, interest and other income
(expense)................................... 8.4 6.8 9.4 14.4 10.0 16.6 81.0
Interest expense.............................. 58.4 58.2 77.8 77.4 81.9 91.4 94.2
Interest expense, net of earnings on invested
cash, cash equivalents and marketable
securities.................................. 51.2 51.9 69.0 72.6 72.5 93.6 77.6
Income (loss) from continuing operations
before income taxes, extraordinary items and
cumulative effect of changes in accounting
principles.................................. 3.4 2.3 5.9 16.1 (17.7) (10.7) 42.1
Income (loss) from continuing operations
before extraordinary items and cumulative
effect of changes in accounting
principles.................................. 4.5 1.6 4.2 19.2 (14.1) (12.0) 36.4
Income (loss) from the net assets transferred
to MAXXAM, net of minority interests and
related income taxes(1)..................... -- -- -- -- (272.0) 17.5 40.0
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items, net of related income
taxes(2).................................... $ -- $ -- $ -- $(14.9) $ (31.5) $ -- $ --
Cumulative effect of changes in accounting
principles(3)............................... -- -- -- -- (220.4) -- --
Net income (loss)............................. 4.5 1.6 4.2 4.4 (538.0) 5.5 76.4
OTHER HISTORICAL DATA:
Fixed charge coverage deficiency.............. -- -- -- -- 17.7 10.7 --
Ratio of earnings to fixed charges............ 1.1x 1.0x 1.1x 1.2x -- -- 1.5x
Capital expenditures.......................... 9.0 6.6 9.9 11.3 11.1 8.7 6.4
Summary of cash flow information(4):
Cash provided (used) by operating
activities................................ 30.7 18.0 25.4 34.9 19.3 32.5 (1.6)
Cash provided (used) by investing
activities................................ (8.9) (4.1) (7.3) (10.2) (22.6) (32.4) 149.8
Cash provided (used) by financing
activities................................ (17.1) (18.5) (18.2) (15.2) (12.0) (5.3) (129.4)
EBITDA(4)(5).................................. 73.6 72.7 99.6 103.8 78.7 92.5 85.7
PRO FORMA OPERATING DATA(6):
Investment, interest and other income
(expense)................................... 18.7 23.2
Interest expense.............................. 70.7 94.2
Interest expense, net of earnings on the
Intercompany Note, invested cash, cash
equivalents and marketable securities....... 53.2 71.6
Income (loss) from continuing operations
before income taxes, extraordinary items and
cumulative effect of changes in accounting
principles.................................. 1.3 3.2
Ratio of earnings to fixed charges............ 1.0x 1.0x
EBITDA(4)(5).................................. 73.5 99.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------- DECEMBER 31,
PRO -------------------------------------------------
ACTUAL FORMA(6) 1995 1994 1993 1992 1991
------- ------------ ------- ------- ------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash, cash equivalents and
marketable securities(7)......... $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8 $ 77.0 $ 113.6
Working capital.................... 126.6 126.6 126.2 104.5 83.9 107.4 147.2
Total assets....................... 713.3 843.3 740.9 744.5 743.0 1,200.5 1,212.1
Total indebtedness................. 772.9 902.9 778.5 782.5 788.4 677.9 677.7
Stockholder's equity
(deficit)(3)..................... (125.9) (125.9) (126.5) (125.9) (130.3) 458.5 468.2
</TABLE>
- ---------------
See "Summary Historical and Pro Forma Consolidated Financial Data of the
Company" for the text of footnotes (1) through (7).
45
<PAGE> 48
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY
SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS
------------------------
ISSUANCE
OF INTERCOMPANY AS
ACTUAL NOTES NOTE ADJUSTED
------ -------- ------------ --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 53.1 $125.0 $(125.0) $ 53.1
Marketable securities............................... 31.9 -- -- 31.9
Receivables......................................... 13.9 -- -- 13.9
Inventories......................................... 78.1 -- -- 78.1
Prepaid expenses and other current assets........... 5.6 -- -- 5.6
------ ------ -------- ------
Total current assets........................ 182.6 125.0 (125.0) 182.6
------ ------ -------- ------
Property, plant and equipment, net.................... 101.2 -- -- 101.2
Timber and timberlands, net........................... 303.0 -- -- 303.0
Receivable from MAXXAM................................ -- -- 125.0 125.0
Restricted cash....................................... 30.5 -- -- 30.5
Deferred income taxes................................. 65.2 -- -- 65.2
Deferred financing costs and other assets............. 30.8 5.0 -- 35.8
------ ------ ------- ------
$713.3 $130.0 $ -- $843.3
====== ====== ======= ======
Current liabilities:
Accounts payable.................................... $ 5.4 $ -- $ -- $ 5.4
Accrued interest.................................... 9.2 -- -- 9.2
Accrued compensation and related benefits........... 9.8 -- -- 9.8
Deferred income taxes............................... 11.5 -- -- 11.5
Other accrued liabilities........................... 3.8 -- -- 3.8
Current maturities of long-term debt................ 16.3 -- -- 16.3
------ ------ ------- ------
Total current liabilities................... 56.0 -- -- 56.0
------ ------ ------- ------
Long-term debt, less current maturities............... 756.6 130.0 -- 886.6
Other noncurrent liabilities.......................... 26.6 -- -- 26.6
------ ------ ------- ------
Total liabilities........................... 839.2 130.0 -- 969.2
------ ------ ------- ------
Contingencies
Stockholder's deficit:
Common stock........................................ -- -- -- --
Additional capital.................................. 89.8 -- -- 89.8
Accumulated deficit................................. (215.7) -- -- (215.7)
------ ------ ------- ------
Total stockholder's deficit................. (125.9) -- -- (125.9)
------ ------ ------- ------
$713.3 $130.0 $ -- $843.3
====== ====== ======= ======
</TABLE>
The Unaudited Pro Forma Consolidated Balance Sheet of the Company
should be read in conjunction with the accompanying Notes.
46
<PAGE> 49
NOTE TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET OF THE COMPANY
SEPTEMBER 30, 1996
The Unaudited Pro Forma Consolidated Balance Sheet reflects the
Transactions as if they occurred on September 30, 1996. The Transactions reflect
the issuance of $130.0 million aggregate principal amount of the Notes, the loan
of $125.0 million to MAXXAM pursuant to the Intercompany Note and the
capitalization of $5.0 million of estimated costs associated with the Offering.
MAXXAM will use a portion of the proceeds from the Intercompany Note to repay
the Old MAXXAM Notes together with accrued interest thereon through the date of
redemption; the remaining amounts will be used for general corporate purposes
including possible repurchases of MAXXAM Common Stock.
47
<PAGE> 50
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS ESTIMATED
--------------------------- GENERAL AND
ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS
ACTUAL NOTES NOTE EXPENSES ADJUSTED
------ ----------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $199.6 $ -- $ -- $ -- $199.6
Costs and expenses..................... (146.2) -- -- (0.1) (146.3)
------ ------ ------ ------ ------
Operating income....................... 53.4 -- -- (0.1) 53.3
Other income (expense):
Investment, interest and other....... 8.4 -- 10.3 -- 18.7
Interest expense..................... (58.4) (12.3) -- -- (70.7)
------ ------ ------ ------ ------
Income before income taxes............. $ 3.4 $ (12.3) $ 10.3 $ (0.1) $ 1.3
====== ====== ====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS ESTIMATED
--------------------------- GENERAL AND
ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS
ACTUAL NOTES NOTE EXPENSES ADJUSTED
------ ----------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $242.6 -- -- -- $242.6
Costs and expenses..................... 168.3 -- -- 0.1 168.4
------ ------ ------ ------ ------
Operating income....................... 74.3 -- -- (0.1) 74.2
Other income (expense):
Investment, interest and other....... 9.4 -- 13.8 -- 23.2
Interest expense..................... (77.8) (16.4) -- -- (94.2)
------ ------ ------ ------ ------
Income before income taxes, minority
interests and extraordinary item..... $ 5.9 $ (16.4) $ 13.8 $ (0.1) $ 3.2
====== ====== ====== ====== ======
</TABLE>
The Unaudited Pro Forma Consolidated Statements of Operations
for the Company should be read in conjunction with the accompanying notes.
48
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996, and the Unaudited Pro Forma Consolidated
Statement of Operations for the year ended December 31, 1995, reflect the
Transactions as if they occurred on January 1, 1995.
I. The Transactions reflect the issuance of $130.0 million aggregate
principal amount of the Notes, the loan of $125.0 million to MAXXAM
pursuant to the Intercompany Note and the capitalization of $5.0 million
of estimated costs associated with the Offering. MAXXAM will use a
portion of the proceeds from the Intercompany Note to repay the Old
MAXXAM Notes together with accrued interest thereon through the date of
redemption; the remaining amounts will be used for general corporate
purposes including possible repurchases of MAXXAM Common Stock. The
Unaudited Consolidated Statements of Operations of the Company reflect
the following adjustments:
a. The incurrence of $11.7 million and $15.6 million of interest expense
on the Notes and $0.6 million and $0.8 million of amortization related
to deferred financing costs associated with the Offering for the nine
months ended September 30, 1996 and for the year ended December 31,
1995, respectively.
b. Interest income of $10.3 million and $13.8 million from the
Intercompany Note for the nine months ended September 30, 1996 and for
the year ended December 31, 1995, respectively.
c. The incurrence of estimated general and administrative costs for the
Company of approximately $0.1 million annually.
49
<PAGE> 52
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF MAXXAM
The following selected historical consolidated financial data should be
read in conjunction with the Consolidated Financial Statements of MAXXAM and the
Notes thereto (including the unconsolidated Parent only, condensed financial
information of MAXXAM) and the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations of MAXXAM"
appearing elsewhere in this Prospectus. The selected historical financial data
as of and for the five years ended December 31, 1995 are derived from the
Consolidated Financial Statements of MAXXAM which have been audited by
independent public accountants. The selected historical consolidated financial
data as of and for the nine months ended September 30, 1996 and 1995 have not
been audited, but in the opinion of management contain all adjustments
(including those of a normal recurring nature) necessary to present fairly the
financial position and results of operations of MAXXAM as of such dates and for
such periods. The following consolidated pro forma operating data for the nine
months ended September 30, 1996 and for the year ended December 31, 1995 give
effect to the Transactions and the issuance of the KACC New Notes and the
application of the net proceeds therefrom (none of which were received by
MAXXAM), as if they occurred on January 1, 1995. The consolidated pro forma
balance sheet data give effect to the Transactions, the issuance of the KACC New
Notes, and the application of the net proceeds therefrom, as if they occurred on
September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING DATA:
Net sales.......................... $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1 $2,202.6 $2,254.5
Cost of sales (exclusive of
depreciation and depletion)...... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6 1,786.9 1,735.6
Gross profit....................... 354.6 418.4 574.3 297.8 243.5 415.7 518.9
Selling, general and administrative
expenses......................... 152.9 140.5 195.8 169.4 183.0 173.5 177.3
Depreciation and depletion......... 92.9 91.0 120.9 121.1 120.8 111.4 106.1
Restructuring of aluminum
operations....................... -- -- -- -- 35.8 -- --
Operating income (loss)............ 108.8 186.9 257.6 7.3 (96.1) 130.8 235.5
Investment, interest and other
income (expense)................. 35.1 8.7 18.2 (2.2) 69.8 51.6 42.8
Interest expense................... 135.5 136.1 181.3 176.9 185.1 195.6 210.9
Interest expense, net of earnings
on invested cash, cash
equivalents and marketable
securities....................... 125.1 125.1 166.3 166.5 174.0 197.4 196.7
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of
changes in accounting
principles....................... 8.4 59.5 94.5 (171.8) (211.4) (13.2) 67.4
Income (loss) before extraordinary
item and cumulative effect of
changes in accounting
principles....................... 28.0 35.1 57.5 (116.7) (131.9) (7.3) 57.5
Extraordinary items, net of related
income taxes(1).................. -- -- -- (5.4) (50.6) -- --
Cumulative effect of changes in
accounting principles(2)......... -- -- -- -- (417.7) -- --
Net income (loss).................. 28.0 35.1 57.5 (122.1) (600.2) (7.3) 57.5
OTHER HISTORICAL DATA:
Fixed charge coverage deficiency... 5.6 -- -- 213.1 225.8 21.1 --
Ratio of earnings to fixed
charges.......................... -- 1.1x 1.2x -- -- -- 1.3x
Capital expenditures............... 108.0 54.9 97.7 89.3 86.2 132.7 130.9
Summary of cash flow
information(3):
Cash provided by operating
activities..................... 13.5 53.0 137.9 4.5 52.1 30.6 125.0
Cash provided (used) by investing
activities..................... (75.4) (39.7) (75.4) (67.9) 44.6 (84.7) (138.0)
Cash provided (used) by financing
activities..................... 78.2 2.3 (42.9) 64.1 (94.7) 30.9 51.8
EBITDA(3)(4)....................... 201.7 277.9 378.5 128.4 24.7 242.2 341.6
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA OPERATING DATA(5):
Investment, interest and other
income (expense)................. $ 35.1 $ 16.3
Interest expense................... 157.6 211.7
Interest expense, net of earnings
on invested cash, cash
equivalents and marketable
securities....................... 147.2 196.7
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of changes in accounting
principles....................... (13.7) 62.2
Fixed charge coverage deficiency... 27.7 --
Ratio of earnings to fixed
charges.......................... -- 1.1x
EBITDA(3)(4)....................... 201.7 378.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
------------------------- ------------------------------------------------------------
ACTUAL PRO FORMA(5) 1995 1994 1993 1992 1991
-------- ------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Cash, cash equivalents and
marketable securities(6)......... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6 $ 152.5 $ 159.2
Working capital.................... 624.5 794.0 546.8 413.5 414.3 466.0 424.2
Total assets....................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0
Long-term debt, less current
portion.......................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9
Minority interests................. 217.9 217.9 223.2 344.3 224.3 176.7 179.2
Stockholders' equity
(deficit)(2)..................... (55.2) (55.8) (83.8) (275.3) (167.9) 443.9 459.6
</TABLE>
- ---------------
See "Summary Historical and Pro Forma Consolidated Financial Data of MAXXAM" for
the text of notes (1) through (6).
51
<PAGE> 54
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF MAXXAM
SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
ISSUANCE REPAYMENT
PAYMENT OF OF KACC OF
CONSENT NEW OLD MAXXAM AS
ACTUAL TRANSACTIONS FEE NOTES NOTES ADJUSTED
-------- ------------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 120.5 $125.0 $ (1.0) $88.1 $(44.5) $ 288.1
Marketable securities............. 50.6 -- -- -- -- 50.6
Receivables....................... 288.6 -- -- -- -- 288.6
Inventories....................... 623.6 -- -- -- -- 623.6
Prepaid expenses and other current
assets......................... 156.5 -- -- -- -- 156.5
-------- ------ ----- ----- ------ --------
Total current assets...... 1,239.8 125.0 (1.0) 88.1 (44.5) 1,407.4
-------- ------ ----- ----- ------ --------
Property, plant and equipment,
net............................... 1,252.4 -- -- -- -- 1,252.4
Timber and timberlands.............. 303.0 -- -- -- -- 303.0
Investments in and advances to
unconsolidated affiliates......... 186.3 -- -- -- -- 186.3
Deferred income taxes............... 435.5 -- -- -- 0.4 435.9
Long-term receivables and other
assets............................ 466.1 5.0 1.0 6.6 (0.1) 478.6
-------- ------ ----- ----- ------ --------
$3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6
======== ====== ===== ===== ====== ========
Current liabilities:
Accounts payable.................. $ 170.7 $ -- $ -- $ -- $ -- $ 170.7
Accrued interest.................. 24.8 -- -- -- (1.9) 22.9
Accrued compensation and related
benefits....................... 126.2 -- -- -- -- 126.2
Other accrued liabilities......... 170.6 -- -- -- -- 170.6
Payable to affiliates............. 96.6 -- -- -- -- 96.6
Current maturities of long-term
debt........................... 26.4 -- -- -- -- 26.4
-------- ------ ----- ----- ------ --------
Total current
liabilities............. 615.3 -- -- -- (1.9) 613.4
-------- ------ ----- ----- ------ --------
Long-term debt, less current
maturities........................ 1,683.9 130.0 -- 94.7 (41.7) 1,866.9
Other noncurrent liabilities........ 1,421.2 -- -- -- -- 1,421.2
-------- ------ ----- ----- ------ --------
Total liabilities......... 3,720.4 130.0 -- 94.7 (43.6) 3,901.5
-------- ------ ----- ----- ------ --------
Minority interests.................. 217.9 -- -- -- -- 217.9
Stockholders' deficit:
Preferred stock................... 0.3 -- -- -- -- 0.3
Common stock...................... 5.0 -- -- -- -- 5.0
Additional capital................ 155.6 -- -- -- -- 155.6
Accumulated deficit............... (180.5) -- -- -- (0.6) (181.1)
Pension liability adjustment...... (16.1) -- -- -- -- (16.1)
Treasury stock.................... (19.5) -- -- -- -- (19.5)
-------- ------ ----- ----- ------ --------
Total stockholders'
deficit................. (55.2) -- -- -- (0.6) (55.8)
-------- ------ ----- ----- ------ --------
$3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6
======== ====== ===== ===== ====== ========
</TABLE>
The Unaudited ProForma Consolidated Balance Sheet of MAXXAM
should be read in conjunction with the accompanying notes.
52
<PAGE> 55
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET OF MAXXAM
SEPTEMBER 30, 1996
The Unaudited Pro Forma Consolidated Balance Sheet reflects that the
following each occurred on September 30, 1996: (i) the Transactions, (ii) the
payment of the Consent Fee, (iii) the issuance of the KACC New Notes, and (iv)
the repayment of the Old MAXXAM Notes.
I. MAXXAM will use a portion of the proceeds from the Intercompany Note to
repay the Old MAXXAM Notes together with accrued interest thereon
through the date of redemption; the remaining amounts will be used for
general corporate purposes including the possible repurchases of MAXXAM
Common Stock. The Unaudited Pro Forma Consolidated Balance Sheet of
MAXXAM reflects the following adjustments:
a. The estimated net proceeds from this Offering, of approximately
$125.0 million, will be loaned to MAXXAM pursuant to the Intercompany
Note and the estimated costs associated with the Offering of $5.0
million will be capitalized.
b. The payment by MAXXAM of the Consent Fee to the holders of the MGI
Notes of approximately $1.0 million will be capitalized.
c. The issuance of Kaiser's $225.0 million aggregate principal amount of
the KACC New Notes which reflects the receipt of $219.3 million of
net proceeds, the repayment of borrowings outstanding under the 1994
KACC Credit Agreement, and the capitalization of approximately $6.6
million of estimated costs related to those transactions. MAXXAM did
not receive any of the net proceeds from the sale of the KACC New
Notes.
d. A portion of the net proceeds from the Intercompany Note will be
applied to the redemption of $42.6 million aggregate principal amount
of the Old MAXXAM Notes and the payment of approximately $1.9 million
of accrued interest thereon. The repayment of the Old MAXXAM Notes
will result in the write off of approximately $0.9 million of debt
discount and $0.1 million of unamortized deferred financing costs,
net of estimated income tax benefits of $0.4 million, attributable to
the Old MAXXAM Notes.
53
<PAGE> 56
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
REPAYMENT
ISSUANCE OF OF OLD
KACC NEW MAXXAM AS
ACTUAL TRANSACTIONS SENIOR NOTES NOTES ADJUSTED
-------- ------------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $1,921.1 $ -- $ -- $ -- $1,921.1
Costs and expenses........................ (1,812.3) -- -- -- (1,812.3)
-------- ------ ------ ---- --------
Operating income.......................... 108.8 -- -- -- 108.8
Other income (expense):
Investment, interest and other.......... 35.1 -- -- -- 35.1
Interest expense........................ (135.5) (12.4) (14.1) 4.4 (157.6)
-------- ------ ------ ---- --------
Income (loss) before income taxes and
minority interests...................... $ 8.4 $(12.4) $(14.1) $ 4.4 $ (13.7)
======== ====== ====== ==== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
REPAYMENT
ISSUANCE OF OF OLD
KACC NEW MAXXAM AS
ACTUAL TRANSACTIONS SENIOR NOTES NOTES ADJUSTED
-------- ------------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $2,565.2 $ -- $ -- $ -- $2,565.2
Costs and expenses........................ 2,307.6 -- -- -- 2,307.6
-------- ------ ------ ---- --------
Operating income.......................... 257.6 -- -- -- 257.6
Other income (expense):
Investment, interest and other.......... 18.2 -- -- (1.9) 16.3
Interest expense........................ (181.3) (16.5) (19.9) 6.0 (211.7)
-------- ------ ------ ---- --------
Income before income taxes and minority
interests............................... $ 94.5 $(16.5) $(19.9) $ 4.1 $ 62.2
======== ====== ====== ==== ========
</TABLE>
The Unaudited Pro Forma Consolidated Statements of Operations
of MAXXAM should be read in conjunction with the accompanying notes.
54
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996 and Unaudited Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1995 reflects that the following
each occurred on January 1, 1995: (i) the Transactions, (ii) the payment of the
Consent Fee, (iii) the issuance of the KACC New Notes, and (iv) the repayment of
the Old MAXXAM Notes.
I. MAXXAM will use approximately $42.6 million of the proceeds from the
Intercompany Note to repay the Old MAXXAM Notes, together with accrued
interest thereon through the date of redemption; the remaining net
proceeds will be used for general corporate purposes including possible
repurchases of MAXXAM's Common Stock. The Unaudited Pro Forma
Consolidated Statements of Operations of MAXXAM reflect the following
adjustments:
a. The incurrence of $11.7 million and $15.6 million of interest expense
on the Notes and $0.7 million and $0.9 million of amortization
related to deferred financing costs associated with the Notes
(including the Consent Fee paid by MAXXAM to the holders of the MGI
Notes) for the nine months ended September 30, 1996 and for the year
ended December 31, 1995, respectively.
b. The incurrence of $18.4 million and $24.3 million of interest expense
and $0.5 million and $0.7 million of amortization related to deferred
financing costs associated with the KACC New Notes for the nine
months ended September 30, 1996 and for the year ended December 31,
1995, respectively.
c. The elimination of $4.4 million and $6.0 million of interest expense
associated with the Old MAXXAM Notes for the nine months ended
September 30, 1996 and for the year ended December 31, 1995,
respectively.
d. The elimination of $4.8 million and $5.1 million of interest expense
associated with the reduction of outstanding borrowings under the
1994 KACC Credit Agreement for the nine months ended September 30,
1996 and for the year ended December 31, 1995, respectively.
e. The write off of $1.7 million of debt discount and $0.2 million of
unamortized deferred financing costs attributable to the Old MAXXAM
Notes for the year ended December 31, 1995.
55
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this section and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers primarily with respect to the future
operating performance of the Company. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors. This
section and "Risk Factors" identify important factors that could cause such
differences.
BACKGROUND
The Company was formed on November 4, 1996, to facilitate the offering of
the Old Notes. Subsequent to its formation, the Company received, as a capital
contribution, 100% of the capital stock of MGI. Concurrently with the
consummation of the Offering, MAXXAM transferred to the Company as an additional
capital contribution the Kaiser Shares, subject to the lien of the MGI
Indenture. The contribution of MGI's capital stock has been accounted for as a
reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to MGI and as such, the
accompanying financial statements of the Company reflect both the historical
operating results of MGI and MAXXAM's purchase accounting adjustments which
principally relate to MGI's timber and depreciable assets. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
contribution of the Kaiser Shares has been reflected in the Consolidated
Financial Statements of the Company as if such contribution occurred as of the
beginning of the earliest period presented at MAXXAM's historical cost using the
equity method of accounting.
The Company engages in forest products operations through MGI and MGI's
principal operating subsidiaries, Pacific Lumber and Britt. MGI's business is
seasonal in that its business generally experiences lower first quarter sales
due largely to the general decline in construction-related activity during the
winter months. The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto which are contained
elsewhere herein.
Old growth trees constitute Pacific Lumber's principal source of upper
grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability
to harvest virgin old growth timber on its property (see "-- Trends"), Pacific
Lumber's supply of upper grade lumber has decreased in some premium product
categories. Pacific Lumber has been able to lessen the impact of these decreases
by augmenting its production facilities to increase its recovery of upper grade
lumber from smaller diameter logs and increasing production capacity for
manufactured upper grade lumber products through its end and edge glue facility
(which was expanded during 1994). However, unless Pacific Lumber is able to
sustain the harvest level of old growth trees, Pacific Lumber expects that its
production of premium upper grade lumber products will decline and that its
manufactured lumber products will constitute a higher percentage of its
shipments of upper grade lumber products. See also "-- Trends," "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and
Environmental Factors" and "Business of the Company -- Pacific
Lumber -- Regulatory and Environmental Factors."
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, Pacific Lumber has significantly increased its
production capacity for manufactured lumber products by assembling knot-free
pieces of common grade lumber into wider and longer pieces in Pacific Lumber's
end and edge glue facility. 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. Pacific Lumber has instituted a number of measures at its
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<PAGE> 59
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 maximize cogeneration power revenues, and
installation of a lumber remanufacturing facility at its Fortuna lumber mill.
RESULTS OF OPERATIONS
The following table presents selected operational and financial information
for the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades................................ 36.1 35.0 46.5 52.9 68.3
Redwood common grades............................... 175.2 164.2 216.7 218.4 184.7
Douglas-fir upper grades............................ 7.8 5.0 7.4 8.6 10.7
Douglas-fir common grades........................... 56.7 43.7 64.6 54.2 41.6
Other............................................... 15.8 9.6 11.4 12.1 4.8
------ ------ ------ ------ ------
Total lumber................................... 291.6 257.5 346.6 346.2 310.1
====== ====== ====== ====== ======
Logs(2)............................................. 16.1 6.9 12.6 17.7 18.6
====== ====== ====== ====== ======
Wood chips(3)....................................... 157.2 166.8 214.0 210.3 156.8
====== ====== ====== ====== ======
Average sales price:
Lumber:(4)
Redwood upper grades................................ $1,382 $1,510 $1,495 $1,443 $1,275
Redwood common grades............................... 509 476 477 460 469
Douglas-fir upper grades............................ 1,138 1,308 1,301 1,420 1,218
Douglas-fir common grades........................... 435 395 392 444 447
Logs(4)............................................... 498 462 440 615 704
Wood chips(5)......................................... 76 102 102 83 81
Net sales:
Lumber, net of discount............................... $175.9 $158.0 $211.3 $216.5 $202.6
Logs.................................................. 8.0 3.2 5.6 10.9 13.1
Wood chips............................................ 11.9 17.0 21.7 17.4 12.7
Cogeneration power.................................... 2.4 1.7 2.5 3.5 3.8
Other................................................. 1.4 1.0 1.5 1.3 1.2
------ ------ ------ ------ ------
Total net sales................................ $199.6 $180.9 $242.6 $249.6 $233.4
====== ====== ====== ====== ======
Operating income........................................ $ 53.4 $ 53.7 $ 74.3 $ 79.1 $ 54.2
====== ====== ====== ====== ======
Operating cash flow(6).................................. $ 73.6 $ 72.7 $ 99.6 $103.8 $ 78.7
====== ====== ====== ====== ======
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles................................. $ 3.4 $ 2.3 $ 5.9 $ 16.1 $(17.7)
====== ====== ====== ====== ======
Capital expenditures.................................... $ 9.0 $ 6.6 $ 9.9 $ 11.3 $ 11.1
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400
pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income plus depletion and depreciation, also referred to as
"EBITDA." See Note 5 of the Notes to Summary Historical and Pro Forma
Consolidated Financial Data of the Company.
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<PAGE> 60
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Shipments
Lumber shipments to third parties for the nine months ended September 30,
1996 increased from the nine months ended September 30, 1995 due primarily to
increased shipments of both common and upper grade Douglas-fir and redwood
lumber. Log shipments for the nine months ended September 30, 1996 were 16.1
million feet, an increase of 9.2 million feet from the nine months ended
September 30, 1995.
Net sales
Net sales for the nine months ended September 30, 1996 increased from the
nine months ended September 30, 1995. This increase was principally due to
higher shipments of common and upper grade Douglas-fir and redwood lumber and
increased log shipments and to higher average realized prices for redwood and
Douglas-fir common lumber. These increases were partially offset by lower
average realized prices for upper grade redwood and Douglas-fir lumber,
resulting primarily from manufactured lumber products which constitute a
significant percentage of upper grade lumber shipments, and wood chips.
Shipments of fencing and other value-added common lumber products from the
Company's new remanufacturing facility were a contributing factor in the
improved redwood common lumber realizations. See also "-- Trends".
Operating income
Operating income for the nine month period, excluding a one time gain in
1995 of $1.5 million related to business interruption proceeds for the
settlement of claims related to an April 1992 earthquake, increased in 1996 due
to the increase in net sales discussed above. Costs of goods sold reflect both
the impact of additional manufacturing costs attributable to the increased
shipments of remanufactured lumber and the increasing regulatory compliance for
the Company's timber harvesting operations.
Income before income taxes
Income before income taxes for the nine months ended September 30, 1996
increased from the same period in 1995, primarily as a result of the increase in
investment, interest and other income relating to cash equivalents and other
non-recurring items.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for the nine month period ended
September 30, 1996 includes a benefit of $2.6 million relating to the refund of
taxes previously paid in connection with a settlement of certain federal income
tax matters in June 1996.
THREE YEARS ENDED DECEMBER 31, 1995
Shipments
Lumber shipments to third parties in 1995 were essentially unchanged from
1994. Increased shipments of common grade Douglas-fir lumber were mostly offset
by decreased shipments of both upper and common grades of redwood lumber. Log
shipments in 1995 were 12.6 million feet (net Scribner scale), a decrease of 5.1
million feet from 1994 shipments.
Lumber shipments to third parties in 1994 increased by 12% compared to
1993. Increased shipments of redwood common lumber and common grade Douglas-fir
and other lumber were partially offset by decreased shipments of upper grade
redwood lumber. Log shipments in 1994 were 17.7 million feet, a decrease of .9
million feet from 1993 shipments.
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<PAGE> 61
Net Sales
Net sales for 1995 decreased compared to 1994. Decreased shipments of upper
grade redwood lumber, lower average realized prices for common grade Douglas-fir
lumber and logs, decreased shipments of logs and redwood common lumber and lower
sales of electrical power were largely offset by increased shipments of common
grade Douglas-fir lumber, increased sales of wood chips and higher average
realized prices for both common and upper grades of redwood lumber.
Net sales for 1994 increased compared to 1993. This increase was
principally due to increased shipments of redwood common lumber, an increase in
the average realized price of upper grade redwood lumber, increased shipments of
common grade Douglas-fir and other lumber and increased sales of wood chips,
partially offset by decreased shipments of upper grade redwood lumber, a
decrease in the average realized price of redwood common lumber and a decrease
in the average realized price of log sales. The increase in sales of wood chips
reflects higher demand from pulp mills.
Operating Income
Operating income for 1995 decreased compared to 1994. This decrease was
primarily due to lower sales of lumber, higher cost of lumber sales and lower
sales of logs and electrical power, partially offset by increased sales of wood
chips and higher gross margins on wood chip sales. Cost of lumber sales for 1995
was unfavorably impacted by higher purchases of logs from third parties,
partially offset by improved sawmill productivity. Cost of goods sold for 1995
and 1993 was reduced by $1.5 million and $1.2 million, respectively, of business
interruption insurance proceeds for the settlement of claims related to an
earthquake in April 1992.
Operating income for 1994 increased compared to 1993. This increase was
principally due to higher sales of lumber and wood chips, lower purchases of
lumber and logs from third parties, improved sawmill productivity and reduced
overhead costs. Pacific Lumber arranged for the purchase of a significant number
of logs early in 1993 in response to concerns regarding inclement weather
conditions hindering logging activities on Pacific Lumber'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.
Income before income taxes and extraordinary item
Income before income taxes and extraordinary item decreased for 1995 as
compared to 1994. This decrease was primarily due to lower investment, interest
and other income and the decrease in operating income. Investment, interest and
other income for 1995 includes net gains on marketable securities of $4.2
million. Investment, interest and other income for 1994 includes the receipt of
a franchise tax refund of $7.2 million (as described in Note 12 to the Company's
Audited Consolidated Financial Statements) and net gains on marketable
securities of $1.7 million.
Income before income taxes, extraordinary items and cumulative effect of
changes in accounting principles increased for 1994 as compared to 1993. This
increase resulted from the increase in operating income, higher investment,
interest and other income and decreased interest expense. Investment, interest
and other income for 1994 includes the receipt of a franchise tax refund net
gains on marketable securities as described above. Investment, interest and
other income for 1993 includes net gains on marketable securities of $6.4
million. Interest expense decreased due to lower interest rates resulting from
the refinancing of the long-term debt of Pacific Lumber and MGI in March and
August of 1993, respectively.
Concurrently with the consummation of the Offering, MAXXAM will contribute
the Kaiser Shares to the Company. The Kaiser Shares are pledged to secure the
MGI Notes. The Company's consolidated financial statements reflect the
contribution of the Kaiser Shares as if such contribution occurred as of the
earliest period presented at MAXXAM's historical cost. As of the date of this
Prospectus, the contribution of the Kaiser Shares would represent, on a fully
diluted basis, an equity interest in Kaiser of approximately 34.7%. The Company
follows the equity method of accounting for its investment in Kaiser. During the
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<PAGE> 62
first quarter of 1993, losses exhausted Kaiser's equity with respect to its
common stockholders principally due to the implementation of new accounting
standards for postretirement benefits and income taxes (see Note 5 to the
Company's Audited Consolidated Financial Statements). The Company recorded its
share of such loss in January 1993 up to the amount of its investment in Kaiser.
Since January 1993, cumulative losses with respect to the results of operations
attributable to Kaiser's common stockholders have exceeded cumulative earnings.
The Company is under no obligation to provide any economic support to Kaiser,
and accordingly, has not recorded any amounts attributable to its equity in
Kaiser's results of operations for any period subsequent to January 1993. The
Company will not record its equity in Kaiser's results of operations until such
time as cumulative earnings exceed the cumulative losses incurred.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for 1994 includes a credit relating to
reserves the Company no longer believed were necessary.
Extraordinary item
The litigation settlement in the second quarter of 1994 (as described in
Note 10 to the Company's Audited Consolidated Financial Statements) resulted in
an extraordinary loss of $14.9 million, net of related income taxes of $6.3
million. The extraordinary loss consists of Pacific Lumber's $14.8 million cash
payment to the settlement fund, a $2.0 million accrual for additional contingent
claims and $4.4 million of related legal fees.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company conducts its operations through MGI, its wholly owned
subsidiary. MGI conducts its operations primarily through its subsidiaries,
Pacific Lumber and Britt. Creditors of MGI's subsidiaries have priority with
respect to the assets, cash flows and earnings of such subsidiaries over the
claims of the creditors of MGI, including the holders of the MGI Notes, with
respect to the assets, cash flows and earnings of MGI. Moreover, the creditors
of MGI have priority over the claims of the Company's creditors, including the
holders of the Notes. See "Risk Factors -- Substantial Indebtedness; Structural
Subordination and Asset Encumbrances" and "-- Ability to Service Indebtedness."
As of September 30, 1996, the indebtedness of MGI was $201.0 million and the
indebtedness of MGI's subsidiaries was $571.9 million. The Company is a holding
company, and as such its ability to service its indebtedness will be largely
dependent on cash interest payments received from MAXXAM pursuant to the terms
of the Intercompany Note, and to a considerably lesser extent, dividends
received from MGI and capital contributions from MAXXAM. The MGI Indenture
contains various covenants which, among other things, limit the payment of
dividends and restricts transactions between MGI and its affiliates. Under the
MGI Indenture, MGI was permitted to pay no dividends in respect of the period
from August 31, 1993 to December 31, 1993, $4.9 million of dividends in respect
of the 1994 fiscal year, $1.8 million of dividends in respect of the 1995 fiscal
year, and $2.0 million of dividends in respect of the nine months ended
September 30, 1996. MGI did not pay any dividends from August 1993 to December
31, 1994. MGI paid dividends of $4.8 million during 1995 and $3.9 million during
the nine months ended September 30, 1996. As of September 30, 1996, no
additional dividends could be paid by MGI.
The indentures governing the Pacific Lumber Senior Notes and the Timber
Notes and the Pacific Lumber 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 Scotia Pacific, exclusive
of the net income and depletion of Scotia Pacific for as long as any Timber
Notes are outstanding. As of September 30, 1996, under the most restrictive of
these covenants, approximately $15.4 million of dividends could be paid by
Pacific Lumber. Pacific Lumber paid an aggregate of $16.5 million, $22.0 million
and $24.5 million of dividends during the nine months ended September 30, 1996
and for the years ended December 31, 1995 and 1994, respectively.
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<PAGE> 63
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
Scotia Pacific. The Company expects that Pacific Lumber will provide a major
portion of MGI's future operating cash flow. Pacific Lumber is dependent upon
Scotia Pacific for the log requirements from which Pacific Lumber generates a
substantial portion of its operating cash flow. Pacific Lumber harvests and
purchases logs from Scotia Pacific's timberlands at prices established pursuant
to a Master Purchase Agreement (see "Business of the Company -- Pacific Lumber
Operations -- Relationships with Scotia Pacific and Britt"). The holders of the
Timber Notes have priority over the claims of creditors of Pacific Lumber with
respect to the assets and cash flows of Scotia Pacific, 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 Timber Note Indenture, Scotia Pacific will not have cash available for
distribution to Pacific Lumber unless Scotia Pacific'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.
Once Scotia Pacific has made appropriate provisions for current debt service on
the Timber Notes and expenditures for operating and capital costs, and in the
absence of certain Trapping Events (as defined in the Timber Note Indenture) or
outstanding judgments, the Timber Note Indenture does not limit monthly
distributions of available cash from Scotia Pacific to Pacific Lumber.
Accordingly, the Company expects that, once Scotia Pacific's debt service and
operating and capital expenditure requirements have been met, substantially all
of Scotia Pacific's available cash will be periodically distributed to Pacific
Lumber. Scotia Pacific paid $59.6 million, $59.0 million, $88.9 million and
$58.3 million of dividends to Pacific Lumber during the nine months ended
September 30, 1996 and during the years ended December 31, 1995 and 1994 and
during the period from March 23, 1993 to December 31, 1993, respectively. In the
event Scotia Pacific'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 to make
distributions to the Company would also be materially impaired, which could
impair the Company's ability to make the required interest payments on the
Notes. See Note 6 to the Company's Audited Consolidated Financial Statements for
a description of the principal payment requirements of the Timber Notes.
During the nine months ended September 30, 1996, and during the years ended
December 31, 1995, 1994 and 1993, Pacific Lumber's operating income plus
depletion and depreciation ("operating cash flow") amounted to $67.8 million,
$90.5 million, $95.9 million and $76.6 million, respectively, which exceeded
interest expense in respect of all of its indebtedness in those periods by $26.9
million, $35.0 million, $39.8 million and $17.4 million, respectively. The
Company believes that Pacific Lumber's level of operating cash flow and other
available sources of financing will enable it to meet the debt service
requirements on the Pacific Lumber Senior Notes and the Timber Notes for the
next year. With respect to its long-term liquidity, Pacific Lumber believes that
its ability to generate sufficient levels of cash from operations, and its
ability to obtain both short and long-term financing, should provide sufficient
funds to meet its long-term working capital and capital expenditure
requirements. See also "Risk Factors -- Ability to Service Indebtedness" and
"-- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental
Factors."
As of September 30, 1996, MGI (excluding its subsidiary companies) had cash
and marketable securities of approximately $72.5 million. The Company believes,
although there can be no assurance, that the aggregate dividends which will be
available to MGI from Pacific Lumber and Britt, during the period in which cash
interest will not be payable on the MGI Discount Notes, will exceed the cash
interest payments on the MGI Senior Notes. When cash interest payments on the
MGI Discount Notes commence on February 1, 1999, the Company believes that MGI
should 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. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Risk
Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors."
On August 4, 1993, MGI issued $100.0 million aggregate principal amount of
the MGI Senior Notes and $126.7 million aggregate principal amount
(approximately $70.0 million net of original issue discount) of the MGI Discount
Notes. The MGI Notes are secured by, among other things, the capital stock of
Pacific
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<PAGE> 64
Lumber and Britt and the Kaiser Shares, which MAXXAM transferred to the Company
concurrently with the consummation of the Offering. See "Principal Indebtedness"
and Note 6 to the Company's Audited Consolidated Financial Statements for a
description of the terms of the MGI Notes and the use of proceeds from their
issuance. The MGI Notes are senior indebtedness of MGI and are effectively
senior to the indebtedness of the Company; however, they are effectively
subordinate to the liabilities of MGI's subsidiaries, which include the Timber
Notes and the Pacific Lumber Senior Notes.
On March 23, 1993, Pacific Lumber issued $235.0 million of the Pacific
Lumber Senior Notes and Scotia Pacific issued $385.0 million of the Timber
Notes. See "Principal Indebtedness" and Note 6 to the Company's Audited
Consolidated Financial Statements for a description of the terms of the Pacific
Lumber Senior Notes and the Timber Notes and the use of proceeds from their
issuance.
Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1998, are secured by Pacific Lumber's trade receivables and inventories,
with interest computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for
borrowings of up to $60.0 million, of which $15.0 million may be used for
standby letters of credit and $30.0 million is restricted to timberland
acquisitions. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of September 30, 1996, $45.4 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $4.7 million was available
for letters of credit and $30.0 million was restricted to timberland
acquisitions. No borrowings were outstanding as of September 30, 1996, and
letters of credit outstanding amounted to $10.3 million. The Pacific Lumber
Credit Agreement contains covenants substantially similar to those contained in
the indenture governing the Pacific Lumber Senior Notes. See "-- Description of
Principal Indebtedness -- Pacific Lumber Senior Notes."
Pacific Lumber's and Britt's capital expenditures were made to improve
production efficiency, reduce operating costs and, to a lesser degree, acquire
additional timberlands. Pacific Lumber's and Britt's capital expenditures were
$9.0 million, $9.9 million, $11.3 million and $11.1 million for the nine months
ended September 30, 1996 and for the years ended December 31, 1995, 1994 and
1993, respectively. Capital expenditures for 1996 are expected to be $12-$15
million and for the 1997-1998 period are estimated to be between $10.0 million
and $15.0 million per year. Pacific Lumber may purchase additional timberlands
from time to time as appropriate opportunities arise. Moreover, such purchases
could exceed historical levels. Capital expenditures attributable to the
reconstruction of Pacific Lumber's commercial facilities destroyed by an
earthquake in April 1992 were approximately $1.9 million for 1993 and $2.6
million for 1994, when construction was completed.
As of September 30, 1996, MGI and its subsidiaries had consolidated working
capital of $124.5 million and long-term debt of $726.2 million (net of current
maturities and restricted cash deposited in a liquidity account for the benefit
of the holders of the Timber Notes). MGI and its subsidiaries anticipate that
cash flow from operations, together with existing cash, marketable securities
and available sources of financing, will be sufficient to fund their working
capital and capital expenditure requirements for the next year. With respect to
their long-term liquidity, MGI and its subsidiaries believe that their existing
cash and cash equivalents, together with their ability to generate sufficient
levels of cash from operations, and their ability to obtain both short and
long-term financing, should provide sufficient funds to meet their working
capital and capital expenditure requirements. However, due to their highly
leveraged condition, MGI and its subsidiaries are more sensitive than less
leveraged companies to factors affecting their operations, including
governmental regulation affecting their timber harvesting practices, increased
competition from other lumber producers or alternative building products and
general economic conditions. See also "-- Trends" and "Risk Factors -- Risk
Factors Relating to Pacific Lumber."
As of September 30, 1996, on a pro forma basis, after giving effect to the
issuance of the Old Notes and the loan of the net proceeds therefrom to MAXXAM,
the Company would have had working capital of $126.6 million and consolidated
indebtedness of $856.2 million (net of current maturities and restricted cash
held for the benefit of the Timber Notes). The Company expects that the cash
interest payments received from MAXXAM pursuant to the Intercompany Note and, to
a considerably lesser extent, dividends received from
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<PAGE> 65
MGI and capital contributions from MAXXAM will be sufficient to fund its debt
service requirements for the next year and for the next several years
thereafter. Cash flows from operations of the Company and its subsidiaries are
unlikely to be sufficient to pay principal on the Notes. The ability of the
Company and its subsidiaries to refinance their respective indebtedness at or
prior to the respective maturities thereof will depend on a number of factors,
including their respective financial condition, results of operations and cash
flows, and then prevailing interest rates and market conditions. There can be no
assurance that such refinancing will be available, or available on reasonable
terms. The failure of any of the Company's subsidiaries to refinance its
indebtedness could materially adversely affect the ability of the Company to
satisfy its obligations under the Notes. See also "Risk Factors -- Ability to
Service Indebtedness" and "-- Litigation."
TRENDS
The Company's forest products operations are primarily conducted by Pacific
Lumber and are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. Compliance with such laws and regulations
together with the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber have increased the cost of logging
operations. These laws include 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 BOF. The ESA and 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. CESA 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 is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future governmental regulations, legislation or judicial or
administrative decisions would not materially and adversely affect the Company.
In March 1992, the marbled murrelet was approved for listing as endangered
under the CESA. 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. Pacific Lumber has incorporated, and will
continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands. The
BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber. Such surveys can only be conducted during a portion of the murrelet's
nesting and breeding season, which extends from April through mid-September.
Accordingly, such surveys are expected to delay the review and approval process
with respect to certain of the THPs filed by Pacific Lumber. The results of such
surveys to date (based upon current survey protocols) have indicated that
Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet
habitat, the majority of which is located within the Headwaters Timberlands. A
substantial portion of this land contains virgin and residual old growth timber
and the bulk of it falls within the areas designated as critical habitat for the
marbled murrelet (see below). Pacific Lumber is unable to predict when or if it
will be able to harvest this acreage.
In May 1996, the USFWS published the Final Designation of critical habitat
for the marbled murrelet, which designated over four million acres as critical
habitat for the marbled murrelet. Although nearly all of the designated habitat
is public land, approximately 33,000 acres of the Company's timberlands are
included in the Final Designation, the substantial portion of such acreage being
young growth timber. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber over the last few years has attempted to develop the Murrelet
HCP. Due to, among
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other things, the unfavorable response of the USFWS to Pacific Lumber's initial
Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed the Takings
Litigation alleging that certain portions of its timberlands have been "taken"
and seeking just compensation (see "Legal Proceedings -- Pacific Lumber" for a
description of the Takings Litigation). Pursuant to the Headwaters Agreement
described below, the Takings Litigation has been stayed by the court at the
request of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be materially
adverse. If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking. There continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered under
the ESA and/or the CESA and to designate critical habitat for such species. For
example, the NMFS recently announced that by April 25, 1997, it would make a
final determination concerning whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by Pacific Lumber. It
is uncertain what impact, if any, such listings and/or designations of critical
habitat would have on the Company's consolidated financial position, results of
operations or liquidity. See also "Legal Proceedings -- Pacific Lumber
Litigation" for a description of the pending Marbled Murrelet action. See
"-- Headwaters Agreement" below for a description of the Headwaters Agreement
relating to processing and approval of the Multi-Species HCP covering Pacific
Lumber's timberlands.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish an LTSY harvest level that takes into account
environmental and economic considerations. The SYP must demonstrate that the
average annual harvest over any rolling ten-year period will not exceed the LTSY
harvest level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the
CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as
Pacific Lumber's average annual timber harvest over the last five years. The
proposed SYP also indicates that Pacific Lumber's average annual timber harvest
during the first decade of the SYP would approximate the LTSY harvest level.
During the second decade of the proposed SYP, Pacific Lumber's average annual
timber harvest would be approximately 8% less than that proposed for the first
decade. The SYP, when approved, will be valid for ten years. Thereafter, revised
SYPs will be prepared every decade that will address the LTSY harvest level
based upon reassessment of changes in the resource base and protection of public
resources. The proposed SYP assumes that the transactions contemplated by the
Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, the Company is unable to predict the impact that these regulations
will have on its future timber harvesting practices. It is possible that the
results of the review and approval process could require Pacific Lumber to
reduce its timber harvest in future years from the harvest levels set forth in
the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
Accordingly, the Company is unable to predict the ultimate impact the sustained
yield regulations will have on its future financial position, results of
operations or liquidity. See "-- Headwaters Agreement" below for a description
of certain terms of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of the Company's THPs and other timber harvesting
64
<PAGE> 67
operations, and the Company expects that such groups and individuals will
continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent the Company from implementing certain of its
approved THPs or which challenge other operations by the Company. These
challenges have severely restricted Pacific Lumber's ability to harvest old
growth timber on its property. To date, challenges with respect to the Company's
THPs relating to young growth timber have been limited; however, no assurance
can be given as to the extent of such challenges in the future. The Company
believes that environmentally focused challenges to its timber harvesting
operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have delayed or
prevented the Company from conducting a portion of its operations, they have not
had a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to predict
the future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or liquidity of
the Company. See also "Legal Proceedings -- Pacific Lumber Litigation" for a
description of the pending Marbled Murrelet action.
Judicial or regulatory actions adverse to Pacific Lumber, increased
regulatory delays and inclement weather in northern California, independently or
collectively, could impair Pacific Lumber's ability to maintain adequate log
inventories and force Pacific Lumber to temporarily idle or curtail operations
at certain of its lumber mills from time to time. With respect to the foregoing,
see also "Risk Factors -- Risk Factors Relating to Pacific Lumber."
HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement, which provides the framework for the acquisition by the
United States and California of the approximately 5,600 acres of Headwaters
Timberlands. A substantial portion of the Headwaters Timberlands consist of
"virgin old" growth timberlands (those which have never been harvested). The
Headwaters Timberlands would be transferred in exchange for (a) property and
other consideration (possibly including cash) from the United States and
California having an aggregate fair market value of $300 million and (b) the Elk
River Timberlands, consisting of approximately 7,775 acres of adjacent
timberlands to be acquired by the United States and California from a third
party. The Pacific Lumber Parties have agreed not to conduct logging operations
(including salvage logging) on the Headwaters Timberlands while the Headwaters
Agreement is in effect. The continuing effectiveness of the Headwaters Agreement
is predicated on the satisfaction of various conditions, including completion
within ten months of specified closing items.
The Headwaters Agreement requires the United States and/or California to
furnish Pacific Lumber a list of property interests owned or controlled by the
United States and/or California with a good faith estimated fair market value
equal to or in excess of $300 million which are available and acceptable to
Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity Counties in California, and surplus acreage next to a federal office
building in Laguna Niguel, California. The California list contained a variety
of properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available," as legislative action would be required for exchange of certain of
the properties.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including: (a) acquisition by the government of
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<PAGE> 68
the Elk River Timberlands from a third party, (b) approval of an SYP and a
Multi-Species HCP, and issuance of a Permit, each in form and substance
satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service
and the California Franchise Tax Board of closing agreements in form and
substance sought by and satisfactory to the Pacific Lumber Parties, (d) the
absence of a judicial decision in any litigation brought by third parties that
any party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal with
prejudice at closing of the Takings Litigation. The parties to the Headwaters
Agreement are working to satisfy these conditions; however, there can be no
assurance that the Headwaters Agreement will be consummated. See "Business of
the Company -- Pacific Lumber -- Headwaters Agreement" for further information
concerning the Headwaters Agreement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MAXXAM
This section contains statements which constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this section and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers primarily with respect to the future operating
performance of the Company. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors. This section and
"Risk Factors" identify important factors that could cause such differences.
RESULTS OF OPERATIONS
MAXXAM operates in three principal industries: aluminum, through its
majority owned subsidiary, Kaiser, a fully integrated aluminum producer; forest
products, through the Company and its wholly owned subsidiaries, principally
Pacific Lumber and Britt; real estate investment and development, managed
through MAXXAM Property Company; and other commercial operations through various
other wholly owned subsidiaries. The following should be read in conjunction
with MAXXAM's Consolidated Financial Statements and the Notes thereto which are
contained elsewhere herein.
ALUMINUM OPERATIONS
Aluminum operations account for the substantial portion of MAXXAM's
revenues and operating results. 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 and on hedging strategies. Kaiser, through its principal subsidiary, KACC,
operates in two business segments: bauxite and alumina, and aluminum processing.
The following table presents selected operational and financial information for
the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993. The information presented in the table is in
millions of dollars except shipments and prices.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shipments:(1)
Alumina.............................. 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5
Aluminum Products:
Primary aluminum.................. 262.9 184.5 271.7 224.0 242.5
Fabricated aluminum products...... 245.4 284.3 368.2 399.0 373.2
-------- -------- -------- -------- --------
Total aluminum products...... 508.3 468.8 639.9 623.0 615.7
======== ======== ======== ======== ========
Average realized sales price:
Alumina (per ton).................... $ 199 $ 203 $ 208 $ 169 $ 169
Primary aluminum (per pound)......... .69 .82 .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina........................... $ 300.2 $ 303.8 $ 424.8 $ 352.8 $ 338.2
Other (2)(3)...................... 77.2 65.3 89.4 79.7 85.2
-------- -------- -------- -------- --------
Total bauxite and alumina.... 377.4 369.1 514.2 432.5 423.4
-------- -------- -------- -------- --------
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Aluminum processing:
Primary aluminum.................. 402.8 335.0 488.0 292.0 301.7
Fabricated aluminum products...... 861.4 929.0 1,218.6 1,043.0 981.4
Other(3).......................... 10.5 13.6 17.0 14.0 12.6
-------- -------- -------- -------- --------
Total aluminum processing.... 1,274.7 1,277.6 1,723.6 1,349.0 1,295.7
-------- -------- -------- -------- --------
Total net sales.............. $1,652.1 $1,646.7 $2,237.8 $1,781.5 $1,719.1
======== ======== ======== ======== ========
Operating income (loss)................ $ 91.9 $ 153.9 $ 216.5 $ (50.3) $ (117.4)
======== ======== ======== ======== ========
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of changes
in accounting principles............. $ 26.6 $ 73.0 $ 108.7 $ (145.8) $ (201.7)
======== ======== ======== ======== ========
Capital expenditures and investments in
unconsolidated joint ventures(4)..... $ 91.1 $ 53.2 $ 88.4 $ 70.0 $ 67.7
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Shipments are expressed in thousands of metric tons. A metric ton is
equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in
consolidated subsidiaries.
(4) The nine months ended September 30, 1995 and the year ended December 31,
1995 include investments in unconsolidated joint ventures of $9.0 million.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Summary
Kaiser's net sales for the first nine months of 1996 were $1,652.1 million,
compared to $1,646.7 million for the same period in 1995. For the first nine
months of 1996, Kaiser's operating income was $91.9 million, compared to
operating income of $153.9 million in the first nine months of 1995.
Results for the nine months ended September 30, 1996, reflect the
substantial reduction in market prices for primary aluminum more fully discussed
below (see "-- Trends -- Aluminum Operations"). Alumina prices, which are
significantly influenced by changes in primary aluminum prices, also declined
from period to period. The decrease in product prices more than offset the
positive impact of increases in shipments in several segments of Kaiser's
business, as more fully discussed below.
Results for the first nine months of 1995 include approximately $17.0
million of first-quarter 1995 pre-tax expenses associated with an eight-day
strike at five major U.S. locations, a six-day strike at Kaiser's Alumina
Partners of Jamaica ("Alpart") alumina refinery, and a four-day disruption of
alumina production at Alpart caused by a boiler failure.
Bauxite and Alumina
Net sales for the bauxite and alumina segment for the nine months ended
September 30, 1996, were basically unchanged from the same period in 1995 as, on
a year to date basis, nominal alumina price declines were offset by a modest
increase in alumina shipments. The reduction in prices realized reflects the
decline in primary aluminum prices experienced in 1996 discussed above, as well
as the impact of certain short term sales of previously uncommitted alumina
production.
Operating income (loss) for this segment of the Kaiser's business declined
significantly from the prior year period as a result of: (i) reduced gross
margins from alumina sales resulting from the price declines
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<PAGE> 71
referred to above; (ii) high operating costs associated with disruptions in the
power supply at Alpart; and (iii) increased natural gas costs at Kaiser's
Gramercy, Louisiana alumina refinery. Operating income for the nine months ended
September 30, 1996, was also unfavorably impacted by a temporary raw material
quality problem experienced at Kaiser's Gramercy, Louisiana facility during the
second quarter of 1996.
Aluminum Processing
For the first nine months of 1996 increases in shipments of 42.5% more than
offset a 16% decline in product prices from period to period. The increase in
shipments during the nine months ended September 30, 1996, is the result of
increased shipments of primary aluminum to third parties as a result of a
decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the nine months
ended September 30, 1996 as compared to the prior year period as a result of a
decrease in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of consumer inventories. The impact
of reduced product shipments was to a limited degree offset by a 7% increase in
prices realized from the sale of fabricated aluminum products for the nine
months ended September 30, 1996, resulting from a shift in product mix (to
higher-end value added products), due to reduced can sheet shipments.
THREE YEARS ENDED DECEMBER 31, 1995
Net Sales
Bauxite and alumina. Revenue from net sales to third parties for the
bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2% higher in
1994 than in 1993. Revenue from alumina increased 20% in 1995 from 1994 due to
higher average realized prices, partially offset by lower shipments. Revenue
from alumina increased 4% in 1994 compared to 1993 because of increased
shipments. The remainder of the segment's sales revenues was from sales of
bauxite, which remained about the same throughout the three-year period, and the
portion of sales of alumina attributable to the 35% minority interest in Alpart.
Aluminum processing. Revenue from net sales to third parties for the
aluminum processing segment was 28% higher in 1995 than in 1994 and 4% higher in
1994 than in 1993. The bulk of the segment's sales represents Kaiser's primary
aluminum and fabricated aluminum products, with the remainder representing the
portion of sales of primary aluminum attributable to the minority interest in
Valco.
Revenue from primary aluminum increased 67% in 1995 from 1994 due primarily
to higher average realized prices and higher shipments. In 1995, Kaiser's
average realized price from sales of primary aluminum was approximately $.81 per
pound, compared to the AMT price of approximately $.86 per pound. The higher
shipments of primary aluminum were due to increased production at Kaiser's
smelters in the Pacific Northwest and Valco, and reduced intracompany
consumption of primary aluminum at Kaiser's fabricated products units. The
increase in revenue for 1995 was partially offset by decreased shipments caused
by a strike of the United Steelworkers of America (the "USWA") discussed below.
Revenue from primary aluminum decreased 3% in 1994 from 1993 as higher average
realized prices were more than offset by lower shipments. Average realized
prices in 1994 reflected the defensive hedging of primary aluminum prices in
respect to 1994 shipments, which was initiated prior to improvements in metal
prices that had recently occurred. Shipments in 1994 reflected production
curtailments at Kaiser's smelters in the Pacific Northwest and Valco. Shipments
of primary aluminum to third parties were approximately 42% of total aluminum
products shipments in 1995 compared with approximately 36% in 1994 and 39% in
1993. Revenue from fabricated aluminum products increased 17% in 1995 from 1994
due to higher average realized prices partially offset by lower shipments for
most of these products. Revenue from fabricated aluminum products increased 6%
in 1994 from 1993, principally due to increased shipments of most of these
products.
Operating Income (Loss)
Improved operating results for 1995 were partially offset by expenses
related to Kaiser's smelting joint venture in China (see "-- Financial Condition
and Investing and Financing Activities -- Aluminum Opera-
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<PAGE> 72
tions"), accelerated expenses on Kaiser's micromill technology, maintenance
expenses as a result of an electrical lightning strike at Kaiser's Trentwood,
Washington, facility, and a work slowdown at Kaiser's 49%-owned Kaiser Jamaica
Bauxite Company prior to the signing of a new labor contract. The combined
impact of these expenditures on the results for 1995 was approximately $6.0
million (on a pre-tax basis). Operating results for 1995 were further impacted
by (i) an eight-day strike of the USWA at Kaiser's five major domestic
locations, (ii) a six-day strike of the National Workers Union at Kaiser's
65%-owned Alpart alumina refinery, and (iii) a four-day disruption of alumina
production at Alpart caused by a boiler failure. The combined impact of these
events on the results for 1995 was approximately $17.0 million (on a pre-tax
basis), principally from lower production volume and other related costs. In
1993, Kaiser recorded pre-tax charges of $35.8 million relating to the
restructuring of aluminum operations (see "-- Aluminum Processing" below) and
approximately $19.4 million in the fourth quarter of 1993 because of reductions
in the carrying value of its inventories caused principally by prevailing lower
prices for alumina, primary aluminum and fabricated aluminum products.
Kaiser's corporate general and administrative expenses of $82.3 million,
$67.6 million and $72.6 million in 1995, 1994 and 1993, respectively, were
allocated by MAXXAM to the bauxite and alumina and aluminum processing segments
based upon those segments' ratio of sales to unaffiliated customers.
Bauxite and alumina. Operating income for the bauxite and alumina segment
was $37.2 million in 1995, compared to operating income of $5.6 million in 1994
and an operating loss of $20.1 million in 1993. In 1995 compared to 1994,
operating income increased principally due to higher revenue, partially offset
by the effect of the strikes and boiler failure. In 1994 compared to 1993,
operating income was favorably affected by increased shipments and lower
manufacturing cost.
Aluminum processing. Operating income for the aluminum processing segment
was $179.3 million in 1995, compared to an operating loss of $55.9 million in
1994 and an operating loss of $97.3 million in 1993. Operating results improved
in 1995 compared to 1994, principally due to higher revenue, partially offset by
the effect of the USWA strike. The decrease in operating loss in 1994 compared
to 1993 was caused principally by a nonrecurring $35.8 million restructuring
charge recorded in 1993, as described below, increased shipments of fabricated
aluminum products, and higher average realized prices of primary aluminum,
partially offset by lower shipments of primary aluminum. In October 1993, KACC
announced that it was restructuring its flat-rolled products operation at its
Trentwood plant to reduce that facility's annual operating costs by at least
$50.0 million after full implementation. Additionally, KACC implemented a plan
to streamline its casting operations, which included the shutdown of two
facilities located in Ohio. This entire restructuring was successfully completed
by the end of 1995. The pre-tax charge for this restructuring of $35.8 million
included $25.2 million for pension, severance and other termination benefits at
Trentwood; $8.0 million related to casting facilities; and $2.6 million for
various other items. Other contributing factors to the 1993 operating results
were lower production at Kaiser's smelters in the Pacific Northwest as a result
of the removal of three reduction potlines from production in January 1993 in
response to the reduction by the BPA during the first quarter of 1993 of the
amount of power it had normally provided to Kaiser, and the increased cost of
substitute power in such quarter. Additionally, during 1993, 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
Income before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles for 1995, as compared to
the loss for 1994, resulted from the improvement in operating income previously
described, partially offset by other charges, principally related to the
establishment of additional litigation reserves. See "-- Financial Condition and
Investing and Financing Activities -- Aluminum Operations." The decrease in the
loss before income taxes, minority interests, extraordinary item and cumulative
effect of changes in accounting principles in 1994 compared to 1993 resulted
from the reduction in operating losses previously described.
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<PAGE> 73
As described in Note 1 to MAXXAM's Audited Consolidated Financial
Statements, Kaiser's cumulative losses in the first and second quarters of 1993,
principally due to the implementation of the new accounting standard for
postretirement benefits other than pensions as described in Note 6 to MAXXAM's
Audited Consolidated Financial Statements, eliminated Kaiser's equity with
respect to its common stock; accordingly, MAXXAM recorded 100% of Kaiser's
losses in the third and fourth quarters of 1993 and all of 1994, without regard
to the minority interests represented by Kaiser's other common stockholders (as
described in Note 7 to MAXXAM's Audited Consolidated Financial Statements).
MAXXAM recorded 100% of Kaiser's earnings in 1995 and will continue to do so
until such time as the cumulative losses recorded by MAXXAM 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 MAXXAM's Audited Consolidated Financial Statements.
FOREST PRODUCTS OPERATIONS
For information concerning the results of MAXXAM's forest products
operations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations." Information
concerning net sales, operating income (loss) and assets attributable to certain
geographic areas and industry segments is set forth in Note 11 to MAXXAM's
Audited Consolidated Financial Statements.
REAL ESTATE AND OTHER OPERATIONS
The following table presents selected operational and financial information
for the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993. The information presented in the table is in
millions of dollars.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------
1996 1995 1995 1994 1993
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales............................... $69.4 $65.0 $ 84.8 $ 84.6 $ 78.5
Operating loss.......................... (7.3) (6.4) (13.6) (10.0) (13.5)
Income (loss) before income taxes,
minority interests, extraordinary item
and cumulative effect of changes in
accounting principles................. 10.2 (.9) (.8) (1.5) 38.1
</TABLE>
Net sales includes revenues from (i) sales of developed lots, bulk acreage
and real property associated with MAXXAM's real estate developments, (ii) resort
and other commercial operations conducted at certain of MAXXAM's real estate
developments, (iii) rental revenues associated with the real properties
purchased from the Resolution Trust Corporation in June 1991 (the "RTC
Portfolio"), and (iv) beginning in the fourth quarter of 1995, revenues from
SHRP, Ltd., a Texas limited partnership which owns and operates a Class 1 horse
racing facility in Houston, Texas (see "-- Financial Condition and Investing and
Financing Activities -- Real Estate and Other Operations"). Net sales do not
include any amounts from the sale of RTC Portfolio properties and loans, which
are recorded net of costs as investment, interest and other income. As of
September 30, 1996 the RTC Portfolio consisted of two loans and eight properties
which had an aggregate net book value of $18.2 million. For a description of the
holdings of the Real Estate Subsidiaries, see "Business of MAXXAM -- Real Estate
and Other Operations."
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales
Net sales for the nine months ended September 30, 1996 increased over the
same period in 1995 as the inclusion in 1996 results of $15.1 million of
revenues attributable to SHRP, Ltd. more than offset lower real
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<PAGE> 74
estate revenues. Operating results with respect to SHRP, Ltd. were not
consolidated prior to October 6, 1995. Net sales attributable to real estate
operations of $54.3 million for the nine months ended September 30, 1996
decreased from $65.0 million in the same period in 1995 due to lower sales of
real property in the Fountain Hills development in Arizona and lower revenues
from the RTC Portfolio due to the sale of a substantial number of these
properties in 1996 and prior periods.
Operating loss
The operating loss increased for the nine months ended September 30, 1996
from the same period in 1995, principally due to lower margins on sales of real
property and $1.6 million of operating losses attributable to SHRP, Ltd. for the
nine months ended September 30, 1996.
Income (loss) before income taxes and minority interests
Income before income taxes and minority interests for the nine months ended
September 30, 1996 increased compared to the income (loss) for the same period
in 1995. Investment, interest and other income for the nine months ended
September 30, 1996 includes a pre-tax gain of $16.9 million from the sale of
three multi-family properties and the remaining mortgage notes from the RTC
Portfolio for $32.4 million in net proceeds. Additionally, investment income for
the nine months ended September 30, 1996 includes income derived from lot sales
and operations at SunRidge Canyon, the Company's 50%-owned joint venture in
Arizona. Interest expense for the nine months ended September 30, 1996 includes
interest on SHRP Ltd.'s Senior Secured Extendible Notes (See Note 4 to MAXXAM's
Audited Consolidated Financial Statements).
THREE YEARS ENDED DECEMBER 31, 1995
Net Sales
Net sales for 1995 were essentially unchanged from 1994. The inclusion of
revenues in the fourth quarter of 1995 from SHRP, Ltd. and a bulk sale of
acreage in Texas were offset by a decrease in rental revenues from the RTC
Portfolio due to the sale of some of those properties. Net sales for 1994
increased as compared to 1993. This increase was primarily due to bulk acreage
sales in New Mexico and increased lot sales at MAXXAM's Fountain Hills
development in Arizona, partially offset by a decrease in rental revenues
resulting from the sale of sixteen apartment complexes from the RTC Portfolio in
December 1993.
Operating Loss
The operating loss for 1995 increased as compared to 1994, primarily due to
a $4.0 million writedown of certain real property to its estimated net
realizable value, partially offset by a bulk sale of acreage in Texas. The
operating loss for 1994 decreased as compared to 1993. The operating results for
1994 were favorably impacted by the bulk acreage sales and the increased sales
at Fountain Hills, offset by decreased revenues from the RTC Portfolio as a
result of the sale of the sixteen apartment complexes in December 1993. The
operating loss for 1993 also included a $5.9 million writedown of certain of
MAXXAM's nonstrategic real estate holdings to their estimated net realizable
value.
Income (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 for 1995 decreased as
compared to 1994. This decrease was primarily due to higher investment, interest
and other income and lower interest expense, partially offset by the increased
operating loss discussed above. Investment, interest and other income for 1995
includes a pre-tax gain of $10.5 million resulting from the sale of five real
properties and one loan from the RTC Portfolio for $25.5 million. The loss
before income taxes, minority interests, extraordinary item and cumulative
effect of changes in accounting principles for 1994 was $1.5 million, as
compared to income of $38.1 million for 1993. The loss for 1994 reflects a
decrease in investment, interest and other income, offset by a decrease in
interest expense and the decreased operating loss discussed above. Investment,
interest and other income for 1994 includes pre-tax
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<PAGE> 75
gains of $7.3 million resulting from the sale of two real properties and one
loan from the RTC Portfolio for $14.2 million. The decrease in interest expense
for 1994 compared to 1993 resulted primarily from repayments on debt
attributable to the sixteen apartment complexes sold from the RTC Portfolio in
December 1993. Investment, interest and other income for 1993 includes a pre-tax
gain of $47.8 million attributable to the sale of these properties for $113.6
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.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Operating loss............................ $(29.3) $(14.3) $(19.6) $(11.5) $(19.5)
Loss before income taxes, minority
interests, extraordinary item and
cumulative effect of changes in
accounting principles................... (32.4) (15.2) (19.8) (19.3) (30.1)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Operating loss
The operating losses represent corporate general and administrative
expenses that are not attributable to MAXXAM's industry segments. The operating
losses for the nine months ended September 30, 1996 increased from the same
period in 1995. This increase was principally due to accruals of $21.9 million
for certain legal contingencies of which a substantial portion relates to legal
fees and expenses that the Company may incur in connection with matters related
to (i) a civil action filed by the FDIC against Mr. Charles E. Hurwitz seeking
damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was
a controlling shareholder, de facto senior officer and director of USAT, and was
involved in certain decisions which contributed to the insolvency of USAT and
(ii) formal administrative proceedings initiated by the OTS against MAXXAM and
others (the "Notice") alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and
the other respondents with respect to the failure of USAT. The OTS seeks, among
other things, unspecified damages in excess of $138.0 million from MAXXAM and
Federated and civil penalties. See "Legal Proceedings -- USAT Matters."
Loss before income taxes and minority interests
The loss before income taxes and minority interests includes operating
losses, investment, interest and other income (expense) and interest expense,
including amortization of deferred financing costs, that are not attributable to
MAXXAM's industry segments. The losses for the nine months ended September 30,
1996 increased from the same period in 1995 principally due to increased
operating losses discussed above.
Credit (Provision) for Income Taxes
MAXXAM's credit for income taxes for the nine months ended September 30,
1996 and the provision for income taxes for the nine months ended September 30,
1995 include the reversal of reserves MAXXAM no longer believed were necessary
(See Note 6 of the Condensed Notes to MAXXAM's Unaudited Consolidated Financial
Statements).
Minority interests
Minority interests represent the minority stockholders' interest in
MAXXAM's aluminum operations and, with respect to periods after October 6, 1995,
the minority partners' interest in SHRP, Ltd.
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THREE YEARS ENDED DECEMBER 31, 1995
Operating Loss
The operating losses represent corporate general and administrative
expenses that are not attributable to MAXXAM's industry segments. The operating
loss for 1995 increased compared to 1994, primarily due to a $2.5 million
increase in costs attributable to phantom share rights granted to certain
employees and a $6.1 million charge for the cost of certain litigation. These
phantom share rights, together with rights granted to certain employees of
MAXXAM's real estate subsidiaries, were exercised in 1995. See Note 8 to
MAXXAM's Audited Consolidated Financial Statements. The operating loss for 1994
decreased compared to 1993, primarily due to a $6.5 million charge related to
litigation contingencies in 1993 and 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 (expense) and interest expense, including
amortization of deferred financing costs, that are not attributable to MAXXAM's
industry segments. The loss for 1995 increased compared to 1994, primarily due
to the increased operating loss, partially offset by higher investment, interest
and other income. The loss before income taxes, minority interests,
extraordinary item and cumulative effect of changes in accounting principles for
1994 was significantly less than the loss for 1993. This decrease was primarily
due to the decreased operating losses discussed above and a decrease in interest
expense. The decrease in interest expense resulted primarily from the redemption
in August 1993 of $20.0 million aggregate principal amount of MAXXAM's Reset
Notes. Investment, interest and other income (expense) for 1994 includes the
equity in losses of affiliates attributable to MAXXAM's equity interest in SHRP,
Ltd., offset by net gains on marketable securities. Affiliates of MAXXAM held an
equity interest in SHRP, Ltd. of approximately 29.7% until October 1994, when,
as a result of an additional capital contribution of $5.6 million, MAXXAM's
interest increased to approximately 45%. MAXXAM obtained a majority interest in
SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy proceedings on October
6, 1995. See "-- Financial Condition and Investing and Financing
Activities -- Real Estate and Other Operations."
Credit (Provision) for Income Taxes
MAXXAM's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) revision of prior years' tax estimates and
other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. MAXXAM's
provision for income taxes as reflected in MAXXAM's Audited Consolidated
Statement of Operations for the year ended December 31, 1995 reflects a benefit
of $24.2 million relating to the revision of prior years' tax estimates and
other changes in valuation allowances. See Note 5 to MAXXAM's Audited
Consolidated Financial Statements.
Minority Interests
Minority interests represent the minority stockholders' interest in
MAXXAM's aluminum operations and, with respect to periods after October 6, 1995,
minority partners' interest in SHRP, Ltd.
Extraordinary Item
The refinancing activities of Kaiser during the first quarter of 1994, as
described in Note 4 to MAXXAM's Audited Consolidated Financial Statements,
resulted in an extraordinary loss of $5.4 million, net of benefits for income
taxes of $2.9 million. The extraordinary loss consists primarily of the
write-off of unamortized deferred financing costs on Kaiser's previous credit
agreement (the "1989 KACC Credit Agreement").
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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 MAXXAM's
Audited 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 Pacific Lumber's retired 12% Series A
Senior Notes, 12.2% Series B Senior Notes and 12 1/2% Senior Subordinated
Debentures, MGI's retired 12 3/4% Notes and KACC's retired 14 1/4% Senior
Subordinated Notes.
Cumulative Effect of Changes in Accounting Principles
As of January 1, 1993, MAXXAM 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 MAXXAM's Audited Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased 1993 results of operations by
$26.6 million. The cumulative effect of the change in accounting principle for
the adoption of SFAS 106 reduced 1993 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 1993 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 MAXXAM's cash
outlays for postretirement and postemployment benefits, nor does the cumulative
effect of the changes in accounting principles affect MAXXAM's compliance with
its existing debt covenants. Postretirement benefits other than pensions are
generally provided through contracts with various insurance carriers. MAXXAM has
not funded the liability for these benefits, which are expected to be paid out
of cash generated by operations. MAXXAM 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
Since 1993, subsidiaries of MAXXAM's aluminum operations and forest
products operations have completed a number of transactions designed to enhance
their liquidity, significantly extend their debt maturities and lower their
interest costs. Collectively, these transactions have included public and
private offerings for approximately $1.6 billion of debt securities,
approximately $220.0 million of additional equity capital and the replacement of
revolving credit facilities. The following should be read in conjunction with
MAXXAM's Consolidated Financial Statements and the Notes thereto.
MAXXAM (PARENT COMPANY)
MAXXAM conducts its operations primarily through its subsidiaries.
Creditors of and holders of minority interests in subsidiaries of MAXXAM have
priority with respect to the assets and earnings of such subsidiaries over the
claims of the creditors of MAXXAM, including the holders of MAXXAM's public
debt. As of September 30, 1996, the indebtedness of the subsidiaries and the
minority interests reflected on MAXXAM's consolidated balance sheet were
$1,668.6 million and $217.9 million, respectively. On a pro forma basis, as of
September 30, 1996, after giving effect to: (a) the issuance of $130.0 million
principal amount of Old Notes, (b) the redemption of $42.6 million aggregate
principal amount of the Old MAXXAM Notes, and (c) the issuance of Kaiser's
$225.0 million aggregate principal amount of KACC New Notes and the application
of the net proceeds therefrom, MAXXAM would have had consolidated indebtedness
of $1,893.3 million. MAXXAM did not receive any of the net proceeds from the
sale of the KACC New Senior Notes. Certain of MAXXAM'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 MAXXAM. The 1994
KACC Credit Agreement contains covenants which, among other things, limit
Kaiser's ability to pay cash dividends and restrict transactions between Kaiser
and its affiliates. The indentures governing the KACC Notes contain covenants
which, among other things, limit KACC's ability to pay cash dividends and
restrict
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<PAGE> 78
transactions between KACC and its affiliates. Pursuant to the terms of the 1994
KACC Credit Agreement, Kaiser is precluded from paying any dividends with
respect to its common stock. The Indenture governing the Notes contains various
covenants which, among other things, will limit the payment of dividends and
restrict transactions between the Company and its affiliates. Except for
possible proceeds from the Headwaters Agreement, MAXXAM does not expect to
receive any dividends from the Company during the next several years. Moreover,
MAXXAM expects that the Company will be, to a large measure, dependent upon cash
interest payments in respect of the Intercompany Note to meet the debt service
obligations to the holders of the Notes. The most restrictive covenants
governing debt of MAXXAM's real estate and other subsidiaries would not restrict
payment to MAXXAM of all available cash and unused borrowing availability for
such subsidiaries (aggregating approximately $12.1 million as of September 30,
1996). See also "Risk Factors -- Ability to Service Indebtedness."
Although there are no restrictions on MAXXAM's ability to pay dividends on
its capital stock, MAXXAM has not paid any dividends for a number of years and
has no present intention to do so. MAXXAM has stated that, from time to time, it
may purchase its common stock on national exchanges or in privately negotiated
transactions.
During 1994, MAXXAM sold 1,239,400 of Kaiser's Depositary Shares (as
defined in "-- Aluminum Operations" below) for aggregate net proceeds of $10.3
million. MAXXAM sold its remaining 893,550 of Depositary Shares during the first
six months of 1995 for aggregate net proceeds of $7.6 million. See Note 7 to the
Audited Consolidated Financial Statements of MAXXAM.
On October 6, 1995, wholly owned subsidiaries of MAXXAM made investments in
SHRP, Ltd. of approximately $8.7 million, consisting of land, cash ($5.8
million) and other assets. In an unrelated transaction, on October 20, 1995, a
wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million
aggregate initial principal amount of SHRP, Ltd.'s 11% Senior Secured Extendible
Notes (the "SHRP Notes"). See "-- Real Estate and Other Operations."
On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with
Custodial Trust Company providing for up to $25.0 million in borrowings. Any
amounts drawn would be payable upon demand and be secured by Kaiser Common Stock
owned by MAXXAM (exclusive of the Kaiser Shares which will be contributed to the
Company concurrently with the consummation of the Offering), or such other
marketable securities acceptable to the lender, with an initial market value (as
defined therein) of approximately three times the amount borrowed. Borrowings
under this agreement would bear interest at the prime rate plus 1/2% per annum.
The Custodial Trust Agreement provides for a revolving credit arrangement during
the first year of the agreement. Any borrowings outstanding on the first
anniversary date of the agreement convert into a term loan maturing on the
second anniversary date of the agreement. No borrowings were outstanding as of
the date of this Prospectus.
On April 24, 1996, the SEC declared effective a shelf registration
statement which MAXXAM had filed with respect to up to $200.0 million aggregate
principal amount of debt securities. MAXXAM intends to withdraw this shelf
registration statement. In that regard, Kaiser also filed a shelf registration
statement with the SEC, which was also declared effective on April 24, 1996,
covering 10 million shares of its common stock owned by MAXXAM. MAXXAM would use
the net proceeds (or portions thereof) from the sale of such securities for
working capital and general corporate purposes.
On December 26, 1995, the OTS initiated formal administrative proceedings
against MAXXAM and others by filing the Notice. The Notice alleges misconduct by
MAXXAM, Federated, Mr. Charles Hurwitz and others (the "respondents") with
respect to the failure of USAT, a wholly owned subsidiary of United Financial
Group Inc. ("UFG"). The Notice claims that MAXXAM was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against MAXXAM and the other respondents, including, among other
things, allegations that through USAT it was involved in prohibited transactions
with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks
unspecified damages in excess of $138.0 million from MAXXAM and Federated, civil
money penalties and a removal from, and prohibition against MAXXAM and the other
respondents engaging in, the banking industry. MAXXAM has concluded that it is
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unable to determine a reasonable estimate of the loss (or range of loss), if
any, that could result from this contingency. Accordingly, it is impossible to
assess the ultimate impact, if any, of the outcome this matter may have on
MAXXAM's consolidated financial position, results of operations or liquidity.
On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E.
Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas. The FDIC action did not name MAXXAM as a defendant.
The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on
the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM
maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a
motion to join the OTS to this action. On December 8, 1995, MAXXAM filed a
motion to intervene in this action and conditioned it on the Court joining the
OTS to this action. MAXXAM filed with its motion to intervene a proposed
complaint which alleges that the OTS violated the Administrative Procedures Act
by rejecting MAXXAM's bid for USAT. MAXXAM's bylaws provide for indemnification
of its officers and directors to the fullest extent permitted by Delaware law.
MAXXAM is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is ultimately
determined that the individual was not entitled to indemnification. In addition,
MAXXAM's indemnity obligation can, under certain circumstances, include amounts
other than defense costs, including judgments and settlements. MAXXAM has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from this contingency. Accordingly, it
is impossible to assess the ultimate outcome of the foregoing matter or its
potential impact on MAXXAM's consolidated financial position, results of
operations or liquidity.
As of September 30, 1996, MAXXAM (excluding its subsidiaries) had cash and
marketable securities of approximately $56.6 million. On a pro forma basis, as
of September 30, 1996, after giving effect to: (a) the issuance of $130.0
million aggregate principal amount of the Notes and (b) the redemption of $42.6
million aggregate principal amount of the Old MAXXAM Notes together with accrued
interest thereon, MAXXAM (excluding its subsidiaries) would have had cash and
marketable securities of $136.1 million. Following the retirement of the Old
MAXXAM Notes, MAXXAM will use the remaining proceeds from the Offering for
general corporate purposes, including possible repurchases of its common stock.
MAXXAM has issued a letter of financial support to Palmas del Mar
Properties Inc., a subsidiary of MAXXAM ("PDMPI"), in each of the years
subsequent to its formation in September 1993 stating that MAXXAM has provided
economic support for PDMPI's past operations and plans to continue such support.
MAXXAM has historically made these representations of financial support on an
annual basis and has not expressed any intention of discontinuing such support.
A subsidiary of PDMPI intends to borrow up to $15 million to construct a new
golf course at Palmas. The principal security for the loan will be the new and
existing golf courses at Palmas. MAXXAM is also required to guaranty $3.5
million of the loan.
MAXXAM expects that its cash outlays for cash interest payments pursuant to
the Intercompany Note will aggregate approximately $10.6 million each year.
During the three years ended December 31, 1995, MAXXAM's corporate general and
administrative expenses, net of cost reimbursements from its subsidiaries, have
ranged between $11.0 million and $19.0 million per year. During the nine months
ended September 30, 1996, MAXXAM's corporate general and administrative expenses
were $28.8 million, of which $21.9 million represented an accrual for certain
legal contingencies, of which a substantial portion relates to legal fees and
expenses that MAXXAM may incur in connection with the legal matters described in
"Legal Proceedings -- USAT Matters." Although MAXXAM cannot predict when or
whether the expenses represented by such accrual will be incurred, there can be
no assurance that such accrual will be adequate or that MAXXAM's recurring cash
corporate general and administrative expenses will not increase.
MAXXAM has realized a substantial portion of its cash flows during the past
several years from the sale of real property and loans from the RTC Portfolio.
From 1992 to September 30, 1996, an aggregate of approximately $41.7 million in
loans (which represented thirteen loans) were sold or paid off and thirty-four
properties were sold for aggregate consideration of approximately $177.3
million. These transactions resulted
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in aggregate gains of $94.2 million. As of September 30, 1996, two loans
resulting from property sales and eight properties (including two acquired via
foreclosures) were held, which had an aggregate net book value of $18.2 million.
Two properties within this portfolio have subsequently been sold for a gain of
$3.0 million. Net proceeds consisted of $3.6 million in cash and a note of $1.3
million. All of the remaining assets are being managed and marketed for sale.
One property in the portfolio is under contract for sale with closing estimated
to occur during the first quarter of 1997. This sale is expected to produce a
gain of approximately $2.5 million and net cash proceeds of approximately $4.3
million. MAXXAM does not expect the Real Estate Subsidiaries will be able to
generate distributable cash flows during the next several years at or near
recent historical levels. See also "Risk Factors -- Ability to Service
Indebtedness" and "-- Litigation."
MAXXAM believes that its existing cash resources, together with the cash
available from subsidiaries and other sources of financing, will be sufficient
to fund its working capital requirements, including the payment of interest on
the Intercompany Note for the next year and for the next several years
thereafter. With respect to its long-term liquidity, MAXXAM believes that its
existing cash and cash resources, together with the cash proceeds from the sale
of assets, distributions from its subsidiaries, and the proceeds from the sale
of debt securities should be sufficient to meet its working capital
requirements, including the payment of interest and principal on the
Intercompany Note. However, there can be no assurance that MAXXAM's cash
resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries and other sources of financing, will be
sufficient for such purposes or that MAXXAM would be able to refinance or pay at
maturity the aggregate principal amount of the Intercompany Note. Any adverse
outcome of the litigation described above could materially adversely affect
MAXXAM's ability to make payments under the Intercompany Note and satisfy its
obligations under its guaranty. See also "Risk Factors -- Ability to Service
Indebtedness" and "-- Litigation."
ALUMINUM OPERATIONS
The 1994 KACC Credit Agreement consists of a $325.0 million five-year
secured revolving line of credit which matures 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 $325.0
million or a borrowing base relating to eligible accounts receivable and
inventory. The 1994 KACC Credit Agreement is unconditionally guaranteed by
Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994
KACC Credit Agreement bear interest at a rate per annum, at KACC's election,
equal to a Reference Rate (as defined) plus a margin of 0% to 1 1/2% or LIBO
Rate (Reserve Adjusted) (as defined) plus a margin of 1 3/4% to 3 1/4%. The
interest rate margins applicable to borrowings under the 1994 KACC Credit
Agreement are based on a financial test, quarterly. During the first two
quarters of 1996, Kaiser paid interest at a rate per annum of the Reference Rate
plus 0% or LIBO Rate plus 1 3/4%. During the third quarter of 1996, the per
annum interest rates increased by 1/2% to the Reference Rate plus 1/2% or LIBO
Rate plus 2 1/4%. Effective October 1, 1996, the margin applicable to loans
under the 1994 KACC Credit Agreement increased by an additional 1/2% per annum
based on the financial test.
On October 23, 1996, KACC completed the offering of $175.0 million
principal amount of the KACC New Senior Notes at 99.5% of their principal amount
to yield 10.96% to maturity. The KACC New Senior Notes rank pari passu in right
and priority of payment with outstanding indebtedness under the 1994 KACC Credit
Agreement and the KACC Senior Notes and are guaranteed on a senior, unsecured
basis by certain of KACC's subsidiaries. Net proceeds from the offering, after
estimated expenses, were approximately $168.9 million, which were utilized to
reduce the outstanding borrowings under the revolving credit facility of the
1994 Credit Agreement to zero. The remaining net proceeds were invested in
short-term investments pending their application for working capital and general
corporate purposes, including capital projects. On November 12, 1996, pursuant
to an agreement with the initial purchasers of the KACC New Senior Notes, KACC
filed a registration statement (the "KACC Registration Statement") with respect
to an offer to exchange the KACC New Senior Notes for new notes with
substantially identical terms (the "KACC Exchange Offer"). The KACC Registration
Statement, as amended on December 10, 1996, was declared effective on December
11, 1996; however, the Exchange Offer thereunder has not yet been commenced.
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On December 23, 1996, KACC completed the offering of $50.0 million
principal amount of the KACC New Series C Senior Notes at 103.5% of their
principal amount to yield 10.3% to maturity. The KACC New Series C Senior Notes
rank pari passu in right and priority of payment with outstanding indebtedness
under the 1994 KACC Credit Agreement and the KACC Senior Notes and are
guaranteed on a senior, unsecured basis by certain of KACC's subsidiaries. Net
proceeds from the offering, after estimated expenses, were approximately $50.4
million.
In 1993, Kaiser issued 19,382,950 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").
See Note 7 to MAXXAM's Audited Consolidated Financial Statements. On September
19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted
in the simultaneous redemption of all Depositary Shares in exchange for (i)
13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and
unpaid dividends up to and including the day immediately prior to the redemption
date of $2.8 million, and (iii) cash in lieu of any fractional shares of common
stock that would have otherwise been issuable.
As a result of the issuance of the PRIDES and the Depositary Shares, and
the subsequent redemption of the Depositary Shares, MAXXAM's equity interest in
Kaiser has decreased to approximately 62% on a fully diluted basis.
On February 17, 1994, KACC issued $225.0 million of the KACC Senior Notes.
On February 1, 1993, KACC issued $400.0 million of the KACC Senior Subordinated
Notes. The obligations of KACC with respect to the KACC New Senior Notes, the
KACC Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly
and severally, by certain subsidiaries of KACC. See Note 4 to the Consolidated
Financial Statements for a description of the terms of the KACC Notes and the
use of proceeds from their issuance. Pursuant to the terms of the 1994 KACC
Credit Agreement, Kaiser is precluded from paying any dividends with respect to
its common stock. The declaration and payment of dividends by Kaiser with
respect to the PRIDES are expressly permitted by the terms of the 1994 KACC
Credit Agreement.
Kaiser's Board of Directors had approved a proposed recapitalization (the
"Proposed Recapitalization") which would have, among other things: (i) provided
for two classes of common stock: Class A Common Shares with one vote per share
("Class A Common Shares") and a new, lesser-voting class designated as Common
Stock with 1/10 vote per share ("Recap Common Stock"); (ii) redesignated as
Class A Common Shares the 100 million currently authorized shares of Kaiser's
existing common stock and authorized an additional 250 million shares of Recap
Common Stock; and (iii) reclassified each issued share of Kaiser's existing
common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of
Recap Common Stock.
On May 1, 1996, Kaiser's stockholders approved the Proposed
Recapitalization, but it was not implemented at that time due to a preliminary
injunction issued by the Delaware Court of Chancery. The preliminary injunction
was upheld on appeal by the Delaware Supreme Court on August 29, 1996. Kaiser's
Board of Directors subsequently adopted a resolution abandoning the Proposed
Recapitalization. See also "Legal Proceedings -- Kaiser Litigation -- Other
Proceedings."
The decision to abandon the Proposed Recapitalization does not preclude a
recapitalization from being proposed to Kaiser's stockholders in the future,
including a substantially identical recapitalization structure after the
redemption or conversion of the PRIDES. In the event that such a
recapitalization were implemented in the future, MAXXAM could retain a majority
of the voting power of Kaiser even if it substantially reduced its total
holdings of Kaiser's equity securities by more than two-thirds. Any securities
which may be issued with respect to the Kaiser Shares pursuant to any future
recapitalization of Kaiser, would be subject to the lien of the MGI Indenture.
Further, if and to the extent any Kaiser Shares are then pledged pursuant to the
Indenture governing the Notes, such securities would be subject to the lien of
the Indenture.
Kaiser's expenditures for property, plant and equipment during the first
nine months of 1996 were $90.8 million, which were used primarily to improve
production efficiency, reduce operating costs, expand capacity
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at existing facilities, and construct new facilities, including Kaiser's first
micromill which is nearing completion in Nevada as a full-scale demonstration
and production facility.
Kaiser's capital expenditures (of which approximately 6% is expected to be
funded by Kaiser's minority partners in certain foreign joint ventures) are
expected to be between $130.0 and $160.0 million per annum in each of 1996
through 1998. Management continues to evaluate numerous projects all of which
require substantial capital, including Kaiser's micromill project and other
potential opportunities both in the United States and overseas. In response to
lower aluminum and alumina prices, management may consider deferring certain
non-essential capital expenditures and/or raising investment capital (including
through joint ventures), in order to conserve a portion of Kaiser's available
cash resources to meet incremental capital and operating requirements and to
take advantage of new investment opportunities.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
Kaiser, entered into a Joint Venture Agreement and related agreements (the
"Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the
China National Nonferrous Metals Industry Corporation relating to the formation
and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign
joint equity enterprise (the "Joint Venture") organized under the laws of the
PRC. KYRIL contributed $9.0 million to the capital of the Joint Venture in July
1995. The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing, and other conditions relating to KYRIL's
additional contributions to the Joint Venture. Governmental approval in the PRC
will be necessary in order to implement certain arrangements agreed to by the
parties, and there can be no assurance such approvals will be obtained. At a
recent meeting of the directors of the Joint Venture, KYRIL, LAS and the Joint
Venture reached an agreement (i) that extended until early 1997 the time for
KYRIL to make a second capital contribution to the Joint Venture, and (ii) that
KYRIL would continue to explore various methods of financing any future capital
contributions to the Joint Venture, including financing that could be obtained
from third-party investors. See "Business of MAXXAM -- International Business
Development."
As described in Note 7 to MAXXAM's Unaudited Consolidated Financial
Statements, Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon such
laws. KACC is currently subject to a number of lawsuits under CERCLA and, along
with certain other entities, has been named as a potentially responsible party
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA. Based on Kaiser's evaluation of these and other
environmental matters, Kaiser has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater remediation
matters. At September 30, 1996, the balance of such accruals, which are
primarily included in other noncurrent liabilities, was $32.9 million. These
environmental accruals represent Kaiser's estimate of costs reasonably expected
to be incurred based on presently enacted laws and regulations, currently
available facts, existing technology and Kaiser's assessment of the likely
remediation to be performed. Kaiser expects these remediation actions to occur
over the next several years and estimates that annual expenditures to be charged
to these environmental accruals will be approximately $2.0 million to $10.0
million for the years 1996 through 2000 and an aggregate of approximately $7.0
million 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. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, Kaiser currently believes that the
resolution of such uncertainties should not have a material adverse effect on
MAXXAM's consolidated financial position, results of operations or liquidity.
See also "Risk Factors -- Risk Factors Relating to Kaiser -- Environmental
Matters and Litigation."
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Additionally, KACC is a defendant in a substantial number of lawsuits, some
of which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at least 15
years. At September 30, 1996, the number of claims pending was approximately
75,900, compared to 59,700 at December 31, 1995. During 1995, approximately
41,700 claims were received and approximately 7,200 were settled or dismissed
and, during the first nine months of 1996, approximately 20,000 of such claims
were received and 3,800 claims were settled or dismissed.
Based on past experience and reasonably anticipated future activity, Kaiser
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and Kaiser's actual
costs could exceed these estimates. Kaiser's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an estimated asbestos-related cost
accrual of $160.0 million, before consideration of insurance recoveries, is
included primarily in other noncurrent liabilities at September 30, 1996. Kaiser
estimates that annual future cash payments in connection with such litigation
will be approximately $13.0 million to $20.0 million for each of the years 1996
through 2000, and an aggregate of approximately $78.0 million thereafter through
2008. While Kaiser does not believe there is a reasonable basis for estimating
such costs beyond 2008, and, accordingly, did not accrue such costs, there is a
reasonable possibility that such costs may continue beyond 2008, and that such
costs may be substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and the first nine months of 1996 were filed in
Texas. KACC has been advised by its counsel that, although there can be no
assurance, the increase in pending claims may have been attributable in part to
tort reform legislation in Texas. Although asbestos-related claims are currently
exempt from certain aspects of the Texas tort reform legislation, Kaiser has
been advised that efforts to remove the asbestos-related exemption in the tort
reform legislation relating to the doctrine of forum non conveniens, as well as
other developments in the legislative and legal environment in Texas, may be
responsible for the accelerated pace of new claims experienced in late 1995 and
its continuance through the first nine months of 1996, albeit at a somewhat
reduced rate.
Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. KACC believes, based on prior insurance-related recoveries with
respect to asbestos-related claims, existing insurance policies, and the advice
of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of those policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3 million, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at September 30, 1996.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on MAXXAM's consolidated financial position,
results of operations or liquidity. See also "Risk Factors -- Risk Factors
Relating to Kaiser -- Environmental Matters and Litigation."
Kaiser and KACC are involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management believes
that the
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resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on MAXXAM's consolidated financial position,
results of operations or liquidity.
Kaiser believes that its existing cash resources, together with cash flows
from operations and borrowings under the 1994 KACC Credit Agreement, will be
sufficient to meet its working capital and capital expenditure requirements for
the next year. Additionally, with respect to long-term liquidity, Kaiser
believes that operating cash flows, together with the ability to obtain both
short and long-term financing, should provide sufficient funds to meet its
working capital and capital expenditure requirements. See "Risk
Factors -- Ability to Service Indebtedness."
FOREST PRODUCTS OPERATIONS
For information concerning the Company's financial condition and investing
and financing activities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Financial Condition and
Investing and Financing Activities."
REAL ESTATE AND OTHER OPERATIONS
As of September 30, 1996, approximately $3.8 million was outstanding
pursuant to a loan agreement secured by the RTC portfolio (the "RTC Portfolio
Loan"). The RTC Portfolio Loan matures on December 31, 1999 and bears interest
at prime plus 3%. Upon the sale of any secured property or loan, principal
payments are required based on the release price (as defined) of such property
or loan.
On July 15, 1995, a real estate subsidiary of MAXXAM, MCO Properties Inc.
("MCOP"), amended and restated its revolving credit agreement with a bank which
will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings under the
MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables
and real estate held for investment or development and sale, (ii) MCOP's pledge
of the common stock of certain of its subsidiaries, and (iii) the guarantee of
certain of MCOP's subsidiaries and MAXXAM. Further, MAXXAM has pledged MCOP's
common stock as additional security. Interest is computed at the bank's prime
rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit
Agreement contains various covenants including a minimum net worth requirement
and limitations on the payment of dividends (neither of which MAXXAM believes is
material), investments and the incurrence of indebtedness. The MCOP Credit
Agreement provides for borrowings of up to $14.0 million, of which $8.5 million
may be used for standby letters of credit. The available credit is subject to
borrowing base limitation calculations. As of September 30, 1996, $11.0 million
of borrowings was available under the MCOP Credit Agreement; there were no
outstanding borrowings, and letters of credit outstanding amounted to $1.4
million.
In July 1993, MAXXAM, through various subsidiaries, acquired various
interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million.
MAXXAM increased its equity interest in SHRP, Ltd. to 45.0%, as a result of a
$5.6 million capital contribution in October 1994. On January 15, 1995, SHRP,
Ltd. defaulted on the $4.4 million semi-annual interest payment due on $75.0
million aggregate principal amount of its 11 3/4% Senior Secured Notes. On April
17, 1995, SHRP, Ltd. and its wholly owned subsidiary, SHRP Capital Corp.,
together with SHRP Acquisition, Inc., a wholly owned subsidiary of MAXXAM and
SHRP, Ltd.'s largest limited partner (collectively, the "Debtors"), filed
voluntary petitions seeking to reorganize under the provisions of Chapter 11 of
the United States Bankruptcy Code. The bankruptcy cases were consolidated and
transferred to the United States Bankruptcy Court for the Southern District of
Texas, Houston Division, Case No. 95-43739-H3-11. On September 22, 1995, the
bankruptcy plan of the Debtors (the "Plan") was confirmed and on October 6,
1995, the transactions called for by the Plan were completed.
A new investor group (the "New SHRP Investor Group") made a capital
contribution of cash in the aggregate amount of $5.9 million (wholly owned
subsidiaries of MAXXAM contributed $5.8 million) to SHRP, Ltd. Additionally, a
wholly owned subsidiary of MAXXAM contributed an adjoining approximately 87-acre
tract of land (with a fair market value of $2.3 million). The new managing
general partner of the reorganized SHRP, Ltd. (the "SHRP Managing General
Partner") is SHRP General Partner, Inc., a wholly owned subsidiary of MAXXAM.
SHRP Managing General Partner was issued a 1% interest in the
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reorganized SHRP, Ltd. in exchange for contributing its pro rata share of the
investment made by the New SHRP Investor Group. In an unrelated transaction, on
October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for $7.3
million, $14.6 million aggregate initial principal amount of the SHRP Notes and
the corresponding shares of common stock of SHRP Equity, Inc. (a Delaware
corporation and an additional general partner of the reorganized SHRP, Ltd.) to
which the selling noteholder was entitled. Such shares of common stock represent
39.0% of the shares of common stock of SHRP Equity, Inc. After giving effect to
these transactions, wholly owned subsidiaries of MAXXAM hold, directly or
indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd.
SHRP, Ltd. has sustained substantial operating losses since it began
operations in April 1994. At September 30, 1996, SHRP, Ltd. had cash and cash
equivalents of $2.9 million and a line of credit from its partners of $1.7
million, of which MAXXAM's portion is $1.6 million. SHRP, Ltd. projects a loss
from operations for the next two years. In the event that the existing cash
resources of SHRP, Ltd. and the line of credit are inadequate to support the
cash flow requirements of SHRP, Ltd., alternative sources of funding will be
necessary. MAXXAM is not obligated to provide any further economic support to
SHRP, Ltd., beyond the $1.6 million line of credit commitment.
As of September 30, 1996, MAXXAM's real estate and other subsidiaries had
approximately $11.0 million available for use under the MCOP Credit Agreement
(all of which could be borrowed and distributed to MAXXAM). MAXXAM believes that
the existing cash and credit facilities of its real estate and other
subsidiaries are sufficient to fund the working capital and capital expenditure
requirements of such subsidiaries for the next year. With respect to the
long-term liquidity of such subsidiaries, MAXXAM believes that their ability to
generate cash from the sale of their existing real estate, together with their
ability to obtain financing, should provide sufficient funds to meet their
working capital and capital expenditure requirements. See also "Risk
Factors -- Ability to Service Indebtedness."
TRENDS
ALUMINUM OPERATIONS
Sensitivity to Prices
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. KACC enters
into primary aluminum hedging transactions from time to time in the normal
course of business. Primary aluminum hedging transactions are designed to
mitigate Kaiser's exposure to declines in the market price of primary aluminum,
while retaining the ability to participate in favorable environments that may
materialize. KACC has employed strategies which include forward sales and
purchases of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. At November 30, 1996, KACC had sold forward, at
fixed prices, approximately 70,000 and 93,600 tons of primary aluminum in excess
of its projected internal fabrication requirements for 1997 and 1998,
respectively, and had purchased put options to establish a minimum price for
196,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. The
weighted average price for Kaiser's purchased put options with respect to 1997
are below the AMT Price for the week ended December 13, 1996. The weighted
average price of the minimum of the range established with respect to Kaiser's
other 1998 option contracts approximates the AMT Price for the week ended
December 13, 1996.
In addition, as of November 30, 1996, KACC had sold approximately 89% and
90% of the alumina available to it in excess of its projected internal smelting
requirements for 1997 and 1998, respectively. Virtually all of such 1997 and
1998 sales were made at prices indexed to the future prices of primary aluminum.
KACC has established margin accounts with its counterparties related to
forward aluminum sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized losses
related to these contracts. At December 31, 1995, Kaiser was not required to
maintain any such margin deposits. At
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December 31, 1994, KACC had $50.5 million on deposit with various counterparties
with respect to such deposit requirements. These amounts were recorded in
prepaid expenses and other current assets.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per metric ton ($.67 per pound) of primary aluminum, natural gas and fuel oil
forward purchase and option contracts, and forward foreign exchange contracts
was $46.4 million.
Recent Trends and Developments
During 1995, the average Midwest U.S. transaction price (the "AMT Price")
for primary aluminum was approximately $.86 per pound compared to $.72 and $.54
per pound in 1994 and 1993, respectively. The significant improvement in prices
during 1994 and 1995 resulted from strong growth in Western world consumption of
aluminum and the curtailment of production in response to lower prices in prior
periods by many producers worldwide. In 1995, production of primary aluminum
increased and consumption of aluminum continued to grow, but at a much lower
rate than in 1994. In general, the overall aluminum market was strongest in the
first half of 1995. By the second half of 1995, orders and shipments for certain
products had softened and the rate of decline in London Metal Exchange ("LME")
inventories had leveled off. By the end of 1995, some small increases in LME
inventories occurred, and prices of aluminum weakened from first-half levels.
This trend has continued throughout the first eleven months of 1996 as the
supply of primary aluminum exceeded demand during this period. Net reported
primary aluminum inventories have increased by approximately 53,000 tons in 1996
based upon recent reports of the LME (through December 13, 1996) and the
International Primary Aluminium Institute ("IPAI") (through October 31, 1996),
following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995,
respectively. The AMT Price for primary aluminum for the week ended December 13,
1996, was approximately $.72 per pound.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, management believes
that the reduction of aluminum inventories by consumers, as prices have
continued to decline, has suppressed the growth in primary aluminum demand that
normally accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, management believes the recent decline in primary
aluminum prices may have been influenced by a recent major decline in copper
prices on the LME.
Fourth Quarter Results
Kaiser incurred net losses of $4.8 million in the third quarter of 1996 and
expects to continue to sustain net losses in the fourth quarter of 1996 due
principally to lower average realized prices for alumina and primary aluminum,
as compared to prices realized in the fourth quarter of 1995, and due to
increased raw material, energy, and operational costs associated with the
production of alumina at Kaiser's Gramercy alumina refinery and 65%-owned Alpart
alumina refinery in Jamaica as compared to amounts incurred in the fourth
quarter of 1995. Such losses could substantially exceed the loss for the third
quarter of 1996.
Profit Enhancement and Cost Cutting Initiative
Kaiser has set a goal of achieving significant cost reductions and other
profit improvements during 1997, with the full effect planned to be realized in
1998. The initiative is based on Kaiser's conclusion that the current level of
performance of its existing facilities and businesses will not achieve the level
of profits Kaiser considers satisfactory based upon historic long-term average
prices for primary aluminum and alumina. To achieve this goal, Kaiser plans
reductions in production costs, improvements in operating efficiencies,
decreases in corporate selling, general and administrative expenses and
enhancements to product mix. There can be no assurance that the initiative will
result in the desired cost reductions and other profit improvements.
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FOREST PRODUCTS OPERATIONS
For information concerning trends with respect to the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Financial Condition and Investing and Financing
Activities."
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans, and provides for alternative methods for an
employer to recognize stock-based compensation costs. Under the first method, an
employer may continue to account for compensation costs for stock, stock
options, and other equity instruments issued to employees as it has
historically, using the "intrinsic value based method" (as described in SFAS
123), and such compensation costs would be the excess, if any, of the quoted
market price of the stock subject to an option at the grant date or other
measurement date over the amount an employee must pay to acquire the stock. The
intrinsic value based method generally would not result in the recognition of
compensation costs upon the grant of stock options. Under the second method, an
employer may adopt the "fair value based method" (as described in SFAS 123).
Under the fair value based method, such compensation costs would be valued using
an option-pricing model, and such amount would be charged to expense over the
option's vesting period. Employers which elect to continue to account for
stock-based compensation under the intrinsic value based method will be required
by SFAS 123 to disclose in the notes to their financial statements the amount of
net income and the earnings per share which would have been reported had the
employer elected to use the fair value based method. MAXXAM has elected to
continue to account for stock-based compensation under the intrinsic value based
method, and will comply with the disclosure requirement of SFAS 123 for fiscal
years beginning January 1, 1996.
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BUSINESS OF THE COMPANY
GENERAL
The Company engages in forest products operations through MGI and its
wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's
subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber, which has been in
continuous operation for over 125 years, engages in several 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 (which cannot efficiently
process them in its own mills).
PACIFIC LUMBER OPERATIONS
TIMBERLANDS
Pacific Lumber owns and manages approximately 192,000 acres of commercial
timberlands. These timberlands are located in Humboldt County along the northern
California coast which has very favorable soil and climate conditions. 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 network of roads.
These factors greatly facilitate Pacific Lumber's operations and 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.
Approximately 179,000 acres of Pacific Lumber's timberlands are owned by
Scotia Pacific (the "Scotia Pacific Timberlands"), a special purpose Delaware
corporation and wholly owned subsidiary of Pacific Lumber. Pacific Lumber has
the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands
consisting substantially of virgin old growth redwood and virgin old growth
Douglas-fir timber located on numerous small parcels throughout the Scotia
Pacific Timberlands. Substantially all of Scotia Pacific's assets, including the
Scotia Pacific Timberlands and the GIS (defined below), are pledged as security
for the Timber Notes. Pacific Lumber harvests and purchases from Scotia Pacific
all of the logs harvested from the Scotia Pacific Timberlands. See
" -- Relationships With Scotia Pacific and Britt" for a description of this and
other relationships among Pacific Lumber, Scotia Pacific and Britt.
Approximately 6,000 acres of Pacific Lumber's timberlands are owned by Salmon
Creek.
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 partially harvested in the past.
Pacific Lumber has engaged in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pacific Lumber also
actively engages in efforts to establish timberlands from open areas such as
pasture land. During 1995, Pacific Lumber planted approximately 676,000 redwood
and Douglas-fir seedlings. Regeneration of redwood timber generally is
accomplished through the natural growth of new 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 regeneration by planting redwood seedlings.
Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost
entirely by planting seedlings.
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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 THPs. THPs are
required to be developed by registered professional foresters and must be filed
with, and approved by, the CDF prior to the harvesting of timber. Each THP is
designed to comply with applicable environmental laws and regulations. The CDF's
evaluation of proposed THPs incorporates review and analysis of such THPs 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. See "-- Regulatory and Environmental Factors"
for information regarding a critical habitat designation, sustained yield
regulations and related matters. 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 and conducting field studies, Pacific Lumber's
foresters are better able to develop detailed THPs addressing the various
regulatory requirements. Pacific Lumber also utilizes a Global Positioning
System ("GPS") which allows precise location of geographic features through
satellite positioning. Use of the GPS greatly enhances the quality and
efficiency of GIS data.
Pacific Lumber employs a variety of well-accepted methods of selecting
trees for harvest. These methods, which are designed to achieve optimal
regeneration and growth, are referred to as "silvicultural systems" in the
forestry profession. Silvicultural systems range from very light thinnings aimed
at enhancing the growth rate of retained trees to clear cutting which results in
the harvest of all trees in an area and regeneration of a new forest stand. In
between are a number of varying levels of partial harvests which can be
employed. Pacific Lumber's foresters select the appropriate silvicultural system
for any given site based upon the specific conditions of that site. Pacific
Lumber frequently employs silvicultural systems that involve thinnings followed
by a variety of partial cuttings to achieve a high degree of natural
regeneration. Partial harvesting allows the remaining trees to obtain more
light, nutrients and water, thereby promoting faster growth rates. Pacific
Lumber uses a variety of factors, including the size and density of the
remaining trees, to determine when to again submit a THP with respect to a given
area. Clear cutting is only used when it is prudent due to specific site
conditions (such as the inadvisability of repetitive partial harvestings,
undesirable tree species composition for natural regeneration, topographic
difficulties which preclude partial cuttings or the need to create more diverse
wildlife habitats within watersheds as recommended by Pacific Lumber's wildlife
biologists). Due to the magnitude of its timberlands and conservative
application of silvicultural systems, 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 268 million board feet, with approximately 290, 286, and 228
million board feet produced in 1995, 1994 and 1993, respectively. Lumber
production volume was 221 million board feet during the first nine months of
1996. The Fortuna sawmill, built by Pacific Lumber in 1972, produces primarily
common grade lumber. During 1995 and the first nine months of 1996, the Fortuna
mill produced approximately 94 million and 75 million board feet of lumber,
respectively. The Carlotta sawmill was acquired in 1986 and produces both common
and upper grade redwood lumber. During 1995 and the first nine months of 1996,
the Carlotta mill produced approximately 67 million and 47 million board feet of
lumber, respectively. Sawmill "A," located in Scotia, was remodeled in 1983 and
processes Douglas-fir logs while Sawmill "B," also located in Scotia, primarily
processes large diameter redwood logs. During 1995 and the first nine months of
1996, Sawmill "A" produced 79 million and 67 million board feet of lumber,
respectively. During 1995 and the first nine months of 1996, Sawmill "B"
produced 51 million and 31 million board feet of lumber, respectively.
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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 assembling knot-free pieces of narrower and shorter lumber into
wider or longer pieces in its state-of-the-art end and edge glue plants. The
result is a standard sized upper grade product which can be sold at a
significant premium over common grade products. Pacific Lumber has also
installed a lumber remanufacturing facility at its mill in Fortuna.
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 27
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 its 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 where several of its manufacturing
facilities are located. Pacific Lumber sells surplus power to Pacific Gas and
Electric Company. In 1995, the sale of surplus power accounted for approximately
1% of Pacific Lumber's total revenues.
PRODUCTS
The following table sets forth the distribution of Pacific Lumber's lumber
production (on a net board foot basis) and revenues by product line:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------ ------------------------------------
% OF TOTAL % OF TOTAL
LUMBER % OF TOTAL LUMBER % OF TOTAL
PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL
PRODUCT VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
- ----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood lumber......... 12% 33% 27% 17% 38% 31%
Common grade redwood lumber........ 52% 41% 34% 54% 40% 32%
--- --- -- --- --- --
Total redwood lumber..... 64% 74% 61% 71% 78% 63%
--- --- -- --- --- --
Upper grade Douglas-fir lumber..... 4% 6% 5% 3% 5% 4%
Common grade Douglas-fir lumber.... 26% 16% 13% 23% 14% 11%
--- --- -- --- --- --
Total Douglas-fir
lumber................. 30% 22% 18% 26% 19% 15%
--- --- -- --- --- --
Other grades of lumber............. 6% 4% 3% 3% 3% 4%
--- --- -- --- --- --
Total lumber............. 100% 100% 82% 100% 100% 82%
=== === == === === ==
Logs............................... 10% 7%
== ==
Hardwood chips..................... 2% 4%
Softwood chips..................... 4% 5%
-- --
Total wood chips......... 6% 9%
== ==
</TABLE>
Lumber
Pacific Lumber primarily produces and markets lumber. In 1995 and during
the first nine months of 1996, Pacific Lumber sold approximately 277 million and
233 million board feet of lumber, respectively, which accounted for
approximately 82% of Pacific Lumber's total revenues for each period. Lumber
products
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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. 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
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. The overall supply of upper grade lumber has been
diminishing due to increasing environmental and regulatory restrictions and
other factors. While Pacific Lumber's competitive position with respect to upper
grade lumber has been improving due to the quality of its timberlands, Pacific
Lumber's supply of upper grade lumber has decreased in some premium product
categories. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations." 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.
Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.
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. See
" -- Relationships With Scotia Pacific and Britt" 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 Pacific Lumber.
Wood Chips
Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood
trees which would otherwise be left as waste. These chips are sold to third
parties primarily for the production of facsimile and other specialty papers.
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.
BACKLOG AND SEASONALITY
Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was
approximately $11.5 million and approximately $11.9 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. Pacific Lumber's backlog of sales orders at September 30, 1996 was
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approximately $20.4 million. Pacific Lumber has historically experienced lower
first 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 63%
and 67% of these sales in 1995 and during the first nine months of 1996,
respectively. Common grades of Douglas-fir lumber are sold primarily in
California. In 1995, no single customer accounted for more than 4% of Pacific
Lumber's total revenues. Exports of lumber accounted for approximately 4% of
Pacific Lumber's total revenues during each of 1995 and the first nine months of
1996. 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, product availability
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company -- Results of 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 September 30, 1996, Pacific Lumber had approximately 1,600 employees,
none of whom are covered by a collective bargaining agreement.
RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT
In March 1993, Pacific Lumber consummated its offering of $235.0 million of
its Senior Notes and Scotia Pacific consummated its offering of $385.0 million
of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements. Pacific Lumber and
Scotia Pacific 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 Scotia Pacific Timberlands containing
timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia
Pacific's own employees. Such services include the furnishing of all equipment,
personnel and expertise not within Scotia Pacific's possession and reasonably
necessary for the operation and maintenance of the Scotia Pacific
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Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia
Pacific Timber by fires, maintain a system of roads throughout the Scotia
Pacific Timberlands, take measures to control the spread of disease and insect
infestation affecting Scotia Pacific Timber and comply with environmental laws
and regulations, including measures with respect to waterways, habitat,
hatcheries and endangered species. Pacific Lumber is also required (to the
extent necessary) to assist Scotia Pacific personnel in updating the GIS and to
prepare and file, on Scotia Pacific'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, Scotia Pacific 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 approximately $115,000 per month in 1995 and has been approximately $112,000
per month in 1996. Pursuant to the Additional Services Agreement, Scotia Pacific
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 Scotia Pacific 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 Scotia Pacific also entered into a Master Purchase
Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement
governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each
purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a
separate log purchase agreement (which incorporates the terms of the Master
Purchase Agreement) for the Scotia Pacific 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 ("SBE") 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 released every six months.
As Pacific Lumber purchases logs from Scotia Pacific pursuant to the Master
Purchase Agreement, Pacific Lumber is responsible, at its own expense, for
harvesting and removing the standing Scotia Pacific 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
Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber
under the Master Purchase Agreement.
Pacific Lumber, Scotia Pacific 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, Pacific Lumber entered into an Environmental Indemnification Agreement
with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia
Pacific 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 Scotia Pacific
Timberlands.
Pacific Lumber entered into an agreement with Britt (the "Britt Agreement")
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
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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.
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 federal laws and regulations dealing
with timber harvesting, endangered species and critical habitat, and air and
water quality. These laws include 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 BOF. The ESA and 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. 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 is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect the Company.
In March 1992, the marbled murrelet was approved for listing as endangered
under the CESA. 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. Pacific Lumber has incorporated, and will
continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands. The
BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber. Such surveys can only be conducted during a portion of the murrelet's
nesting and breeding season, which extends from April through mid-September.
Accordingly, such surveys are expected to delay the review and approval process
with respect to certain of the THPs filed by Pacific Lumber. The results of such
surveys to date (based upon current survey protocols) have indicated that
Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet
habitat. A substantial portion of this land contains virgin and residual old
growth timber and the bulk of it falls within the areas designated as critical
habitat for the marbled murrelet (see below). Pacific Lumber is unable to
predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published the Final Designation of critical habitat
for the marbled murrelet, designating over four million acres as critical
habitat for the marbled murrelet. Although nearly all of the designated habitat
is public land, approximately 33,000 acres of the Company's timberlands are
included in the Final Designation, the substantial portion of such acreage being
young growth timber. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber over the last few years has attempted to develop the Murrelet
HCP. Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed the Takings Litigation alleging that certain portions of its
timberlands have been "taken" and seeking just compensation. See "Legal
Proceedings -- Pacific Lumber Litigation" for a description of the Takings
Litigation. Pursuant to the Headwaters Agreement described below under
"-- Headwaters Agreement," the Takings Litigation has been stayed by the Court
at the request of the parties.
It is impossible to determine the potential adverse effect of the Final
Designation on the Company's consolidated financial position, results of
operations or liquidity until such time as the material regulatory and
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legal issues are resolved; however, if Pacific Lumber is unable to harvest, or
is severely limited in harvesting, on timberlands designated as critical habitat
for the marbled murrelet, such effect could be materially adverse. If Pacific
Lumber is unable to harvest or is severely limited in harvesting, it intends to
seek just compensation from the appropriate governmental agencies on the grounds
that such restrictions constitute a governmental taking. There continue to be
other regulatory actions and lawsuits seeking to have various other species
listed as threatened or endangered under the ESA and/or the CESA and to
designate critical habitat for such species. For example, the NMFS recently
announced that by April 25, 1997, it would make a final determination whether to
list the coho salmon under the ESA in northern California, including,
potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any,
such listings and/or designations of critical habitat would have on the
Company's consolidated financial position, results of operations or liquidity.
See "-- Headwaters Agreement" below for a description of certain terms of the
Headwaters Agreement relating to processing and approval of the Multi-Species
HCP covering Pacific Lumber's timberlands. See also "Legal
Proceedings -- Pacific Lumber Litigation" for a description of the pending
Marbled Murrelet action. See "-- Headwaters Agreement" below for a description
of certain terms of the Headwaters Agreement relating to processing and approval
of the Multi-Species HCP.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish an LTSY harvest level that takes into account
environmental and economic considerations. The SYP must demonstrate that the
average annual harvest over any rolling ten-year period will not exceed the LTSY
harvest level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the
CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as
Pacific Lumber's average annual timber harvest over the last five years. The
proposed SYP also indicates that Pacific Lumber's average annual timber harvest
during the first decade of the SYP would approximate the LTSY harvest level.
During the second decade of the proposed SYP, Pacific Lumber's average annual
timber harvest would be approximately 8% less than that proposed for the first
decade. The SYP, when approved, will be valid for ten years. Thereafter, revised
SYPs will be prepared every decade that will address the LTSY harvest level
based upon reassessment of changes in the resource base and protection of public
resources. The proposed SYP assumes that the transactions contemplated by the
Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, Pacific Lumber is unable to predict the impact that these
regulations will have on its future timber harvesting practices. It is possible
that the results of the review and approval process could require Pacific Lumber
to reduce its timber harvest in future years from the harvest levels set forth
in the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
The Company is unable to predict the ultimate impact the sustained yield
regulations will have on its future financial position, results of operations or
liquidity. See "-- Headwaters Agreement" below for a description of certain
terms of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of Pacific Lumber's THPs and other timber harvesting operations, and
Pacific Lumber expects that such groups and individuals will continue to file
such objections. In addition, lawsuits are pending or threatened which seek to
prevent Pacific Lumber from implementing certain of its approved THPs or which
challenge other operations by Pacific Lumber. These challenges have severely
restricted Pacific Lumber's ability to harvest old growth timber on its
property. To date, challenges with respect to Pacific Lumber's THPs relating to
young growth timber have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its timber harvesting operations are
likely to occur in the future,
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particularly with respect to virgin and residual old growth timber. Although
such challenges have delayed or prevented Pacific Lumber from conducting a
portion of its operations, they have not had a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the consolidated operating results,
financial position or liquidity of the Company. See also "Legal Proceedings --
Pacific Lumber Litigation" for a description of the pending Marbled Murrelet
action.
In June 1990, the USFWS designated the northern spotted owl as threatened
under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The
ESA and its implementing regulations (and related California 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. Pacific Lumber has
developed and the USFWS has given its full concurrence to a northern spotted owl
management plan (the "Owl Plan"). The Owl Plan was recently updated through 1999
and the USFWS expressed its agreement that operations consistent with the Owl
Plan would not result in the taking of any owls. By incorporating the Owl Plan
into each THP filed with the CDF, Pacific Lumber is able to expedite the
approval time with respect to its THPs. The plaintiffs in the Marbled Murrelet
action have requested and received injunctive relief with respect to certain
THPs involving the Owl Plan. See "Legal Proceedings -- Pacific Lumber
Litigation." 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 or impact on the Company.
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. From time to time, bills are introduced 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, air and water
quality, and the restriction, regulation and administration of timber harvesting
practices. It is impossible to predict the content of any such bills, the
likelihood of any of the bills passing or the impact of any of these bills on
the future liquidity, consolidated financial position or operating results 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 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 impossible, however, to assess
the effect of such matters on the Company's consolidated financial position,
operating results or liquidity.
HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement, which provides the framework for the acquisition by the
United States and California of certain timberlands of Pacific Lumber.
The Headwaters Agreement requires the parties to use their respective best,
good faith efforts to achieve certain items (the "Specified Items"). The
Specified Items include the transfer to the United States and California of the
Headwaters Timberlands, such timberlands consisting of 5,600 acres of Pacific
Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk
Head Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest"). Approximately 4,900 of these acres are owned
by Salmon Creek and are part of the area commonly referred to as the "Headwaters
Forest." The remaining acreage is owned by Scotia Pacific (Pacific Lumber having
harvesting rights on a portion of the acreage).
These timberlands would be transferred in exchange for (a) property and
other consideration (possibly including cash) from both the United States and
California having an aggregate fair market value of $300 million and (b) the Elk
River Timberlands, consisting of 7,775 acres of adjacent timberlands to be
acquired by
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the United States and California from a third party. The Specified Items also
include acquisition by the United States and California of the Elk River
Property, consisting of approximately 9,600 acres of timberlands, including the
Elk River Timberlands, which would be transferred to Pacific Lumber (the
"Exchanged Elk River Property"). An additional Specified Item is the expedited
development and submission by Pacific Lumber and processing (a) by the United
States of a Permit to be based upon a Multi-Species HCP covering Pacific
Lumber's remaining timberlands and the timberlands and timber harvesting rights
which Pacific Lumber will own as a result of the various transactions (the
"Resulting Pacific Lumber Timber Property") as well as the Headwaters Forest and
the Elk Head Forest (both as conserved habitat) and (b) by California of an SYP
covering the Resulting Pacific Lumber Timber Property. The Headwaters Agreement
contains various provisions regarding the processing of the HCP, the Permit and
the SYP. Pacific Lumber expects that receipt of the Permit would expedite the
approval time and reduce the costs associated with its THPs.
The Specified Items also require, among other things, dismissal with
prejudice at closing of the Takings Litigation pending against the United States
and California. See "Legal Proceedings -- Pacific Lumber Litigation." The
Headwaters Agreement provides that the parties will file appropriate joint
motions to stay the Takings Litigation, subject to certain rights of the parties
to terminate the stay.
The Headwaters Agreement provides that the Pacific Lumber Parties will not
enter the Headwaters Forest or the Elk Head Forest to conduct logging
operations, including salvage logging (the "Moratorium"). The Moratorium will,
however, terminate if within ten months from the date of the Agreement the
parties have not achieved the Specified Items to their respective satisfaction.
In addition, as a condition to the continued effectiveness of the Moratorium,
the United States and/or California must provide to Pacific Lumber, within 60
days of the date of the Agreement, a list of property interests owned or
controlled by the United States and/or California meeting certain conditions,
including that they have a good faith estimated fair market value equal to or in
excess of $300 million and are available for exchange (the "Presented
Properties"). Should California and/or the United States fail to perform this
obligation within 120 days from the date of the Agreement, the Moratorium
terminates. If the Presented Properties list is furnished, the parties have a
ten-day period of time in which to agree upon the procedures to be used for
determining the fair market value of the Presented Properties. Pacific Lumber
has an additional 30-day period of time (the "Evaluation Period") in which to
evaluate the Presented Properties. The Moratorium terminates if the parties fail
to agree upon such appraisal procedures by the end of the ten-day period or if
at the end of the Evaluation Period Pacific Lumber has failed to identify $300
million in fair market value of Presented Properties that it finds acceptable.
The Headwaters Agreement requires the lists of Presented Properties to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity Counties in California, and surplus acreage next to a federal office
building in Laguna Niguel, California. The California list contained a variety
of properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available," as legislative action would be required for exchange of certain of
the properties.
Closing of the Headwaters Agreement is subject to various conditions,
including (a) completion of the Specified Items, (b) approval of an HCP and SYP
and issuance of the Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) approval by the boards of directors of the
applicable Pacific Lumber Parties. The Headwaters
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Agreement also provides that the parties will cooperate and act in good faith to
preserve diligently the Headwaters Agreement, the HCP, the Permit and the SYP
against third party challenge.
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
11 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" x 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 "-- Pacific Lumber Operations -- Relationships With Scotia
Pacific and Britt" for a description of Britt's log purchases from Pacific
Lumber.
MARKETING
In 1995, Britt sold approximately 78 million board feet of lumber products
to approximately 100 different customers. During the first nine months of 1996,
Britt sold approximately 62 million board feet of lumber products to over 100
customers. Over one-half of Britt's 1995 lumber sales were in northern
California. The remainder of its 1995 sales were in southern California and ten
other western states. The largest and top five of such customers accounted for
approximately 33% and 72%, respectively, of such 1995 sales. Britt markets its
products through its own salesmen to a variety of customers, including
distribution centers, industrial remanufacturers, wholesalers and retailers and
is expanding its market eastward.
Britt's backlog of sales orders at December 31, 1995 and 1994 was
approximately $3.2 million and $3.6 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal year.
Britt's backlog of sales orders at September 30, 1996 was $2.2 million.
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 one quarter of a mile away. The
mill was constructed in 1980, and capital expenditures to enhance its output and
efficiency are made periodically. Britt's (single shift) mill capacity, assuming
40 production hours per week, is estimated at 35.5 million board feet of fencing
products per year. As of September 30, 1996, Britt employed approximately 110
people, none of whom are covered by a collective bargaining agreement.
COMPETITION
Management estimates that Britt accounted for approximately one-third of
the redwood fence market in 1995. Britt competes primarily with the northern
California mills of Louisiana Pacific, Georgia Pacific and Eel River.
LEGAL PROCEEDINGS
See "Legal Proceedings -- Pacific Lumber Litigation" for a description of
certain legal proceedings in which Pacific Lumber is involved and "Legal
Proceedings -- USAT Matters" for a description of the Martel action in which MGI
is involved.
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<PAGE> 99
BUSINESS OF MAXXAM
ALUMINUM OPERATIONS
GENERAL
MAXXAM engages in aluminum operations through Kaiser. Kaiser is a fully
integrated aluminum producer operating in all principal aspects of the aluminum
industry -- the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum and the manufacture of fabricated (including semi-fabricated) aluminum
products. Kaiser is one of the largest domestic aluminum producers in terms of
primary aluminum smelting capacity and is the Western world's second largest
producer/seller of alumina, accounting for approximately 7% of the Western
world's alumina capacity in 1995. Kaiser's production levels of alumina and
primary aluminum exceed its internal processing needs which allows it to be a
major seller of alumina (approximately 2.0 million tons in 1995 or 72% of 1995
production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of
1995 production) to third parties. Kaiser is also a major domestic supplier of
fabricated aluminum products. In 1995, Kaiser shipped approximately 368,200 tons
of fabricated aluminum products to third parties, which accounted for
approximately 6% of the total tonnage of United States domestic shipments. A
majority of Kaiser's fabricated products are sold to distributors or used by
customers as components in the manufacture and assembly of finished end-use
products.
INDUSTRY OVERVIEW
Primary aluminum is produced by the refining of bauxite into alumina 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, transportation and construction 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 1995
in the United States, Japan and Western Europe, aluminum's recyclability and
weight advantages have enabled it to gain market share from steel and glass,
primarily in the beverage container area. Nearly all beer cans and soft drink
cans manufactured for the United States market are made of aluminum. Kaiser
believes that growth in the packaging area is likely to continue through the
1990s due to general population increase and to further penetration of the
beverage container market in emerging markets. Kaiser believes that growth in
demand for can sheet in the United States will follow the growth in population,
offset, in part, by the effects of the use of lighter gauge aluminum for can
sheet and of plastic container production from newly installed capacity.
In the transportation industry, which accounted for approximately 28% of
aluminum consumption in the United States, Japan and Western Europe in 1995,
automotive manufacturers use aluminum instead of steel, ductile iron, or copper
for an increasing number of components, including radiators, wheels, suspension
components, and engines, in order to meet more stringent environmental, safety,
and fuel efficiency standards. Kaiser believes that sales of aluminum to the
transportation industry have considerable growth potential due to projected
increases in the use of aluminum in automobiles. In addition, Kaiser believes
that consumption of aluminum in the construction industry will follow the
cyclical growth pattern of that industry, and will benefit from higher growth in
Asian and Latin American economies.
Supply
As of year-end 1995, Western world aluminum capacity from 107 smelting
facilities was approximately 16.6 million tons per year. Western world
production of primary aluminum for 1995 increased approximately 1.8% compared to
1994. Net exports of aluminum from the former Sino Soviet bloc increased
approximately
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<PAGE> 100
240% from 1990 levels during the period from 1991 through 1995 to approximately
2.1 million tons per year. These exports contributed to a significant increase
in LME stocks of primary aluminum which peaked in June 1994 at 2.7 million tons.
By the end of 1995, LME stocks of primary aluminum had declined 2.1 million tons
from this peak level and 1.1 million tons from the beginning of 1995. As of
December 13, 1996, LME stocks of primary aluminum were approximately 947,175
tons. See "-- Recent Industry Trends."
Based upon information currently available, Kaiser believes that moderate
additions will be made during 1996-1998 to Western world alumina and primary
aluminum production capacity. The increases in alumina capacity during 1996-1998
are expected to come from one new refinery which began operations in 1995 and
incremental expansions of existing refineries. In addition, Kaiser believes that
there is currently approximately 1.1 million tons of unutilized smelting
capacity that is available for production. The increases in primary aluminum
capacity during 1996-1998 are expected to come from a major new smelter in South
Africa which began operations in 1995, two new smelters which may begin
operations in 1996 or 1997, and the remainder principally from incremental
expansions of existing smelters.
RECENT INDUSTRY TRENDS
Primary Aluminum
During 1995, the AMT Price for primary aluminum was approximately $.86 per
pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The
significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in LME inventories had leveled off. By the end of 1995, some
small increases in LME inventories occurred, and prices of aluminum weakened
from first-half levels. This trend has continued throughout the first eleven
months of 1996 as the supply of primary aluminum exceeded demand during this
period. Net reported primary aluminum inventories have increased by
approximately 53,000 tons in 1996 based upon recent available reports of the LME
(through December 13, 1996) and the IPAI (through October 31, 1996), following
substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995,
respectively. The AMT Price for primary aluminum for the week ended December 13,
1996 was approximately $.72 per pound.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, Kaiser believes that
the reduction of aluminum inventories by consumers, as prices have continued to
decline, has suppressed the growth in primary aluminum demand that normally
accompanies growth in economic and industrial activity. In addition to these
supply/demand dynamics, Kaiser believes that the recent decline in primary
aluminum prices may have been influenced by a recent major decline in copper
prices on the LME.
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<PAGE> 101
The following table indicates the monthly average AMT Price for each of the
months from January 1993 through November 1996 as reported by Metals Week. The
AMT Price for the week ended December 13, 1996, as reported by Metals Week, was
72.0264 cents per pound.
<TABLE>
<CAPTION>
AVERAGE TRANSACTION PRICES (CENTS/POUND)
----------------------------------------
1996 1995 1994 1993
------ ------- ------ ------
<S> <C> <C> <C> <C>
January................................ 75.514 100.377 57.019 56.479
February............................... 75.100 93.847 61.641 55.993
March.................................. 76.414 88.745 62.343 53.794
April.................................. 75.517 90.388 61.890 52.345
May.................................... 75.314 85.338 64.007 52.694
June................................... 70.450 85.305 67.807 54.673
July................................... 69.767 87.788 72.656 56.829
August................................. 70.023 87.828 71.249 55.516
September.............................. 67.567 82.010 77.764 52.095
October................................ 65.112 78.384 83.839 51.660
November............................... 70.019 78.000 91.926 50.365
December............................... 78.823 91.484 53.902
------ ------- ------ ------
Average.............................. 71.891 86.403 71.969 53.862
====== ======= ====== ======
</TABLE>
Alumina
Western world demand for alumina, and the price of alumina, declined in
1994 in response to the curtailment of Western world smelter production of
primary aluminum, partially offset by increased usage of Western world alumina
by smelters in the Commonwealth of Independent States ("CIS") and in the PRC.
Increased Western world production of primary aluminum, as well as continued
imports of Western world alumina by the CIS and the PRC, during 1995 resulted in
higher demand for Western world alumina and significantly stronger alumina
pricing. In the first nine months of 1996, however, the alumina market softened,
primarily as a result of increased alumina production and decreased alumina
exports to the CIS and the PRC, resulting in lower alumina prices.
Fabricated Products
United States shipments of domestic fabricated aluminum products in 1995
were approximately at 1994 levels, although in 1995 demand for can sheet in the
United States softened relative to 1994. Shipments of domestic mill products
during the first nine months of 1996 declined approximately 4% compared to the
first nine months of 1995, principally due to an approximate 10% decline in the
shipment of can sheet and a reduction of consumer inventories of other
fabricated aluminum products. This trend has continued through the fourth
quarter of 1996.
See "Risk Factors -- Risk Factors Relating to Kaiser" for a discussion of
certain factors that could cause actual results to differ from those that could
otherwise result from the industry trends discussed above.
STRATEGY
Kaiser's objectives are to maintain leading market positions in its core
businesses, while developing new opportunities both domestically and
internationally which will enhance, and reduce the cyclicality of, Kaiser's
earnings. The primary elements of Kaiser's strategies to achieve these
objectives are:
Increasing the competitiveness of its existing facilities. Kaiser is
continuing to increase the competitiveness of its existing facilities. In 1995,
Kaiser successfully restructured electric power purchase agreements for its
smelting facilities in the Pacific Northwest, which has resulted in
significantly lower electric power costs in 1996 for the Mead and Tacoma,
Washington, smelters compared with 1995 electric power costs. Kaiser
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<PAGE> 102
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. See "Risk Factors -- Risk Factors Relating
to Kaiser -- Power Supply."
Kaiser has also commenced the modernization and expansion of the carbon
baking furnace at its Mead smelter at an estimated cost of approximately $52.0
million. This project will lower costs, enhance safety and improve the
environmental performance of the facility. This modernization is expected to be
completed in late 1998.
Kaiser continues to implement changes to the process and product mix of its
Trentwood rolling mill in an effort to maximize its profitability and maintain
full utilization of the facility. Recently, Kaiser has approved an expansion of
its heat treat capacity by approximately one-third. Sales of Kaiser's heat treat
products have increased significantly over the last several years and are made
primarily to the aerospace and general engineering markets, which are
experiencing growth in demand. The project is estimated to cost approximately
$45.0 million and to take approximately two years to complete. See
"-- Production Operations."
Developing proprietary technologies. Kaiser has developed proprietary
technologies which present growth opportunities in the future and have enabled
it to substantially improve its operating efficiencies.
Kaiser has developed a unique micromill for the production of can sheet
from molten metal using a continuous cast process. The capital and conversion
costs of these micromills are expected to be significantly lower than
conventional rolling mills. Micromills are also expected to result in lower
transportation costs due to the ability to strategically locate a micromill in
close proximity to a manufacturing facility. Micromills are expected to be
particularly well suited to take advantage of the rapid growth in demand for can
sheet expected in emerging markets in Asia and Latin America where there is
limited indigenous supply. Kaiser believes that micromills should also be
capable of manufacturing other sheet products at relatively low capital and
operating costs. The micromill technology is based on a proprietary thin-strip,
high-speed, continuous-belt casting technique linked directly to hot and cold
rolling mills. The major advantage of the process is that the sheet is
continuously manufactured from molten metal, unlike the conventional process in
which the metal is first cast into large, solid ingots and subsequently rolled
into sheet through a series of highly capital-intensive steps. The first
micromill is nearing completion in Nevada as a full-scale demonstration and
production facility. Kaiser expects operational start-up of the facility by the
end of 1996. If Kaiser is successful in proving and commercializing its
micromill technology, micromills could represent an important source of future
growth. There can be no assurance that Kaiser will be able to successfully
develop and commercialize the technology for use at full-scale facilities. See
"-- Research and Development."
Kaiser has developed and installed proprietary retrofit technology in all
of its smelters over the last decade, which has significantly contributed to
increased and more efficient production of primary aluminum. Through continuing
technological improvements, Kaiser's smelters have achieved improved energy
efficiency and longer average life of reduction cells. Kaiser is actively
engaged in licensing its smelting and other process and product technology and
selling technical and managerial assistance to other producers worldwide. See
"-- Production Operations -- Primary Aluminum Products."
Increasing participation in emerging markets. Kaiser is actively pursuing
opportunities to increase its participation in emerging markets by using its
technical expertise and capital to form joint ventures or acquire equity in
aluminum-related facilities in foreign countries where it can apply its
proprietary technology. Kaiser has created Kaiser Aluminum International to
identify growth opportunities in targeted emerging markets and develop the
needed country competence to complement Kaiser's product and process competence
in capitalizing on such opportunities. Kaiser has focused its efforts on
countries that are expected to be important suppliers of aluminum and/or large
customers for aluminum and alumina, including the PRC, Russia and other members
of the CIS, India, and Venezuela. Kaiser's proprietary retrofit technology has
been installed by Kaiser at various third party locations throughout the world
and is an integral part of Kaiser's initiatives for participating in new and
existing smelting facilities. See "Risk Factors -- Risk Factors Relating to
Kaiser -- Foreign Activities" above and "-- International Business Development"
below.
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<PAGE> 103
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. Primary
aluminum prices have historically been subject to significant cyclical price
fluctuations. During the period January 1, 1993 through December 13, 1996, the
AMT Price for primary aluminum has ranged from approximately $.50 to $1.00 per
pound. For the week ended December 13, 1996, the AMT Price of primary aluminum
was approximately $.72 per pound. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag behind
primary aluminum price changes by up to three months. See "-- Industry Overview"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Trends -- Aluminum Operations."
Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina
(approximately 2.0 million tons in 1995 or 72% of production) and primary
aluminum (approximately 271,700 tons in 1995 or 66% of production) to third
parties.
As of November 30, 1996, Kaiser had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for the balance of 1996, and 89% and 90% of such excess alumina for
1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made
at prices indexed to future prices of primary aluminum.
As of November 30, 1996, Kaiser had sold forward at fixed prices
approximately 70,000 tons of its primary aluminum in excess of its projected
internal fabrication requirements in 1997 and approximately 93,600 tons of such
surplus in 1998 at fixed prices in excess of the AMT Price for primary aluminum
for the week ended December 13, 1996. In addition, Kaiser has purchased put
options in respect of approximately 196,000 tons and 45,000 tons of such surplus
in 1997 and 1998, respectively, to establish a minimum price in excess of the
AMT Price for primary aluminum for the week ended December 13, 1996. The
weighted average price for Kaiser's purchased put options with respect to 1997
are below the AMT Price for the week ended December 13, 1996. The weighted
average price of the minimum of the range established with respect to Kaiser's
other 1998 option contracts approximates the AMT Price for the week ended
December 13, 1996.
PRODUCTION OPERATIONS
The following table sets forth total shipments and intracompany transfers
of Kaiser's alumina, primary aluminum, and fabricated aluminum operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
ALUMINA:
Shipments to Third Parties........ 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5
Intracompany Transfers............ 662.2 546.3 800.6 820.9 807.5
PRIMARY ALUMINUM:
Shipments to Third Parties........ 262.9 184.5 271.7 224.0 242.5
Intracompany Transfers............ 97.0 171.3 217.4 225.1 233.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties........ 245.4 284.3 368.2 399.0 373.2
</TABLE>
Kaiser's operations are conducted through KACC's decentralized business
units which compete through-out the aluminum industry.
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<PAGE> 104
- - The alumina business unit, which mines bauxite and obtains additional bauxite
tonnage under long-term contracts, produced approximately 8% of Western world
alumina in 1995. During 1995, Kaiser's shipments of bauxite to third parties
represented approximately 21% of bauxite mined. In addition, Kaiser's third
party shipments of alumina represented approximately 72% of alumina produced.
Kaiser's share of total Western world alumina capacity was approximately 7% in
1995.
- - The primary aluminum products business unit operates two domestic smelters
wholly owned by Kaiser and two foreign smelters in which Kaiser holds
significant ownership interests. During 1995, Kaiser's shipments of primary
aluminum to third parties represented approximately 66% of primary aluminum
production. Kaiser's share of total Western world primary aluminum capacity
was approximately 3% in 1995.
- - Fabricated aluminum products are manufactured by three business
units -- flat-rolled products, extruded products and engineered components.
The products include body, lid, and tab stock for beverage containers, sheet
and plate products, heat-treated products, screw machine stock, redraw rod,
forging stock, truck wheels and hubs, air bag canisters, engine manifolds, and
other castings, forgings and extruded products, which are manufactured at
plants located in principal marketing areas of the United States and Canada.
The aluminum utilized in Kaiser's fabricated products operations is comprised
of primary aluminum, obtained both internally and from third parties, and
scrap metal purchased from third parties.
Alumina
The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 1995:
<TABLE>
<CAPTION>
ANNUAL TOTAL
PRODUCTION ANNUAL
CAPACITY PRODUCTION
COMPANY AVAILABLE TO CAPACITY
ACTIVITY FACILITY LOCATION OWNERSHIP KAISER ---------
-------------------------- -------- --------- --------- ------------ (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
========= =========
</TABLE>
- ---------------
(1) Although Kaiser owns 49% of KJBC, it has the right to receive all of such
entity's output.
(2) Alpart bauxite is refined into alumina at the Alpart refinery.
Bauxite mined in Jamaica by 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.
Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina
plant located in Jamaica. Kaiser owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. Kaiser has management
responsibility for the facility on a fee basis. Kaiser and Hydro have agreed to
be responsible for their proportionate shares of Alpart's costs and expenses.
The Government of Jamaica has granted Alpart a mining lease and has entered into
other agreements with Alpart designed to assure that sufficient reserves of
bauxite will be available to Alpart to operate its refinery as it may be
expanded to a capacity of 2,000,000 tons per year through the year 2024.
Kaiser owns a 28.3% interest in Queensland Alumina Limited ("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
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<PAGE> 105
contracts. The stockholders, including Kaiser, purchase bauxite from another QAL
stockholder under long-term supply contracts. Kaiser has contracted with QAL to
take approximately 792,000 tons per year of capacity or pay standby charges.
Kaiser is unconditionally obligated to pay amounts calculated to service its
share ($93.3 million in principal amount at September 30, 1996) 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 Kaiser.
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, trading intermediaries who resell raw materials to end-users, and
users of chemical-grade alumina. In 1995, Kaiser sold all of its bauxite to two
customers, the largest of which accounted for approximately 74% of such sales.
Kaiser also sold alumina to nine customers, the largest and top five of which
accounted for approximately 23% and 90% of such sales, respectively. See
"-- Competition." Kaiser believes that among alumina producers it is now the
Western 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 under
multi-year sales contracts. See "-- Sensitivity to Prices and Hedging Programs."
Primary Aluminum Products
The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 1995:
<TABLE>
<CAPTION>
ANNUAL
RATED TOTAL
CAPACITY ANNUAL 1995
COMPANY AVAILABLE 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 82%
Washington.................. Tacoma 100% 73,000 73,000 82%
------- -------
Subtotal................. 273,000 273,000
------- -------
International
Ghana....................... Valco 90% 180,000 200,000 68%
Wales, United Kingdom....... Anglesey 49% 55,000 112,000 119%
------- -------
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. Approximately 71% of Mead's 1995
production was used at Kaiser's Trentwood fabricating facility and the balance
was 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, extended the anode
life-cycle in the smelting process, changed from pencil to liquid pitch to
produce carbon anodes which achieve environmental and operating savings, and
engaged in efforts to increase production through the use of improved, higher-
efficiency reduction cells. Kaiser has also commenced the modernization and
expansion of the carbon baking furnace at its Mead smelter at an estimated cost
of approximately $52.0 million. This project will lower costs, enhance safety
and improve the environmental performance of the facility. This modernization is
expected to be completed in late 1998. See "-- Strategy."
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<PAGE> 106
Electric power supply represents an important production cost for Kaiser at
its aluminum smelters. In 1995, Kaiser successfully restructured electric power
purchase agreements for its smelting facilities in the Pacific Northwest, which
has resulted in significantly lower electric power costs for the Mead and
Tacoma, Washington, smelters compared with 1995 electric power costs. Kaiser
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. From 1981 until 1995, electric power for
Kaiser's Mead and Tacoma smelters was purchased exclusively from the Bonneville
Power Administration ("BPA") by Kaiser under a contract which expires in 2001.
In April 1995, the BPA agreed to allow each of the direct service industrial
customers (the "DSIs"), which include Kaiser, to purchase a portion of its
electric power requirement from sources other than the BPA beginning October 1,
1995. In June 1995, Kaiser entered into an agreement with The Washington Water
Power Company ("WWP") to purchase up to 50 megawatts of electric power for its
Northwest facilities for a five-year term beginning October 1, 1995. Kaiser is
receiving power under that contract, which power displaces a portion of Kaiser's
interruptible power from the BPA. In addition, in 1995 Kaiser entered into a new
power purchase contract with the BPA, which amends the existing BPA power
contract and which contemplates reductions during 1996 in the amount of power
which Kaiser is obligated to purchase from the BPA and which the BPA is
obligated to sell to Kaiser, and the replacement of such power with power to be
purchased from other suppliers. Kaiser is negotiating power purchase agreements
for such power with suppliers other than the BPA. Contracts for the purchase of
all power required by Kaiser's Mead and Tacoma smelters and Trentwood rolling
mill for 1996, and for approximately 75% of such power for the period 1997-2001,
have been finalized. Two parties filed lawsuits in December 1995 against the BPA
petitioning the court to review and set aside the BPA's offers of the new power
purchase contracts to the DSIs, including the offer that Kaiser accepted. These
lawsuits have been consolidated. In addition, the BPA's Business Plan
Environmental Impact Statement that is under review in connection with the
lawsuits challenging the BPA's transmission agreements with the DSIs, including
Kaiser, as described in the following paragraph, is part of the record
supporting the BPA's new power purchase contracts with the DSIs, and an adverse
decision in those lawsuits may affect Kaiser's new power purchase contract with
the BPA. The effect of such lawsuits, if any, on Kaiser's new power purchase
contract with the BPA is not known. Certain of the DSIs, including Kaiser, have
intervened in the lawsuits.
In 1995, Kaiser also entered into agreements with the BPA and with the WWP,
with terms ending in 2001, under which the BPA and the WWP would provide to
Kaiser transmission services for power purchased from sources other than the
BPA. The term of the transmission services agreement with the BPA was
subsequently extended for an additional fifteen years, which extension has been
challenged. Four lawsuits have been filed against the BPA by various parties,
which lawsuits either challenge the BPA's record of decision offering such an
extension agreement to the DSIs or challenge the BPA's Business Plan
Environmental Impact Statement record of decision in connection therewith.
Certain of the DSIs, including Kaiser, have intervened in the four lawsuits. See
"-- Strategy."
Kaiser reduced operations at its Mead and Tacoma smelters in Washington to
approximately 75% of their full capacity in January 1993, when three reduction
potlines were removed from production (two at Mead and one at Tacoma) in
response to a power reduction imposed by the BPA. In March 1995, the BPA offered
to its industrial customers, including Kaiser, surplus firm power at a
discounted rate for the period April 1, 1995, through July 31, 1995, to enable
such customers to restart idle industrial loads. In April 1995, Kaiser and the
BPA entered into a contract for an amount of such power, and thereafter Kaiser
restarted one-half of an idle potline (approximately 9,000 tons of annual
capacity) at its Tacoma, Washington, smelter. The Tacoma smelter was returned to
full production in October 1995. In 1995, Kaiser entered into a one-year power
supply contract with the BPA, for a term ended September 30, 1996, in connection
with the restart of idled capacity at its Mead smelter. The Mead smelter
returned to full production in December 1995.
Kaiser manages, and owns a 90% interest in, the Valco aluminum smelter in
Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied
by Kaiser 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. Kaiser's share of the primary aluminum is sold to third parties. Power
for the Valco smelter is supplied under an agreement which expires in 2017. The
agreement indexes two-thirds of the price of the contract quantity of power to
the market
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price of primary aluminum. The agreement also provides for a review and
adjustment of the base power rate and the price index every five years. The most
recent review was completed in April 1994 for the 1994-1998 period. Valco has
entered into an agreement with the government of Ghana under which Valco has
been assured (except in cases of force majeure) that it will receive sufficient
electric power to operate at its current level of three and one-half potlines
through December 31, 1996. Kaiser believes that Valco should have available
sufficient electric power to operate at least at its current level through 1997.
See "Risk Factors -- Risk Factors Relating to Kaiser -- Power Supply."
Kaiser owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey")
aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses
pre-bake technology. Kaiser supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. Kaiser sells its share of
Anglesey's output to third parties. Power for the Anglesey alumina smelter is
supplied under an agreement which expires in 2001.
Kaiser has developed and installed proprietary retrofit technology in all
of its smelters, as well as at third party locations. 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 -- has
significantly contributed to increased and more efficient production of primary
aluminum and 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 to other producers
worldwide, and may participate in joint ventures or similar business
partnerships which employ Kaiser's technical and managerial knowledge. See
"-- Strategy" and "-- Research and Development."
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 1995, Kaiser sold its primary aluminum production not utilized for internal
purposes to approximately 35 customers, the largest and top five of which
accounted for approximately 25% and 62% of such sales, respectively. See
"-- Competition." 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 often 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 Aluminum 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. In 1995, four domestic beverage
container manufacturers were among the leading customers for Kaiser's fabricated
products and accounted for approximately 12% of Kaiser's sales revenue.
Kaiser's fabricated products compete with those of numerous domestic and
foreign producers and with products made of steel, copper, glass, plastic, and
other materials. Product quality, price, and availability are the principal
competitive factors in the market for fabricated aluminum products. Kaiser has
focused its fabricated products operations on selected products in which Kaiser
has production expertise, high-quality capability, and geographic and other
competitive advantages.
Flat-Rolled Products. The flat-rolled product 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 approximately 64% of Kaiser's 1995
fabricated aluminum products shipments. The business unit supplies the beverage
container market (producing body, lid, and tab stock), the aerospace and general
engineering markets (producing heat treat products), and the specialty coil
markets (producing automotive brazing sheet, wheel, and tread products), both
directly and through distributors. During 1995, Kaiser successfully completed a
two year restructuring of its flat-rolled products operation at its Trentwood
plant to reduce that facility's annual operating costs by at least $50.0
million.
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Kaiser's flat-rolled products are sold primarily to beverage container
manufacturers located in the western United States and in the Asian Pacific Rim
countries where the Trentwood plant's location provides Kaiser with a
transportation advantage. Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which Kaiser
competes. Kaiser has made significant capital expenditures at Trentwood during
the past several years in rolling technology and process control to improve the
metal integrity, shape and gauge control of its products. Kaiser believes that
such improvements have enhanced the quality of its products for the beverage
container industry and the capacity and efficiency of its manufacturing
operations. Kaiser believes that it is one of the highest quality producers of
aluminum beverage can sheet in the world.
Kaiser continues to implement changes to the process and product mix of its
Trentwood rolling mill in an effort to maximize its profitability and maintain
full utilization of the facility. Recently, Kaiser has approved an expansion of
its heat treat capacity by approximately one-third, which will enable Kaiser to
increase the range of its heat treat products and improve Trentwood's operating
efficiency. Sales of Kaiser's heat treat products have increased significantly
over the last several years and are made primarily to the aerospace and general
engineering markets, which are experiencing growth in demand. The project is
estimated to cost approximately $45.0 million and to take approximately two
years to complete.
In 1995, the flat-rolled products business unit had 31 domestic and foreign
can sheet customers. The largest and top five of such customers accounted for
approximately 14% and 41%, respectively, of the business unit's revenue. See
"-- Competition." In 1995, the business unit shipped products to approximately
150 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 13% of the business unit's revenue. The marketing staff for the
flat-rolled products business unit is located at the Trentwood facility and in
Pleasanton, California. Sales are made directly to customers (including
distributors) from eight sales offices located throughout the United States.
International customers are served by sales offices in the Netherlands and Japan
and by independent sales agents in Asia and Latin America.
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; rod and bar facilities in Newark, Ohio,
and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging
stock, and billet; and a facility in Richland, Washington, which produces
seamless tubing in both hard and soft alloys for the automotive, other
transportation, export, recreation, agriculture, and other industrial markets.
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 in the distribution,
durable goods, defense, building and construction, ordnance and electrical
markets. In 1995, the extruded products business unit had approximately 825
customers for its products, the largest and top five of which accounted for
approximately 6% and 20%, respectively, of its revenue. See "-- Competition."
Sales are made directly from plants as well as marketing locations across the
United States.
Engineered Components. The engineered components business unit operates
forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood,
South Carolina; a machine shop at Greenwood, South Carolina; and a casting
facility in Canton, Ohio. The engineered components 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
and cast aluminum make it particularly well-suited for automotive applications.
The business unit's casting facility manufactures aluminum engine manifolds for
the automobile, truck and marine markets.
In 1995, the engineered components business unit had approximately 250
customers, the largest and top five of which accounted for approximately 34% and
77%, respectively, of the business unit's revenue. See
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"-- Competition." The engineered components business unit's headquarters and a
sales and engineering office are located in Detroit, Michigan. The sales and
engineering office works with car makers and other customers, the Center for
Technology (see "-- Research and Development"), and plant personnel to create
new automotive component designs and improve existing products.
Kaiser entered into a letter of intent with Accuride Corporation
("Accuride") in September 1996 to form a global joint-venture company to design,
manufacture and market aluminum wheels for the commercial transportation
industry. Kaiser and Accuride will each own 50% of the new company. Kaiser will
receive a cash payment in exchange for certain wheel manufacturing assets
located primarily at its Erie, Pennsylvania facility, which currently forges
wheels and other fabricated aluminum products. The transaction is expected to be
consummated during the first quarter of 1997 and is subject to various
conditions, including the negotiation of definitive agreements, third party
consents, and board approvals.
COMPETITION
Aluminum competes in many markets with steel, copper, glass, plastic and
numerous other materials. In recent years, plastic containers have increased and
glass containers have decreased their respective shares of the soft drink sector
of the beverage container market. In the United States, beverage container
materials, including aluminum, face increased competition from plastics as
increased polyethylene terephthalate ("PET") container capacity is brought on
line by plastics manufacturers. Within the aluminum business, Kaiser competes
with both domestic and foreign producers of bauxite, alumina and primary
aluminum, and with domestic and foreign fabricators. Many of Kaiser's
competitors have greater financial resources than Kaiser. Kaiser's principal
competitors in the sale of alumina include Alcoa Alumina and Chemicals LLC,
Billiton Marketing and Trading BV, and Alcan Aluminium Limited. Kaiser competes
with most aluminum producers in the sale of primary aluminum. See "Risk
Factors -- Risk Factors Relating to Kaiser -- Leverage."
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. 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 it has production expertise, high-quality capability, and geographic
and other competitive advantages. Kaiser 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 its customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations.
RESEARCH AND DEVELOPMENT
Kaiser conducts research and development activities principally at three
facilities -- the Center for Technology ("CFT") in Pleasanton, California; the
Primary Aluminum Products Division Technology Center ("ATC") adjacent to the
Mead smelter in Spokane, Washington; and the Alumina Development Laboratory
("ADL") at the Gramercy, Louisiana, refinery, which supports Kaiser Alumina
Technical Services ("KATS") and the facilities of the alumina business unit. Net
expenditures for company-sponsored research and development activities were
$18.5 million in 1995, $16.7 million in 1994, and $18.5 million in 1993.
Kaiser's research staff totaled 157 at December 31, 1995. Kaiser estimates that
research and development net expenditures will be approximately $22.5 million in
1996.
CFT performs research and development across a range of aluminum process
and product technologies to support Kaiser's business units and new business
opportunities. It also selectively offers technical services to third parties.
Significant efforts are directed at product and process technology for the can
sheet, aircraft and automotive markets, and aluminum reduction cell models which
are applied to improving cell designs and operating conditions. The largest and
most notable single project being developed at CFT is a unique micromill for the
production of can sheet from molten metal using a continuous cast process. The
capital and conversion costs of these micromills are expected to be
significantly lower than conventional rolling mills.
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Micromills are also expected to result in lower transportation costs due to the
ability to strategically locate a micromill in close proximity to a
manufacturing facility. Micromills are expected to be particularly well suited
to take advantage of the rapid growth in demand for can sheet expected in
emerging markets in Asia and Latin America where there is limited indigenous
supply. Kaiser believes that micromills should also be capable of manufacturing
other sheet products at relatively low capital and operating costs. The
micromill technology is based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot and cold rolling mills.
The major advantage of the process is that the sheet is continuously
manufactured from molten metal, unlike the conventional process in which the
metal is first cast into large, solid ingots and subsequently rolled into sheet
through a series of highly capital-intensive steps. The first micromill is
nearing completion in Nevada as a full-scale demonstration and production
facility. Kaiser expects operational start-up of the facility by the end of
1996. If Kaiser is successful in proving and commercializing its micromill
technology, micromills could represent an important source of future growth.
There can be no assurance that Kaiser will be able to successfully develop and
commercialize the technology for use at full-scale facilities. Kaiser is
currently financing the cost of the construction of the Nevada micromill,
estimated to be approximately $70 million, from general corporate funds,
including borrowings under the 1994 KACC Credit Agreement.
ATC maintains specialized laboratories and a miniature carbon plant where
experiments with new anode and cathode technology are performed. ATC supports
Kaiser's primary aluminum smelters, and concentrates on the development of
cost-effective technical innovations such as equipment and process improvements.
KATS provides improved alumina process technology to Kaiser's facilities and
technical support to new business ventures in cooperation with Kaiser's
international business development group. See "-- Strategy."
Kaiser is actively engaged in efforts to license its technology and sell
technical and managerial assistance to other producers worldwide. Kaiser's
technology has been installed in alumina refineries, aluminum smelters and
rolling mills located in the United States, Jamaica, Sweden, Germany, Russia,
India, Australia, Korea, New Zealand, Ghana, the United Arab Emirates, and the
United Kingdom. Kaiser's revenue from technology sales and technical assistance
to third parties was $5.7 million in 1995, $10.0 million in 1994, and $12.8
million in 1993. See "-- Strategy."
Kaiser has entered into agreements with respect to the Krasnoyarsk smelter
in Russia under which Kaiser has licensed certain of its technology for use in
such facility and agreed to provide purchasing services in obtaining
Western-sourced technology and equipment to be used in such facility. These
agreements were entered into in November 1990, and the services under them are
expected to be completed in 1996. In addition, in 1993, Kaiser entered into
agreements with respect to the Nadvoitsy smelter in Russia and the Korba smelter
of the Bharat Aluminium Co. Ltd., in India, under which Kaiser has licensed
certain of its technology for use in such facilities. Services under the
Nadvoitsy agreements were completed in 1995, and services under the Korba
agreements are essentially completed although final contract closure will not
occur until mid-1997.
INTERNATIONAL BUSINESS DEVELOPMENT
Kaiser is actively pursuing opportunities to increase its participation in
emerging markets by using its technical expertise and capital to form joint
ventures or acquire equity in aluminum-related facilities in foreign countries
where it can apply its proprietary technology. Kaiser has created Kaiser
Aluminum International to identify growth opportunities in targeted emerging
markets and develop the needed country competence to complement Kaiser's product
and process competence in capitalizing on such opportunities. Kaiser has focused
its efforts on countries that are expected to be important suppliers of aluminum
and/or large customers for aluminum and alumina, including the PRC, Russia and
other members of the CIS, India, and Venezuela. Kaiser's proprietary retrofit
technology has been installed by Kaiser at various third party locations
throughout the world and is an integral part of Kaiser's initiatives for
participating in new and existing smelting facilities.
In 1995, KYRIL entered into the Joint Venture Agreements with LAS relating
to the formation and operation of the Joint Venture. The Joint Venture's assets
and operations are located primarily in the industrial city of Lanzhou, the
capital of Gansu Province in northwestern China, and in nearby Lianhai, a
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special economic zone also in Gansu Province. The smelter at Lanzhou is the
fifth largest aluminum smelter in the PRC and has a capacity of approximately
55,000 tons of primary aluminum per year. The smelter at Lianhai has a capacity
of approximately 30,000 tons of primary aluminum per year. In 1995, the two
smelters produced an aggregate of approximately 71,000 tons of primary aluminum,
which amount was less than the aggregate capacity of the plants principally
because of a shortage of electric power available to the plants in 1995 due to a
drought which impacted the hydroelectric system. The shortage of electric power
available to the plants continued during the first part of 1996; however, normal
power supply has been restored since July.
KYRIL contributed $9.0 million to the capital of the Joint Venture in July
1995. The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing and other conditions relating to KYRIL's
additional contributions to the Joint Venture and the use thereof by the Joint
Venture. Governmental approval in the PRC will be necessary in order to
implement any arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained. At a recent meeting of the directors
of the Joint Venture, KYRIL, LAS, and the Joint Venture reached an agreement (i)
that extended until early 1997 the deadline for KYRIL to make a second capital
contribution to the Joint Venture, and (ii) that KYRIL would continue to explore
various methods of financing any future capital contributions to the Joint
Venture, including possible financing from third-party investors.
Kaiser, through its extruded products business unit, has entered into
contracts to form two small joint venture companies in the PRC. Kaiser
indirectly acquired equity interests of approximately 45% and 49%, respectively,
in these two companies which will manufacture aluminum extrusions, in exchange
for the contribution to those companies of certain used equipment, technology,
services and cash. The majority equity interests in the two companies are owned
by affiliates of Guizhou Guang Da Construction Company.
See "Risk Factors -- Risk Factors Relating to Kaiser -- Foreign
Activities."
EMPLOYEES
During 1995, Kaiser employed an average of approximately 9,500 persons,
compared with an average of approximately 9,700 employees in 1994, and 10,200
employees in 1993. At December 31, 1995, Kaiser's work force was approximately
9,600, including a domestic work force of approximately 5,900, of whom 4,000
were paid at an hourly rate. Most hourly paid domestic employees are covered by
collective bargaining agreements with various labor unions. Approximately 74% of
such employees are covered by a master agreement (the "Labor Contract") with the
USWA which expires September 30, 1998. The Labor Contract covers Kaiser's plants
in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and
Newark, Ohio. The Labor Contract replaced a contract that expired October 31,
1994, and was reached after an eight-day work stoppage by the USWA at these
plants in February 1995.
The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly bonus
payments based on various indices of profitability, productivity, efficiency,
and other aspects of specific plant performance, as well as, in certain cases,
the price of alumina or primary aluminum. Pursuant to the Labor Contract, base
wage rates were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective November 3,
1997, and an amount in respect of the cost of living adjustment under the
previous master agreement will be phased into base wages during the term of the
Labor Contract. In the second quarter of 1995, Kaiser acquired up to $2,000 of
preference stock held in a stock plan for the benefit of each of approximately
82% of the employees covered by the Labor Contract and in the first half of 1998
will acquire up to an additional $4,000 of such preference stock held in such
plan for the benefit of substantially the same employees. In addition, a
profitability test was satisfied and, therefore, Kaiser acquired during 1996 up
to an additional $1,000 of such preference stock held in such plan for the
benefit of substantially the same employees. Kaiser made comparable acquisitions
of preference stock held for the benefit of each of certain salaried employees.
In February 1995, Alpart's employees engaged in a six-day work stoppage by
its National Workers Union, which was settled by a new contract which expired in
April 1996. Contract negotiations are ongoing.
Management considers Kaiser's employee relations to be satisfactory.
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ENVIRONMENTAL MATTERS
Kaiser is subject to the Environmental Laws. From time to time the
Environmental Laws are amended and new ones are adopted. 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 ("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 "Legal Proceedings." Kaiser currently is
subject to a number of lawsuits under CERCLA. Kaiser, along with several other
entities, has also been named as a 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. Kaiser's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. By letter dated June 18,
1996, the Washington State Department of Ecology advised Kaiser that there are
several options for remediation at the Mead facility that would be acceptable to
the Department. Kaiser expects that one of these remedial options will be agreed
upon and incorporated into a Consent Decree in early 1997. 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.
Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals, primarily related to potential
solid waste disposal and soil and ground-water remediation matters. At September
30, 1996, the balance of such accruals, which are primarily included in other
non-current liabilities, was $32.9 million. These environmental accruals
represent Kaiser's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts, existing
technology, and Kaiser's assessment of the likely remediation to be performed.
Kaiser expects remediation to occur over the next several years and estimates
that annual expenditures to be charged to these environmental accruals will be
approximately $2.0 to $10.0 million for the years 1996 through 2000 and an
aggregate of approximately $7.0 million thereafter. Cash expenditures of $4.5
million in 1995, $3.6 million in 1994, and $7.2 million in 1993 were charged to
previously established accruals relating to environmental costs. Approximately
$8.4 million is expected to be charged to such accruals in 1996.
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. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, Kaiser currently believes that the
resolution of such uncertainties should not have a material adverse effect on
Kaiser's consolidated financial position, results of operations, or liquidity.
In addition to cash expenditures charged to environmental accruals,
environmental capital spending was $9.2 million in 1995, $11.9 million in 1994,
and $12.6 million in 1993. Annual operating costs for pollution control, not
including corporate overhead or depreciation, were approximately $26.0 million
in 1995, $23.1 million in 1994, and $22.4 million in 1993. Legislative,
regulatory and economic uncertainties make it difficult to project future
spending for these purposes. However, Kaiser currently anticipates that in the
1996-1997 period, environmental capital spending will be within the range of
approximately $27.0-$33.0 million per year, and operating costs for pollution
control will be within the range of $28.0-$29.0 million per year.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of MAXXAM -- Financial Condition and Investing and
Financing Activities -- Aluminum Operations," Note 9 of the Notes to
Consolidated Financial Statements under the heading "Environmental
Contingencies," and "Risk Factors -- Risk Factors Relating to
Kaiser -- Environmental Matters and Litigation."
PROPERTIES
The locations and general character of the principal plants, mines, and
other materially important physical properties relating to Kaiser's operations
are described in "-- Production Operations." Kaiser owns in fee or leases all
the real estate and facilities used in connection with its business. Plants and
equipment and other facilities are generally in good condition and suitable for
their intended uses, subject to changing environmental requirements. Although
Kaiser's domestic aluminum smelters and alumina facility were initially designed
early in Kaiser's history, they have been modified frequently over the years to
incorporate technological advances in order to improve efficiency, increase
capacity, and achieve energy savings. Kaiser believes that its domestic plants
are cost competitive on an international basis. Due to Kaiser's variable cost
structure, the plants' operating costs are relatively lower in periods of low
primary aluminum prices and relatively higher in periods of high primary
aluminum prices.
Kaiser's obligations under the 1994 KACC Credit Agreement are secured by,
among other things, mortgages on its major domestic plants (other than the
Gramercy alumina refinery and Nevada micromill). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations."
LEGAL PROCEEDINGS
See "Legal Proceedings -- Kaiser Litigation" for a description of certain
legal proceedings in which Kaiser is involved.
FOREST PRODUCTS OPERATIONS
See "Business of the Company" for a description of MAXXAM's forest products
operations.
REAL ESTATE AND OTHER OPERATIONS
REAL ESTATE AND RESORT OPERATIONS
General
MAXXAM, principally through its wholly owned subsidiaries, is also engaged
in the business of residential and commercial real estate investment and
development, primarily in Arizona, California, Texas and Puerto Rico. At
September 30, 1996, MAXXAM had approximately $19.5 million of outstanding
receivables derived from the financing of real estate sales in its developments
and may continue to finance such real estate sales in the future. As of
September 30, 1996, these receivables had a weighted average interest rate of
approximately 9.6%, a weighted average maturity of less than four years and
average borrower equity of approximately 52%. As of September 30, 1996, MAXXAM
also held $2.5 million of other receivables as a portion of the RTC Portfolio.
Principal Properties
Texas. In June 1991, a wholly owned subsidiary of MAXXAM purchased from
the RTC at an auction, for approximately $122.3 million, the RTC Portfolio,
which consisted of 27 parcels of income producing real property and 28 loans
secured by real property, fifteen of which have subsequently been converted to
income-producing real property through either foreclosure or contractual
agreement with the borrower. Substantially all of the real property was located
in Texas, with the largest concentration in the vicinities of San Antonio,
Houston, Austin and Dallas. From 1992 to September 30, 1996, an aggregate of
approximately $41.7 million in loans (which represented thirteen loans) were
sold or paid off and thirty-four properties were sold for aggregate
consideration of approximately $177.3 million. These transactions resulted in
aggregate gains of
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$94.2 million. As of September 30, 1996, two loans resulting from property sales
and eight properties (including two acquired via foreclosures) were held, which
had an aggregate net book value of $18.2 million. Two properties within this
portfolio have subsequently been sold for a total gain of $3.0 million. Net
proceeds consisted of $3.6 million in cash and a note of $1.3 million. All of
the remaining assets are being managed (and marketed for sale or disposition as
appropriate) by MAXXAM. One other property in the portfolio is under contract
for sale with closing estimated to occur during the first quarter of 1997. This
sale is expected to produce a gain of approximately $2.5 million and net cash
proceeds of approximately $4.3 million.
Palmas del Mar. Palmas del Mar, a time-sharing and land development and
sales business with resort amenities, located on the southeastern coast of
Puerto Rico near Humacao ("Palmas"), was acquired in 1984. Palmas consists of
approximately 1,919 acres of undeveloped land, 104 condominiums utilized in its
time-sharing program (comprising 5,300 time-share intervals of which
approximately 841 remain to be sold), a 102-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 marina. 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 del Mar by their owners throughout the
year for rental to vacationers. Since 1985, MAXXAM has been actively engaged in
the development and sale of condominiums, estate lots and villas. For the nine
months ended September 30, 1996, Palmas sold 20 condominiums, 177 time-share
intervals, one residential lot and 490 time-share conversions for an aggregate
of $8.5 million. During 1995, Palmas sold 31 condominium units and 65 time-share
intervals. Additionally, Palmas completed a sale and leaseback transaction on
July 14, 1995 of 33 furnished condominium units for approximately $8.4 million.
As of September 30, 1996, the net book value of Palmas' assets was approximately
$10.3 million.
PDMPI has entered into a Purchase Agreement with BlueWater Palmas Ltd.
("BlueWater"), an affiliate of Talon Group, Inc., for the sale of the Candelero
Hotel and certain other assets of Palmas for a purchase price of approximately
$7.6 million. The Candelero Hotel and certain other Palmas' assets would be
managed by BlueWater and Wyndham Hotels. PDMPI will continue to receive royalty
payments from BlueWater, for a period of 49 years, equal to 3% of the gross
revenues from the Candelero Hotel and a percentage of gross revenues from
certain other assets. The sale is scheduled to close on December 18, 1996,
subject to a right to extend the closing for 30 days and subject to certain
other conditions. The Company may reinvest all or a portion of the proceeds of
this sale in Palmas.
Fountain Hills. In 1968, a subsidiary of MAXXAM purchased and began
developing approximately 12,100 acres of real property at Fountain Hills,
Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As
of September 30, 1996, Fountain Hills had approximately 3,873 acres of
undeveloped residential land, 83 developed commercial and industrial lots, 119
acres of undeveloped commercial and industrial land and 67 developed residential
lots available for sale. The population of Fountain Hills is approximately
14,000. MAXXAM is planning the development of certain of the remaining acreage
at Fountain Hills. Future sales are expected to consist mainly of undeveloped
acreage, semi-developed parcels and fully-developed lots, although MAXXAM may
engage in limited construction and direct sale of residential units. During
1995, approximately 115 residential lots, 22 commercial parcels and 103 acres
were sold for an aggregate of $14.5 million. During the first nine months of
1996, approximately 51 residential lots, 18 commercial parcels and 2 acres were
sold for an aggregate of $5.5 million.
Additionally, in 1994 a subsidiary of MAXXAM entered into a venture to
develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The
development of SunRidge Canyon contemplates a residential golf-oriented, upscale
master-planned community. The project includes 950 acres, of which 185 have been
developed into a championship-quality, public golf course which opened for play
in November 1995. The remaining 765 acres are being developed into approximately
860 single family lots. Sales of the individual lots began in November 1995. The
project consists of both custom lots, marketed on an individual basis, and
production lots, marketed to home builders. There are currently four
homebuilders actively involved in the construction and sale of new homes within
SunRidge Canyon. During the nine months ended September 30, 1996, 30 custom lots
and 39 production lots were sold for an aggregate of $6.0 million. Nine
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custom lots and three production lots were sold during 1995 for an aggregate of
$1.4 million. The development is being undertaken by SunRidge Canyon L.L.C., an
Arizona limited liability company organized by a subsidiary of MAXXAM and SunCor
Development Company. A subsidiary of MAXXAM holds a 50% equity interest in the
venture.
MAXXAM intends to continue development of its remaining acreage at Fountain
Hills in a manner that will allow it to maintain recent sales levels, although
there can be no assurance that it will be able to do so.
Lake Havasu City. In 1963, a subsidiary of MAXXAM 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. MAXXAM has sold
substantially all of its lot inventory in Lake Havasu City and is currently
planning the marketing of the remaining 129 acres.
Rancho Mirage. In 1991, a subsidiary of MAXXAM acquired Mirada, a 195-acre
luxury resort-residential project located in Rancho Mirage, California. Mirada
is a master planned community built into the Santa Rosa Mountains, 650 feet
above the Coachella Valley floor. Two of the five parcels have been developed,
one of which is a custom lot subdivision of 46 estate lots with home prices
ranging from $1.5 million to $3.0 million. The other parcel was developed by
Ritz-Carlton hotels and an affiliate of MAXXAM as the Ritz-Carlton Rancho
Mirage, a hotel with views of the Palm Springs area. The three remaining parcels
encompass nearly 150 acres with entitlements allowing a variety of residential
options. MAXXAM is currently marketing the project's 23 fully-developed lots.
Other. MAXXAM, 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. Most notably, in June 1995 MAXXAM sold approximately 6,000
acres at its Waterwood National Resort and Country Club project in Texas, for an
aggregate of $4.1 million.
Marketing
MAXXAM is engaged in marketing and sales programs of varying magnitudes at
its real estate developments. In recent years, MAXXAM has constructed
residential units and sold time-share intervals at certain of its real estate
developments. MAXXAM 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 MAXXAM'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 investment
and development business. 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 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. The resort and time-sharing business of Palmas competes
with similar businesses in the Caribbean, Florida and other locations.
MAXXAM'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 MAXXAM and its subsidiaries. Periodic approval is required from various
agencies in connection with the design of developments, the nature and extent of
improvements, construction activity, land use, zoning, and numerous other
matters. Failure to obtain such approval, or periodic renewal thereof, could
adversely affect the real estate development and marketing operations of MAXXAM
and its subsidiaries. Various jurisdictions also require inspection of
properties by appropriate authorities, approval of
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sales literature, disclosure to purchasers of specific information, bonding for
property improvements, approval of real estate contract forms and delivery to
purchasers of a report describing the property.
Employees
As of September 30, 1996, MAXXAM's real estate operations had approximately
600 employees, of which approximately 500 were employed by Palmas. On July 20,
1995, a majority of the employees of Palmas voted to have a local union
represent them for collective bargaining purposes. MAXXAM and the union are
engaged in collective bargaining negotiations. Until the collective bargaining
process is completed, MAXXAM is unable to estimate the impact, if any, the
union representation of its employees may have on its resort operations at
Palmas. If the sale of the Candelero Hotel closes (see "-- Principal Properties
- -- Palmas Del Mar"), a large number of these employees would transfer to the
new owner.
SAM HOUSTON RACE PARK
General
In July 1993, MAXXAM, through subsidiaries, acquired various interests in
SHRP, Ltd., a Texas limited partnership which owns and operates Sam Houston Race
Park (the "Race Park"), a Texas Class 1 horse racing facility located within the
greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd. defaulted on
the $4.4 million semi-annual interest payment due on its 11 3/4% Senior Secured
Notes. On April 17, 1995, the Debtors, consisting of SHRP, Ltd. and two
affiliated entities, filed voluntary petitions, each seeking to reorganize under
the provisions of Chapter 11 of the United States Bankruptcy Code. The
bankruptcy cases were consolidated and transferred to the United States
Bankruptcy Court (the "Bankruptcy Court") for the Southern District of Texas,
Houston Division (Case No. 95-43739-H3-11). On September 22, 1995, the
Bankruptcy Court confirmed the Plan (the Debtors' plan of reorganization) and on
October 6, 1995, the transactions called for by the Plan were completed.
The Plan provided for, among other things, a significant modification of
SHRP, Ltd.'s 11 3/4% Senior Secured Notes (the "Original Notes" and, as
modified, the "Extendible Notes"), an additional capital infusion and a
reorganization of SHRP, Ltd. The Extendible Notes have an aggregate initial
principal amount of $37.5 million, mature on September 1, 2001 and bear interest
at the rate 11% per annum. The maturity date of the Extendible Notes may be
extended to September 1, 2003 (with an increase in the rate of interest to 13%
per annum) if the Texas legislature passes significant gaming legislation (as
defined) during the 2001 legislative session. Interest on the Extendible Notes
will accrue in-kind and will not be payable in cash until a certain level of
cash flow from operations has been achieved. Once cash interest payments
commence, interest payments may not thereafter be paid in-kind. The indenture
governing the Extendible Notes provides additional latitude for SHRP, Ltd. to
incur indebtedness and make investments in gaming, entertainment and other
ventures.
The New SHRP Investor Group made a capital contribution of cash in the
aggregate amount of $5.9 million (wholly owned subsidiaries of MAXXAM
contributed $5.8 million). Additionally, a wholly owned subsidiary of MAXXAM
contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of land
(having a fair market value of $2.3 million). A wholly owned subsidiary of
MAXXAM is the new managing general partner of SHRP, Ltd. Each member of the New
SHRP Investor Group provided its pro rata share of a $1.7 million line of
credit, should the initial cash contributed to SHRP, Ltd. prove insufficient to
fund the future operating and working capital requirements of SHRP, Ltd. MAXXAM
has guaranteed its subsidiaries' share of the line of credit, which totaled $1.6
million. On October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for
$7.3 million, $14.6 million of the Extendible Notes and the corresponding shares
of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional
general partner of the reorganized SHRP, Ltd.) to which one noteholder was
entitled. Such shares of common stock represent approximately 39.0% of the
shares of common stock of SHRP Equity, Inc. After giving effect to these
transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly,
approximately 78.8% of the equity in the reorganized SHRP, Ltd.
Although the Race Park has sustained substantial operating losses since it
began operations in April 1994, the reorganization of principal indebtedness of
SHRP, Ltd. resulting in the issuance of the 11% Senior
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Secured Extendible Notes (the "Extendible Notes") in exchange for the 11 3/4%
Senior Secured Notes (the "Original Notes"), significantly improved the
liquidity of SHRP, Ltd. by providing for the deferral of cash interest payments
until certain conditions are met. SHRP, Ltd. projects a loss from operations for
the next two years. Management believes the proceeds contributed on the date
closing of the bankruptcy reorganization of SHRP, Ltd. (together with a $1.7
million line of credit) will be adequate to fund the operating activities of
SHRP, Ltd. for that period of time.
Racing Operations and Race Park Facilities
The Race Park offers pari-mutuel wagering on live thoroughbred or quarter
horse racing or simulcast racing generally seven 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. The Race Park's principal sources of revenue
are its statutory and contractual share of total wagering on live and simulcast
racing. The Race Park also derives revenues from admission fees, food services,
club memberships, luxury suites, advertising sales and other sources. The Race
Park is located on approximately 300 acres of land in northwest Harris County
approximately 18 miles from the Houston central business district and
approximately 15 miles from Houston Intercontinental Airport.
Regulation of 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
wagering proceeds among betting participants, horsemen's purses, racetracks, the
State of Texas and for other purposes, and empowers the Racing Commission to
license and regulate substantially all aspects of horse racing in the state. 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 agreements. Class 1
racetracks in Texas are entitled to conduct at least seventeen weeks of live
racing for each breed of horses (thoroughbreds and quarter horses).
Marketing and Competition
The Race Park believes that the majority of the patrons for the Race Park
reside within a 50-mile radius of the Race Park, which includes the greater
Houston metropolitan area, and that a secondary market of occasional patrons can
be developed outside the 50-mile radius but within a 100-mile radius of the Race
Park. The Race Park uses a number of marketing strategies in an attempt to reach
these people and make them more frequent visitors to the Race Park. The Race
Park competes with other forms of entertainment, including casinos located
approximately 125 to 150 miles from Houston, a greyhound racetrack located 60
miles from the Race Park and a wide range of sporting events and other
entertainment activities in the Houston area. The Race Park could in the future
also compete with other forms of gambling in Texas, including casino gambling on
Indian reservations or otherwise. While the Race Park believes that the location
of the Race Park is a competitive advantage over the other more distant gaming
ventures mentioned above, the most significant challenge for the Race Park is to
develop and educate new racing fans in a market where pari-mutuel wagering has
been absent since the 1930's. Other competitive factors faced by the Race Park
include the allocation of sufficient live race days by the Racing Commission and
attraction of sufficient race horses to run at the Race Park. The Race Park will
have 142 days of live racing during 1996. The Race Park currently has 109 days
of live racing scheduled for 1997.
EMPLOYEES
At September 30, 1996, MAXXAM and its subsidiaries employed approximately
2,400 persons, exclusive of those involved in Aluminum Operations.
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LEGAL PROCEEDINGS
GENERAL
The following describes certain legal proceedings in which MAXXAM or its
subsidiaries are involved. MAXXAM and certain of its subsidiaries are also
involved in various claims, lawsuits and other proceedings not discussed herein
which relate to a wide variety of matters. Uncertainties are inherent in the
final outcome of those and the below-described matters and it is presently
impossible to determine the actual costs that ultimately may be incurred.
Nevertheless, MAXXAM believes (unless otherwise indicated herein) that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on MAXXAM's liquidity, consolidated financial
position or results of operations. See also "Risk Factors -- Litigation."
However, there can be no assurance that there will not be adverse determinations
or settlements in one or more of the matters identified below or other
proceedings that could have a material adverse effect on MAXXAM's financial
condition, results of operations and liquidity.
Certain present and former directors and officers of MAXXAM are defendants
in certain of the actions described below. MAXXAM's bylaws provide for
indemnification of its officers and directors to the fullest extent permitted by
Delaware law. MAXXAM is obligated to advance defense costs to its officers and
directors, subject to the individual's obligation to repay such amount if it is
ultimately determined that the individual was not entitled to indemnification.
In addition, MAXXAM's indemnity obligation can under certain circumstances
include amounts other than defense costs, including judgments and settlements.
USAT MATTERS
In October 1994, MAXXAM learned that the OTS had commenced an investigation
into UFG and the insolvency of USAT, UFG's wholly owned subsidiary. In December
1988, the Federal Home Loan Bank Board ("FHLBB") placed USAT into receivership
and appointed the Federal Savings & Loan Insurance Corp. ("FSLIC") as receiver.
At the time of the receivership, MAXXAM owned approximately 13% of the voting
stock of UFG.
On December 26, 1995, the OTS initiated formal administrative proceedings
(the "OTS action") against MAXXAM and others by filing the Notice. The Notice
alleges misconduct by MAXXAM, Federated, Mr. Charles Hurwitz and the other
respondents with respect to the failure of USAT. Mr. Hurwitz is the Chairman of
the Board, Chief Executive Officer and President of MAXXAM. Mr. Hurwitz is also
the Chairman of the Board and Chief Executive Officer of Federated, a New York
business trust wholly owned by Mr. Hurwitz, members of his immediate family and
trusts for the benefit thereof. Mr. Hurwitz and a wholly owned subsidiary of
Federated collectively own approximately 61.1% of the aggregate voting power of
MAXXAM. The Notice claims that MAXXAM was a savings and loan holding company,
that with others it controlled USAT, and that, as a result of such status and
agreements with the Federal Home Loan Bank Board, it was therefore obligated to
maintain the net worth of USAT. The Notice makes numerous other allegations
against MAXXAM and the other respondents, including, among others, allegations
that through USAT it was involved in prohibited transactions with Drexel,
Burnham, Lambert Inc. ("Drexel"). The OTS, among other things, seeks unspecified
damages in excess of $138.0 million from MAXXAM and Federated, civil money
penalties and a removal from, and prohibition against MAXXAM and the other
respondents engaging in, the banking industry. On February 20, 1996, the
respondents filed their responses to the Notice. The date for the hearing on the
merits has been scheduled for May 28, 1997. See also the description of the FDIC
action and the Martel action below. It is impossible to predict the ultimate
outcome of the foregoing matter or its potential impact on MAXXAM's consolidated
financial position, results of operations or liquidity, although there can be no
assurance that such impact will not be material.
In a separate but related matter, on December 7, 1995, MAXXAM filed a
petition for review in the U.S. Fifth Circuit Court of Appeals alleging various
statutory violations by certain predecessor agencies to the OTS and seeking to
modify, terminate or set aside the December 30, 1988 order awarding the bid to
acquire USAT to a bidder other than MAXXAM, whose bid was lower than MAXXAM's
bid (i.e. more costly to the government and taxpayers). The action is entitled
MAXXAM Inc. v. Office of Thrift Supervision, Department
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of the Treasury (No. 95-60753) (the "MAXXAM v. OTS action"). By order dated
December 10, 1996, the U.S. Fifth Circuit Court of Appeals denied MAXXAM's
petition for review and denied any relief to MAXXAM.
On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E.
Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas. This action did not name MAXXAM as a defendant. The
suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the
allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM
maintained the net worth of USAT. On October 24, 1995, Mr. Hurwitz filed a
motion to dismiss this action. On November 14, 1995, Mr. Hurwitz filed a motion
to join the OTS to this action. MAXXAM and certain other respondents in the OTS
action subsequently filed motions to intervene in this action; MAXXAM
conditioned its motion on the Court joining the OTS to this action. MAXXAM filed
with its motion to intervene a proposed complaint which alleges that the OTS
violated the Administrative Procedures Act by rejecting MAXXAM's bid for USAT.
The FDIC is opposing the motion to join the OTS and the intervention motions and
is seeking to stay this action pending the outcome of the OTS action or proceed
in this case only against Mr. Hurwitz. On August 6, 1996, the court entered an
order denying the FDIC's motion to stay this case pending the outcome of the OTS
action. At the November 19, 1996 pre-trial conference, the Court granted the
motions to intervene of MAXXAM and others, and added the OTS as a party to this
action. The Court instructed the plaintiffs to file an amended complaint by
January 15, 1997, and the defendants to answer by February 5, 1997. It is
impossible to predict the ultimate outcome of the foregoing matter or its
potential impact on MAXXAM's liquidity, consolidated financial position or
results of operations, although there can be no assurance that such impact will
not be material.
In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et
al. (the "Martel action") was filed in the U.S. District Court for the Northern
District of California (No. C950322) and names as defendants MAXXAM, Mr.
Hurwitz, MGI, Federated, UFG and a former director of MAXXAM. This action is
purportedly brought by plaintiff on behalf of the U.S. government; however, the
U.S. government has declined to participate in the suit. The suit alleges that
defendants made false statements and claims in violation of the Federal False
Claims Act in connection with USAT. Plaintiff alleges, among other things, that
defendants used the federally insured assets of USAT to acquire junk bonds from
Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel arranged
financing for defendants' various business ventures, including the acquisition
of Pacific Lumber. Plaintiff alleges that USAT became insolvent in 1988 and that
defendants should be required to pay $1.6 billion (subject to trebling) to cover
USAT's losses. MAXXAM's alleged portion of such damages has not been specified.
Plaintiff seeks, among other things, that the Court impose a constructive trust
upon the fruits of the alleged improper use of USAT funds. On March 22, 1996,
the Court granted defendants' motion to have this case transferred to the U.S.
District Court for the Southern District of Texas. On June 11, 1996, defendants
filed their motion to dismiss this case. On August 6, 1996, the Court
transferred this case to the judge handling the FDIC action.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against MAXXAM, MGI, MAXXAM Properties
Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of MAXXAM'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 MAXXAM derivatively
on behalf of MAXXAM 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 to a Put and Call Agreement entered into between MPI
and Mr. Hurwitz, 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 MAXXAM's common stock
into which they
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were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call
and acquired 990,400 shares of MAXXAM'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 MAXXAM, that the Put and Call
Agreement constituted a waste of corporate assets of MAXXAM 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
In May 1991, a derivative action entitled Progressive United Corporation v.
MAXXAM Inc., et al. (No. 12111) (the "Progressive United action") was filed in
the Court of Chancery, State of Delaware against MAXXAM, Federated, MAXXAM's
Board of Directors and MCOP. The action alleges abuse of control and breaches of
fiduciary obligations based on, and unfair consideration for, MAXXAM'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 later assigned by MCOP to MAXXAM),
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").
Plaintiff seeks, among other things, an accounting under the loan agreements,
repayment of any losses or damages suffered by MAXXAM or MCOP, costs and
attorneys fees.
The following six additional lawsuits, similar to the Progressive United
action, were filed in 1991 and 1992 in Delaware Chancery Court challenging the
Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al. (No. 12353)
(the "NL Industries action"); Kahn, et al. v. Federated Development Company, et
al. (No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377) (the
"Thistlethwaite action"); 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; and 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 MAXXAM (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. The parties have agreed to stay this action in light of the In re
MAXXAM Inc./Federated Development Shareholders Litigation. With respect to the
In re MAXXAM Inc./Federated Development Shareholders Litigation, on February 10,
1995, the Court issued its decision disapproving a previously announced proposed
settlement and on June 23, 1995, the Court denied defendants' motion to dismiss
certain of plaintiffs' claims. This matter was tried before the Court commencing
January 29, 1996. The Court held a hearing on April 2, 1996 on various
trial-related matters, including defendants' motion to dismiss the claims
relating to the 1987 loan transactions. On August 14, 1996, the Court heard
final oral argument on the merits of the case, but has not issued its decision.
By order dated September 6, 1996, the Court denied defendants' motion to dismiss
the 1987 loan claims and granted plaintiffs' motion to intervene and substitute
a new plaintiff to cure standing problems concerning plaintiffs' 1987 loan
claims.
KAISER LITIGATION
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")
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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 estimated cost of the major soil remediation
selected for the Sites is approximately $32 million. Other possible remedies
described in the ROD included on-site incineration and on-site ash disposal at
an estimated cost of approximately $53 million and $222 million, respectively.
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.
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. In addition to KACC, a number
of other companies are also named as respondents. KACC has entered into a PRP
Participation Agreement with certain of the respondents (the "Aberdeen Site PRP
Group" or the "Group") to participate jointly in responding to the
Administrative Orders dated May 20, 1993, regarding soil remediation, 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. By letter dated July
6, 1993, KACC has notified the EPA of its ongoing participation with the Group
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 of 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 thirty years of operation and
maintenance, at approximately $11.8 million. On June 22, 1994, the EPA issued
two unilateral Administrative Orders under Section 106(a) of CERCLA ordering the
respondents, including KACC, to undertake the groundwater remediation at three
of the Sites. A PRP Participation Agreement with respect to groundwater
remediation has been entered into by certain of the respondents, including KACC.
By letter dated March 6, 1996, KACC gave notice of withdrawal from the
Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation
Agreement. KACC advised the Group and the EPA that even if it were liable for
cleanup at the Sites, which it expressly denies, it had already contributed far
more than its allocable potential share of response costs. KACC has advised the
Group and the EPA that it has fully complied with the unilateral Administrative
Orders.
In May 1996, the EPA urged KACC to rejoin the Group and indicated that it
would consider seeking penalties against KACC if it did not. On October 10,
1996, the EPA notified KACC that it deems KACC to be in violation of the
Administrative Orders. KACC and certain members of the Group have entered into
an agreement with the United States Department of Justice (the "DOJ") to enter
into a mediation process regarding an appropriate allocation of responsibility
for response costs at the Sites. KACC has also agreed to fund a portion of the
costs associated with certain work at the Sites during the mediation process.
United States of America v. Kaiser Aluminum & Chemical Corporation
In February 1989, a civil action was filed by the DOJ 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 KACC'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.
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KACC and the EPA, without adjudication of any issue of fact or law, and
without any admission of the violations alleged in the underlying complaint,
have entered into a Consent Decree, which was approved by a Consent Order
entered by the United States District Court for the Eastern District of
Washington in January 1996. As approved, the Consent Decree settles the
underlying disputes and requires KACC to (i) pay a $.5 million civil penalty
(which penalty has been paid), (ii) complete a program of plant improvements and
operational changes that began in 1990 at its Trentwood facility, including the
installation of an emission control system to capture particulate emissions from
certain furnaces, and (iii) achieve and maintain furnace compliance with the
opacity standard in the SIP by no later than February 28, 1997. KACC anticipates
that capital expenditures for the environmental upgrade of the furnace operation
at its Trentwood facility, including the improvements and changes required by
the Consent Decree, will be approximately $20.0 million.
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 the United
States, 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.
The Plaintiffs sought recovery of response costs and natural resource damages
under CERCLA. Certain of the Plaintiffs alleged that they had incurred or expect
to incur costs and damages of approximately $49.0 million. Catellus subsequently
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. Thereafter, the Plaintiffs filed a separate complaint against
KACC, Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims
against the United States for $3.5 million plus thirty-five percent (35%) of
future response costs.
The trial involving this case commenced in March 1995. During the trial,
Plaintiffs settled their claims against Catellus in exchange for payment of
approximately $3.3 million. Subsequently, on June 2, 1995, the United States
District Court for the Northern District of California issued an order on the
remaining claims in that action. On December 7, 1995, the District Court issued
a final judgment on those claims concluding that KACC is liable for various
costs and interest, aggregating approximately $2.2 million, fifty percent (50%)
of future costs of cleaning up certain parts of the Property and certain fees
and costs associated specifically with the claim by Catellus against KACC. KACC
paid the City of Richmond $1.8 million in partial satisfaction of this judgment.
In January 1996, Catellus filed a notice of appeal with respect to its indemnity
judgment against KACC. KACC has since filed a notice of cross appeal as to the
Court's decision adjudicating that KACC is obligated to indemnify Catellus. In
February 1996, the Plaintiffs filed motions seeking reimbursement of fees and
costs from KACC in the aggregate amount of $2.8 million. On July 8, 1996 the
Court issued an order awarding Plaintiffs nominal costs, which amount has been
paid. The order also awarded Catellus de minimis costs. Catellus has filed a
notice of appeal. On August 12, 1996, the Court issued an order granting the
Catellus motion for attorneys' fees in the amount of approximately $.9 million.
KACC and Catellus have filed notices of appeal with respect to the attorneys'
fees award. Based on KACC's estimate of future costs of cleanup, resolution of
the Catellus matter is not expected to have a material adverse effect on KACC's
consolidated financial condition, results of operations, or liquidity.
Waste Inc. Superfund Site
On December 8, 1995, the EPA issued a unilateral Administrative Order for
Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other
respondents for remedial design and action at the Waste Inc. Superfund Site at
Michigan City, Indiana. This site was operated as a landfill from 1965 to 1982.
KACC is alleged to have arranged for the disposal of waste from its formerly
owned plant at Wanatah, Indiana, during the period from 1964 to 1972. In its
Record of Decision, the EPA estimated the cost of the work to be performed to
have a present value of $15.7 million. KACC's share of the total waste sent to
the site is unknown. A consultant retained by a group of PRPs estimated that
KACC contributed 2.0% of the waste
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sent to the site by the forty-one largest contributors. KACC's ultimate exposure
will depend on the number of PRPs that participate and the volume of waste
properly allocable to KACC. Based on the EPA's cost estimate, KACC believes that
its financial exposure for remedial design and remedial action at this site is
less than $500,000. KACC has entered into a Participation Agreement with
thirteen of the respondents to perform the work required under the
Administrative Order.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years. For a discussion of
asbestos-related litigation, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of MAXXAM -- Financial Condition
and Investing and Financing Activities -- Aluminum Operations."
DOJ Proceedings
On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356
("CID No. 11356") requesting information from Kaiser regarding (i) its
production, capacity to produce, and sales of primary aluminum from January 1,
1991, to the date of the response; (ii) any actual or contemplated reduction in
its production of primary aluminum during that period; and (iii) any
communications with others regarding any actual, contemplated, possible or
desired reductions in primary aluminum production by KAC or any of its
competitors during that period. KAC's management believes that KAC's actions
have at all times been appropriate, and KAC has submitted documents and
interrogatory answers to the DOJ responding to CID No. 11356.
On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503
("CID No. 12503"), as part of an industry-wide investigation, requesting
information from KACC regarding (i) any actual or contemplated changes in its
method of pricing can sheet from January 1, 1994, through March 31, 1995, (ii)
the percentage of aluminum scrap and primary aluminum ingot used by KACC to
produce can sheet and the manner in which KACC's cost of acquiring aluminum
scrap is factored into its can sheet prices, and (iii) any communications with
others regarding any actual or contemplated changes in its method of pricing can
sheet from January 1, 1994, through March 31, 1995. Management believes that
KACC's actions have at all times been appropriate, and KACC has submitted
documents and interrogatory answers to the DOJ responding to CID No. 12503. KACC
was recently informed that the DOJ has officially closed its investigation and
is returning the documents submitted by KACC.
OTHER PROCEEDINGS
Matheson et al. v. Kaiser Aluminum Corporation et al.
On March 19, 1996, a lawsuit was filed against MAXXAM, Kaiser and Kaiser's
directors challenging and seeking to enjoin the Proposed Recapitalization of
Kaiser and the April 10, 1996 special stockholders meeting at which the Proposed
Recapitalization was to be considered. The suit, which is entitled Matheson et
al. v. Kaiser Aluminum Corporation et al.(No. 14900) and was filed in the
Delaware Court of Chancery, alleges, among other things, breaches of fiduciary
duties by certain defendants and that the Proposed Recapitalization violates
Delaware law and the certificate of designations for the PRIDES. On April 8,
1996, the Delaware Court of Chancery issued a ruling which preliminarily
enjoined Kaiser from implementing the Proposed Recapitalization. On May 1, 1996,
Kaiser's stockholders approved the Proposed Recapitalization which was not
implemented at that time due to a pending appeal of the trial court's ruling. On
August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction
and remanded the case to the Court of Chancery. On September 24, 1996, the
plaintiffs filed a motion to make permanent the temporary injunction issued on
April 8, 1996. On September 27, 1996, KACC's Board of Directors adopted a
resolution abandoning the Proposed Recapitalization. On October 2, 1996, KACC
filed a motion in the Delaware Court of Chancery to
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dismiss the shareholder litigation relating to the Proposed Recapitalization on
the ground of mootness and filed a response to plaintiffs' motion for entry of a
permanent injunction. The Court has scheduled briefing for both motions, along
with plaintiffs' petition for attorneys' fees and expenses. The Court will
schedule oral argument after briefing is concluded on these issues on February
11, 1997. The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization from being proposed to the stockholders of Kaiser in
the future, including a substantially identical recapitalization structure after
the redemption or conversion of the PRIDES. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations."
Hammons v. Alcan Aluminum Corp., et al.
On March 5, 1996, a class action complaint was filed against KACC, Alcan
Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds Metals
Company and the Aluminum Association in the Superior Court of California for the
County of Los Angeles, Case No. BC145612. The complaint claims that the
defendants conspired, in violation of the California Cartwright Act (Bus. &
Prof. Code sec.16720 & 16750), in conjunction with a Memorandum of Understanding
("MOU") entered into by representatives of Australia, Canada, the European
Union, Norway, the Russian Federation and the United States in 1994, to restrict
the production of primary aluminum resulting in rises in prices for primary
aluminum and aluminum products. The complaint seeks certification of a class
consisting of persons who at any time between January 1, 1994, and the date of
the complaint purchased aluminum or aluminum products manufactured by one or
more of the defendants and estimates damages sustained by the class to be $4.4
billion during the year 1994, before trebling. Plaintiff's counsel has estimated
damages to be $4.4 billion per year for each of the two years the MOU was
active, which when trebled equals $26.4 billion.
On April 2, 1996 the case was removed to the United States District Court
for the Central District of California. On July 1, 1996, the Court granted
summary judgment in favor of KACC and other defendants and dismissed the
complaint as to all defendants. On July 18, 1996, the plaintiff filed a notice
of appeal to the United States Court of Appeals for the Ninth Circuit appealing
the summary judgment granted by the United States District Court for the Central
District of California in favor of KACC and other defendants and the Court's
dismissal of the complaint as to all defendants.
Other Matters
Various other lawsuits and claims are pending against KACC. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on KACC's
consolidated financial position, results of operations, or liquidity.
There can be no assurance that adverse determinations and/or unfavorable
settlements with respect to KACC's legal proceedings will not have a material
adverse effect on KACC's consolidated financial position, results of operations,
or liquidity. See "Risk Factors -- Litigation."
PACIFIC LUMBER LITIGATION
On September 15, 1995, an action entitled Marbled Murrelet, et al. v. Bruce
Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") was filed in the
U.S. District Court for the Northern District of California. This action relates
to, among other things, exemptions for forest health which Pacific Lumber and
its subsidiaries had previously filed covering their entire timberlands. These
exemptions allow Pacific Lumber to harvest dead, dying or diseased trees
("exempt harvesting operations"). As amended, the complaint alleges, among other
things, violations of the ESA, the National Environmental Protection Act
("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted owl.
Following a hearing on September 28, 1995, the Court issued a preliminary
injunction
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enjoining Pacific Lumber and its subsidiaries from conducting a portion of the
exempt operations until a trial on the merits of the case. The majority of the
timberlands which were subject to the injunction are timberlands which have been
proposed as critical habitat for the marbled murrelet. Pacific Lumber appealed
the issuance of the preliminary injunction to the U.S. Ninth Circuit Court of
Appeals. On May 7, 1996, the U.S. Ninth Circuit Court of Appeals reversed the
preliminary injunction order concerning the exempt harvesting operations.
On March 6, 1996, the plaintiffs asked for leave to amend their pleadings
and on April 3, 1996, the Court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on the
Owl Plan. In addition to appealing the preliminary injunction issued on April 3,
1996 preventing harvesting on eight of its THPs, Pacific Lumber has obtained
regulatory reapproval of seven of the eight enjoined THPs without reliance on
the Owl Plan and has, to date, confirmed with the Court that six of those THPs
are not subject to the preliminary injunction. On November 4, 1996, the U.S.
Ninth Circuit Court of Appeals heard oral arguments concerning Pacific Lumber's
appeal of the April 3, 1996 preliminary injunction; the court has not yet
rendered a decision on this matter.
On August 23, 1996, plaintiffs filed a renewed motion for preliminary
injunction to prevent the exempt harvesting operations in Pacific Lumber's old
growth timberlands. In addition, on September 12, 1996, plaintiffs requested an
emergency temporary restraining order ("TRO") with respect to such harvesting
operations. The court denied both of these motions. On October 9, 1996, Pacific
Lumber was cited for accidentally downing a hemlock tree and ordered to stop
exempt harvesting operations in its old growth timberlands for 24 hours.
Plaintiffs sought a TRO and preliminary injunction based on this citation and
related events. After hearing plaintiffs' motions, the court denied the
plaintiffs' requests. The CDF has withdrawn the citation and asked that it be
dismissed.
In related matters, in August 1996, the Sierra Club, the Environmental
Protection Information Center ("EPIC") and others petitioned the BOF to adopt
emergency regulations preventing Pacific Lumber from
undertaking exempt harvesting operations in its old growth timberlands. On
September 9, 1996, the BOF rejected such proposals and petitions. In September
and October, the BOF was formally asked to reconsider its September 9, 1996
decision. The BOF reconsidered this matter and, ultimately, enacted no emergency
regulation to prevent or further restrict Pacific Lumber's exempt harvesting
operations in its old growth timberlands.
The EPIC, et al. v. California State Board of Forestry, et al. (No.
91CP244) action in the Superior Court of Humboldt County, filed by the Sierra
Club and EPIC in 1991, relates to a THP for approximately 237 acres of virgin
old growth timber. After the Superior Court reversed the BOF's approval of this
THP, certain modifications were made to the THP, which was then unanimously
approved by the BOF. The Superior Court later issued judgment in favor of
Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the
trial court's judgment approving harvesting under this THP. In April 1993, EPIC
filed another action with respect to this THP entitled EPIC, Marbled Murrelet,
et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No.
C93-1400) (the "EPIC action") in the U.S. District Court for the Northern
District of California, alleging an unlawful "taking" of the marbled murrelet
under the ESA. The Court dismissed the federal and state agency defendants and
limited plaintiffs' claims against Pacific Lumber. Harvesting was stayed pending
outcome of a trial which commenced in August 1994 and concluded in September
1994. On February 24, 1995, the judge ruled that the area covered by the THP is
occupied by the marbled murrelet and permanently enjoined implementation of the
THP in order to protect the marbled murrelet. The U.S. Ninth Circuit Court of
Appeals affirmed the District Court's decision. On September 24, 1996, Pacific
Lumber filed its petition for writ of certiorari requesting that the U.S.
Supreme Court consider its appeal of the Ninth Circuit Court's decision.
In view of the recent developments in the Marbled Murrelet action, the
Company is uncertain whether or not the matters described above will have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operations. See "Business of the Company -- Pacific
Lumber Operations -- Regulatory and Environmental Factors" above for a
description of regulatory and similar matters which could affect Pacific
Lumber's timber harvesting practices and future operating results.
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On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon Creek
Corporation v. California State Board of Forestry, et al. (No. 96CS01057) in the
Superior Court of Sacramento County. This action seeks to overturn the BOF's
decision denying approval of a THP for approximately 8 acres of virgin old
growth timber in the area commonly known as the Headwaters Forest. Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial and
previous actions of governmental authorities. In addition, on May 7, 1996,
Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit entitled The
Pacific Lumber Company, et al. v. The United States of America in the United
States Court of Federal Claims. The suit alleges that the federal government has
"taken" over 3,800 acres of Pacific Lumber's old growth timberlands through its
application of the ESA (including the Headwaters Forest). Pacific Lumber, Scotia
Pacific and Salmon Creek seek constitutional "just compensation" damages for the
taking of these timberlands by the federal government's actions. The Court in
each of these actions has granted the parties' agreed motions to stay the
actions pursuant to the Headwaters Agreement. These actions would be dismissed
if the Headwaters Agreement is consummated. See "Business of the
Company -- Pacific Lumber Operations -- Headwaters Agreement" for a description
of the Headwaters Agreement.
OTHER MATTERS
Groundwater contamination has been found on property sold to a subsidiary
of MAXXAM by a subsidiary of Rockwell International Corporation ("Rockwell"). In
March 1992, an enforcement action was filed against Rockwell and the current
property owners by the Nevada Division of Environmental Protection seeking an
order that would require defendants to investigate and report on the nature and
extent of the pollution and contamination on the property. This action has been
stayed, pending continued environmental investigation and remediation by
Rockwell. MAXXAM was named as a defendant in three related damage actions filed
by certain persons. Two of these cases have settled to date and in each case
MAXXAM's share of the settlement was 21%. In September 1996, Rockwell submitted
a global settlement package to MAXXAM. An Environmental Cleanup Liability
report, which accompanied Rockwell's settlement package and which was prepared
by Rockwell's experts, estimates total liability to be $26.08 million (which
MAXXAM is disputing). No further settlement discussions have taken place between
Rockwell and MAXXAM concerning the indemnification issue since the settlement
package was presented.
MAXXAM is involved in various other claims, lawsuits and other proceedings
relating to a wide variety of matters. While uncertainties are inherent in the
final outcome of such matters and it is presently impossible to determine the
actual costs that ultimately may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on MAXXAM's consolidated financial position or
results of operations, or liquidity.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information, as of November 15,
1996, with respect to the executive officers and directors of the Company. All
officers and directors hold office until their respective successors are elected
and qualified or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH THE COMPANY
---- --------------------------------------
<S> <C>
Chairman of the Board, President and Chief Executive
Charles E. Hurwitz.......... Officer
Paul N. Schwartz............ Vice President, Chief Financial Officer and Director
John A. Campbell............ Vice President and Director
Gary L. Clark............... Vice President
John T. La Duc.............. Vice President and Director
Anthony R. Pierno........... Vice President, General Counsel and Director
William S. Riegel........... Vice President and Director
Ronald L. Reman............. Vice President -- Taxes
Byron L. Wade............... Vice President, Secretary and Deputy General Counsel
</TABLE>
Charles E. Hurwitz. Mr. Hurwitz, age 56, has served as Chairman of the
Board, Chief Executive Officer and President of the Company since its formation
in November 1996. He has also served as a member of the Board of Directors and
the Executive Committee of MAXXAM since August 1978 and was elected as Chairman
of the Board and Chief Executive Officer of MAXXAM in March 1980. Mr. Hurwitz
has also served MAXXAM as President since January 1993. Mr. Hurwitz has been,
since January 1974, Chairman of the Board and Chief Executive Officer of
Federated, a New York business trust primarily engaged in the management of real
estate investments. In December 1994, Mr. Hurwitz was appointed Vice Chairman of
the Board of KACC. He has served as a director of Kaiser since October 1988 and
of KACC since November 1988. Since May 1982, Mr. Hurwitz has been Chairman of
the Board and Chief Executive Officer, and since January 1, 1993, President, of
MGI, a wholly owned subsidiary of MAXXAM. From May 1986 until February 1993, Mr.
Hurwitz served as a director of Pacific Lumber. Mr. Hurwitz has also served SHRP
as a director since May 1993, Chairman of the Board since October 1995, and
President from May 1993 until April 1996.
Paul N. Schwartz. Mr. Schwartz, age 50, has served as Vice President and
Chief Financial Officer of the Company since its formation in November 1996. He
was named Executive Vice President and Chief Financial Officer of MAXXAM,
positions he has held since January 1, 1995. He previously served as Senior Vice
President -- Corporate Development of MAXXAM from June 1987 until December 31,
1994, and Vice President -- Corporate Development of MAXXAM from July 1985 to
June 1987. Mr. Schwartz has served as a Vice President of MGI and Pacific Lumber
since May 1987 and January 1987, respectively, and has served as Chief Financial
Officer of Pacific Lumber and Scotia Pacific, since February 1995. He also
serves as Chairman of the Board and sole executive officer of United Financial
Group, Inc., a Delaware public corporation, and has served as a director of
Pacific Lumber and Scotia Pacific since February 1993, and as a director of MGI
since January 1994. Since May 1993, Mr. Schwartz has also served as a director
and a Vice President of SHRP. Mr. Schwartz is also a director of SLM Funding
Corporation, which is a subsidiary of the Student Loan Marketing Association.
John A. Campbell. Mr. Campbell, age 54, has served as a director and Vice
President of the Company since its formation in November 1996. He also serves as
a director and Vice President of MGI, positions he assumed in December 1994. Mr.
Campbell has served Pacific Lumber and Scotia Pacific as a director and
President since January 1989 and November 1992, respectively. Mr. Campbell was
also elected as Chief Executive Officer of Pacific Lumber and Scotia Pacific in
February and June 1993, respectively; Mr. Campbell served as Pacific Lumber's
Executive Vice President -- Forest Products Operations from January 1985 to
January 1989. He also served as Pacific Lumber's Vice President -- Wood Products
from April 1982 to January 1985. Commencing shortly after he joined Pacific
Lumber in 1969 until April 1982, Mr. Campbell served Pacific Lumber in a variety
of managerial positions.
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Gary L. Clark. Mr. Clark, age 54, has served as Vice President of the
Company since its formation in November 1996. He also serves as Vice President
of MGI, a position he assumed in December 1994. Mr. Clark has also served as
Vice President -- Finance and Administration of Pacific Lumber and of Scotia
Pacific since January 1, 1993. Prior to assuming these positions, he had served
Pacific Lumber as Vice President and Treasurer since October 1990. Mr. Clark
also served as Vice President and Treasurer of MAXXAM and MGI from September
1990 and October 1990, respectively, to December 31, 1992. Mr. Clark also served
as the Treasurer of Kaiser and of KACC from May 1990 and January 1990,
respectively, to December 31, 1992. From September 1987 until January 1990, Mr.
Clark was the Director of Financial Planning and Analysis of KACC, and from
April 1985 until September 1987, Mr. Clark served as the Business Manager and
Controller of KACC's Primary Products Division.
John T. La Duc. Mr. La Duc, age 53, has served as a director and Vice
President of the Company since its formation in November 1996. He has also
served as Senior Vice President of MAXXAM since September 1990, and as Vice
President and as a director of MGI since October 1990 and January 1994,
respectively. He also served MAXXAM and MGI as Chief Financial Officer from
September 1990 until December 31, 1994 and February 28, 1995, respectively. Mr.
La Duc has also served Kaiser as Chief Financial Officer since May 1990 and as a
Vice President since June 1989. He has also served KACC as a Vice President
since June 1989 and Chief Financial Officer since January 1990. Mr. La Duc
served as Kaiser's Treasurer from August 1995 until February 1996 and from
January 1993 until April 1993, and as KACC's Treasurer from June 1995 until
February 1996 and from January 1993 until April 1993. Mr. La Duc also currently
serves as a director and Vice President of Pacific Lumber and Scotia Pacific. He
previously served as Chief Financial Officer of Pacific Lumber and of Scotia
Pacific from October 1990 and November 1992, respectively, until February 28,
1995.
Anthony R. Pierno. Mr. Pierno, age 64, has served as Vice President and
General Counsel of the Company since its formation in November 1996. He also
serves as Senior Vice President and General Counsel of MAXXAM, positions he has
held since February 1989. He has also served as Vice President and General
Counsel of MGI and Pacific Lumber since May 1989, and of Scotia Pacific since
November 1992, and has served as a director of Pacific Lumber and MGI since
November 1993 and January 1994, respectively. Additionally, Mr. Pierno has
served as Vice President and General Counsel of Kaiser and KACC since January
1992. Immediately prior to joining MAXXAM, Mr. Pierno served as partner in
charge of the business practice group in the Los Angeles office of the law firm
of Pillsbury, Madison & Sutro. He has served as the Commissioner of Corporations
of the State of California and as Chair of several committees of the State Bar
of California. Mr. Pierno is Chairman of the Board of Trustees of Whittier
College, and a former member and past Chairman of the Board of Trustees of
Marymount College.
William S. Riegel. Mr. Riegel, age 50, has served as a director and Vice
President of the Company since its formation in November 1996. He has also
served MGI as a director and Vice President since December 1994. He has also
served Pacific Lumber as a director since January 1992, and as Vice President --
Sales since January 1990. From the time he joined Pacific Lumber in 1971 until
January 1990, Mr. Riegel served in various sales management positions.
Ronald L. Reman. Mr. Reman, age 38, has served as Vice President -- Taxes
of the Company since its formation in November 1996. He was named Vice
President -- Taxes of MAXXAM in September 1992. Prior to September 1992, he had
served MAXXAM as Director of Taxes since joining MAXXAM in October 1986. From
July 1984 until October 1986, Mr. Reman was a Senior Manager in the Tax
Department of the New York office of Price Waterhouse after having served seven
years with the New York office of Coopers & Lybrand, both of which are
accounting firms. Mr. Reman also serves as Vice President -- Taxes of MGI and
certain other subsidiaries of MAXXAM, and as Assistant Treasurer of Kaiser and
KACC.
Byron L. Wade. Mr. Wade, age 49, has served as Vice President and Deputy
General Counsel of the Company since its formation in November 1996. He has also
served as Vice President and Deputy General Counsel of MAXXAM since May 1990,
and Secretary of MAXXAM since October 1988. Mr. Wade has also served as Vice
President and Secretary of Kaiser and KACC since January 1992, and Deputy
General Counsel of Kaiser and KACC since May and June 1992, respectively. He has
been Vice President, Secretary and Deputy General Counsel of Pacific Lumber and
Scotia Pacific since June 1990 and November 1992,
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respectively. In addition, Mr. Wade has served since May 1993 as a Vice
President and Secretary of SHRP. Mr. Wade has also served as a Vice President,
Secretary and Deputy General Counsel of MGI since July 1990. He was Assistant
Secretary of MAXXAM from November 1987 to October 1988 and Assistant General
Counsel from November 1987 until May 1990. He had previously served as Vice
President, Secretary and General Counsel of MCO Resources, Inc., a publicly
traded oil and gas company, which was majority owned by MAXXAM.
EXECUTIVE OFFICERS AND DIRECTORS OF MAXXAM
The following table sets forth certain information, as of November 15,
1996, with respect to the executive officers and directors of MAXXAM. All
officers and directors hold office until their respective successors are elected
and qualified or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH MAXXAM
---- ---------------------------------
<S> <C>
Charles E. Hurwitz........... Chairman of the Board, President and Chief Executive Officer
Paul N. Schwartz............. Executive Vice President and Chief Financial Officer
John T. La Duc............... Senior Vice President
Anthony R. Pierno............ Senior Vice President and General Counsel
Robert E. Cole............... Vice President -- Federal Government Affairs
Diane M. Dudley.............. Vice President -- Chief Personnel Officer
Robert W. Irelan............. Vice President -- Public Relations
Ronald L. Reman.............. Vice President -- Taxes
Byron L. Wade................ Vice President, Secretary and Deputy General Counsel
Robert J. Cruikshank......... Director
Ezra G. Levin................ Director
Stanley D. Rosenberg......... Director
</TABLE>
See " -- Executive Officers and Directors of the Company" for biographical
information relating to Messrs. Hurwitz, Schwartz, La Duc, Pierno, Reman and
Wade.
Diane M. Dudley. Ms. Dudley, age 55, was named Vice President -- Chief
Personnel Officer of MAXXAM in May 1990. Since November 9, 1995, Ms. Dudley has
also served as a Vice President of Pacific Lumber. From June 1987 until May
1990, she was Vice President -- Personnel and Administration of MAXXAM. From
December 1983 until June 1987, Ms. Dudley served as Assistant Vice President --
Personnel of MAXXAM.
Robert E. Cole. Mr. Cole, age 49, has served MAXXAM as Vice
President -- Federal Government Affairs since September 1990. Since March 1981,
Mr. Cole has also served as a Vice President of KACC. In addition, Mr. Cole has
served as Vice President -- Federal Government Affairs for MGI and Pacific
Lumber since September 1990. Mr. Cole is currently Chairman of the United States
Auto Parts Advisory Committee to the United States Congress.
Robert J. Cruikshank. Mr. Cruikshank, age 66, has served as a director of
MAXXAM since May 1993. In addition, he has served as a director of Kaiser and
KACC since January 1994. Mr. Cruikshank was a Senior Partner in the
international public accounting firm of Deloitte & Touche from December 1989
until his retirement from that firm in March 1993. Prior to its merger with
Touche Ross & Co. in December 1989, Mr. Cruikshank served as Managing Partner of
Deloitte Haskins & Sells from June 1974 until the merger and served on such
firm's board of directors from 1981 to 1985. Mr. Cruikshank also serves as a
director and on the Compensation Committee of Houston Industries Incorporated, a
public utility holding company with interests in electric utilities, coal and
transportation businesses; as a director of Texas Biotechnology Incorporated as
a director of American Residential Services; and as Advisory Director of Compass
Bank -- Houston.
Robert W. Irelan. Mr. Irelan, age 59, has served MAXXAM as Vice
President -- Public Relations since September 1990. He has also been Vice
President -- Public Relations of MGI and Pacific Lumber since September 1990,
and Vice President -- Public Relations of KACC since February 1988. From June
1985 to
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<PAGE> 130
February 1988, Mr. Irelan served as Divisional Vice President -- Corporate
Public Relations of KACC, and from 1968 to June 1985 he served KACC and certain
affiliated companies in a variety of positions.
Ezra G. Levin. Mr. Levin, age 62, was first elected a director of MAXXAM
in May 1978. He has served as a director of Kaiser and KACC since July 1991 and
November 1988, respectively. From May 1982 through December 1993, he also served
as a director of MGI. He is a partner in the law firm of Kramer, Levin, Naftalis
& Frankel. Mr. Levin also serves as a director of Pacific Lumber, Scotia Pacific
and United Mizrahi Bank and Trust Company.
Stanley D. Rosenberg. Mr. Rosenberg, age 65, was first elected to the
Board of Directors of MAXXAM in June 1981. Mr. Rosenberg is a partner in the law
firm of Rosenberg, Tuggey, Agather & Rosenthal. Mr. Rosenberg was a partner in
the law firm of Oppenheimer, Rosenberg & Kelleher, Inc. from its inception in
1971 until February 1990, at which time he served as Of Counsel to that firm
through June 30, 1993.
SECURITY OWNERSHIP OF MAXXAM BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE
COMPANY
The Company is a wholly owned subsidiary of MAXXAM. The following table
sets forth, as of December 20, 1996, unless otherwise indicated, the beneficial
ownership of MAXXAM's Common Stock and the Preferred Stock by (i) those persons
known by MAXXAM to own beneficially more than 5% of the shares of each class
then outstanding, (ii) each of the executive officers and directors of the
Company, and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
COMBINED
% OF
VOTING
NAME OF BENEFICIAL OWNER TITLE OF CLASS # OF SHARES(1) % OF CLASS POWER(2)
------------------------ ----------------- -------------- ---------- --------
<S> <C> <C> <C> <C>
Federated Development Inc.(3).......... Common Stock 1,740,626(4) 19.9 54.2
Preferred Stock 661,377 98.9
The Stockholder Group(3)............... Common Stock 2,735,219(4)(5)(6) 31.3 61.3
Preferred Stock 685,074(7) 99.1
Harold C. Simmons, Kronos, Inc.,....... Common Stock 1,278,150(8) 14.8 8.3
The Combined Master Retirement Trust,
NL Industries, Inc. and related
entities
Robertson, Stephens & Company, Inc.,... Common Stock 710,100(9) 8.2 4.6
The Robertson, Stephens Orphan Fund,
The Contrarian Fund and related
entities
John A. Campbell....................... Common Stock 3,000 * *
Gary L. Clark.......................... -- -- -- --
Charles E. Hurwitz(10)................. Common Stock 2,733,542(4)(5)(11) 31.3 61.2
Preferred Stock 684,941(7)(12) 99.1
John T. La Duc......................... -- -- -- --
Anthony R. Pierno...................... Common Stock 4,983(13) * *
Ronald L. Reman........................ Common Stock 39(14) * *
William S. Riegel...................... -- -- -- --
Paul N. Schwartz....................... Common Stock 30,975(15) * *
Byron L. Wade.......................... Common Stock 5,526(16) * *
All directors and executive officers of
the.................................. Common Stock 2,778,065(4)(5) 31.7 61.4
Company as a group (9 persons)....... Preferred Stock 684,941(7) 99.1
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the beneficial owners have sole voting and
investment power with respect to the shares listed in the table. Includes
the number of shares such persons would have received on December 20, 1996,
if any, for their exercisable stock appreciation rights ("SARs") (excluding
SARs
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<PAGE> 131
payable in cash only) if such rights had been paid solely in shares of
Common Stock. Also includes the number of shares of Common Stock credited
to such person's stock fund account under MAXXAM's 401(k) savings plan as
of September 30, 1996.
(2) MAXXAM's Preferred Stock is generally entitled to ten votes per share on
matters presented to a vote of MAXXAM's stockholders.
(3) FDI, Federated, Messrs. Hurwitz and Levin, and Mr. James H. Paulin, Jr.,
Secretary and Treasurer of Federated, may be deemed a "group" (the
"Stockholder Group") within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended. The address of FDI is 5847 San Felipe,
Suite 2600, Houston, Texas 77057. The address of the Stockholder Group is
c/o Ezra G. Levin, Esq., Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York 10022.
(4) Includes 71,175 shares of Common Stock which FDI may acquire in exchange
for 7% Cumulative Exchangeable Preferred Stock of MCOP, whose issued and
outstanding common stock is wholly owned by MAXXAM.
(5) Includes (a) 1,669,451 shares of Common Stock owned by FDI as to which Mr.
Hurwitz indirectly possesses voting and investment power, (b) 20,892 shares
of Common Stock separately owned by Mr. Hurwitz's spouse and as to which
Mr. Hurwitz disclaims beneficial ownership, (c) 46,500 shares of Common
Stock owned by a limited partnership controlled by Mr. Hurwitz and his
spouse, 23,250 of which shares were separately owned by Mr. Hurwitz's
spouse prior to their transfer to such limited partnership and as to which
Mr. Hurwitz disclaims beneficial ownership, (d) 119,832 shares of Common
Stock owned by the 1992 Hurwitz Investment Partnership, L.P., of which
59,916 shares are owned by Mr. Hurwitz's spouse as separate property and as
to which Mr. Hurwitz disclaims beneficial ownership, and (e) 805,692 shares
of Common Stock held directly by Mr. Hurwitz.
(6) Includes options exercisable within 60 days of December 20, 1996 to
purchase 325 shares of Common Stock.
(7) Includes options exercisable within 60 days of December 20, 1996 to
purchase 22,500 shares of Preferred Stock.
(8) Information is based solely on the Schedule 13D filed with the Commission
dated June 30, 1989, as amended through November 13, 1991 (the "Simmons
13D"). The Simmons 13D was filed by Harold C. Simmons, Kronos, Inc.
("Kronos"), NL Industries, Inc. ("NL"), The Combined Master Retirement
Trust (the "Trust") and certain related entities. The Simmons 13D states
that Kronos and the Trust are the direct beneficial owners of 250,900 and
1,027,250 shares of MAXXAM's Common Stock, respectively. The Simmons 13D
also states that Mr. Simmons may be deemed to have the direct power to vote
and direct the disposition of the shares of MAXXAM's Common Stock held by
the Trust and that Mr. Simmons and the entities other than Kronos who filed
the Simmons 13D may be deemed to share the indirect power to vote and
direct the disposition of the shares of MAXXAM's Common Stock held by
Kronos. Mr. Simmons disclaims beneficial ownership of all of such shares of
MAXXAM's Common Stock. The address of Mr. Simmons and the Trust is Three
Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240. The
address of Kronos and NL is 3000 North Sam Houston Parkway East, Houston,
Texas 77032.
(9) Information is based solely on the Schedule 13D filed with the SEC dated
April 14, 1994, as amended through October 13, 1995 (the "Robertson 13D").
The Robertson 13D was filed by The Robertson Stephens Contrarian Fund (the
"Contrarian Fund"), Robertson, Stephens & Company, Incorporated ("RS &
Co.") and RS & Co.'s five shareholders (Messrs. Sanford R. Robertson, Paul
H. Stephens, Michael G. McCaffery, G. Randy Hecht and Kenneth R.
Fitzsimmons). The purchase of MAXXAM's Common Stock giving rise to the
Robertson 13D was made by the Contrarian Fund, the Robertson Stephens
Orphans Fund, the Robertson Stephens Partners Fund and the Robertson
Stephens Growth & Income Fund (collectively, the "Funds"). Pursuant to the
Robertson 13D, the Funds are the direct beneficial owners of 705,000 shares
of MAXXAM's Common Stock and in addition, Paul H. Stephens directly holds
5,100 shares. The Robertson 13D also states that Mr. Stephens is the Chief
Investment Officer of RS & Co., and as such may be deemed to have shared
voting power over the 705,000 shares of
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<PAGE> 132
MAXXAM's Common Stock held by the Funds. The five shareholders of RS & Co.
disclaim any beneficial ownership of all of such shares of MAXXAM's Common
Stock, except for Mr. Stephens as to the 5,100 shares owned by him
personally. The address of Mr. Stephens, RS & Co. and the Funds is 555
California Street, Suite 2600, San Francisco, CA 94104.
(10) Mr. Hurwitz serves as a trustee of Federated, and together with members of
his immediate family and trusts for the benefit thereof, owns all of the
voting shares of Federated, and his positions include Chairman of the
Board, President and Chief Executive Officer of MAXXAM and Federated and
membership on MAXXAM's Executive Committee. By reason of the foregoing and
his relationship with the members of the Stockholder Group, Mr. Hurwitz may
be deemed to possess shared voting and investment power with respect to the
shares held by the Stockholder Group.
(11) Does not include shares owned by other members of the Stockholder Group.
(12) Includes 661,377 shares of Preferred Stock owned by FDI as to which Mr.
Hurwitz possesses voting and investment power, and 1,064 shares of
Preferred Stock held directly by Mr. Hurwitz.
(13) Includes 4,827 shares of Common Stock, which is the number of shares Mr.
Pierno would have received on December 20, 1996 for SARs exercisable within
60 days of such date on 26,000 shares of Common Stock, if such SARs had
been paid solely in shares of Common Stock.
(14) Includes 39 shares of Common Stock, which is the number of shares Mr. Reman
would have received on December 20, 1996 for SARs exercisable within 60
days of such date on 1,000 shares of Common Stock, if such SARs had been
paid solely in shares of Common Stock.
(15) Includes 6,547 shares of Common Stock, which is the number of shares Mr.
Schwartz would have received on December 20, 1996 for SARs exercisable
within 60 days of such date on 18,000 shares of Common Stock, if such SARs
had been paid solely in shares of Common Stock. Also includes options to
purchase 10,000 shares of Common Stock exercisable within 60 days of
December 20, 1996, and 10,749 shares of Common Stock owned by a trust of
which Mr. Schwartz and his spouse are trustees.
(16) Includes 4,890 shares of Common Stock, which is the number of shares Mr.
Wade would have received on December 20, 1996 for SARs exercisable within
60 days of such date on 13,000 shares of Common Stock, if such SARs had
been paid solely in shares of Common Stock.
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<PAGE> 133
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Company is a newly formed holding company and wholly owned subsidiary
of MAXXAM and does not separately compensate its executive officers. However,
each of the Company's executive officers are executive officers of one or more
of MAXXAM, MGI, Kaiser, and Pacific Lumber and receive compensation from one of
these companies. The following table sets forth the information with respect to
the total compensation, cash and non-cash, rather than any allocated part of
such compensation, for each of the last three completed fiscal years of MAXXAM
with respect to the Chief Executive Officer and the four most highly compensated
executive officers of MAXXAM who are also executive officers of the Company
(collectively referred to as the "named executive officers") for the fiscal year
ended December 31, 1995:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL COMPENSATION --------------------- PAYOUTS
---------------------------------- -------
(E) (F)
(A) OTHER RESTRICTED (G) (H) (I)
NAME AND (C) (D) ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION (B) SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
WITH THE COMPANY YEAR ($) ($) ($)(1) ($) (#) ($) ($)
- -------------------------- ---- ------- ------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles E. Hurwitz, Chief 1995 633,235 450,000 -- -0- 22,500 -0- 100,985(3)
Executive Officer,
President 1994 614,880 450,000 -- -0- 295,000 (2) -0- 97,332(3)
and Chairman of the Board 1993 598,994 500,000 -- -0- -0- -0- 97,494(3)
Anthony R. Pierno, 1995 344,771 263,633(4) -- -0- 5,000 -0- 55,928(3)
Senior Vice President and 1994 337,298 263,633(4) -- -0- -0- -0- 55,514(3)
General Counsel 1993 330,226 290,000(4) -- -0- -0- -0- 57,179(3)
Paul N. Schwartz,(5) 1995 290,850 218,307(4) -- -0- 10,000 -0- 48,476(3)
Executive Vice President
and 1994 270,138 218,307(4) -- -0- 25,000 -0- 45,390(3)
Chief Financial Officer 1993 265,204 293,000(4) -- -0- -0- -0- 47,426(3)
John T. La Duc,(6) 1995 248,333 130,000(7) -- -0-(8) -0- -0- 12,417(10)
Senior Vice President 1994 240,000 103,000(7) -- -0- 9,200 (9) -0- 4,800(10)
1993 240,000 100,000(7) -- -0- -0- -0- 4,872(10)
Byron L. Wade, 1995 196,660 128,355 -- -0- 5,000 -0- 37,500(3)
Vice President, Secretary 1994 177,140 128,355 -- -0- -0- -0- 31,671(3)
and Deputy General Counsel 1993 171,913 124,412 -- -0- -0- -0- 30,955(3)
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits because the aggregate
amount of such compensation is the lesser of either $50,000 or 10% of the
total of annual salary and bonus reported for the named executive officer.
(2) A 1994 option for 45,000 shares of MAXXAM Preferred Stock was granted in
exchange for Mr. Hurwitz relinquishing the SARs for 50,000 shares of MAXXAM
Common Stock granted in 1993. Additionally, an option for 250,000 shares of
Kaiser Common Stock was granted by Kaiser.
(3) Reflects the following aggregate amounts accrued in respect of MAXXAM's
Revised Capital Accumulation Plan for 1995, 1994 and 1993, respectively,
pursuant to which, in general, benefits vesting 10% annually are payable
upon termination of employment with the Company: Mr. Hurwitz -- $94,985,
$91,332 and $88,500; Mr. Pierno -- $51,716, $49,727 and $48,185; Mr.
Schwartz -- $43,628, $39,661 and $38,432; and Mr. Wade -- $31,500, $25,671
and $24,875. Additionally, these amounts reflect matching contributions by
MAXXAM under its 401(k) savings plan for 1995, 1994 and 1993, respectively,
as follows: Mr. Hurwitz -- $6,000, $6,000 and $8,994; Mr. Pierno -- $4,212,
$5,787 and $8,994; Mr. Schwartz -- $4,848, $5,729 and $8,994; and Mr.
Wade -- $6,000, $6,000 and $6,080.
(4) Pursuant to the employment agreements of Messrs. Pierno and Schwartz, their
personal loans from MAXXAM outstanding on the date of such agreements were
forgiven in the amount of $15,000 and $20,000, respectively, per year.
These amounts are included here as additional bonus compensation. See
"Certain Transactions" for discussion on such personal loans.
(5) Mr. Schwartz served as Senior Vice President -- Corporate Development of
MAXXAM for fiscal years 1994 and 1993.
(footnotes continued on the following page)
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<PAGE> 134
(6) Mr. La Duc also served as Chief Financial Officer of MAXXAM for fiscal
years 1994 and 1993. Mr. La Duc received his compensation for all three
years principally from Kaiser; however, MAXXAM reimbursed Kaiser for
certain allocable costs associated with the performance of services for
MAXXAM by such executive officer. The table reflects such officer's total
compensation, rather than any allocated part of such compensation.
(7) Includes $50,000 (to be paid over a two-year period), $75,000 (to be paid
over a three-year period) and $100,000 (to be paid over a four-year
period), awarded for 1995, 1994 and 1993, respectively, for which MAXXAM
will reimburse Kaiser.
(8) As of December 29, 1995, Mr. La Duc held 47,437 shares of restricted Kaiser
Common Stock valued at approximately $622,611 based on the closing price on
such date of $13.125 per share. Restrictions on all such shares were lifted
on December 2, 1996. No dividends will be paid to Mr. La Duc in respect of
any restricted shares held. No other named executive officer held
restricted stock of Kaiser or MAXXAM at fiscal year end 1995.
(9) Represents option for shares of Kaiser Common Stock.
(10) Amount represents contributions under Kaiser's 401(k) savings plan by
Kaiser.
OPTION/SAR GRANTS TABLE
The following table sets forth certain information concerning stock options
or SARs granted by MAXXAM in fiscal year 1995 to any of the named executive
officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------- GRANT
(C) DATE VALUE
(B) % OF TOTAL -------------
# OF OPTIONS/
SECURITIES SARS (D) (F)
UNDERLYING GRANTED TO EXERCISE OR (E) GRANT DATE
(A) OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTS 1995 ($/SHARE) DATE ($)(1)
- ----------------------------- ------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Charles E. Hurwitz........... 22,500(2) 38.5 46.80 01/24/06 398,302
Anthony R. Pierno............ 5,000(3) 8.5 45.15 11/29/05 86,158
Paul N. Schwartz............. 10,000(3) 17.1 45.15 11/29/05 172,316
Byron L. Wade................ 5,000(3) 8.5 45.15 11/29/05 86,158
</TABLE>
- ---------------
(1) Valuation utilizing Black-Scholes Option Price Model using the following
assumptions: 5-year daily volatility for MAXXAM Common Stock, 5.8% risk-free
rate (10-year Government Bond as of the grant date) (5.6% for Mr. Hurwitz),
no dividend yield and 10-year exercise or expiration date. No adjustments
were made for non-transferability or risk of forfeiture.
(2) Represents underlying shares of MAXXAM Preferred Stock. These options were
actually granted after 1995 fiscal year end but were for services Mr.
Hurwitz provided during such year.
(3) Represents underlying shares of MAXXAM Common Stock.
The SARs set forth in the above table cover shares of MAXXAM Preferred
Stock which were granted to Mr. Hurwitz on January 24, 1996 and shares of MAXXAM
Common Stock granted to Messrs. Pierno, Schwartz and Wade on November 29, 1995
under MAXXAM's 1994 Omnibus Employee Incentive Plan (the "Omnibus Plan") at an
exercise price of 20% above the closing price of MAXXAM Common Stock on the date
of grant. SARs under the MAXXAM Omnibus Plan are exercisable for cash, MAXXAM
Common Stock or a combination thereof at the discretion of MAXXAM's Board, and
vest with respect to 20% on the first anniversary date of the grant and an
additional 20% on each anniversary date thereafter until fully vested.
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<PAGE> 135
OPTION/SAR EXERCISES AND FISCAL YEAR END VALUE TABLE
The table below provides information on an aggregated basis concerning each
exercise of stock options (or tandem SARs) and freestanding SARs during the
fiscal year ended December 31, 1995 by each of the named executive officers, and
the 1995 fiscal year-end value of unexercised options and SARs, including SARs
exercisable for cash only.
<TABLE>
<CAPTION>
(D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
(B) OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES (C) AT YEAR END(#) AT FISCAL YEAR-END($)
(A) ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ -------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Hurwitz............ 21,300 928,200 22,500 36,000 334,125(3) 175,500(3)
-- -- 62,500 187,500 23,438(4) 70,313(4)
John T. La Duc................ -- -- 6,000 4,000 43,500(3) 29,000(3)
-- -- 2,300 6,900 863(4) 2,588(4)
Paul N. Schwartz.............. 10,000 349,000 16,000 40,000 104,125(3) 170,000(3)
Anthony R. Pierno............. 2,000 50,000 25,000 5,000 --(3) --(3)
Byron L. Wade................. 19,000 922,625 9,000 11,000 65,250(3) 43,500(3)
</TABLE>
- ---------------
(1) If no shares received, the number reflected, if any, represents the number
of securities with respect to which options/SARs were exercised.
(2) Valued at the closing price of MAXXAM's Common Stock on the date of
exercise, less exercise price.
(3) Valued at $35.25 per share, the closing price of MAXXAM's Common Stock on
December 29, 1995, less exercise price. If exercise price is equal to or
higher than the closing price, no value is shown.
(4) Valued at $13.125 per share, the closing price of Kaiser Common Stock on
December 29, 1995, less exercise price. If exercise price is equal to or
higher than closing price, no value is shown.
DEFINED BENEFIT PLANS
MAXXAM Pension Plan
All officers who are also employees and other regular employees of MAXXAM
who work at least 1,000 hours in the plan year automatically participate in
MAXXAM's Pension Plan (the "MAXXAM Pension Plan"), a qualified, noncontributory,
funded plan. Benefits equal the sum of an employee's "past service benefit" and
"future service benefit" as set forth in the following two paragraphs. Benefits
are based on an employee's base salary or wages, plus overtime (excluding
bonuses, commissions, incentive compensation and all other extra compensation),
the age of such employee at retirement and years of service.
Under the MAXXAM Pension Plan, the annual past service benefit is the
greatest of:
(i) benefits accrued under the plan through December 31, 1986,
(ii) the product of (a) the sum of 0.8% of the participant's Past
Service Compensation Base (as defined), plus 0.8% of the participant's Past
Service Compensation Base in excess of $15,000 multiplied by (b) the
participant's credited years of service prior to January 1, 1987, or
(iii) the product of 1.2% of the participant's Past Service
Compensation Base multiplied by the participant's credited years of service
prior to January 1, 1987.
For 1987 and 1988, the annual future service benefit equaled 1.6% of an
employee's plan compensation up to two-thirds of the Social Security wage base,
plus 2.4% of any remaining compensation. Effective January 1, 1989, the annual
future service benefit equaled 1.75% of an employee's compensation for each year
of participation, plus 0.6% of the employee's compensation in excess of $10,000.
Effective January 1, 1995, the annual future service benefit equals 2.35% of an
employee's compensation for each year of participation.
The amount of an employee's aggregate plan compensation that may be
included in benefit computations under the MAXXAM Pension Plan is limited to
$150,000 for 1995. Benefits are generally payable as a straight life annuity or,
with respect to married employees, as a 50% joint and survivor annuity, or, if
the
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<PAGE> 136
employee elects (with spousal consent), in certain alternative annuity forms.
Benefits under the MAXXAM Pension Plan are not subject to any deductions for
Social Security or other offsets. The covered compensation for 1995 and credited
years of service as of December 31, 1995 for the MAXXAM Pension Plan and
estimated annual benefits payable upon retirement at normal retirement age (age
65) for the named executive officers (other than those compensated by Kaiser who
do not participate in the MAXXAM Pension Plan) were as follows: Mr. Hurwitz:
$150,000 -- 15 years -- $112,000; Mr. Pierno: $150,000 -- 6 years -- $36,118;
Mr. Schwartz: $150,000 -- 15 years -- $111,257; and Mr. Wade: $150,000 -- 15
years -- $93,143.
The projected benefits shown above were computed as single life annuity
amounts, payable beginning at age 65. The benefit amounts reflect a covered
compensation limit of $150,000 for 1996 and subsequent years under Section
401(a)(17) of the Internal Revenue Code (the "Code"). In addition, the amounts
reflect a maximum benefit limit of $120,000 for 1996 and subsequent years (with
early retirement reductions where applicable) that is placed upon annual
benefits that may be paid to a participant in the MAXXAM Pension Plan at
retirement under Section 415 of the Code. Combined plan limits applicable to
employees participating in both defined contribution and defined benefit plans
have not been reflected.
Kaiser Retirement Plan
Kaiser maintains a qualified, defined-benefit Retirement Plan (the "Kaiser
Retirement Plan") for salaried employees of Kaiser and co-sponsoring
subsidiaries who meet certain eligibility requirements. The table below shows
estimated annual retirement benefits payable under the terms of the Kaiser
Retirement Plan to participants with the indicated years of credited service.
These benefits are reflected without reduction for the limitations imposed by
the Code on qualified plans and before adjustment for the Social Security
offset, thereby reflecting aggregate benefits to be received, subject to Social
Security offsets, under the Kaiser Retirement Plan and the Kaiser Supplemental
Benefit Plan (as defined below).
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL ------------------------------------------------------------
REMUNERATION 15 20 25 30 35
---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$150,000.................. $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750
175,000.................. 39,375 52,500 65,625 78,750 91,875
200,000.................. 45,000 60,000 75,000 90,000 105,000
225,000.................. 50,625 67,500 84,375 101,250 118,125
250,000.................. 56,250 75,000 93,750 112,500 131,250
300,000.................. 67,500 90,000 112,500 135,000 157,500
350,000.................. 78,750 105,000 131,250 157,500 183,750
400,000.................. 90,000 120,000 150,000 180,000 210,000
450,000.................. 101,250 135,000 168,750 202,500 236,250
500,000.................. 112,500 150,000 187,500 225,000 262,500
</TABLE>
The estimated annual retirement benefits shown are based upon the
assumptions that current Kaiser Retirement Plan and Kaiser Supplemental Benefit
Plan provisions remain in effect, that the participant retires at age 65, and
that the retiree receives payments based on a straight life annuity for his
lifetime. Mr. La Duc had 26.3 years of credited service on December 31, 1995.
Monthly retirement benefits, except for certain minimum benefits, are determined
by multiplying years of credited service (not in excess of 40) by the difference
between 1.50% of average monthly compensation for the highest base period (of
36, 48 or 60 consecutive months, depending upon compensation level) in the last
10 years of employment and 1.25% of monthly primary Social Security benefits.
Pension compensation covered by the Kaiser Retirement Plan and the Kaiser
Supplemental Benefits Plan consists of salary and bonus amounts set forth in the
Summary Compensation Table (column (c) plus column (d) thereof).
Participants are entitled to retire and receive pension benefits, unreduced
for age, upon reaching age 62 or after 30 years of credited service. Full early
pension benefits (without adjustment for Social Security offset prior to age 62)
are payable to participants who are at least 55 years of age and have completed
10 or more years of pension service (or whose age and years of pension service
total 70) and who have been terminated by
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Kaiser or an affiliate for reasons of job elimination or partial disability.
Participants electing to retire prior to age 62 who are at least 55 years of age
and have completed 10 or more years of pension service (or whose age and years
of pension service total at least 70) may receive pension benefits, unreduced
for age, payable at age 62 or reduced benefits payable earlier. Participants who
terminate their employment after five years or more of pension service, or after
age 55 but prior to age 62, are entitled to pension benefits, unreduced for age,
commencing at age 62 or, if they have completed 10 or more years of pension
service, actuarially reduced benefits payable earlier. For participants with
five or more years of pension service or who have reached age 55 and who die,
the Kaiser Retirement Plan provides a pension to their eligible surviving
spouses. Upon retirement, participants may elect among several payment
alternatives including, for most types of retirement, a lump-sum payment.
MAXXAM Supplemental Executive Retirement Plan
Effective March 8, 1991, MAXXAM adopted an unfunded non-qualified
Supplemental Executive Retirement Plan (the "MAXXAM SERP"). The MAXXAM SERP
provides that participants are entitled to receive benefits which would have
been payable to such participants under the MAXXAM Pension Plan except for the
limitations imposed by the Code. Participants in such plan are selected by the
Company's Board of Directors or are entitled to participate by virtue of
provisions in their employment agreements. Four named executive officers,
Messrs. Hurwitz, Pierno, Schwartz and Wade, were entitled to receive benefits
under the MAXXAM SERP during 1995.
The following projections are based on the same assumptions as utilized in
connection with the MAXXAM Pension Plan projections above. The 1996 qualified
plan pay limit ($150,000) and benefit limit ($120,000) are reflected for all
years in the future. In addition, no future increases in the participants'
covered compensation amounts from the 1995 levels are assumed.
<TABLE>
<CAPTION>
HURWITZ PIERNO SCHWARTZ WADE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COVERED COMPENSATION FOR 1995:
Qualified Plan........................... $150,000 $150,000 $150,000 $150,000
Nonqualified Plan........................ 46,660 194,771 140,850 46,660
-------- -------- -------- --------
Total............................ $196,660 $344,771 $290,850 $196,660
======== ======== ======== ========
CREDITED YEARS OF SERVICE AS OF DECEMBER
31, 1995................................. 15 6 15 15
======== ======== ======== ========
PROJECTED NORMAL RETIREMENT BENEFIT:
Qualified Plan........................... $ 93,143 $ 36,118 $111,257 $ 93,143
Nonqualified Plan........................ 19,138 20,126 56,598 19,138
-------- -------- -------- --------
Total............................ $112,281 $ 56,244 $167,855 $112,281
======== ======== ======== ========
</TABLE>
Kaiser Supplemental Benefits Plan
Kaiser maintains an unfunded, non-qualified Supplemental Benefits Plan (the
"Kaiser Supplemental Benefits Plan"), the purpose of which is to restore
benefits which would otherwise be paid from the Kaiser Retirement Plan or the
Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the
"Kaiser Savings Plan"), were it not for the Section 401(a)(17) and Section 415
limitations imposed by the Code. Participation in the Kaiser Supplemental
Benefits Plan includes all employees of Kaiser and its subsidiaries whose
benefits under the Kaiser Retirement Plan and Kaiser Savings Plan are likely to
be affected by such limitations imposed by the Code. Eligible participants,
including Mr. La Duc, are entitled to receive the equivalent of the Kaiser
Retirement Plan and Kaiser Savings Plan benefits which they may be prevented
from receiving under those plans because of such Code limitations.
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MAXXAM Severance or Termination Policy
Severance or termination pay is generally granted to regular full-time
employees who are involuntarily terminated, subject to a number of exclusions,
pursuant to an unfunded policy. After such termination, the policy provides for
payment in an amount ranging from two weeks salary for at least one year of
service graduating to a maximum of 104 weeks salary. The amounts payable under
the policy if the named executive officers had been involuntarily terminated on
December 31, 1995 would have been as follows: Mr. Hurwitz: $1,266,470; Mr.
Pierno: $79,563; Mr. Schwartz: $581,700; and Mr. Wade: $420,000.
Kaiser Termination Payment Policy
Most full-time salaried employees of Kaiser are eligible for benefits under
an unfunded termination policy if their employment is involuntarily terminated,
subject to a number of exclusions. The policy provides for lump sum payments
after termination ranging from one-half month's salary for less than one year of
service graduating to eight months' salary for 30 or more years of service. The
amount payable to Mr. La Duc under the policy if he had been involuntarily
terminated on December 31, 1995 would have been $145,833.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
All executive officers of MAXXAM are eligible to participate in a deferred
compensation program. An executive officer may defer up to 20% of gross salary
and up to 20% of any bonus otherwise payable to such executive officer for any
calendar year. The designated percentage of deferred compensation is credited to
a book account as of the date such compensation would have been paid and is
deemed "invested" in an account bearing interest calculated using one-twelfth of
the sum of the prime rate plus 2% on the first day of each month. Deferred
compensation, including all earnings credited to the book account, will be paid
in cash to the executive or beneficiary as soon as practicable following the
date the executive ceases for any reason to be an employee of MAXXAM either in a
lump sum or in a specified number of annual installments, not to exceed ten, at
the executive's election. No compensation was deferred under this program for
1995.
DIRECTOR COMPENSATION
Directors who were not employees of or consultants to MAXXAM receive an
annual fee of $30,000 and no additional compensation for attending Committee
meetings. Directors are also reimbursed for travel and other disbursements
relating to Board and Committee meetings. Fees to directors who are also
employees of MAXXAM are deemed to be included in their salary. Non-employee
directors of MAXXAM who also serve as directors of certain of MAXXAM's
majority-owned subsidiaries (Kaiser) also receive additional director or
committee fees and are reimbursed for expenses pertaining to their services in
such capacities from those subsidiaries.
All non-employee directors of MAXXAM are eligible to participate in a
deferred compensation program. By executing a Deferred Fee Agreement, a
non-employee director may defer all or part, in 25% increments, of the
director's fees received from the Company for service in such capacity. Deferred
fees are credited to a book account as of the date such fees would have been
paid to the director and are deemed "invested" in two investment choices, again
in 25% increments, of phantom shares of MAXXAM's Common Stock and/or in an
account bearing interest at a rate established from time to time by the
Compensation Committee. Deferred director's fees, including all earnings
credited to the book account, will be paid in cash to the director or
beneficiary as soon as practicable following the date the director ceases for
any reason to be a member of the Board of Directors, at the director's election,
either in a lump sum or in a specified number of annual installments not to
exceed ten.
Non-employee directors are also eligible to participate in MAXXAM's 1994
Non-Employee Director Stock Plan. Pursuant to such plan, each eligible director
receives an initial grant of an option to purchase 500 shares of MAXXAM Common
Stock the day following the later of the 1994 Annual Meeting or the first Annual
Meeting after such eligible director is first elected or appointed by the Board
to be a director. Thereafter, each eligible director is granted an option to
purchase 300 shares of MAXXAM Common Stock each year the day following the
Annual Meeting. The exercise price of the options per share is the closing
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price of the MAXXAM Common Stock as reported by the American Stock Exchange on
the date the option is granted. Each option granted under such plan becomes
exercisable as to 25% of the shares on the first, second, third and fourth
anniversaries of the date of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors of MAXXAM
was, during the 1995 fiscal year, an officer or employee of MAXXAM or any of its
subsidiaries, or was formerly an officer of MAXXAM or any of its subsidiaries;
however, one member had a relationship requiring disclosure by MAXXAM under Item
404 of Regulation S-K. Mr. Levin served on MAXXAM's Compensation Committee and
Board of Directors during 1995. Mr. Levin is also a partner in the law firm of
Kramer, Levin, Naftalis & Frankel, which provided legal services for MAXXAM and
its subsidiaries during 1995.
During MAXXAM's 1995 fiscal year, no executive officer of MAXXAM served as
(i) a member of the Compensation Committee (or other board committee performing
equivalent functions) of another entity, one of whose executive officers served
on the Compensation Committee of the Board of Directors of MAXXAM, (ii) a
director of another entity, one of whose executive officers served on the
Compensation Committee of MAXXAM, or (iii) a member of the Compensation
Committee (or other board committee performing equivalent functions) of another
entity, one of whose executive officers served as a director of MAXXAM.
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CERTAIN TRANSACTIONS
THE COMPANY
MAXXAM, Pacific Lumber, Salmon Creek and Scotia Pacific entered into a tax
allocation agreement effective March 23, 1993, which in part modified MAXXAM's
existing tax allocation agreement with MGI and certain of its subsidiaries,
including Pacific Lumber (collectively, the "Tax Allocation Agreements").
Pursuant to the terms of the Tax Allocation Agreements, MAXXAM pays any
consolidated federal income tax liability for its affiliated group of
corporations (the "Group") within the meaning of Section 1504 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Company and its subsidiaries,
including MGI, Pacific Lumber, Salmon Creek and Scotia Pacific, are each members
of the Group.
Under the Tax Allocation Agreements, Pacific Lumber is liable to MAXXAM for
the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific
and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively the "PL Subgroup") computed as if the PL Subgroup were a separate
affiliated group of corporations which was never affiliated with the Group
(taking into account all limitations under the Code and regulations applicable
to the PL Subgroup). To the extent such calculation results in a net operating
loss or a net capital loss or credit which the PL Subgroup could have carried
back to a prior taxable period under the principles of Sections 172 and 1502 of
the Code, MAXXAM will pay to Pacific Lumber an amount equal to the tax refund to
which the PL Subgroup would have been entitled (but not in excess of the
aggregate net amount previously paid by Pacific Lumber to MAXXAM for the current
year and the three preceding taxable years). If such separately calculated net
operating loss or net capital loss or credit of the PL Subgroup cannot be
carried back to a prior taxable year of the PL Subgroup for which Pacific Lumber
paid its consolidated tax liability to MAXXAM, the net operating loss or net
capital loss or credit becomes a loss or credit carryover of the PL Subgroup to
be used in computing the PL Subgroup's consolidated income tax liability for
future taxable years. Although, under Treasury regulations, all members of the
Group, including the members of the PL Subgroup, are severally liable for the
Group's federal tax liability, under the Tax Allocation Agreements, MAXXAM
indemnifies each PL Subgroup member for all federal tax liabilities relating to
taxable years during which such PL Subgroup member is a member of the Group,
except for payments required of Pacific Lumber or Salmon Creek under the Tax
Allocation Agreements. The same principles are applied to any consolidated or
combined state or local income tax returns filed by the Group with respect to
the PL Subgroup. Under the Tax Allocation Agreements, Pacific Lumber will
indemnify Scotia Pacific for all federal and state tax liabilities relating to
any taxable years during which Scotia Pacific is not a member of the Group. The
Tax Allocation Agreements further provide that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed as if Salmon Creek was a separate
corporation which was never affiliated with the Group (taking into account all
limitations under the Code and regulations applicable to Salmon Creek).
Under the Tax Allocation Agreements, MGI's subsidiary, MPI, is liable to
MAXXAM for its federal income tax liability computed as if it filed separate
returns and was never a member of the Group. Under a separate tax allocation
agreement, Britt is liable to MAXXAM for its federal income tax liability
computed as if it filed separate returns and was never a member of the Group
(the "Britt Tax Allocation Agreement").
Effective August 4, 1993, MAXXAM and MGI modified the Tax Allocation
Agreements with respect to MGI (the "Revised MGI Tax Allocation Agreement").
Under the terms of the Revised MGI Tax Allocation Agreement, MAXXAM computes a
tentative federal income tax liability for MGI as if MGI, members of the PL
Subgroup, Britt, MPI and MGI's other subsidiaries, but excluding Salmon Creek,
were a separate affiliated group of corporations which was never connected with
MAXXAM (the "MGI Subgroup"). The federal income tax liability of MGI is the
difference between (i) the tentative federal income tax liability of the MGI
Subgroup and (ii) the sum of the separate tax liabilities (net of any refunds
due to tax loss or credit carrybacks) for Pacific Lumber, Britt, MPI and MGI's
other subsidiaries, but excluding Salmon Creek. To the extent that the tentative
federal income tax liability is less than the aggregate amounts in (ii), MAXXAM
is obligated to pay the amount of such difference to MGI. If the calculation of
the tentative federal income tax liability results in a net operating loss or a
net capital loss or credit which the MGI Subgroup could have carried back to a
prior taxable period under the principles of Sections 172 and 1502 of the Code,
MAXXAM
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will pay to MGI an amount equal to the tax refund to which the MGI Subgroup
would have been entitled (but not in excess of the aggregate net amount
previously paid by MGI Subgroup members to MAXXAM for the current year and the
three preceding taxable years). While MGI is severally liable for MAXXAM's
federal income tax liability for all taxable periods during which it is a member
of the Group, pursuant to the Tax Allocation Agreements, the Britt Tax
Allocation Agreement and the Revised MGI Tax Allocation Agreement, MAXXAM will
indemnify MGI and its subsidiaries, except for payments required under such
agreements.
Contemporaneously with the consummation of this Offering, MAXXAM and the
Company entered into a tax allocation agreement (the "MGHI Tax Allocation
Agreement"). Under the terms of the MGHI Tax Allocation Agreement, MAXXAM will
compute a tentative federal income tax liability for the Company as if the
Company, members of the MGI Subgroup, and any other subsidiaries of the Company,
but excluding Salmon Creek, were a separate affiliated group of corporations
which was never connected with MAXXAM (the "MGHI Subgroup"). The federal income
tax liability of the Company is the difference between (i) the tentative federal
income tax liability of the MGHI Subgroup, and (ii) the tentative federal income
tax liability of the MGI Subgroup computed pursuant to the Revised MGI Tax
Allocation Agreement. To the extent that the tentative federal income tax
liability of the MGHI Subgroup is less than the tentative federal income tax
liability of the MGI Subgroup, MAXXAM will be obligated to pay the amount of
such difference to the Company. If the calculation of the tentative federal
income tax liability results in a net operating loss or a net capital loss or
credit which the MGHI Subgroup could have carried back to a prior taxable period
under the principles of Sections 172 and 1502 of the Code, MAXXAM will be
obligated to pay to the Company an amount equal to the tax refund to which the
MGHI Subgroup would have been entitled, under principles similar to the Revised
MGI Tax Allocation Agreement. While the Company is severally liable for MAXXAM's
federal income tax liability for all taxable periods during which it is a member
of the Group, pursuant to the MGHI Tax Allocation Agreement, MAXXAM will
indemnify the Company, except for payments required under such agreement.
The net proceeds of the Offering were loaned by the Company to MAXXAM
pursuant to the Intercompany Note, which is pledged to secure the Notes. The
Intercompany Note bears interest at the rate of 11% per annum (payable
semiannually on the interest payment dates applicable to the Notes) and matures
on August 1, 2003. MAXXAM is entitled to defer the payment of interest on the
Intercompany Note on any interest payment date to the extent that the Company
has sufficient available funds to satisfy its obligations on the Notes on such
date. Any such deferred interest will be added to the principal amount of the
Intercompany Note and be payable at the maturity thereof. The principal amount
of the Intercompany Note will be reduced in an amount equal to any payments made
by MAXXAM in respect of its guaranty of the Notes. The Intercompany Note may be
amended to the extent such amendments do not materially adversely affect the
Company's ability to pay its obligations on the Notes. MAXXAM will use a portion
of the proceeds of the loan to redeem all of the outstanding public indebtedness
of MAXXAM, consisting of the approximately $17.6 million aggregate principal
amount of its Subordinated Debentures and the approximately $25.0 million
aggregate principal amount of its Reset Notes, and to pay accrued interest on
such instruments which aggregated approximately $0.4 million at December 23,
1996. MAXXAM will use the remaining proceeds of the loan for general corporate
purposes, including possible repurchases of its common stock through open market
purchases, in privately negotiated transactions or otherwise.
MAXXAM and its subsidiaries have an arrangement pursuant to which they
reimburse each other for certain allocable costs associated with the performance
of services by their respective employees. These reimbursements are computed and
allocated by and among the several entities at cost. The resulting costs of such
services are no less favorable than what could be obtained from unrelated
parties.
MAXXAM
See "Legal Proceedings -- USAT Matters," "-- Zero Coupon Note Litigation"
and "-- Rancho Mirage Litigation" with respect to certain actions in which
certain directors and officers of MAXXAM are defendants and in which MAXXAM is
advancing expenses pursuant to indemnification obligations.
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In May 1995, MCOP granted Olympus Rancho Mirage, L.P. ("Olympus"), an
unaffiliated third party, a non-exclusive easement on certain property in Rancho
Mirage, California. Such easement is to allow access to a proposed golf course.
At the same time, a partnership owned by Federated which operated the business
of the Ritz-Carlton Hotel (the "Hotel"), which is also located in Rancho Mirage,
California, transferred the Hotel to Olympus. In consideration for such
easement, Olympus agreed to provide MCOP with Hotel amenity benefits which will
be available to area lot owners for a fee. Such amenities include, among other
things, room service, maid service and use of the tennis center, health club,
meeting rooms and swimming pool. MCOP also agreed not to develop a contemplated
hotel-type facility on other real property it owns in the vicinity. Olympus
received a revocable parking license on certain other adjacent property of MCOP.
MAXXAM and certain of its subsidiaries shared certain administrative and
general expenses with Federated. Under these arrangements, Federated's
obligation to MAXXAM and its subsidiaries was approximately $201,000 for 1995
and $124,000 for the nine months ended September 30, 1996. Federated and MAXXAM
also share office space leased by MAXXAM. The obligations of Federated relating
to 1995 under such office space sharing arrangement amounted to approximately
$9,000. At September 30, 1996, Federated owed MAXXAM $100,000 for shared office
space and certain general and administrative expenses.
MAXXAM's wholly owned subsidiary, Bering Holdings, Inc. ("Bering
Holdings"), is a Texas registered investment adviser which has an agreement with
Federated whereby Bering Holdings manages an investment portfolio for Federated
on substantially the same terms as provided to other persons. The agreement
provides for an annual management fee equal to 1% of the average value of the
portfolio, except for certain short-term investments for which the management
fee is 1/2 of 1% per annum. The agreement also provides for an annual
performance fee equal to 10% of the net gain in certain portfolios. Bering
Holdings has accrued management and performance fees for the year ended December
31, 1995 of approximately $84,000 and $215,000, respectively. At September 30,
1996, Federated owed Bering Holdings $113,000 in respect of such fees.
Mr. Levin, a director of MAXXAM, Pacific Lumber, Scotia and Kaiser, is a
partner in the law firm of Kramer, Levin, Naftalis & Frankel, which provides
legal services for MAXXAM, the Company and its subsidiaries, and for KAC and its
subsidiaries.
On April 17, 1995, SHRP, Ltd., SHRP Acquisition, Inc. and SHRP Capital
Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code. Their bankruptcy reorganization plan has since been confirmed and the
transactions contemplated by the bankruptcy plan were consummated on October 6,
1995. Since July 1993, Mr. Wade has served as a director, Vice President and
Secretary of SHRP Inc., SHRP, Ltd.'s sole general partner prior to SHRP, Ltd.'s
bankruptcy reorganization, and of SHRP Capital Corp., a subsidiary of SHRP,
Ltd.; Mr. Schwartz has served as a director and Executive Vice President of both
SHRP, Inc. and SHRP Capital Corp.; and Mr. Hurwitz has served as director and
Chairman of the Board of SHRP, Inc., and as a director, Chairman of the Board
and President of SHRP Capital Corp.
In January 1995, Mr. Pierno repaid a $150,000 bank loan which had been
guaranteed by MAXXAM. Pursuant to the terms of Mr. Pierno's employment agreement
with MAXXAM (which expired in March 1995), his personal loans from MAXXAM, which
aggregated $150,000 at 6% interest, were forgiven at the rate of $15,000 per
year. Such loans were, and continue to be, secured by real estate owned by Mr.
Pierno. As of February 28, 1995, MAXXAM entered into an amendment of Mr.
Pierno's promissory note evidencing such loans which provides that (i)
installments of $18,750 be paid on each of December 31, 1995, 1996 and 1997,
with the balance to be paid in full on December 31, 1998; and (ii) the loans
also be secured by any amounts to which Mr. Pierno may be entitled pursuant to
MAXXAM's Revised Capital Accumulation Plan. Mr. Pierno's principal balance on
such loans is currently $56,250. Pursuant to the terms of Mr. Pierno's
employment agreement, he borrowed an additional $200,000 bearing interest at 6%
per annum, with interest being payable monthly and principal being due December
15, 1998 (with prepayments due upon the exercise by Mr. Pierno of any stock
appreciation rights granted pursuant to the agreement or employee benefit plan).
Such promissory note was also amended, extending the due date to December 15,
1998, and securing such loan with any amounts to which Mr. Pierno may be
entitled pursuant to MAXXAM's Revised Capital Accumulation Plan.
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Mr. Schwartz repaid his $100,000 outstanding loan from MAXXAM, together
with accrued interest thereon, in August 1995.
Mr. Wade repaid his $20,000 loan from MAXXAM, together with accrued
interest thereon, in August 1995.
Ms. Dudley repaid her $100,000 loan from MAXXAM, together with accrued
interest thereon, in September 1995.
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DESCRIPTION OF PRINCIPAL INDEBTEDNESS
THE COMPANY
The following sets forth a summary of certain terms of the principal
indebtedness of the Company and its subsidiaries outstanding as of September 30,
1996. This summary is qualified in its entirety by reference to the applicable
instruments, which have been filed as exhibits to the SEC Reports of the
applicable companies. The term "as defined," as used below, refers to the
definition of such term in the applicable instrument. The Company will furnish a
copy of any such instrument, upon oral or written request to the Company, at
5847 San Felipe, Suite 2600, Houston, Texas 77057, attention: Investor Relations
Coordinator (telephone number (713) 267-3675).
MGI NOTES
General
The $100.0 million of MGI Senior Notes and $101.0 million (accreted amount
as of September 30, 1996) of MGI Discount Notes mature on August 1, 2003. The
MGI Senior Notes bear interest at the rate per annum of 11 1/4%, payable
semiannually in arrears on February 1 and August 1 of each year. The MGI
Discount Notes bear interest at the rate per annum of 12 1/4%, payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1999. Interest on the MGI Notes is computed on the basis of a
360-day year of twelve 30-day months.
Optional Redemption
Except for partial redemptions prior to August 1, 1997 with the proceeds of
a public equity offering by Pacific Lumber or certain other subsidiaries of MGI,
the MGI Notes may not be redeemed prior to August 1, 1998. Thereafter, the MGI
Notes may be redeemed at the option of MGI, at any time as a whole, or from time
to time in part, at a redemption price equal to the principal amount thereof
plus (until August 1, 2002) a redemption premium ranging from 6.125% during the
12 months commencing August 1, 1998 to 1.531% during the 12 months commencing
August 1, 2001, in the case of the MGI Discount Notes, and ranging from 5.50% to
1.375% during the same periods, in the case of the MGI Senior Notes, plus
accrued and unpaid interest (if any) to the date of redemption.
Sinking Fund
There are no mandatory sinking fund payments for the MGI Notes.
Ranking
The indebtedness represented by the MGI Notes is senior indebtedness of MGI
and ranks pari passu in right and priority of payment with any existing or
future senior indebtedness of MGI.
Security
The MGI Notes are secured by a first priority pledge of (i) all of the
outstanding shares of stock owned or from time to time acquired by MGI or its
Subsidiaries (as defined), of Pacific Lumber, Britt and MPI, and (ii) the
27,938,250 shares of common stock of Kaiser which, upon the consummation of the
Offering, will be owned by the Company. The MGI Notes are not secured by any
Salmon Creek Distributions (as defined) and, in addition, except during the
continuance of an Event of Default, Interest Payment Default or Collateral
Default (each as defined), the pledgors, including in the case of the pledged
Kaiser shares the Company, will be entitled to receive and retain all Exempt
Distributions (as defined) in respect of the shares so pledged. The pledgors
will be entitled to vote all of such shares except under certain circumstances.
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<PAGE> 145
Release for Pledged Share Sales
The MGI Indenture permits a Pledgor (as defined) to obtain a release of
Pledged Shares (as defined) in order to effect a Pledged Share Sale (as
defined); provided that (i) no Event of Default, Collateral Default or Interest
Payment Default (each as defined) has occurred and is continuing or would result
from such release, (ii) an officers' certificate is delivered to the trustee
under the MGI Indenture (the "MGI Trustee") by MGI so stating and stating that
such release is otherwise permitted under the relevant MGI Indenture provision
and (iii) MGI agrees to subject money in an amount equal to the amount of Net
Proceeds (as defined) of such Pledged Share Sale received by MGI and its
Subsidiaries (as defined) that are Pledgors (and, with respect to the Pledged
Kaiser Shares (as defined), MAXXAM or, following the consummation of the
Offering, the Company), including all money and Cash Equivalents (as defined)
required to constitute collateral under the MGI Indenture ("Trust Moneys") in
the Accounts (as defined) to the extent required under Article 10 of the MGI
Indenture, to an offer to purchase MGI Notes in accordance with the provisions
described below under "-- Offers to Purchase MGI Notes with Certain Proceeds of
Collateral."
Release of Non-Cash Net Proceeds and Extraordinary Distributions
The MGI Indenture entitles the Pledgors to obtain a release from the lien
of the MGI Indenture of nonmoney and non-Cash Equivalent (i) Net Proceeds of (A)
a Primary Share Sale (as defined) that were distributed on Pledged Shares or (B)
a Pledged Share Sale and (ii) Extraordinary Distributions (as defined) on any
Pledged Shares as follows: (x) if all or any portion of such Net Proceeds or
Extraordinary Distributions are disposed of in one or more transactions (a
"Monetization") for consideration consisting of money or Cash Equivalents (but
which may also include indemnities) and MGI delivers or causes to be delivered
to the MGI Trustee, for deposit into a cash collateral offer account, all of the
money or Cash Equivalents received in such Monetization, then all or such
portion of such Net Proceeds or Extraordinary Distributions will be released
(simultaneously with such Monetization) from the lien of the MGI Indenture; and
(y) if, in connection with an offer to purchase MGI Notes, as described below
under "-- Offers to Purchase MGI Notes with Certain Proceeds of Collateral," MGI
delivers to the MGI Trustee for deposit into the cash collateral offer account
money in the amount, if any, to be deposited into such Account, as described in
the first sentence of the second paragraph under such caption, then (1) if the
purchase price at which such offer to purchase MGI Notes is made equals or
exceeds 110% of the principal amount or the Accreted Value (as defined), as the
case may be (the "respective Call Prices"), for the MGI Notes, plus accrued and
unpaid interest, all of such Net Proceeds or Extraordinary Distributions will be
released, simultaneously with such deposit, from the lien of the MGI Indenture,
and (2) if the preceding clause (1) is not applicable, a portion of such Net
Proceeds or Extraordinary Distributions, designated by MGI, not greater in value
(at the time such Net Proceeds or Extraordinary Distributions became collateral)
than the amount of money so delivered by MGI, will be released, simultaneously
with such deposit, from the lien of the MGI Indenture.
Offers to Purchase MGI Notes with Certain Proceeds of Collateral
If at any time the sum of (i) Trust Moneys deposited in the cash collateral
offer account, plus (ii) the value (as reasonably determined by the Board of
Directors) when it became collateral of nonmoney and non-Cash Equivalent Net
Proceeds, Extraordinary Distributions and Exempt Distributions then required to
constitute collateral, in each case that have not previously been (and are not
being) subjected to an offer to purchase MGI Notes pursuant to the provisions
described under this caption or (in the case of Net Proceeds of a public equity
offering by Pacific Lumber or certain other Subsidiaries of MGI) applied to an
optional redemption of MGI Notes, exceed $10,000,000, MGI will be required to
apply such sum to make an offer to purchase MGI Notes (provided that MGI may in
its discretion make such an offer before such $10,000,000 threshold is met), for
a purchase price of not less than 101% of the principal amount or Accreted Value
thereof, as the case may be, plus accrued and unpaid interest, if any, to the
date of purchase, and having an aggregate purchase price equal to the sum of the
amounts included in items (i) and (ii) above (to the extent not subjected or
applied (or being subjected or applied) as aforesaid), as of the close of
business on the second business day preceding the mailing of written notice, to
the MGI Trustee and the holders of MGI Notes, as provided in the MGI Indenture,
of the terms of such offer (the "Offer Amount"); provided that, among other
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things, no Net Proceeds of a public equity offering by Pacific Lumber or certain
other Subsidiaries of MGI that have been applied to an optional redemption (or
that are being so applied or that may be so applied by an election by MGI
pursuant to the provisions of the MGI Indenture the time for which has not
expired) shall be required to be subjected to such an offer.
The MGI Indenture provides that MGI will, prior to the scheduled time of
purchase pursuant to any such offer, deliver to the MGI Trustee, for deposit
into the cash collateral offer account, an amount of money equal to the amount,
if any, by which the aggregate purchase price of all MGI Notes (or portions
thereof) to be purchased pursuant to such offer (i.e., the lesser of (A) the
aggregate purchase price of all MGI Notes duly tendered and not withdrawn and
(B) the Offer Amount) exceeds the amount of money on deposit in the cash
collateral offer account. Following such delivery, but in any event prior to the
time of purchase, the MGI Trustee will release from the lien of the MGI
Indenture and deliver to the paying agent for such offer money from such Account
in an amount equal to the aggregate purchase price of the MGI Notes to be
purchased pursuant to such offer. If the price at which such offer to purchase
MGI Notes is made is less than the respective Call Prices of the MGI Notes plus
accrued and unpaid interest, if any, thereon, any Trust Moneys in the cash
collateral offer account, to the extent not actually utilized in such offer,
will remain collateral subject to the lien of the MGI Indenture. If, however,
such purchase price is equal to at least the respective Call Prices of the MGI
Notes as of the purchase date for such offer plus accrued and unpaid interest,
if any, thereon, any such Trust Moneys not actually utilized to purchase MGI
Notes in such offer will be released from the lien of the MGI Indenture. Any
moneys included in the Offer Amount that remain subject to the Lien of the MGI
Indenture following completion of an offer will be deposited into the cash
collateral account and may be applied, as directed by MGI, to redeem the MGI
Notes or to repurchase MGI Notes on the open market or otherwise.
Release and Substitution of Kaiser Shares
The MGI Indenture permits a release of Pledged Kaiser Shares from the lien
of the MGI Indenture at any time, from time to time, if: (i) no Event of
Default, Collateral Default or Interest Payment Default is continuing or would
result from such release, (ii) an officers' certificate is delivered to the MGI
Trustee so stating and stating that such release is otherwise permitted under
such provision of the MGI Indenture and (iii) there remains as collateral,
immediately subsequent to any such release, Pledged Kaiser Shares bearing the
same proportion (taking account of any subdivision, combination or
reclassification of such shares) to 28 million as (A) the sum of (x) the
aggregate principal amount at maturity of MGI Notes outstanding on the date of
such release, plus (y) one-half of the difference obtained by subtracting the
aggregate principal amount at maturity of MGI Notes outstanding on the date of
such release from $226,720,000 bears to (B) $226,720,000. In effect, so long as
any MGI Notes remain outstanding, this provision permits the release of
approximately 61,750 Kaiser Shares for each $1 million reduction in the
outstanding principal amount of the MGI Notes.
The MGI Indenture permits a release of Pledged Kaiser Shares from the lien
of the MGI Indenture at any time and from time to time in connection with a
merger or consolidation of Kaiser (or successor thereto pursuant to this
provision) into, or a sale or transfer of all or substantially all of the assets
of Kaiser in any transaction or series of related transactions to, another
person, or in connection with any other corporate reorganization of Kaiser
(other than a spinoff or other similar distribution of shares of Kaiser Stock to
stockholders of MAXXAM or the Company (a "Kaiser Transaction")) if: (i) no Event
of Default, Collateral Default or Interest Payment Default has occurred and is
continuing or would result from such release, (ii) the MGI Trustee receives, as
collateral subject to the lien of the MGI Indenture, in substitution for such
Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the
consideration received in respect of such Pledged Kaiser Shares pursuant to such
Kaiser Transaction, (iii) all holders of common stock of Kaiser (or such
successor) shall (subject to proration, customary treatment of fractional
amounts and other similar adjustments) be entitled to receive substantially the
same consideration in respect of their shares of Kaiser common stock pursuant to
the terms of such Kaiser Transaction, and (iv) any nonmoney or non-Cash
Equivalent consideration received in respect of such Pledged Kaiser Shares
pursuant to such Kaiser
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Transaction shall have been registered under the Securities Act to the extent
required under the federal securities law.
Change of Control
Upon the first Change of Control (as defined) to occur after the date of
the MGI Indenture (but not upon any subsequent Change of Control), each holder
of the MGI Notes has the right, at the holder's option, subject to the terms and
conditions of the MGI Indenture, to require MGI to purchase any or all of such
holder's MGI Notes at a cash purchase price equal to 101% of the principal
amount of the MGI Notes to be purchased plus accrued and unpaid interest.
Certain Covenants
The MGI Indenture contains certain covenants including, among others,
limitations on indebtedness, restricted payments, sales of capital stock of
subsidiaries, dividends and other payment restrictions affecting subsidiaries,
asset sales, transactions with affiliates, limitations on liens, amendments of
the Timber Note Indenture and certain other agreements of Scotia Pacific, and
mergers, consolidations and sales of all or substantially all of the assets of
MGI. The MGI Indenture limits the amount of dividends MGI can pay to an amount
that is generally equal to 50% of aggregate Consolidated Net Income (as defined)
of MGI accrued on a cumulative basis subsequent to June 30, 1993.
Consolidated Net Income (as defined) includes the fair market value in
excess of $62 million of Salmon Creek Distributions (as defined) received by MGI
or any of its Restricted Subsidiaries (as defined) from Pacific Lumber. There
are no restrictions in the Pacific Lumber Indenture on the ability of Pacific
Lumber to make Salmon Creek Distributions. The definition of the term Salmon
Creek Distributions is the same in the MGI Indenture as in the Indenture
governing the Notes. See "Description of New Notes -- Certain Definitions."
PACIFIC LUMBER SENIOR NOTES
General
The $235.0 million of Pacific Lumber Senior Notes mature on March 1, 2003,
and bear interest at the rate per annum of 10 1/2%, payable semiannually in
arrears on March 1 and September 1 of each year. Interest on the Pacific Lumber
Senior Notes is computed on the basis of a 360-day year of twelve 30-day months.
Optional Redemption
The Pacific Lumber Senior Notes may not be redeemed prior to March 1, 1998.
Thereafter, the Pacific Lumber Senior Notes may be redeemed at the option of
Pacific Lumber, at any time as a whole, or from time to time in part, at a
redemption price equal to the principal amount thereof plus (until March 1,
2000) a redemption premium plus accrued and unpaid interest (if any) to the date
of redemption.
Sinking Fund
There are no mandatory sinking fund payments for the Pacific Lumber Senior
Notes.
Ranking
The indebtedness evidenced by the Pacific Lumber Senior Notes ranks pari
passu in right and priority of payment with indebtedness of Pacific Lumber under
the Pacific Lumber Credit Agreement, and any future senior indebtedness of
Pacific Lumber. The Pacific Lumber Senior Notes are unsecured obligations.
Change of Control
Upon the first Change of Control (as defined) to occur after the date of
the Pacific Lumber Indenture (but not upon any subsequent Change of Control),
each holder of the Pacific Lumber Senior Notes will have
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the right, at the holder's option, subject to the terms and conditions of the
Pacific Lumber Indenture, to require Pacific Lumber to purchase any or all of
such holder's Pacific Lumber Senior Notes at a cash purchase price equal to 100%
of the principal amount of the Pacific Lumber Senior Notes to be purchased plus
accrued and unpaid interest.
Certain Covenants
The Pacific Lumber Indenture contains certain covenants including, among
others, limitations on indebtedness, restricted payments, sales of capital stock
of subsidiaries, dividends and other payment restrictions affecting
subsidiaries, asset sales, transactions with affiliates, limitations on liens,
amendments of the Timber Note Indenture and certain other agreements of Scotia
Pacific, and mergers, consolidations and sales of all or substantially all of
the assets of Pacific Lumber. The Pacific Lumber Indenture limits the amount of
dividends Pacific Lumber can pay, exclusive of Salmon Creek Distributions, to an
amount that is generally equal to 50% of Pacific Lumber's consolidated net
income plus depletion and cash dividends received from Scotia Pacific (for
periods subsequent to March 1, 1993), exclusive of net income and depletion of
Scotia Pacific so long as any Timber Notes are outstanding.
TIMBER NOTES
Interest
Interest is payable on the $336.1 million outstanding principal amount of
the Timber Notes (as of September 30, 1996) at the rate of 7.95% per annum
(computed on the basis of a 360-day year of twelve 30-day months; the "Timber
Note Rate") on January 20 and July 20 of each year (a "Timber Note Payment
Date"). Interest on overdue principal and, to the extent permitted by law,
overdue interest and premium, is payable at the Timber Note Rate plus 200 basis
points (the "Timber Note Default Rate") on each Timber Note Payment Date.
Principal
The Timber Notes have Scheduled Amortization, which represents the amount
of principal which Scotia Pacific must have paid (on a cumulative basis) through
each Timber Note Payment Date in order to avoid payment of prepayment or
deficiency premiums. The Timber Notes also have Rated Amortization, which
represents the minimum amount of principal which Scotia Pacific must pay (on a
cumulative basis) on or prior to each Timber Note Payment Date.
The amount of principal payable on any Timber Note Payment Date is an
amount which is intended to link, to the extent of cash available, the deemed
depletion of the Scotia Pacific Timber (through the harvest and sale of logs) to
the required amortization of the Timber Notes. The amount payable on any Timber
Note Payment Date is based on various formulas in the Timber Note Indenture
which generally compare the present value of the "fixed liabilities" associated
with the Scotia Pacific Timber (i.e., the balance of the Timber Notes plus the
discounted value of certain future operating expenses) to a hypothetical deemed
valuation of the collateral supporting the Timber Notes. The deemed valuation is
a theoretical construct which does not represent, and is not intended to
reflect, the actual value of the Scotia Pacific Timber.
The Timber Note Indenture provides that if, on any Timber Note Payment
Date, the principal paid on such date exceeds the Scheduled Amortization Amount,
as defined below (such excess, an "Excess Payment"), a premium (a "Prepayment
Premium") will be payable on such date with respect to such Excess Payment. The
Timber Note Indenture also provides that if, on any Timber Note Payment Date,
the principal paid on such date is less than the Scheduled Amortization Amount
(such deficiency, a "Payment Deficiency"), a premium (a "Deficiency Premium")
will be payable on the next Timber Note Payment Date with respect to such
Payment Deficiency. The Timber Note Indenture defines "Scheduled Amortization
Amount," for any Timber Note Payment Date, as an amount equal to the excess, if
any, of (i) the cumulative amount of all Scheduled Amortization, through and
including such Note Payment Date over (ii) the cumulative amount of all
principal paid on the Timber Notes, to and excluding such Timber Note Payment
Date.
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Premiums
The Prepayment Premium payable on any Timber Note Payment Date with respect
to the Excess Payment on such Timber Note Payment Date is a make whole premium,
calculated based upon the yield of like term Treasury securities plus 50 basis
points. The Deficiency Premium payable on any Timber Note Payment Date with
respect to the Payment Deficiency on the previous Timber Note Payment Date
equals an amount of interest (computed on the basis of a 360-day year of twelve
30-day months) on the Payment Deficiency, for the period from and including the
Timber Note Payment Date immediately preceding such Timber Note Payment Date, to
but excluding such Timber Note Payment Date, at a rate per annum equal to 1.50%.
Optional Redemption
Scotia Pacific may redeem the Timber Notes, in whole, but not in part, at
any time, at a redemption price equal to all unpaid principal amounts, all
accrued and unpaid premium thereon, all accrued and unpaid interest thereon, and
a redemption premium. Scotia Pacific also has the right to cause additional
prepayments of principal to be made on any Timber Note Payment Date by making
additional deposits to the Payment Account (as defined below) from other funds
available to Scotia Pacific. To the extent that any such additional deposit
causes an Excess Payment on any Timber Note Payment Date, a Prepayment Premium
will be payable in respect of such Excess Payment.
Accounts; Payment on the Timber Notes
The Timber Note Indenture provides that the trustee under the Timber Note
Indenture (the "Timber Note Trustee") must maintain, subject to a lien for the
benefit of holders of Timber Notes, the Liquidity Account, which provides
liquidity for the Timber Notes and an account into which funds will be
transferred on each Monthly Deposit Date (as defined in the Timber Note
Indenture), for disbursement on each Timber Note Payment Date (the "Payment
Account"). The balance in the Liquidity Account is to be maintained at the
Required Liquidity Balance (as defined). The balance in the Liquidity Account at
September 30, 1996 was $30.5 million.
The Timber Note Indenture provides that all payments received by Scotia
Pacific in connection with the harvesting, severing, cutting or sale of timber
and all other cash proceeds of or from the Mortgaged Property will be deposited
into a segregated trust account (the "Collection Account") maintained with the
Timber Note Trustee, subject to a lien for the benefit of the holders of Timber
Notes. Amounts to be utilized for payments on the Timber Notes generally are
withdrawn from the Collection Account on each Monthly Deposit Date, deposited
into the Payment Account, and (if the Monthly Deposit Date is not also a Timber
Note Payment Date) invested in Eligible Investments (as defined) until the next
Timber Note Payment Date. The amount so transferred from the Collection Account
to the Payment Account on each Monthly Deposit Date (the Targeted Monthly
Deposit Amount) is (to the extent of available cash) calculated so that the
amount in the Payment Account will be sufficient to pay all accrued interest and
Deficiency Premiums on the Timber Notes to the Monthly Deposit Date and the
appropriate portion of principal amortization and Prepayment Premiums, if any,
expected to be payable on the next Timber Note Payment Date (or, if such Monthly
Deposit Date is also a Timber Note Payment Date, on such Timber Note Payment
Date). Amounts remaining in the Collection Account on a Monthly Deposit Date
after the required transfer of funds into the Payment Account, unless a Trapping
Event (as described below) has occurred and is continuing, may be released to
Scotia Pacific free and clear of the lien and security interest of the Deed of
Trust securing the Timber Notes (the "Deed of Trust Lien").
On each Timber Note Payment Date, the amounts on deposit in the Payment
Account are utilized to make required payments on the Timber Notes (or to make
any required deposits to the Liquidity Account). Required principal payments in
excess of Rated Amortization on the Timber Notes will be due and payable only to
the extent of available cash in the Payment Account. However, if, for 24
consecutive months, the amount transferred from the Collection Account to the
Payment Account is less than the Targeted Monthly Deposit Amount (as defined),
Scotia Pacific will be required to make a payment into the Payment Account in
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an amount equal to the difference between the Targeted Monthly Deposit Amount in
the last such month and the actual amount transferred from the Collection
Account to the Payment Account in such month. To the extent funds on deposit in
the Payment Account are inadequate to make payments of interest (excluding
interest on Premiums) and Rated Amortization when due, additional amounts will
be drawn from the Liquidity Account to the extent of the balance thereof. To the
extent that amounts on deposit in the Payment Account on a Timber Note Payment
Date exceed the required payments on the Timber Notes (and any required deposits
to the Liquidity Account) on such Timber Note Payment Date, such excess amounts,
unless a Trapping Event has occurred and is continuing, may be released to
Scotia Pacific free and clear of the Deed of Trust Lien.
Consistent with Scotia Pacific's purpose and its needs to fund operating
and capital expenses, substantially all of the cash released to Scotia Pacific
free of the Deed of Trust Lien is periodically distributed to Pacific Lumber.
Once appropriate provision for current debt service on the Timber Notes has been
made, in the absence of certain Trapping Events or certain outstanding
judgments, the Timber Note Indenture does not limit monthly distributions of
available cash from Scotia Pacific to Pacific Lumber.
Trapping Events
During the continuance of a Trapping Event, amounts that otherwise may be
released to Scotia Pacific free and clear of the Deed of Trust Lien will be
retained by the Timber Note Trustee subject to the Deed of Trust Lien and, if a
Trapping Event is continuing on the next Timber Note Payment Date, applied to
the payment of principal on the Timber Notes. The Timber Note Indenture defines
a "Trapping Event" as any of the following: (i) Events of Default (as defined)
consisting of payment defaults on the Timber Notes, the bankruptcy or insolvency
of Scotia Pacific or the sale or other disposition by Pacific Lumber of any
capital stock of Scotia Pacific (other than in connection with a merger or
similar transaction permitted by the Services Agreement), (ii) Events of Default
other than payment defaults in respect of certain covenants, including, among
others, those relating to title to the Mortgaged Property, the Deed of Trust
Lien, the incurrence of indebtedness and the maintenance of a separate corporate
identity by Scotia Pacific, provided that such Event of Default has, or, with
the passage of time, would have, a Material Adverse Effect (as defined in the
Timber Note Indenture), (iii) an acceleration of the Timber Notes which has not
been rescinded, or (iv) an Event of Default arising from the failure of Scotia
Pacific to comply with a variety of covenants, representations or warranties
shall have occurred and be continuing, and the Trustee, within the previous 60
days, has commenced a consent solicitation for an election to accelerate the
Timber Notes by reason of such Event of Default.
Description of Mortgaged Property
The Timber Notes are secured by a lien on, and security interest in, the
Scotia Pacific Timberlands (subject to the Pacific Lumber Harvest Rights). The
Timber Notes are also secured by (i) an assignment of the rights of Scotia
Pacific under the Master Purchase Agreement, the Services Agreement, and certain
other contracts, (ii) a lien on all amounts on deposit in the Collection
Account, the Payment Account and the Liquidity Account, and (iii) a lien on
certain data processing hardware and software utilized in the preparation of
THPs (subject to certain rights of concurrent use with Pacific Lumber) and
certain other assets.
Certain Covenants
The Timber Note Indenture contains certain covenants including, among
others, limitations on the incurrence of liens by Scotia Pacific, a prohibition
on the incurrence of additional indebtedness for borrowed money by Scotia
Pacific, limitations on transactions with Affiliates (as defined in the Timber
Note Indenture) and a limit on Scotia Pacific's business activities to the
management, sale or maintenance of the Scotia Pacific Timberlands and Scotia
Pacific's timber, the issuance and sale of the Timber Notes and actions
reasonably incidental to the foregoing.
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MAXXAM
PARENT COMPANY
MAXXAM's outstanding public indebtedness, consisting of the Subordinated
Debentures and the Reset Notes, will be redeemed with the proceeds of the
Offering.
On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with
Custodial Trust Company providing for up to $25.0 million in borrowings by
MAXXAM. No borrowings were outstanding under the Custodial Trust Agreement as of
September 30, 1996. Any amounts borrowed would be secured by Kaiser Common Stock
owned by MAXXAM (or such other marketable securities acceptable to the lender)
with an initial market value (as defined therein) of approximately three times
the amount borrowed. Borrowings under the Custodial Trust Agreement would bear
interest at the prime rate plus 1/2% per annum. The Custodial Trust Agreement
provides for a revolving credit arrangement during the first year of the
agreement. Any borrowings outstanding on the first anniversary date of the
agreement convert into a term loan maturing on the second anniversary date of
the agreement. MAXXAM is entitled to dividends and to exercise voting rights in
respect of pledged shares so long as no Event of Default (as defined) has
occurred. Other than for certain specified liens, the Custodial Trust Agreement
prohibits Liens (as defined) on Kaiser Common Stock owned by MAXXAM except with
the consent of Custodial Trust Company. Any borrowings under the Custodial Trust
Agreement would rank pari passu in right and priority of payment with the MAXXAM
Guaranty.
ALUMINUM OPERATIONS
As of September 30, 1996 Kaiser's principal indebtedness consisted of the
$225.0 million principal amount of KACC's 9 7/8% Senior Notes due 2002, the
$400.0 million principal amount of KACC's 12 3/4% Senior Subordinated Notes due
2003, and KACC's borrowings under the 1994 KACC Credit Agreement. On October 23,
1996, KACC completed an offering of $175.0 million principal amount of 10 7/8%
Senior Notes due 2006. For information regarding this indebtedness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," Note 4 to the Audited Consolidated Financial
Statements of Kaiser and Note 6 to the Unaudited Consolidated Financial
Statements of Kaiser. On December 23, 1996, KACC completed an offering of $50.0
million principal amount of 10 7/8% Series C Senior Notes due 2006. For
information regarding this indebtedness, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial
Condition and Investing and Financing Activities -- Aluminum Operations."
FOREST PRODUCTS OPERATIONS
See "-- The Company" for a description of the principal indebtedness of
MAXXAM's forest products operations.
REAL ESTATE AND OTHER OPERATIONS
The principal indebtedness of MAXXAM's real estate and other operations
consists of the 11% Senior Secured Extendible Notes of SHRP, Ltd., the RTC
Portfolio Loan and the MCOP Credit Agreement. For information regarding this
indebtedness, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations of MAXXAM -- Financial Condition and Investing and
Financing Activities -- Real Estate and Other Operations" and Note 4 to the
Audited Consolidated Financial Statements of MAXXAM.
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DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued under the Indenture, among the Company, as
issuer, MAXXAM, as Guarantor, and First Bank National Association, as Trustee
(the "Trustee"). Except as otherwise indicated below, the following summary
applies to both the Old Notes and the New Notes. As used herein, the term
"Notes" shall mean the Old Notes and the New Notes unless otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of Additional
Interest, which, except in certain limited circumstances, terminates upon
consummation of the Exchange Offer, and (iii) will not bear any legends
restricting transfer thereof. The New Notes will be issued solely in exchange
for an equal principal amount of Old Notes. As of the date hereof, $130.0
million aggregate principal amount of Old Notes is outstanding. See "The
Exchange Offer."
The following statements relating to the Notes, the Indenture and the
Registration Rights Agreement are summaries of certain provisions thereof and
are subject to the detailed provisions of the Indenture and the Registration
Rights Agreement, which documents have been filed as exhibits to this
Registration Statement, to which reference is hereby made for a complete
statement of such provisions. Wherever particular provisions of the Indenture or
terms defined therein are referred to herein, such provisions or definitions are
incorporated by reference and the summaries are qualified in their entirety by
such reference. Capitalized terms used without definition have the respective
meanings ascribed to them in the Indenture, certain of which are described below
under "Certain Definitions." All parenthetical section references are to
sections of the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on August 1, 2003. Interest on the Notes will be
payable semiannually in arrears on February 1 and August 1 of each year,
commencing on February 1, 1997, at the rate per annum stated on the cover page
of this Prospectus. Interest will be payable to the persons who are registered
holders of the Notes at the close of business on the January 15 or July 15
immediately preceding such interest payment date. The Trustee will authenticate
and deliver Notes for original issuance in an aggregate principal amount of
$130,000,000. The Company will pay interest on overdue principal and, to the
extent permitted by applicable law, interest at the rate borne by the Notes.
Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months. Principal, premium and interest will be payable at the
office of the Trustee but, at the option of the Company, interest may be paid by
check mailed to the registered holders at their registered addresses. The Notes
will be transferable and exchangeable at the office of the Trustee and will be
issued in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple thereof.
OPTIONAL REDEMPTION
On and after August 1, 2000, the Notes may be redeemed at the option of the
Company, in whole or in part, on not less than 15 days (or 30 days if legally
required by The Depository Trust Company) but not more than 60 days notice to
each holder of the Notes to be redeemed, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid interest
to (but not including) the date of redemption, if redeemed during the 12-month
period commencing August 1 of the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------------- ----------
<S> <C>
2000....................... 106.00%
2001....................... 103.00%
2002....................... 100.00%
</TABLE>
In the case of a partial redemption, the Trustee will allocate the Notes to
be redeemed on a pro rata basis.
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Notwithstanding the foregoing, at any time prior to August 1, 2000, the
Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price plus accrued and unpaid interest to (but not including) the
date of redemption. In addition, until August 1, 2000, upon any Public Equity
Offering with respect to the Company or MGI (or any successor to MGI pursuant to
the Indenture provision described below under "-- Security -- Merger by MGI")
the Notes may be redeemed at the option of the Company in part, on not less than
15 days (or 30 days if legally required by The Depository Trust Company) but not
more than 60 days notice to each holder of the Notes to be redeemed, with cash
in the amount of the proceeds of such Public Equity Offering, at the Call Price,
plus accrued and unpaid interest to (but not including) the date of redemption;
provided, however, that after any such redemption the aggregate principal amount
of Notes outstanding must equal at least 65% of such principal amount upon
consummation of the Offering.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
RANKING
The Indebtedness evidenced by the Notes will not be expressly subordinated
to any other Indebtedness of the Company and will rank pari passu in right and
priority of payment with any future senior indebtedness of the Company. The
Notes will be general obligations of the Company secured by the Pledged MGI
Shares and the Intercompany Note. In addition, under certain circumstances, the
Company will be obligated to further secure payment of the Notes by pledging up
to 16,055,000 Kaiser Shares that may be released from the Lien of the MGI
Indenture pursuant to release provisions thereof by reason of payment in full of
the MGI Notes, defeasance of the MGI Notes pursuant to Article 8 of the MGI
Indenture, or early retirement of a portion of the MGI Notes resulting in a
release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant
to the provision of the MGI Indenture described in the first paragraph under
"Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser
Shares." However, collateral released from the Lien of the MGI Indenture need
not be pledged to secure the Notes if it is pledged to secure indebtedness that
refinances the MGI Notes.
Substantially all of the Company's consolidated assets will be owned
directly by its Subsidiaries, including MGI, Pacific Lumber, Britt and Scotia
Pacific. As of September 30, 1996, MGI, Pacific Lumber, Britt and Scotia Pacific
had approximately $772.9 million aggregate principal amount of outstanding
indebtedness which effectively will be senior in right of payment to the Notes,
although no such indebtedness is guaranteed by MAXXAM.
GUARANTY
Payment of principal and interest and premium, if any, on the Notes will be
guaranteed on a senior unsecured basis by MAXXAM. The Indenture will provide
that MAXXAM shall not consolidate with or merge with or into (whether or not
MAXXAM is the surviving person), or sell all or substantially all of its assets
to, another corporation, person or entity whether or not affiliated with MAXXAM
unless (i) the person formed by or surviving any such consolidation or merger
(if other than MAXXAM) or that acquires such assets assumes all the obligations
of MAXXAM pursuant to a supplemental indenture, in form reasonably satisfactory
to the Trustee, under the Notes and the Indenture and (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists.
SECURITY
Collateral
The Notes will be secured by a first priority pledge of: (i) all
outstanding shares of Stock of MGI now owned or from time to time acquired by
the Company, (ii) all dividends distributed with respect to and property
received in exchange for any of the Pledged MGI Shares other than any Salmon
Creek Distributions, (iii) the Intercompany Note and (iv) all payments of
interest on and principal of the Intercompany Note. If and only if any Released
Kaiser Shares are released from the Lien of the MGI Indenture, the Company shall
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pledge, and thereupon the Notes will be further secured by a first priority Lien
on, certain of such Released Kaiser Shares as follows: (a) one hundred percent
(100%) of the first 8,027,500 Released Kaiser Shares shall be pledged by the
Company as additional Collateral securing the Notes; and (b) a number of
additional Released Kaiser Shares in excess of those required to be pledged
pursuant to clause (a) shall be pledged by the Company as additional Collateral
securing the Notes in an amount equal to (1) 8,027,500 times (2) a fraction, the
numerator of which is the aggregate principal amount of Notes outstanding on the
date such Released Kaiser Shares are released from the Lien of the MGI
Indenture, and the denominator of which is the aggregate principal amount of
Notes outstanding on the Issue Date. To the extent that Released Kaiser Shares
are comprised of securities or other property substituted or adjusted for Kaiser
Shares (as contemplated by clause (i) or clause (ii) of the definition of
Released Kaiser Shares), the kind and amount of Released Kaiser Shares to be
pledged will be appropriately adjusted to take account of the kind and amount of
such securities or other property so substituted for each Kaiser Share. All
Kaiser Shares released from the Lien of the MGI Indenture that are not required
to be so pledged shall be released to the Company.
All dividends distributed with respect to, and property received in
exchange for, any of the Released Kaiser Shares pledged to secure the Notes
shall also be pledged as additional Collateral. In addition, if any cash
proceeds of Kaiser Shares referred to in clause (i) of the definition of Kaiser
Share Cash Equivalents are released from the Lien of the MGI Indenture as a
result of such cash proceeds not having been used to purchase MGI Notes at a
price at least equal to the respective Call Prices (as defined in the MGI
Indenture) of the MGI Notes (see "Principal Indebtedness -- MGI Notes -- Offers
to Purchase MGI Notes with Certain Proceeds of Collateral") or as a result of
the payment in full or defeasance of the MGI Notes, such cash proceeds are
required to be pledged as Collateral under the Indenture. The Pledged MGI Shares
and other Collateral (including Released Kaiser Shares, if any, that become
Collateral) will be subject to release from the Lien of the Indenture from time
to time on the basis described below. Notwithstanding the foregoing, in no event
will the aggregate of the number of Released Kaiser Shares required to be
pledged as Collateral and the number of Kaiser Share Cash Equivalents resulting
from the pledge of cash proceeds of Kaiser Shares referred to in the second
sentence of this paragraph exceed the number of Released Kaiser Shares that
would be required to be pledged if no such cash proceeds were pledged as
Collateral under the Indenture. To the extent that collateral released from the
Lien of the MGI Indenture is required to be pledged to secure the Notes, the
Company has covenanted to seek the release of such collateral from the Lien of
the MGI Indenture promptly after it becomes eligible for such release pursuant
to the terms of the MGI Indenture.
The Indenture will permit MGI to refinance, in whole or in part, the MGI
Notes in an aggregate principal amount up to the then outstanding principal
amount thereof, not to exceed $225.7 million, plus related expenses and
redemption premiums, if any, and pledge the Kaiser Shares and other collateral
under the MGI Indenture to secure such refinancing Indebtedness, provided that
such refinancing Indebtedness contains provisions for release of collateral from
the Lien thereunder that (except for the maturity date of such refinancing
Indebtedness) are no less favorable in any material respect (taken as a whole)
to the Holders than the release provisions of the MGI Indenture. Kaiser Shares
and other collateral released from the Lien of the MGI Indenture pledged to
secure such refinancing Indebtedness will not be deemed to be Released Kaiser
Shares for any purpose of the Indenture.
There can be no assurance that any Kaiser Shares will become Collateral
securing the Notes at any time. Released Kaiser Shares will be pledged under the
Indenture only in certain limited circumstances involving early retirement of
MGI Notes, and then only on satisfaction of certain conditions specified in the
MGI Indenture. The MGI Notes mature in 2003 concurrently with the maturity of
the Notes, and there can be no assurance that any of the MGI Notes will be
repurchased or redeemed prior to maturity. Moreover, if the MGI Notes are
refinanced and the refinancing Indebtedness matures after the maturity of the
Notes, it is less likely that any substantial number of Kaiser Shares will be
pledged to secure the Notes. Any early retirement of the MGI Notes will be at
the option of MGI or, with limited exceptions, as a result of transactions which
neither the Company nor any of its Subsidiaries is required to enter into or
consummate.
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Voting and Foreclosure
The Indenture provides that, unless a Notice of Acceleration has been
delivered and is in effect, the Company may exercise all voting and other
corporate rights pertaining to the Pledged Shares for any purpose. If at the
time a Notice of Acceleration is in effect the Trustee delivers written notice
to the Company of its intention to exercise such voting and other corporate
rights, all such rights of the Company will cease and all such rights will
become vested in the Trustee until such Notice of Acceleration has been
rescinded.
The Indenture provides that, if a Notice of Acceleration has been delivered
and remains in effect, the Trustee may, subject to the terms of the Indenture,
foreclose upon and sell the Collateral and seek any other available remedy with
respect thereto. The Indenture provides that, upon such foreclosure, the Trustee
may require the Company to use its best efforts to cause such Pledged Shares to
be registered pursuant to an effective registration statement filed in
accordance with the Securities Act.
If voting rights with respect to the Pledged Shares were to become vested
in the Trustee, or if the Trustee were to foreclose on the Collateral, such
vesting or foreclosure, as the case may be, could constitute a change of control
under instruments governing certain indebtedness of MGI and of Pacific Lumber
and could constitute a change of control under instruments governing certain
indebtedness of Kaiser. Such occurrence would enable the holders of such
indebtedness to require the issuer to repurchase such indebtedness. See "Risk
Factors -- Security for the Notes."
Deposit of Trust Moneys into Accounts
The Indenture requires all money and Cash Equivalents required to
constitute Collateral and to be delivered to the Trustee or received by the
Trustee, whether pursuant to the Indenture, the Uniform Commercial Code, other
applicable law or otherwise ("Trust Moneys"), to be deposited in one of four
accounts: the Cash Collateral Offer Account, the Cash Collateral Public Equity
Offering Account, the Cash Collateral Default Account and the Cash Collateral
Account (collectively, the "Accounts"). The Trustee will invest, apply, deposit
into another Account or release, as the case may be, Trust Moneys in accordance
with the terms of the Indenture, as described below. All right, title and
interest in and to the Accounts will vest in the Trustee, who will have sole
dominion and control over the Accounts, and only the Trustee will have any right
of withdrawal therefrom.
Pursuant to the Indenture, the Company may direct the Trustee in writing
to, and the Trustee will, except as otherwise required under the Indenture,
invest any Trust Moneys held in the Accounts in Cash Equivalents and liquidate
Cash Equivalents held in the Accounts into money. Interest and other amounts
earned on an Account will be held as part of the Collateral, will be credited to
the Account in which the principal on which they are earned is deposited, and
will be transferred between Accounts together with and in the same manner as the
principal on which they are earned.
Net Proceeds of Pledged Share Sales. The Indenture provides that, upon the
release of any Pledged Shares and the receipt of any Net Proceeds of a Pledged
Share Sale in respect of such Pledged Shares, the Company will deliver or cause
to be delivered to the Trustee, for deposit into the Cash Collateral Offer
Account (for application as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral"), all such Net Proceeds so received that
are money or Cash Equivalents; provided that if such Pledged Share Sale is also
a Public Equity Offering and such receipt occurs prior to August 1, 2000, all
such Net Proceeds so received that are money or Cash Equivalents will instead be
deposited into the Cash Collateral Public Equity Offering Account. See "-- Net
Proceeds of Certain Public Equity Offerings." In addition, the Indenture
provides that, if money is released from the Lien of the MGI Indenture that is
required to be pledged to secure the Company's obligations under the Indenture,
the Company will deliver or cause to be delivered such money to the Trustee for
deposit into the Cash Collateral Offer Account for application as described
below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral."
Net Proceeds of Primary Share Sales. Primary Share Sales by MGI will
constitute Asset Sales under the Indenture and the cash portion of the proceeds
thereof will qualify as Net Cash Proceeds of an Asset Sale under the Indenture,
except to the extent Net Proceeds of a Primary Share Sale by MGI are distributed
on
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the Pledged MGI Shares. The Indenture provides that, upon the receipt of any Net
Proceeds of a Primary Share Sale by MGI or by Kaiser, that were dividended or
distributed on Pledged MGI Shares or on Pledged Kaiser Shares, as the case may
be, the Company will deliver or cause to be delivered to the Trustee, for
deposit into the Cash Collateral Offer Account (for application as described
below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"),
all such Net Proceeds so received that are money or Cash Equivalents; provided
that if such Primary Share Sale is also a Public Equity Offering and such
receipt occurs prior to August 1, 2000, all such Net Proceeds so received that
are money or Cash Equivalents will instead be deposited into the Cash Collateral
Public Equity Offering Account. See "-- Net Proceeds of Certain Public Equity
Offerings."
Certain Non-Cash Amounts. If, following receipt by the Company of (i) Net
Proceeds, other than money or Cash Equivalents, of either (A) a Primary Share
Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI
Shares or on Pledged Kaiser Shares, as the case may be, or (B) a Pledged Share
Sale in respect of any Pledged Shares or (ii) Extraordinary Distributions on any
Pledged Shares in a form other than money or Cash Equivalents, all or any
portion of such Net Proceeds or Extraordinary Distributions at the time subject
to the Lien of the Indenture are disposed of for money or Cash Equivalents,
pursuant to the provisions described below in clause (x) under "-- Release of
Non-Cash Net Proceeds and Extraordinary Distributions," the Company will deliver
or cause to be delivered to the Trustee, for deposit into the Cash Collateral
Offer Account (for application as described below under "-- Offers to Purchase
Notes with Certain Proceeds of Collateral"), all money and Cash Equivalents
received in consideration of such disposition; provided that if any such Primary
Share Sale or Pledged Share Sale is also a Public Equity Offering and such
receipt occurs prior to August 1, 2000, all such money and Cash Equivalents will
instead be deposited into the Cash Collateral Public Equity Offering Account.
See "-- Net Proceeds of Certain Public Equity Offerings."
Extraordinary Distributions. The Indenture provides that, upon receipt by
the Company of an Extraordinary Distribution on any Pledged Shares, the Company
will deliver or cause to be delivered to the Trustee, for deposit into the Cash
Collateral Offer Account (for application as described below under "-- Offers to
Purchase Notes with Certain Proceeds of Collateral"), all amounts so received
that are money or Cash Equivalents.
Certain Exempt Distributions. The Company will deliver or cause to be
delivered to the Trustee all Exempt Distributions made on any Pledged Shares the
right to receive and retain which are vested in the Trustee under the provisions
described below under "-- Dividends," for deposit into the Cash Collateral
Default Account. Any Trust Moneys held in the Cash Collateral Default Account
will be released from the Lien of the Indenture and, as the Company directs in
writing, applied by the Trustee to cure any outstanding Interest Payment
Defaults in respect of the Notes and to pay the principal due on the Notes at
the final maturity thereof. If at any time following the deposit of Trust Moneys
into the Cash Collateral Default Account, no Event of Default, Collateral
Default or Interest Payment Default is continuing, any amounts in the Cash
Collateral Default Account will be deposited in the Cash Collateral Offer
Account, for application as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral."
Net Proceeds of Certain Public Equity Offerings. The Company will deliver
or cause to be delivered to the Trustee, for deposit into the Cash Collateral
Public Equity Offering Account, all Net Proceeds of a Public Equity Offering
that constitute Collateral, are money or Cash Equivalents and are received prior
to August 1, 2000. Following such receipt, the Company may elect, within 30 days
after such receipt, optionally to redeem Notes with all or any portion of such
Net Proceeds. If the Company so elects, such Net Proceeds (or such portion
thereof) will remain in the Cash Collateral Public Equity Offering Account for
application in accordance with the redemption provisions of the Indenture and
the Notes. If no such election is made by the Company within such election
period, all of such Net Proceeds will be deposited into the Cash Collateral
Offer Account for application as described below under "-- Offers to Purchase
Notes with Certain Proceeds of Collateral."
Cash Collateral Account. The Indenture provides that the Trustee will
deposit into the Cash Collateral Account any money or Cash Equivalents (i)
eligible for transfer out of the Cash Collateral Offer Account pursuant to the
provisions described below under "-- Offers to Purchase Notes with Certain
Proceeds of
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Collateral" or (ii) constituting Trust Moneys whose disposition by the Trustee
upon receipt thereof is not otherwise provided for.
Intercompany Note
The Indenture provides that, upon receipt by the Company of payments of
interest on the Intercompany Note, the Company will deliver or cause to be
delivered to the Trustee, for deposit in the Cash Collateral Account (for
application as discussed below under "-- Release of Trust Moneys in the Cash
Collateral Account," including to pay interest on the Notes) all amounts so
received. Upon receipt by the Company of any payment or prepayments of principal
of the Intercompany Note, the Company will deliver or cause to be delivered to
the Trustee, for deposit in the Cash Collateral Offer Account (for application
as described below under "-- Offers to Purchase Notes With Certain Proceeds of
Collateral") all amounts so received. Notwithstanding the foregoing, prepayments
of principal of the Intercompany Note that do not result in the principal amount
of the Intercompany Note being reduced below the outstanding principal amount of
the Notes shall be released from the Lien of the Indenture and paid over to the
Company.
Dividends
The Indenture provides that, except during the continuance of an Event of
Default, Interest Payment Default or Collateral Default, the Company may receive
and retain any and all Exempt Distributions made on the Pledged Shares. Upon the
occurrence and during the continuance of an Event of Default, Interest Payment
Default or Collateral Default, all rights to receive and retain Exempt
Distributions made on the Pledged Shares during such continuance will become
vested in the Trustee, and the money and/or Cash Equivalent portion, if any, of
any such Exempt Distributions so received and retained will be deposited into
the Cash Collateral Default Account. If any such Event of Default, Interest
Payment Default or Collateral Default, as the case may be, is cured or waived
and no other Event of Default, Interest Payment Default or Collateral Default is
continuing, all such rights to receive and retain Exempt Distributions will
revert to the Company. Any Trust Moneys in the Cash Collateral Default Account
that the Trustee receives during the continuance of an Event of Default,
Interest Payment Default or Collateral Default may be released from the Lien of
the Indenture and applied, at the direction of the Company, to cure any
outstanding Interest Payment Defaults and to the payment of principal due on the
Notes at the final maturity thereof. If, at the time at which all Events of
Default, Interest Payment Defaults and Collateral Defaults have been cured or
waived and no Events of Default, Interest Payment Defaults or Collateral
Defaults are continuing, there remain Trust Moneys in the Cash Collateral
Default Account, the Trustee will transfer such remaining Trust Moneys into the
Cash Collateral Offer Account, and such Trust Moneys (together with additional
amounts in respect of the non-money, non-Cash Equivalent portion, if any, of any
Exempt Distribution received and retained by the Trustee) will, subject to the
terms of the Indenture, be subjected to the requirement that the Company make an
offer to purchase Notes for at least 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to (but not including) the date of
purchase. See "-- Offers to Purchase Notes with Certain Proceeds of Collateral."
The Indenture provides that the Trustee will at all times receive and
retain as Collateral any Extraordinary Distributions on any of the Pledged
Shares. The money and/or Cash Equivalent portion, if any, of any Extraordinary
Distribution will be deposited into the Cash Collateral Offer Account, and such
Trust Moneys (together with additional amounts in respect of the non-money or
non-Cash Equivalent portion, if any, of any Extraordinary Distribution) will,
subject to the terms of the Indenture, be subjected to the requirement that the
Company make an offer to purchase Notes for at least 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to (but not including)
the date of purchase. See "-- Offers to Purchase Notes with Certain Proceeds of
Collateral."
Release for Pledged Share Sales
The Indenture permits the Company to obtain a release of Pledged Shares in
order to effect a Pledged Share Sale; provided that (i) no Event of Default,
Collateral Default or Interest Payment Default has occurred and is continuing or
would result from such release, (ii) an Officers' Certificate is delivered to
the
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Trustee by the Company so stating and stating that such release is otherwise
permitted under the relevant Indenture provision and (iii) the Company agrees to
subject money in an amount equal to the amount of Net Proceeds of such Pledged
Share Sale received by the Company, including all Trust Moneys in the Accounts
to the extent required under Article 10 of the Indenture, to an offer to
purchase Notes in accordance with the provisions described below under
"-- Offers to Purchase Notes with Certain Proceeds of Collateral" (or, if the
Pledged Share Sale is a Public Equity Offering and the Company so elects as
described above under "-- Deposit of Trust Moneys into Accounts -- Net Proceeds
of Certain Public Equity Offerings" optionally to redeem Notes in accordance
with the redemption provisions of the Indenture and the Notes).
Release of Non-Cash Net Proceeds and Extraordinary Distributions
The Indenture entitles the Company to obtain a release from the Lien of the
Indenture of non-money and non-Cash Equivalent (i) Net Proceeds of (A) a Primary
Share Sale that were distributed on Pledged Shares or (B) a Pledged Share Sale
and (ii) Extraordinary Distributions on any Pledged Shares as follows: (w) if
all or any portion of such Net Proceeds or Extraordinary Distributions are
disposed of in one or more transactions (a "Monetization") for consideration
consisting of money or Cash Equivalents (but which may also include indemnities)
and the Company delivers or causes to be delivered to the Trustee, for deposit
into the Cash Collateral Offer Account or the Cash Collateral Public Equity
Offering Account, as applicable, all of the money or Cash Equivalents received
in such Monetization, then all or such portion of such Net Proceeds or
Extraordinary Distributions will be released (simultaneously with such
Monetization) from the Lien of the Indenture; (x) if, in connection with an
offer to purchase Notes as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral," the Company delivers to the Trustee for
deposit into the Cash Collateral Offer Account money in the amount, if any, to
be deposited into such Account as described in the first sentence of the second
paragraph under such caption, then (1) if the purchase price at which such offer
to purchase Notes is made equals or exceeds the Call Price for the Notes, plus
accrued and unpaid interest, if any, to (but not including) the purchase date
for such offer, all of such Net Proceeds or Extraordinary Distributions will be
released, simultaneously with such deposit, from the Lien of the Indenture, and
(2) if the preceding clause (1) is not applicable, a portion of such Net
Proceeds or Extraordinary Distributions, designated by the Company, not greater
in value (at the time such Net Proceeds or Extraordinary Distributions became
Collateral) than the amount of money so delivered by the Company, will be
released, simultaneously with such deposit, from the Lien of the Indenture; (y)
if, in connection with an optional redemption following the receipt of Net
Proceeds of a Public Equity Offering that constitute Collateral, the Company
delivers to the Trustee, for deposit into the Cash Collateral Public Equity
Offering Account, money in the amount specified below in the second sentence
under the caption "-- Release of Trust Moneys to Fund Optional Redemptions,"
then a portion of such Net Proceeds, designated by the Company, not greater in
value (at the time it became Collateral) than the amount of money so delivered
by the Company will be released, simultaneously with such deposit, from the Lien
of the Indenture; and (z) if, in connection with an optional redemption referred
to in the fourth paragraph under "-- Offers to Purchase Notes with Certain
Proceeds of Collateral," the Company delivers to the Trustee for deposit into
the Cash Collateral Offer Account money in the amount, if any, to be deposited
in such Account as described in such paragraph, then a portion of such Net
Proceeds or Extraordinary Distributions, designated by the Company, not greater
in value (at the time such Net Proceeds or Extraordinary Distributions became
Collateral) than the amount of money so delivered by the Company will be
released, simultaneously with such deposit, from the Lien of the Indenture.
Offers to Purchase Notes with Certain Proceeds of Collateral
If at any time the sum of (i) Trust Moneys deposited in the Cash Collateral
Offer Account, plus (ii) the value (as reasonably determined by the Board of
Directors) when it became Collateral of non-money and non-Cash Equivalent Net
Proceeds, Extraordinary Distributions and Exempt Distributions then required to
constitute Collateral, in each case that have not previously been (and are not
being) subjected to an offer to purchase Notes pursuant to the provisions
described under this caption or (in the case of Net Proceeds of a Public Equity
Offering) applied to an optional redemption of Notes, exceed $10,000,000, the
Company will be required to apply U.S. Legal Tender to make an irrevocable and
unconditional (subject to applicable law)
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offer to purchase Notes (provided that the Company may in its discretion make
such an offer before such $10,000,000 threshold is met), for a purchase price of
not less than 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to (but not including) the date of purchase, and having an
aggregate purchase price equal to the sum of the amounts included in items (i)
and (ii) above (to the extent not subjected or applied (or being subjected or
applied) as aforesaid), as of the close of business on the second Business Day
preceding the mailing of written notice, to the Trustee and Holders, as provided
in the Indenture, of the terms of such offer (the "Offer Amount"); provided that
no Net Proceeds, Exempt Distributions, Extraordinary Distributions or other
Trust Moneys will be subjected to more than one such offer (or will be subjected
to any such offer to the extent they have been applied to an optional redemption
(or are being so applied) in accordance with the provision described in the
fourth paragraph under this description of Offers to Purchase Notes with Certain
Proceeds of Collateral), and no Net Proceeds of a Public Equity Offering that
have been applied to an optional redemption (or that are being so applied or
that may be so applied by an election by the Company pursuant to the provision
described below under "Release of Trust Moneys to Fund Optional Redemptions" the
time for which has not expired) shall be required to be subjected to such an
offer. Any such offer will be made under procedures substantially the same as
those described below under "Change of Control"; provided that, if the Offer
Amount is insufficient to fund an offer to purchase all of the outstanding Notes
tendered into such offer, such offer may be an offer to purchase Notes on a pro
rata basis.
The Indenture provides that the Company will, prior to the scheduled time
of purchase pursuant to any such offer, deliver to the Trustee, for deposit into
the Cash Collateral Offer Account, an amount of money equal to the amount, if
any, by which the aggregate purchase price of all Notes (or portions thereof) to
be purchased pursuant to such offer (i.e., the lesser of (A) the aggregate
purchase price of all Notes duly tendered and not withdrawn and (B) the Offer
Amount) exceeds the amount of money on deposit in the Cash Collateral Offer
Account. Following such delivery, but in any event prior to the time of
purchase, the Trustee will release from the Lien of the Indenture and deliver to
the paying agent for such offer money from such Account in an amount equal to
the aggregate purchase price of the Notes to be purchased pursuant to such
offer. If the price at which such offer to purchase Notes is made is less than
the Call Price of the Notes plus accrued and unpaid interest, if any, thereon to
(but not including) such purchase date, any Trust Moneys in the Cash Collateral
Offer Account, to the extent not actually utilized in such offer, will remain
Collateral subject to the Lien of the Indenture. If, however, such purchase
price is equal to at least the Call Price of the Notes as of the purchase date
for such offer plus accrued and unpaid interest, if any, thereon to (but not
including) such purchase date, any such Trust Moneys not actually utilized to
purchase Notes in such offer will be released from the Lien of the Indenture.
Any moneys included in the Offer Amount that remain subject to the Lien of the
Indenture following completion of an offer will be deposited into the Cash
Collateral Account and may be applied, as directed by the Company, to redeem the
Notes (if the Company is otherwise permitted to do so under the Indenture) or to
repurchase Notes on the open market or otherwise. See "-- Release of Trust
Moneys in the Cash Collateral Account."
The Company will comply with all applicable tender offer rules (including,
without limitation, Sections 13(e) and 14(e) of the Exchange Act and the rules
and regulations promulgated pursuant thereto) in connection with any offers to
purchase Notes pursuant to the foregoing provisions.
Notwithstanding the foregoing provisions, the Company shall not be required
to make an offer to purchase Notes pursuant to the foregoing provisions if and
to the extent that, prior to the time when the Company would have been required
to make such offer, the Company shall have, by written notice to the Trustee,
(1) elected to apply all or any portion of the Offer Amount (such Offer Amount
to be computed as if the date of delivery of such written notice to the Trustee
were the date of mailing of a notice of such an offer) to a then permitted
optional redemption of the Notes, in whole or in part, at a redemption price
equal to not less than 101% of the principal amount thereof plus accrued and
unpaid interest, if any, thereon to (but not including) the redemption date and
(2) notified the Trustee of the redemption date and the aggregate principal
amount of Notes to be redeemed. Following the giving of such written notice, the
Company shall, prior to the scheduled time for redemption, deliver to the
Trustee, for deposit into the Cash Collateral Offer Account, an amount of money
equal to the amount, if any, by which the aggregate redemption price of all
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Notes called for redemption, including accrued and unpaid interest, if any,
thereon to (but not including) the date of redemption, exceeds the amount of
money on deposit in the Cash Collateral Offer Account. Following such delivery,
but in any event on or prior to the scheduled time for redemption, the Trustee
will release from the Lien of the Indenture and deliver to the paying agent for
such redemption an amount of money from the Cash Collateral Offer Account equal
to the aggregate redemption price of all Notes called for redemption, including
accrued and unpaid interest, if any, thereon to (but not including) the date of
redemption.
Release of Trust Moneys to Fund Optional Redemptions
If the Company receives Net Proceeds from a sale of Pledged Shares or from
a Primary Share Sale that become subject to the Lien of the Indenture, and if
such sale constitutes a Public Equity Offering and the Company is entitled at
such time to effect an optional redemption in part of Notes pursuant to the
Indenture and the Notes with such Net Proceeds, then the Company may elect, by
written notice to the Trustee delivered within 30 days after it receives such
Net Proceeds, to apply all or any portion of such Net Proceeds to such an
optional redemption. The Indenture provides that the Company will, prior to the
scheduled time for redemption established by the Company, deposit into the Cash
Collateral Public Equity Account an amount of money equal to the amount, if any,
by which the aggregate redemption price of all Notes called for redemption,
including accrued and unpaid interest, if any, thereon to (but not including)
the date of redemption, exceeds the amount of money on deposit in the Cash
Collateral Public Equity Offering Account. Following such delivery, but in any
event prior to the time of redemption, the Trustee will release from the Lien of
the Indenture and deliver to the paying agent for such redemption an amount of
money from the Account equal to such aggregate redemption price.
Release and Substitution of Pledged Kaiser Shares
The provisions described under this caption will be applicable only at such
time, if any, as any Kaiser Shares or proceeds thereof are included in the
Collateral.
The Indenture contains a provision entitling the Company to a release of
any Pledged Kaiser Shares from the Lien of the Indenture at any time and from
time to time if: (i) no Event of Default, Collateral Default or Interest Payment
Default is continuing or would result from such release, (ii) an Officers'
Certificate is delivered to the Trustee by the Company so stating and stating
that such release is otherwise permitted under such provision of the Indenture
and (iii) there remains as Collateral, immediately subsequent to any such
release, a number of Pledged Kaiser Shares equal to 16,055,000 multiplied by a
fraction, the numerator of which is equal to the sum of (x) the aggregate
principal amount of Notes outstanding on the date of such release, plus (y)
one-half of the difference obtained by subtracting the aggregate principal
amount of Notes outstanding on the date of such release from the aggregate
principal amount of Notes outstanding on the Issue Date, and the denominator of
which is the aggregate principal amount of Notes outstanding on the Issue Date.
To the extent that Pledged Kaiser Shares are comprised of securities or other
property substituted for Kaiser Shares (as contemplated by the definition of
Pledged Kaiser Shares), the kind and amount of Pledged Kaiser Shares to be
released will be appropriately adjusted to take account of the kind and amount
of such securities or other property so substituted for each Kaiser Share.
The Indenture contains a provision entitling the Company to a release of
any Trust Moneys from the Lien of the Indenture at any time or from time to time
if: (i) the conditions set forth in clauses (i) and (ii) of the preceding
paragraph are satisfied and (ii) there remains as Collateral immediately
subsequent to any such release, an amount of Trust Moneys equal to the greater
of (x) the Make-Whole Price with respect to the then outstanding principal
amount of the Notes (if such release occurs prior to August 1, 2000) and (y)
110% of the then outstanding principal amount of the Notes.
The Indenture entitles the Company to obtain a release of any Pledged
Kaiser Shares from the Lien of the Indenture at any time and from time to time
in connection with, and MAXXAM and the Company may permit Kaiser to effect, a
merger or consolidation of Kaiser (or a successor thereto pursuant to this
provision) into, or a sale or transfer of all or substantially all of the assets
of Kaiser in any transaction or series of related transactions to, another
person, or in connection with any other corporate reorganization of Kaiser
(other than
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a spin-off or other similar distribution of shares of Kaiser Stock to
stockholders of MAXXAM or the Company) (a "Kaiser Transaction") if: (i) no Event
of Default, Collateral Default or Interest Payment Default has occurred and is
continuing or would result from such release; (ii) the Trustee receives, as
Collateral subject to the Lien of the Indenture, in substitution for such
Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the
consideration received in respect of such Pledged Kaiser Shares pursuant to such
Kaiser Transaction; (iii) all holders of the common stock of Kaiser (or such
successor) shall (subject to proration, customary treatment of fractional
amounts and other similar adjustments) be entitled to receive substantially the
same consideration in respect of their shares of Kaiser common stock pursuant to
the terms of such Kaiser Transaction; and (iv) any non-money or non-Cash
Equivalent consideration received in respect of such Pledged Kaiser Shares
pursuant to such Kaiser Transaction shall have been registered under the
Securities Act to the extent required under federal securities law.
Merger by MGI
Notwithstanding any other provision of the Indenture, the Company may, at
any time and from time to time, permit MGI to merge or consolidate into, or sell
or transfer all or substantially all its assets in any transaction or series of
transactions to, any Restricted Subsidiary if: (i) the Trustee receives, as
Collateral subject to the Lien of the Indenture, the consideration distributed
to the Company on the Pledged MGI Shares in such transaction or transactions;
(ii) after giving effect to such transaction or transactions, the Collateral
includes at least a majority of the Voting Stock and outstanding equity
interests (on a fully diluted basis) of the person surviving such merger or
consolidation or to whom such transfer is made, in a proportion at least equal
to that in which the Voting Stock and outstanding equity interests of MGI were
included in the Collateral immediately prior to such transaction or
transactions; (iii) no Default exists or would exist immediately following such
transaction or transactions after giving effect thereto on a pro forma basis;
and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate stating that clause (iii) above is satisfied and stating that such
transaction or transactions are otherwise permitted under this provision of the
Indenture. Upon satisfaction of these requirements the Trustee will, if
requested, release the Pledged MGI Shares from the Lien of the Indenture to the
extent necessary to effect any transaction or transactions permitted under this
provision; provided that any person surviving such merger or consolidation, or
to whom such sale or transfer is made, will be deemed to be MGI for all purposes
of the Indenture and will be a Restricted Subsidiary, and any owner of shares of
Stock of such person that is either the Company or a Subsidiary of the Company
will grant a security interest (of like tenor to the security interest granted
on the Issue Date by the Company) in such shares of Stock and will expressly
assume, by supplemental indenture to the Indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations with
respect to such shares applicable to the Company with respect thereto under
Article 10 of the Indenture.
Notwithstanding any other provision of the Indenture, MGI may, at any time
and from time to time, merge or consolidate into, or transfer all or
substantially all its assets in any transaction or series of transactions to,
the Company.
Release of Trust Moneys in the Cash Collateral Account
The Indenture provides that the Company may obtain a release, at any time
or from time to time, of any Trust Moneys held in the Cash Collateral Account to
be applied, as the Company directs the Trustee in writing, to pay interest on
the Notes (but only to the extent that the Trust Moneys so applied were derived
from payments of interest on the Intercompany Note), to redeem Notes or to
purchase Notes, in the open market or otherwise.
Release upon Defeasance
Upon satisfaction by the Company of the conditions to termination of
certain of its obligations under the Indenture, as described below under
"Discharge of the Indenture," the Lien of the Indenture on all Collateral will
terminate and all of the Collateral will be released without any further action
on part of the Trustee or any other person.
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Application of Collateral upon a Notice of Acceleration and to Pay Certain
Trustee Fees
Notwithstanding any of the foregoing provisions, while a Notice of
Acceleration is in effect, the Trustee shall apply any Trust Moneys deposited in
the Accounts, first, to satisfy certain payment obligations to the Trustee under
the Indenture, second, to make payments to holders of outstanding Notes,
ratably, in respect of unpaid principal of and interest on the Notes and, third,
to the Company. In addition, the Trustee may at any time satisfy certain payment
obligations to it under the Indenture out of (i) Trust Moneys in the Cash
Collateral Account or (ii) if at such time no Trust Moneys are in the Cash
Collateral Account, Trust Moneys in the Cash Collateral Default Account.
CHANGE OF CONTROL
The Indenture provides that, upon the first Change of Control to occur
after the date of the Indenture (but not upon any subsequent Change of Control),
each holder of the Notes will have the right, at the holder's option, subject to
the terms and conditions of the Indenture, to require the Company to purchase
any or all of such holder's Notes, as described below, at a cash purchase price
equal to 101% of the principal amount of the Notes to be purchased, plus accrued
and unpaid interest, if any, to (but not including) the scheduled date of
purchase. For the definition of "Change of Control," see "-- Certain
Definitions" below.
A Change of Control under the Indenture could also constitute a change of
control under instruments governing $235.0 million principal amount of
indebtedness of Pacific Lumber (plus any indebtedness outstanding under the
$60.0 million Pacific Lumber Credit Agreement), approximately $225.7 million
principal amount ($201.0 million accreted value as of September 30, 1996) of
indebtedness of MGI represented by the MGI Notes and approximately $859.0
million principal amount of indebtedness of Kaiser (plus any outstanding
borrowings under the KACC 1994 Credit Agreement). A change of control under such
instruments would enable the holders of such indebtedness to require repurchase
of such indebtedness by Pacific Lumber, MGI and Kaiser. There can be no
assurance that the assets of Pacific Lumber, MGI and Kaiser would be sufficient
to enable them to effect such repurchases. In such event, there is a substantial
risk that the value of the Collateral represented by the Pledged MGI Shares and
any Pledged Kaiser Shares will have been substantially diminished or eliminated.
In addition, these provisions could have limited applicability in the event of a
leveraged buyout transaction initiated or supported by the Company, its
management or an affiliate of the Company or its management.
Within 30 days following the first occurrence of a Change of Control after
the date of the Indenture, the Company is obligated to mail a notice to the
Trustee, the Paying Agent and each holder of the Notes (and to beneficial owners
as required by applicable law, including, without limitation, the rules and
regulations of the Exchange Act) stating, among other things: (i) a brief
description of the Change of Control and the date thereof; (ii) the date on
which the Company is offering to purchase the Notes (the "Change of Control
Purchase Date"), which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed; (iii) the applicable purchase price offered
by the Company; (iv) the procedures that a holder must follow in order to have
its Notes purchased by the Company and a brief description of those rights; and
(v) the procedures for withdrawing a Change of Control Purchase Notice (as
defined below).
To accept the offer to purchase, each holder of Notes must deliver written
notice of the acceptance of such offer (a "Change of Control Purchase Notice")
to the Paying Agent prior to the close of business on the third Business Day
immediately preceding the Change of Control Purchase Date. The Change of Control
Purchase Notice shall state: (i) the name of the holder of the Notes and the
certificate numbers of the Notes to be delivered by the holder thereof for
purchase by the Company; (ii) the portion of the principal amount of Notes to be
purchased (which must be $1,000 or an integral multiple thereof) and (iii) that
such Notes are to be purchased by the Company pursuant to the applicable
provisions of the Notes and the Indenture.
Any Change of Control Purchase Notice may be withdrawn by a holder of Notes
by a written notice of withdrawal delivered to the Paying Agent on or prior to
the close of business on the Business Day next preceding the Change of Control
Purchase Date. The notice of withdrawal shall state the principal amount and the
certificate number(s) of the Note(s) as to which the withdrawal notice relates
and the principal amount, if any, which remains subject to a Change of Control
Purchase Notice.
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Payment by the Company for a holder's Notes for which a Change of Control
Purchase Notice has been delivered and not withdrawn, or a portion thereof, is
conditional upon delivery to the Paying Agent of the Notes described by the
holder in its Change of Control Purchase Notice.
The Company will comply with all applicable laws governing tender offers
(including, without limitation, the Exchange Act and the applicable rules and
regulations thereof) if a holder elects to exercise its option to have the
Company purchase any or all of its Notes under the circumstances described
herein.
CERTAIN DEFINITIONS
"Affiliate" of any person means (i) any person who, directly or indirectly,
is in control of, is controlled by or is under common control with such person
and (ii) any person who is a director or officer (A) of such person, (B) of any
subsidiary of such person or (C) of any person described in clause (i) above,
and shall be deemed to include any joint venture, partnership or other person
(other than a Subsidiary of the Company) in which the Company and/or its
Subsidiaries have an equity ownership interest equal to or greater than 5% and
in which one or more Affiliates of the Company has a direct or an indirect
equity ownership interest in excess of 5% therein other than by virtue of the
direct or indirect equity ownership in such joint venture, partnership or other
person held (in the aggregate) by the Company and/or one or more of its
Subsidiaries; provided, however, that the term "Affiliate" shall not include (i)
the Company or (ii) any Subsidiary of the Company so long as no Affiliate of the
Company has a direct or indirect equity ownership interest equal to or greater
than 5% in such Subsidiary other than by virtue of the direct or indirect equity
ownership in such Subsidiary held (in the aggregate) by the Company and/or one
or more of its Subsidiaries. For purposes of this definition, control of a
person means the power, direct or indirect, to direct or cause the direction of
the management and policies of such person whether by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing. The fact that an Affiliate of a person is a partner of a law firm
that renders services to such person or its Affiliates does not mean that the
law firm is an Affiliate of such person.
"Asset Sale" means any sale, transfer or other disposition (including,
without limitation, dispositions pursuant to any Taking, merger, consolidation
or sale and leaseback transactions), after the Issue Date, by the Company or any
of its Restricted Subsidiaries (other than Scotia Pacific so long as there are
any Timber Notes outstanding) to any person other than to the Company or any of
its Restricted Subsidiaries of (i) any Capital Stock or other ownership interest
of any of the Company's Restricted Subsidiaries (including sales, transfers or
other dispositions by such Restricted Subsidiary of its Capital Stock or other
ownership interest) or (ii) any other assets (other than any Capital Stock or
ownership interests in any Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries, other than sales, transfers or other dispositions of
assets in the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; provided, however, that the term Asset Sale
shall not include (A) the sale, transfer or other disposition of any assets or
Capital Stock or other ownership interest by the Company or its Restricted
Subsidiaries if such transaction would have been an Asset Sale in the absence of
this clause (A) to the extent the gross proceeds thereof (exclusive of
indemnities) do not exceed, in aggregate amount with all other such sales,
transfers or other dispositions after the Issue Date, $25,000,000 from and after
the Issue Date (such proceeds, to the extent non-cash, to be determined in good
faith by the Board of Directors), (B) the creation, incurrence, assumption or
existence of any Lien to the extent not prohibited by the provision described
below under "-- Certain Covenants -- Limitation on Liens," (C) any of the
transactions governed by the provision described below under "-- Successor
Company," (D) an exchange of assets, provided the assets received are to be used
in the lines of business of the Company or any of its Restricted Subsidiaries on
the Issue Date or reasonably related extensions of such lines and only to the
extent such exchange qualifies for non-recognition treatment under the Code, (E)
any transaction to the extent governed by the provisions described below under
"-- Certain Covenants -- Limitation on Restricted Payments" or "-- Ownership of
Capital Stock of Subsidiaries and Kaiser Shares," (F) the sale, transfer or
disposition of Collateral under the Indenture, collateral under the MGI
Indenture or any assets referred to in clause (vi) of the third paragraph under
"-- Certain Covenants -- Limitation on Restricted Payments" or the proceeds of
such assets or (G) any Primary Share Sale by MGI to the extent the Net Proceeds
of such Primary Share Sale are distributed on the Pledged MGI Shares.
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bering Agreement" means the investment management agreement, effective as
of December 1, 1991, between Bering Holdings Inc. and each of MAXXAM, the
Company, MGI, MPI and Pacific Lumber, as the same has been or may be amended,
supplemented or otherwise modified from time to time in a manner that is not
materially adverse to the Holders.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Britt" means Britt Lumber Co., Inc., a California corporation, and any
successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"Business Day" means each day that is not a Legal Holiday.
"Call Price" means, expressed as a percentage of principal amount, 110%.
"Capital Lease Obligations" of any person means, as of any date of
determination, any obligation that is required to be classified and accounted
for as a capital lease on the face of a balance sheet of such person prepared in
accordance with GAAP as of such determination date (it being understood that the
Capital Lease Obligations of the Company shall not include any such obligations
attributable to any Unrestricted Subsidiary as of any determination date); the
amount of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock of such person, including any
Preferred Stock of such person but excluding any Redeemable Stock of such
person.
"Cash Equivalents" means (x) when used in respect of any Trust Moneys (i)
any evidence of any obligation issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand or time deposits with, and certificates
of deposit or acceptances issued by, any bank or trust company organized under
the laws of the United States of America or any State thereof (including the
Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A"
by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service,
Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii)
repurchase agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher,
or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by
S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect
to any obligation described in subclauses (i), (ii) or (iv) of this clause (x);
(iv) commercial paper (including both noninterest-bearing discount obligations
and interest-bearing obligations payable on demand or on a specified date not
later than 180 days from the date of acquisition thereof) and having a rating of
"A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money
market fund or other similar investment company all of whose investments consist
primarily of obligations described in the foregoing clauses of this definition
and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable
rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii)
taxable or non-taxable auction rate securities which have interest rates reset
on periodic short-term intervals (typically each 7, 14, 21, 28 or 49 days via a
Dutch auction process) and which at the time of purchase have been rated and the
ratings for which (A) for direct issues, must not be less than "P2" if rated by
Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues
which follow the asset coverage tests set forth in the Investment Company Act of
1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P
and "Aaa" if rated by Moody's; or (viii) any investments hereafter developed
which are substantially
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comparable to those described above in this clause (x); and (y) otherwise (i)
any evidence of any obligation issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand or time deposits with, and certificates
of deposit or acceptances issued by, any bank or trust company organized under
the laws of the United States of America or any state thereof (including the
Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A"
by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service,
Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii)
repurchase agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher,
or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by
S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect
to any obligation described in subclauses (i), (ii) or (iv) of this clause (y);
(iv) commercial paper (including both noninterest-bearing discount obligations
and interest-bearing obligations payable on demand or on a specified date not
later than 180 days from the date of acquisition thereof) and having a rating of
"A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money
market fund or other similar investment company all of whose investments consist
primarily of obligations described in the foregoing clauses of this definition
and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable
auction rate securities commonly known as "money market rate notes" that at the
time of purchase have been rated and the ratings for which (A) for direct
issues, must not be less than "P2" if rated by Moody's and not less than "A2" if
rated by S&P and (B) for collateralized issues which follow the asset coverage
tests set forth in the Investment Company Act of 1940, as amended, must have
long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by
Moody's; or (vii) any investments hereafter developed which are substantially
comparable to those described above in this clause (y).
"Change of Control" means the occurrence of any of the following events:
(i) MAXXAM, directly or indirectly, not having (other than by reason of the
existence of a Lien, but including by reason of the foreclosure of or other
realization upon a Lien) direct or indirect sole beneficial ownership (as
defined under Regulation 13d-3 of the Exchange Act as in effect on the date of
the Indenture) of at least 40% of the total common equity, on a fully diluted
basis, of the Company; provided, however, that such ownership by MAXXAM,
directly or indirectly, of 30% or greater, but less than 40% of the total common
equity, on a fully diluted basis, of the Company shall not be a Change of
Control if MAXXAM, through direct representation or through persons nominated by
it, controls a majority of the Board of Directors necessary to effectuate any
actions by the Board of Directors; and provided, further, that the foregoing
minimum percentages shall be deemed not satisfied if any person or group shall,
directly or indirectly, own more of the total voting power entitled to vote
generally in the election of directors of the Company than MAXXAM; (ii) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than to a person that is a Subsidiary of MAXXAM both
immediately before and immediately after giving effect to such transaction or to
any of the Principals (as defined below) or to a group of which one or more of
the Principals is a member (provided that one or more of the Principals
beneficially owns Voting Stock representing at least 80% of the voting power in
the election of a majority of the directors of MAXXAM of the Voting Stock
beneficially owned by such group); (iii) the approval by the stockholders of the
Company of a plan for the liquidation or dissolution of the Company other than
into MAXXAM or a Subsidiary of MAXXAM; (iv) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than any of the Principals or a
group of which one or more of the Principals is a member (provided that one or
more of the Principals beneficially owns Voting Stock representing at least 80%
of the voting power in the election of a majority of the directors of MAXXAM of
the Voting Stock beneficially owned by such group), becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, of Voting Stock representing more than 35% of the
voting power in the election of a majority of the directors of MAXXAM
represented by all outstanding Voting Stock of MAXXAM; (v) the consummation of
the first transaction (including, without limitation, any merger or
consolidation) the result of which is that any
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"person" (as defined above) other than a group of which one or more of the
Principals is a member (provided that one or more of the Principals beneficially
owns Voting Stock representing at least 80% of the voting power in the election
of a majority of the directors of MAXXAM of the Voting Stock beneficially owned
by such group) becomes the "beneficial owner" (as defined above), directly or
indirectly, of Voting Stock representing more of the voting power in the
election of a majority of the directors of MAXXAM represented by all outstanding
Voting Stock of MAXXAM than is at the time represented by Voting Stock
"beneficially owned" (as defined above) by the Principals; or (vi) the first day
on which a majority of the members of the Board of Directors of MAXXAM are not
Continuing Directors. For purposes of this definition, any transfer of an equity
interest of an entity that was formed for the purpose of acquiring Voting Stock
of MAXXAM will be deemed to be a transfer of such portion of such Voting Stock
as corresponds to the portion of the equity of such entity that has been so
transferred. "Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of MAXXAM who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election. "Principals" means Charles Hurwitz, his wife and lineal
descendants, any trust for the benefit thereof, and/or any entity in which any
one or more of such persons hold a 0% or more controlling interest.
"Code" means the Internal Revenue Code of 1986, as amended (or any
successor statute thereto), and the regulations promulgated thereunder, all as
in effect from time to time.
"Collateral" means, at any time of determination, all property upon which a
Lien exists at such time in favor of the Trustee for the benefit of the Holders
pursuant to Articles 5 and 10 of the Indenture, including pursuant to
instruments executed and delivered in compliance with the provisions described
above under "-- Security -- Merger by MGI," in the second sentence under
"-- Security -- Collateral" and below under "-- Successor Company."
"Collateral Default" means a Default consisting of the Company's failure to
comply with any provision contained in Article 10 of the Indenture which (i)
either (A) results in an impairment of the validity, perfection, or priority of
the Lien of the Indenture with respect to any portion of the Collateral having a
fair market value in excess of $1 million in the aggregate or (B) would be
materially adverse in any way to the Holders (any Default consisting of the
failure to make any offer required to be made pursuant to the provisions
described above under "-- Security -- Offers to Purchase Notes with Certain
Proceeds of Collateral" being deemed, without limitation, material for this
purpose) and (ii) would constitute an Event of Default unless cured within the
applicable cure or grace period set forth in the Indenture.
"Consolidated Cash Flow Coverage Ratio" of the Company means, as of the
date of the transaction giving rise to the need to calculate the Consolidated
Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of (i) the
aggregate amount of EBITDA for the immediately preceding four fiscal quarters
for which financial information in respect thereof is available immediately
prior to the Transaction Date to (ii) the aggregate Consolidated Interest
Expense for the fiscal quarter in which the Transaction Date occurs and to be
accrued during the three fiscal quarters immediately subsequent thereto (based
upon the pro forma amount of Indebtedness of the Company and its Restricted
Subsidiaries reasonably expected by the Company to be outstanding on the
Transaction Date and thereafter other than the Timber Notes), assuming for the
purposes of this measurement the continuation of market interest rates
prevailing on the Transaction Date and base interest rates in respect of
floating interest rate obligations equal to the base interest rates on such
obligations in effect as of the Transaction Date; provided that if the Company
or any of its Restricted Subsidiaries is a party to any Interest Rate Protection
Agreements which would have the effect of changing the interest rate on any
Indebtedness of the Company or any of its Restricted Subsidiaries for such four
quarter period (or a portion thereof), the resulting rate shall be used for such
four quarter period or portion thereof; and provided, further, that any
Consolidated Interest Expense with respect to Indebtedness Incurred or retired
by the Company or any of its Restricted Subsidiaries during the fiscal quarter
in which the Transaction Date occurs shall be calculated as if such Indebtedness
was so Incurred or retired on the first day of the fiscal quarter in which the
Transaction Date occurs; and provided, further, that if, during the four fiscal
quarters referred to in clause (i) of this definition, (A) the Company or any of
its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for
such period shall be reduced by an amount equal to the EBITDA (if positive), or
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increased by an amount equal to the EBITDA (if negative), directly attributable
to the assets which are the subject of such Asset Sale calculated on a pro forma
basis as if such Asset Sale and any related retirement of Indebtedness had
occurred on the first day of such period or (B) the Company or any of its
Restricted Subsidiaries shall have acquired any material assets out of the
ordinary course of business, EBITDA shall be calculated on a pro forma basis as
if such asset acquisition and any related financing had occurred on the first
day of such period.
"Consolidated Income Tax Expense" of the Company means (without
duplication), for any period, the aggregate of the income tax expense (net of
applicable credits) of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP other than income
taxes (including credits) with respect to items of net income excluded from the
definition of Consolidated Net Income.
"Consolidated Interest Expense" of the Company means, for any period
(without duplication), (i) the sum of (A) the interest expense of the Company
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP, (B) all fees, commissions, discounts and other charges of
the Company and its Subsidiaries with respect to letters of credit and bankers'
acceptances and the costs (net of benefits) associated with Interest Rate
Protection Agreements for such period, determined on a consolidated basis in
accordance with GAAP, and (C) dividends declared on Redeemable Stock of the
Company or any Restricted Subsidiary held by persons other than the Company or a
Wholly Owned Restricted Subsidiary (other than dividends payable in Capital
Stock of the Company or pro rata dividends payable to all stockholders of such
class or series of Stock payable in Capital Stock of any such Restricted
Subsidiary), less (ii) the amortization or write-off of deferred financing costs
by the Company and its Subsidiaries during such period, determined on a
consolidated basis in accordance with GAAP (including, without limitation, the
amortization of any unamortized deferred financing costs in connection with any
refinancing of the Credit Agreement); in the case of clauses (i) and (ii) of
this definition, without giving effect to any such items and amounts
attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as any
Timber Notes are outstanding, during such period.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or net loss, as the case may be) of the Company and its
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP ("GAAP Net Income"); provided that (without duplication) there shall
be excluded from GAAP Net Income (to the extent otherwise included therein) (i)
gains and losses (net of applicable taxes) from (A) Asset Sales or reserves
relating thereto, (B) any sale, transfer or other disposition of any Capital
Stock or ownership interests in (x) Salmon Creek or (y) any Unrestricted
Subsidiary to which non-cash proceeds received by the Company in respect of a
Salmon Creek Distribution have been contributed by the Company as contemplated
by the provision described in the fourth paragraph under "-- Certain
Covenants -- Limitations on Restricted Payments," (C) the sale by the Company of
any assets received by the Company in respect of a Salmon Creek Distribution or
(D) any sale, transfer or other disposition of Kaiser Shares; (ii) items
classified as extraordinary and gains and losses from discontinued operations;
(iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any
person that is not a Subsidiary of the Company or that is accounted for on the
equity method of accounting, provided that in each case the amount of dividends
or other distributions actually paid to the Company (other than Salmon Creek
Distributions) during such period shall be added to Consolidated Net Income (to
the extent, in the case of clause (A), that the Company elects to include such
distributions in the computation of Consolidated Net Income at the time of the
computation thereof) and the amount of dividends or other distributions actually
paid to a Restricted Subsidiary of the Company (other than Salmon Creek
Distributions) during such period shall be included in computing the net income
(or net loss, as the case may be) of such Restricted Subsidiary, subject to
clause (v) below (to the extent, in the case of clause (A), that the Company
elects to include such distributions in the computation of Consolidated Net
Income at the time of the computation thereof); (iv) except to the extent
includable pursuant to clause (iii) of this definition, the net income (or loss)
of any other person accrued or attributable to any period prior to the date it
becomes a Subsidiary of the Company or is merged into or consolidated with the
Company or any of its Subsidiaries or such other person's property (or a portion
thereof) is acquired by the Company or any of its Subsidiaries; (v) the net
income (or loss) of any Restricted Subsidiary during such period if and to the
extent that the declaration or payment of dividends or
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similar distributions by such Restricted Subsidiary to the Company or any
Restricted Subsidiary of any such net income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or government regulation applicable to such
Restricted Subsidiary, provided that the amount of dividends or other
distributions actually paid to the Company by such Restricted Subsidiary (other
than Salmon Creek Distributions) shall be added to Consolidated Net Income
during such period and the amount of dividends or other distributions actually
paid to a Restricted Subsidiary of the Company (the "Recipient Restricted
Subsidiary") by such Restricted Subsidiary (other than Salmon Creek
Distributions) shall be included in computing the net income (or net loss, as
the case may be) of such Recipient Restricted Subsidiary during such period; and
(vi) the transfer of the Kaiser Shares to the Company by MAXXAM; provided that
there shall be excluded from Consolidated Net Income, to the extent otherwise
included therein, the amount of dividends and distributions made with the net
proceeds of any Equity Offering by any Subsidiary of the Company.
"Credit Agreement" means the agreement dated November 10, 1995, between
Bank of America, National Trust and Savings Association and Pacific Lumber,
together with all related notes, letters of credit, collateral documents and
guarantees and any other related agreements and instruments executed and
delivered in connection therewith, in each case, as amended, supplemented,
restated, restructured, renewed, extended, refinanced or otherwise modified, in
whole or in part, from time to time.
"Deed of Trust" means the Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993, from
Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit of
the Collateral Agent named therein, as the same has been or may be amended,
supplemented or otherwise modified from time to time.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default as specified in the provisions described
below in the second paragraph under "-- Events of Default; Notice and Waiver."
"EBITDA" of the Company means, for any period, the sum for such period of
Consolidated Net Income (excluding, to the extent included in Consolidated Net
Income for such period, any gains (net of applicable taxes) from any sale,
transfer or other disposition of any Capital Stock or ownership interests in any
Unrestricted Subsidiary to which non-cash proceeds received by a Restricted
Subsidiary in respect of a Salmon Creek Distribution have been contributed by a
Restricted Subsidiary as contemplated by the provision described in the fourth
paragraph under "-- Certain Covenants -- Limitation on Restricted Payments")
plus, to the extent reflected in the income statement for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and
depletion expense, (iv) amortization expense (including amortization of deferred
financing costs), and (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; (A) in the case of clauses (iii), (iv) and (v) of this definition, of
the Company and its Subsidiaries determined on a consolidated basis in
accordance with GAAP for such period, but without giving effect to any such
items and amounts attributable to any Unrestricted Subsidiary during such period
or to Scotia Pacific so long as any Timber Notes are outstanding, and (B) in the
case of clauses (iv) and (v) of this definition, excluding the amounts thereof
excluded from the definition of "Consolidated Interest Expense" pursuant to
clause (ii) of such definition.
"Equity Offering" means any sale, public or private, of equity securities
of any person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor statute thereto), and the rules and regulations promulgated
thereunder.
"Exempt Distribution" means any and all dividends, cash, instruments and
other property and proceeds received, receivable or otherwise distributed on any
of the Pledged Shares other than: (i) any liquidating dividend or other
liquidating distribution or other similar extraordinary dividend or
distribution; (ii) any dividend or other distribution on Pledged MGI Shares (or
on Stock of MGI's permitted successor pursuant to the provision described above
under "-- Security -- Merger by MGI") if the amount of all dividends and other
distributions on the Stock of MGI made on or after the Issue Date to and
including the date of such
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dividend or other distribution on such Pledged MGI Shares (other than dividends
and distributions to the extent that such dividends or distributions were
previously paid or delivered to the Trustee for inclusion in the Collateral,
whether by deposit into an Account or otherwise, and other than amounts referred
to in clauses (iv), (v) and (vi) below) exceeds 100% of the consolidated net
income of MGI plus 100% of the consolidated depletion expense of MGI, each
determined in accordance with GAAP, accrued on a cumulative basis subsequent to
September 30, 1996; (iii) any dividend or other distribution on any Pledged
Kaiser Shares to the extent of the amount, if any, by which all dividends and
other distributions on such Pledged Kaiser Shares during the 12-month period
ending on and including the date on which such dividend or distribution is paid
(other than dividends and distributions to the extent that such dividends or
distributions were previously paid or delivered to the Trustee for inclusion in
the Collateral, whether by deposit into an Account or otherwise, and other than
amounts referred to in clauses (iv), (v) and (vi) below) exceeds, on a per share
basis, 7.5% of the average of the daily closing prices (or average bid and asked
prices if closing prices are not available) of such Kaiser Shares over such
consecutive 12-month period; (iv) any Salmon Creek Distribution; (v) any
dividend or other distribution consisting of proceeds of any Primary Share Sale
by MGI or Kaiser or proceeds of any Pledged Share Sale; and (vi) any dividend or
other distribution of proceeds of a transaction effected pursuant to and in
accordance with the provision described above in the fourth paragraph under "--
Security -- Release and Substitution of Pledged Kaiser Shares" or the provision
described above under "-- Security -- Merger by MGI." Notwithstanding the
foregoing, any dividend or other distribution made on any Pledged MGI Shares and
received by the Company during any fiscal year shall be an Exempt Distribution
if such dividend or distribution, together with all other dividends and other
distributions previously so made during such fiscal year (exclusive of amounts
referred to in clauses (iv), (v) and (vi) above), does not exceed 120% of the
interest that has become payable or is to become payable on the Notes during
such year.
"Extraordinary Distribution" means any and all dividends, cash, instruments
and other property and proceeds received, receivable or otherwise distributed on
any Pledged Shares other than: (i) an Exempt Distribution; (ii) any Salmon Creek
Distribution; (iii) any dividend or other distribution consisting of proceeds of
any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale;
and (iv) any dividend or other distribution of proceeds of a transaction
effected pursuant to and in accordance with the provision described above in the
fourth paragraph under "-- Security -- Release and Substitution of Pledged
Kaiser Shares" or the provision of the Indenture described above under
"-- Security -- Merger by MGI."
"GAAP" means, at any date, generally accepted accounting principles as in
effect on December 31, 1995, and used in the preparation of the Company's
consolidated balance sheet at such date and the Company's statements of
consolidated income and cash flows for the year then ended.
"Holder" or "Securityholder" means the person in whose name a Note is
registered on the Registrar's books.
"Indebtedness" of any person means, at any date, any of the following
(without duplication): (i) the principal amount of all obligations
(unconditional or contingent) of such person for borrowed money (whether or not
there is recourse to the whole of the assets of such person or only to a portion
thereof) and the principal amount of all obligations (unconditional or
contingent) of such person evidenced by debentures, notes or other similar
instruments (including, without limitation, reimbursement obligations with
respect to letters of credit (except to the extent collateralized by cash or
Cash Equivalents), performance bonds (except to the extent collateralized by
cash or Cash Equivalents) and bankers' acceptances (except to the extent
collateralized by cash or Cash Equivalents)); (ii) all obligations of such
person to pay the deferred purchase price of property or services, except (A)
accounts payable and other current liabilities arising in the ordinary course of
business and (B) compensation, pension obligations and other obligations arising
from employee benefits and employee arrangements; (iii) Capital Lease
Obligations of such person; (iv) all Indebtedness of others secured by a Lien on
any asset of such person (other than assets referred to in clause (vi) of the
provision described in the third paragraph under "-- Certain
Covenants -- Limitation on Restricted Payments" and the proceeds of such assets)
whether or not such Indebtedness is assumed or guaranteed by such person; (v)
all Indebtedness of others guaranteed by such person; and (vi) all Redeemable
Stock, valued at the greater of its voluntary or involuntary maximum fixed
repurchase price (or its stated liquidation value in the case of Preferred Stock
that is not by its terms redeemable) exclusive of accrued and unpaid dividends;
and the amounts thereof shall be
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the outstanding balance of any such unconditional obligations as described in
clauses (i) through (v) (other than clause (iv)), and the maximum liability of
any such contingent obligations at such date as described in clauses (i) through
(v) (other than with respect to clause (iv)), and, in the case of clause (iv),
the lesser of the fair value (as determined by the Board of Directors) at such
date of any asset subject to any Lien securing the Indebtedness of others and
the principal amount of the Indebtedness secured; provided that the Indebtedness
of any person shall not include (x) obligations of such person arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds in the ordinary course
of business; provided that such obligations are extinguished within two Business
Days after their Incurrence and (y) obligations of such person resulting from
the endorsement of negotiable instruments in the ordinary course of business.
For purposes of the Indenture, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were purchased on any date on which Indebtedness is required to
be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Stock, such fair market
value shall be determined in good faith by the board of directors of the issuer
of such Redeemable Stock.
"Intercompany Note" means that certain intercompany note, dated as of the
Issue Date, payable by MAXXAM to the Company.
"Interest Payment Default" means a default in the payment of interest when
due and payable on any of the Notes which would constitute an Event of Default
if such payment were not made within the applicable cure or grace period.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement, currency swap agreement or other
financial agreement or arrangement designed to protect the Company or any
Subsidiary of the Company against fluctuations in interest rates or currency
exchange rates, as in effect from time to time.
"Investment" means, with respect to any person (such person being referred
to in this definition as the "Investor") (without duplication), (i) any amount
paid or any property transferred, in each case, directly or indirectly, by the
Investor for Capital Stock or Redeemable Stock, partnership interests or other
securities of, or as a contribution to the capital of any other person, (ii) any
direct or indirect loan or advance by the Investor to any other person other
than accounts receivable of the Investor relating to the purchase and sale of
property or services arising in the ordinary course of business, and (iii) any
direct or indirect guarantee by the Investor of any Indebtedness of any other
person.
"Issue Date" means the date of initial issuance of Notes pursuant to the
Indenture.
"Kaiser" means Kaiser Aluminum Corporation, a Delaware corporation, and any
successor pursuant to a transaction governed by and in accordance with the
provision described in the fourth paragraph under "-- Security -- Release and
Substitution of Pledged Kaiser Shares" or a similar provision of the MGI
Indenture (see the second paragraph under "Principal Indebtedness -- MGI
Notes -- Release and Substitution of Kaiser Shares").
"Kaiser Share Cash Equivalents" means (i) the amount of any Trust Moneys
constituting proceeds of any Primary Share Sale by Kaiser or a Pledged Share
Sale of Pledged Kaiser Shares or any Extraordinary Distribution on Pledged
Kaiser Shares (or the proceeds of any non-cash consideration received in any
such transaction) that are released from the Lien of the MGI Indenture and
thereupon pledged under the Indenture as a result of such Trust Moneys not
having been utilized to purchase MGI Notes pursuant to an offer by MGI to
purchase MGI Notes at a price at least equal to the respective Call Prices of
the MGI Notes or as a result of payment in full of the MGI Notes or defeasance
of the MGI Notes pursuant to Article 8 of the MGI Indenture, divided by (ii) the
greater of (A) the Net Proceeds per share received by the Company with respect
to Pledged Kaiser Shares released from the Lien of the MGI Indenture in the
transaction that resulted in the deposit of such Trust Moneys thereunder and (B)
$9.00 (as adjusted to reflect any subdivision, combination or reclassification
of Kaiser Shares). To the extent that any of the Net Proceeds referred to in
clause (ii)(A) of the preceding sentence are other than cash, the amount of such
non-cash Net Proceeds
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attributable to each Pledged Kaiser Share released from the Lien of the MGI
Indenture for purposes of such clause (ii)(A) shall be determined by a
nationally recognized investment banking firm selected by the Company based on
the fair market value per share of such non-cash Net Proceeds received by the
Company in such transaction. As used in this definition, each of the terms
Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary
Distribution, Trust Moneys, Call Prices and Net Proceeds has the meaning
ascribed to such term in the MGI Indenture (as in effect on the date of the
Indenture).
"Kaiser Shares" means, at any time, the 27,938,250 shares of common stock,
par value $.01 per share, of Kaiser owned by the Company, and, as of the Issue
Date, pledged under the MGI Indenture, as such shares are (and any number
thereof as utilized in the Indenture is) adjusted to reflect any subdivision,
combination or reclassification (in a merger or otherwise) of such Kaiser shares
on or after the Issue Date, and any securities or property substituted for such
Kaiser Shares pursuant to any Kaiser Transaction (as such term is defined in the
MGI Indenture as in effect on the date of the Indenture; see the second
paragraph under "Principal Indebtedness -- MGI Notes -- Release and Substitution
of Kaiser Shares") under the MGI Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required by applicable law to be open in the States of New
York, California, Minnesota and Texas.
"Lien" means, with respect to any asset, any lien, mortgage, pledge,
security interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement and any lease in the nature thereof) in
respect of such asset.
"Make-Whole Amount" with respect to a Note means an amount equal to the
excess, if any, of (i) the present value of the remaining interest, premium and
principal payments due on such Note as if such Note were redeemed on August 1,
2000, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (ii) the outstanding principal amount of such Note. "Treasury Rate"
is defined as the yield to maturity at the time of the computation of United
States Treasury securities with a constant maturity (as compiled by and
published in the most recent Federal Reserve Statistical Release H.15 (519),
which has become publicly available at least two Business Days prior to the date
of the redemption notice or, if such Statistical Release is no longer published,
any publicly available source of similar market data) most nearly equal to the
then remaining maturity of the Notes assuming redemption of the Notes on August
1, 2000; provided, however, that if the Make-Whole Average Life of such Note is
not equal to the constant maturity of the United States Treasury securities for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Make-Whole Average Life of such Notes is less than
one year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
"Make-Whole Average Life" means the number of years (calculated to the
nearest one-twelfth) between the date of redemption and August 1, 2000.
"Make-Whole Price" with respect to any Note means the greater of (i) the
sum of the outstanding principal amount and the Make-Whole Amount of such Note,
and (ii) 110% of the outstanding principal amount of such Note.
"MAXXAM" means MAXXAM Inc., a Delaware corporation, and, subject to the
provisions described under "-- Guaranty," any successor corporation by way of
merger, consolidation or purchase of all or substantially all of its assets.
"money" or "U.S. Legal Tender" means such coin or currency of the United
States of America as at the time of payment is legal tender for the payment of
public and private debts.
"MGI" means MAXXAM Group Inc., a Delaware corporation, and any successor
Restricted Subsidiary pursuant to a transaction governed by and in accordance
with the provision described above under "-- Security -- Merger by MGI."
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"MGI Indenture" means the Indenture dated as of August 4, 1993, between MGI
and Fleet National Bank, as successor to Shawmut Bank, N.A., as trustee,
pursuant to which the MGI Notes were issued, as the same has been or may be
amended, supplemented or otherwise modified from time to time.
"MGI Notes" means the debt securities outstanding pursuant to, and whose
terms are governed by, the MGI Indenture.
"MPI" means MAXXAM Properties Inc., a Delaware corporation, and any
successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"MXM Guaranty" means the Unconditional Guarantee of Payment and Performance
dated June 17, 1991 to General Electric Capital Corp. by MAXXAM Inc. and MGI ,
as amended by agreements dated as of June 17, 1992 and December 30, 1992, as
amended, supplemented or otherwise modified from time to time in a manner that
is not materially adverse to the Holders.
"Net Cash Proceeds" means cash payments received (but if received in a
currency other than United States dollars, such payments shall not be deemed
received until the earliest time at which such currency is converted into United
States dollars) by the Company and/or any of its Restricted Subsidiaries
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, or the cash
realization of any non-cash proceeds of any Asset Sale, but, in each case, only
as and when, and to the extent, received by the Company or any of its Restricted
Subsidiaries) from an Asset Sale, in each case and without duplication, net of
(i) fees, expenses and other expenditures in connection with such Asset Sale
(whether or not such fees, expenses or expenditures are then due and payable or
made, as the case may be), (ii) the amounts paid to repurchase or repay any
Indebtedness, or the amount of any Indebtedness retained, in each case which
Indebtedness is either (A) secured, directly or indirectly, by Liens on the
assets which are the subject of such Asset Sale or (B) associated with such
assets and due in connection with such Asset Sale, and other fees, expenses and
other expenditures, in each case, incurred in connection with such Asset Sale or
the repurchase, repayment or assumption of such Indebtedness (whether or not
such fees, expenses or expenditures are then due and payable), (iii) all amounts
deemed appropriate by the Company (as evidenced by a signed certificate of the
Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to
be provided as a reserve, in accordance with GAAP, against any liabilities
associated with such assets which are the subject of such Asset Sale, (iv) all
foreign, federal, state and local taxes payable (including taxes reasonably
estimated to be payable) in connection with or as a result of such Asset Sale,
(v) with respect to any Asset Sale by a Restricted Subsidiary of the Company or
any Primary Share Sale, the portion of such cash payments required to be paid to
persons holding a minority interest in such Restricted Subsidiary and (vi) if
such Asset Sale is a Primary Share Sale by MGI, any of the proceeds from such
Primary Share Sale distributed by the issuer in such Primary Share Sale to its
stockholders; provided, in each such case, such fees, expenses, expenditures and
other amounts are not payable to an Affiliate of the Company.
"Net Proceeds" means any property, assets or other consideration of any
kind, whether tangible or intangible, received by the Company as a dividend or
distribution on any Pledged Shares of proceeds of any Primary Share Sale by, or
from any Pledged Share Sale of any of the Pledged Shares of, MGI or Kaiser, in
each case and without duplication net of (i) fees, expenses and other
expenditures in connection with such Pledged Share Sale (whether or not such
fees, expenses or expenditures are then due and payable or made, as the case may
be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the
amount of any Indebtedness assumed, in each case which Indebtedness is either
(A) secured, directly or indirectly, by Liens on the assets which are the
subject of such Pledged Share Sale or (B) associated with such assets and due in
connection with such Pledged Share Sale, and other fees, expenses and other
expenditures, in each case, incurred in connection with such Pledged Share Sale
or the repurchase, repayment or assumption of such Indebtedness (whether or not
such fees, expenses or expenditures are then due and payable), (iii) all amounts
deemed appropriate by the Company (as evidenced by a signed certificate of the
Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to
be provided as a reserve, in accordance with GAAP, against any liabilities
associated with such shares which are the subject of such Pledged Share Sale and
(iv) all foreign, federal, state and local taxes payable (including taxes
reasonably estimated to be payable) in
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connection with or as a result of such dividend or distribution or Pledged Share
Sale; provided, in each such case, such fees, expenses, expenditures and other
amounts are not payable to an Affiliate of the Company; and provided, further,
that, if other than cash, Net Proceeds shall have as their value for purposes of
the Indenture their fair value as reasonably determined by the Board of
Directors.
"Notice of Acceleration" means a written notice delivered during the
continuance of an Event of Default to the Company by the Trustee or by the
holders of at least 25% in aggregate principal amount of Notes then outstanding,
stating that an Event of Default has occurred and is continuing and that the
principal amount of and accrued and unpaid interest, if any, on all of the Notes
are due and payable; provided that a Notice of Acceleration shall be deemed to
have been delivered and to be effective for all purposes under Article 10 of the
Indenture upon the occurrence and during the continuance of certain events of
bankruptcy with respect to the Company constituting Events of Default.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer,
the Secretary, an Assistant Secretary, the Controller or an Assistant Controller
of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee, as the case may be.
"Pacific Lumber" means The Pacific Lumber Company, a Delaware corporation,
and any successor corporation by way of merger, consolidation or purchase of all
or substantially all of its assets.
"Pacific Lumber Indenture" means the indenture, dated as of March 23, 1993,
between Pacific Lumber and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, as trustee, pursuant to which the Pacific
Lumber Senior Notes were issued, as amended, supplemented or otherwise modified,
or, in accordance with and subject to the provisions of the Indenture described
below in the third paragraph under "-- Limitation on Indebtedness," restated,
restructured, renewed or refinanced in whole or in part from time to time.
"Pacific Lumber Senior Notes" means the debt securities outstanding
pursuant to, and whose terms are governed by, the Pacific Lumber Indenture.
"person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Pledged Kaiser Shares" means, at any time, any Kaiser Shares which are
included in the Collateral at such time, and any securities or other property
substituted for Pledged Kaiser Shares pursuant to the provision described above
in the fourth paragraph under "-- Security -- Release and Substitution of
Pledged Kaiser Shares" included in the Collateral at such time.
"Pledged MGI Shares" means, at any time, any shares of Stock of MGI
included in the Collateral at such time, and any securities or other property
substituted for Pledged MGI Shares pursuant to the provision described above
under "-- Security -- Merger by MGI" included in the Collateral at such time.
"Pledged Share Sale" means a sale to any person of Pledged Shares other
than (i) a sale in connection with a transaction pursuant to and in accordance
with the provision described above under "-- Security -- Merger by MGI," (ii) a
sale in connection with a transaction pursuant to and in accordance with the
provision described above in the fourth paragraph under "-- Security -- Release
and Substitution of Pledged Kaiser Shares" or (iii) a sale of Pledged MGI Shares
by the Company or one of its Subsidiaries to any of the Company's Subsidiaries,
in which the purchaser becomes a pledgor with respect to such Pledged Shares
pursuant to Article 10 of the Indenture.
"Pledged Shares" means the Pledged MGI Shares and the Pledged Kaiser
Shares.
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"Preferred Stock," as applied to the Capital Stock or Redeemable Stock of
any corporation, means Capital Stock or Redeemable Stock of any class or classes
(however designated) which is preferred as to the payment of dividends, or as to
the distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such corporation, over shares of Capital Stock or Redeemable
Stock, as the case may be, of any other class of such corporation.
"Primary Share Sale" means (i) any issuance and sale of Stock by MGI other
than to the Company or any of its Subsidiaries (provided that no issuance of
Stock in connection with a transaction pursuant to and in accordance with the
provision described above under "-- Security -- Merger by MGI" shall constitute
a Primary Share Sale) and (ii) any issuance and sale of common stock by Kaiser
(provided that no issuance of Stock in connection with a transaction pursuant to
and in accordance with the provision described above in the fourth paragraph
under "-- Security -- Release and Substitution of Pledged Kaiser Shares," or
pursuant to and in accordance with any similar provision of the MGI Indenture as
in effect on the date of the Indenture, shall constitute a Primary Share Sale).
"Public Equity Offering" means an underwritten public offering of common
stock of the Company or MGI (or the successor in a transaction with MGI pursuant
to the provision described above under " -- Security -- Merger by MGI") pursuant
to an effective registration statement filed pursuant to the Securities Act.
"Redeemable Stock" of any person means any equity security of such person
that by its terms is required to be redeemed prior to the final Stated Maturity
of all principal of the Notes, or is redeemable at the option of the holder
thereof at any time prior to the final Stated Maturity of all principal of the
Notes and shall also include, in the case of the Company, all Preferred Stock of
the Company's Restricted Subsidiaries.
"Released Kaiser Shares" means (i) all or any portion of the Kaiser Shares
transferred to the Company by MAXXAM as of the Issue Date (as such shares are
(and any number thereof as utilized in the Indenture is) adjusted to reflect any
subdivision, combination or reclassification (in a merger or otherwise) of such
Kaiser Shares on or after the Issue Date) that are released after the Issue Date
from the Lien of the MGI Indenture as a result of (a) payment in full of the MGI
Notes, (b) defeasance of the MGI Notes pursuant to Article 8 of the MGI
Indenture, or (c) early retirement of a portion of the MGI Notes resulting in a
release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant
to Section 10.05(c)(1) thereof (see the first paragraph under "Description of
Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser
Shares"); and (ii) all or any portion of any securities or other property
substituted for Kaiser Shares under the MGI Indenture pursuant to a transaction
described in the second paragraph under "Description of Principal
Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares" that are
released from the Lien of the MGI Indenture as a result of an occurrence
referred to in clause (a), (b) or (c) of the preceding clause (i); provided,
however, that Kaiser Shares and other collateral released from the Lien of the
MGI Indenture pledged to secure Indebtedness that refinances the MGI Notes (as
permitted by the provision described in the third paragraph under
" -- Security -- Collateral") shall not be deemed to be Released Kaiser Shares.
"Restricted Investment" means any Investment in an Affiliate (other than
any Unrestricted Subsidiary referred to in the provision described in the last
paragraph under " -- Certain Covenants -- Limitation on Restricted Payments") of
the Company, except for (i) the Intercompany Note and (ii) the Company's
ownership of Kaiser Shares or any other asset that is included in the Collateral
under the Indenture or the collateral under the MGI Indenture.
"Restricted Subsidiary" means, as of any determination date, each of the
Subsidiaries of the Company which is not as of such determination date an
Unrestricted Subsidiary of the Company.
"Salmon Creek" means Salmon Creek Corporation, a Delaware corporation, or
any successor corporation, by way of merger, consolidation, purchase of all or
substantially all of its assets, or otherwise, which holds the Salmon Creek
Property on the date of the Indenture but which may not acquire any other assets
(other than assets incidental to the operation, disposition, management and
maintenance of the Salmon Creek Property or assets received (i) in respect of
all or any part of the Stock of Salmon Creek, (ii) in respect of all
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or any part of the real property constituting the Salmon Creek Property or (iii)
otherwise in connection with Salmon Creek or the Salmon Creek Property, except
in connection with the harvesting of timber located on the Salmon Creek
Property), except in exchange for or out of the proceeds of the sale or
disposition of the Salmon Creek Property.
"Salmon Creek Distribution" means a dividend or other distribution
identified as a "Salmon Creek Distribution" by the Company in writing to the
Trustee at the time of such dividend or other distribution. The Indenture
provides that the Company will not so identify any dividend or distribution,
except for any dividends and other distributions on Pledged MGI Shares or on
shares of Stock of any other Restricted Subsidiary of the Company of amounts or
other consideration received by the Company or any of its Subsidiaries from any
person or entity (i) in respect of all or any part of the Stock of Salmon Creek,
(ii) in respect of all or any part of the real property constituting the Salmon
Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon
Creek Property, except in connection with the harvesting of timber located on
the Salmon Creek Property.
"Salmon Creek Property" means any of the property described on Exhibit C to
the Indenture or any assets or Stock, in each case, held by Salmon Creek.
"Scotia Pacific" means Scotia Pacific Holding Company, a Delaware
corporation, and any successor corporation, by way of merger, consolidation,
purchase of all or substantially all of its assets, or otherwise.
"Scotia Pacific Agreements" means any agreements between Scotia Pacific and
Pacific Lumber or any Subsidiary of Pacific Lumber as the same may be amended
after the date of the Indenture in accordance with the terms thereof, including,
without limitation, the Master Purchase Agreement, dated as of March 23, 1993,
between Scotia Pacific and Pacific Lumber, the Services Agreement, dated as of
March 23, 1993, between Scotia Pacific and Pacific Lumber, the Additional
Services Agreement, dated as of March 23, 1993, between Scotia Pacific and
Pacific Lumber, the Environmental Indemnification Agreement, dated as of March
23, 1993, between Scotia Pacific and Pacific Lumber, and the Reciprocal Rights
Agreement, dated as of March 18, 1993, among Scotia Pacific, Pacific Lumber and
Salmon Creek.
"Securities Act" means the Securities Act of 1933, as amended (or any
successor statute thereto), and the rules and regulations promulgated
thereunder.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
which at the time of determination had, or any group of Restricted Subsidiaries
which, if merged into each other at the time of determination, would at the time
of determination have had, (i) assets which, as of the date of the Company's
most recent quarterly consolidated balance sheet, constituted at least 10% of
the Company's total assets on a consolidated basis as of such date, (ii)
revenues for the 12-month period ending on the date of the Company's most recent
quarterly consolidated statement of income which constituted at least 10% of the
Company's total revenues on a consolidated basis for such period or (iii) EBITDA
for the 12-month period ending on the date of the Company's most recent
quarterly consolidated statement of income which constituted at least 10% of the
Company's total EBITDA on a consolidated basis for such period (it being
understood that for the purposes of clause (iii) of this definition, EBITDA of
any Restricted Subsidiary or group of Restricted Subsidiaries of the Company for
any period shall be that portion of the Company's total EBITDA attributable to
such Restricted Subsidiary or group of Restricted Subsidiaries during such
period).
"Stated Maturity," when used with respect to the payment of any principal
of, or accrued interest on, any Note, means the date specified in such Note as
the fixed date on which such principal of or accrued interest on such Note is
due and payable, as the case may be.
"Stock" of any person means, collectively, the Capital Stock and the
Redeemable Stock of such person.
"Subsidiary" means, with respect to any person, (i) any corporation of
which more than 50% of the outstanding Capital Stock and Redeemable Stock having
ordinary voting power to elect a majority of the board of directors of the
corporation (irrespective of whether at the time Capital Stock or Redeemable
Stock of any other class or classes of such corporation shall or might have
voting power upon the occurrence of any contingency) is at the time owned,
directly or indirectly, by such person, or by one or more other Subsidiaries
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of such person, or by such person and one or more other Subsidiaries of such
person, or (ii) any other entity of which more than 50% of the outstanding
equity ownership interests are at the time owned, directly or indirectly, by
such person, or by one or more other Subsidiaries of such person, or by such
person and one or more other Subsidiaries of such person. Notwithstanding the
foregoing, neither Kaiser nor any Subsidiary of Kaiser shall be deemed a
Subsidiary of the Company for any purpose under the Indenture unless ownership
by the Company of more than 50% of the outstanding Capital Stock of Kaiser
resulted from the acquisition (other than in connection with a Kaiser
Transaction, a dividend or distribution on Capital Stock of Kaiser, a
reclassification of shares of Capital Stock of Kaiser or any other transaction
in which the Company or any Restricted Subsidiary of the Company receives
Capital Stock or other securities of Kaiser in exchange for or in respect of
other shares of Capital Stock or securities of Kaiser) by the Company of Kaiser
Capital Stock after the Issue Date.
"Taking" means any sale, transfer or other disposition of all or any part
of the assets of the Company and its Restricted Subsidiaries that occurs by
reason of condemnation or eminent domain or other similar proceedings exercised
by, or by consensual transfer by the Company or its Restricted Subsidiaries of
assets to, the United States of America or any State, municipality, agency or
other governmental authority thereof.
"Tax Sharing Agreements" means (i) the tax allocation agreement, dated May
21, 1988, by and among MAXXAM, Pacific Lumber and certain other subsidiaries of
MAXXAM and MGI, as amended by the tax allocation agreement, dated as of March
23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek,
and as further amended by the tax allocation agreement, dated as of August 4,
1993, by and between MAXXAM and MGI, (ii) the tax allocation agreement, dated as
of July 3, 1990, by and between MAXXAM and Britt and (iii) the tax allocation
agreement, dated as of the Issue Date, by and between MAXXAM and the Company;
each as amended, supplemented or otherwise modified from time to time.
"Timber Note Indenture" means the indenture, dated as of March 23, 1993,
between Scotia Pacific and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, as trustee, pursuant to which the Timber
Notes were issued, as amended, supplemented or otherwise modified from time to
time.
"Timber Notes" means the 7.95% Timber Collateralized Notes due 2015, issued
by Scotia Pacific as amended, supplemented or otherwise modified, in whole or in
part, from time to time in accordance with the terms of the Timber Note
Indenture.
"Trustee" means the party named as such in the Indenture until a successor
replaces it in accordance with the terms of the Indenture and, thereafter, means
the successor.
"Trust Moneys" has the meaning ascribed to such term in the first paragraph
under " -- Security -- Deposit of Trust Moneys into Accounts."
"Uniform Commercial Code" means the New York Uniform Commercial Code as in
effect from time to time, except with respect to matters concerning the validity
and perfection of security interests of the Trustee in favor of the Holders in
the Accounts, in which case such term shall mean the Minnesota Uniform
Commercial Code as in effect from time to time.
"Unrestricted Investments Outstanding" means, at any time of determination,
in respect of any Unrestricted Subsidiary, the difference between (i) the sum of
all Unrestricted Investments theretofore made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary after the date of the Indenture,
minus (ii) the amount of all dividends and distributions paid to the Company or
a Restricted Subsidiary (to the extent that the Company does not elect to
include the amount of such dividends and distributions in the computation of
Consolidated Net Income pursuant to the parenthetical of clause (iii) of the
definition thereof at the time of determination), and all repayments of the
principal amount of loans or advances by such Unrestricted Subsidiary to the
Company or any of its Restricted Subsidiaries during the period that such person
was an Unrestricted Subsidiary and any other reduction of Unrestricted
Investments in such Unrestricted Subsidiary during the period that such person
was an Unrestricted Subsidiary (the amount of any Unrestricted Investment
returned or reduced, if other than in cash or a sum certain guaranteed, to be
the fair market value as determined in good faith by the Board of Directors,
whose determination shall be evidenced
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by a resolution of the Board of Directors filed with the Trustee); provided that
the amount of Unrestricted Investments Outstanding in respect of any
Unrestricted Subsidiary shall at no time be a negative amount.
"Unrestricted Subsidiary" means (i) each of the Subsidiaries of the Company
so designated by a resolution adopted by the Company's Board of Directors and
whose creditors have no direct or indirect recourse (including, but not limited
to, recourse with respect to the payment of principal or interest on
Indebtedness of such Subsidiary) to the Company or a Restricted Subsidiary
(except to the extent such recourse arises (A) solely by operation of law and
not pursuant to a contractual or other consensual arrangement or (B) pursuant to
an Investment or a Restricted Investment permitted by the Indenture), (ii) any
joint venture, partnership or other person (other than a Subsidiary of the
Company, Kaiser or a Subsidiary of Kaiser) in which the Company and/or its
Subsidiaries have an equity ownership interest equal to or greater than 5% and
(except for any Unrestricted Subsidiary referred to in the provision described
in the last paragraph under " -- Certain Covenants -- Limitation on Restricted
Payments") in which no Affiliate of the Company has a direct or an indirect
equity ownership interest in excess of 5% therein other than by virtue of the
direct or indirect equity ownership interest in such joint venture, partnership
or other person held (in the aggregate) by the Company and/or one or more of its
Subsidiaries and (iii) Salmon Creek. The Board of Directors may designate an
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that any such
redesignation shall be deemed to be an Incurrence by the Company and its
Restricted Subsidiaries of the Indebtedness (if any) of such redesignated
Restricted Subsidiary for purposes of the covenant described below under
" -- Certain Covenants -- Limitation on Indebtedness" as of the date of such
redesignation to the extent that such Indebtedness does not already constitute
Indebtedness of the Company or one or more of its Restricted Subsidiaries.
Subject to the foregoing, the Board of Directors of the Company also may
designate any Restricted Subsidiary (other than Scotia Pacific so long as there
are any Timber Notes outstanding) to be an Unrestricted Subsidiary, provided
that (x) the amount of any outstanding Investments by the Company and its
Restricted Subsidiaries in such Restricted Subsidiary shall be deemed to be
Unrestricted Investments Outstanding at the time of such designation and (y)
immediately after giving effect to such designation and to the characterization
of the Investments by the Company and its Restricted Subsidiaries in such newly
designated Unrestricted Subsidiary, the Company and its remaining Restricted
Subsidiaries could make at least $1.00 of additional Restricted Payments or
Unrestricted Investments pursuant to the covenant described below under
" -- Certain Covenants -- Limitation on Restricted Payments."
"U.S. Governmental Obligations" means any evidence of obligations issued
directly or fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof for the payment of which the full faith and
credit of the United States of America is pledged and which are not callable at
the issuer's option.
"U.S. Legal Tender." See the definition of "money."
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary (i)
which is a corporation of which all of the outstanding shares of Capital Stock
and Redeemable Stock having ordinary voting power to elect a majority of the
board of directors of such corporation (irrespective of whether at the time
Capital Stock or Redeemable Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) are owned at the time, directly or indirectly (through one or more
Wholly Owned Restricted Subsidiaries), by the Company (except for director's
qualifying shares), or (ii) which is any other entity of which all of the
outstanding equity ownership interests are owned at the time, directly or
indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the
Company.
CERTAIN COVENANTS
Limitation on Indebtedness
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or become liable with respect to, contingently
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or otherwise (collectively, "Incur"), any Indebtedness (including, without
duplication, guarantees of Indebtedness by the Company and/or its Restricted
Subsidiaries), except that the Company and its Restricted Subsidiaries (other
than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur
Indebtedness (including, without duplication, guarantees of Indebtedness by the
Company and/or its Restricted Subsidiaries), if, immediately after giving effect
thereto and the receipt and application of the proceeds thereof, the
Consolidated Cash Flow Coverage Ratio of the Company would exceed 2.0 to 1.
Notwithstanding the foregoing provision, the Company and/or its Restricted
Subsidiaries (other than, except in the case of clauses (xi) and (xii) below,
Scotia Pacific so long as there are any Timber Notes outstanding) may Incur
(without duplication) the following: (i) Indebtedness in respect of the Notes;
(ii) aggregate Indebtedness under the Credit Agreement in an amount not to
exceed at any time outstanding $40,000,000; (iii) Indebtedness outstanding on
the Issue Date, including the indebtedness outstanding pursuant to the MGI
Indenture or the Pacific Lumber Indenture (other than the Timber Notes which are
governed by clause (xi) below); (iv) Indebtedness in connection with one or more
letters of credit issued pursuant to (A) self-insurance obligations (other than
workmen's compensation obligations), the aggregate face or stated amount of
which, together with the aggregate amount of any related reimbursement
obligations (without duplication) does not exceed $1,000,000 at any time
outstanding, and (B) workmen's compensation obligations; (v) Indebtedness owed
by the Company to a Restricted Subsidiary or owed by a Restricted Subsidiary to
the Company or to any other Restricted Subsidiary of the Company; (vi) Capital
Lease Obligations (other than Capital Lease Obligations permitted by clause
(xii) below) not exceeding in the aggregate $10,000,000 at any time outstanding;
(vii) Indebtedness under any Interest Rate Protection Agreement to the extent
that such Interest Rate Protection Agreement is related to payment obligations
on Indebtedness otherwise permitted under the Limitation on Indebtedness
covenant; (viii) Indebtedness Incurred in connection with Indebtedness the
interest on which is exempt from federal income tax under the Code in an
aggregate amount not exceeding $10,000,000 at any time outstanding; (ix)
Indebtedness owed to or guaranteed by any governmental agency, instrumentality
or other authority Incurred to provide relief from natural disasters or other
similar assistance; (x) Indebtedness Incurred after August 4, 1993 (in addition
to (and without duplication of) Indebtedness otherwise permitted by the
Limitation on Indebtedness covenant), in an aggregate principal amount not
exceeding $25,000,000 at any one time outstanding in the case of Indebtedness
Incurred by Pacific Lumber and its Subsidiaries which are Restricted
Subsidiaries, $15,000,000 at any one time outstanding in the case of
Indebtedness Incurred by MGI and its Restricted Subsidiaries other than Pacific
Lumber and its Subsidiaries that are Restricted Subsidiaries, and $7,500,000 at
any one time outstanding in the case of Indebtedness Incurred by the Company;
(xi) Indebtedness of Scotia Pacific under the Timber Notes or the Timber Note
Indenture or in respect of the Scotia Pacific Agreements or any other agreement
entered into in connection with the Timber Notes, as the same may be amended
from time to time in accordance with the covenant described below under
"Amendment of Scotia Pacific Agreements"; and (xii) Capital Lease Obligations of
Scotia Pacific.
Notwithstanding anything to the contrary in the two immediately preceding
paragraphs, the Indenture permits the Company and its Restricted Subsidiaries
(other than Scotia Pacific so long as there are any Timber Notes outstanding) to
Incur Indebtedness all of the net proceeds of which (after premiums, reasonable
fees, expenses, and costs related to the Incurrence of such Indebtedness) are
applied to renew, extend, restructure, restate, refund or otherwise refinance,
in whole or in part (collectively "refinance"), the Indebtedness permitted by
the provisions described in the first paragraph of this description of the
limitation of Indebtedness or in clauses (i) and (iii) of the immediately
preceding paragraph or any one or more successive refinancings thereof
(collectively, "Refinancing Indebtedness"), provided that: (i) such Refinancing
Indebtedness is in an aggregate amount not exceeding the aggregate amount
outstanding of the Indebtedness being so refinanced plus an amount equal to the
premiums, reasonable fees and expenses incurred in connection with such
refinancing; (ii) with respect to Refinancing Indebtedness which refinances
Indebtedness of the Company which ranks (pursuant to its terms) subordinate in
right and priority of payment to the Notes, (A) the final stated maturity date
of such Refinancing Indebtedness shall not be earlier than the final stated
maturity date of the Indebtedness being so refinanced, (B) in the case of such
Refinancing Indebtedness Incurred by the Company, such Refinancing Indebtedness
is ranked (pursuant to its terms) subordinate in right and priority of payment
to the Notes to the same extent as the Indebtedness being so refinanced, and
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(C) such Refinancing Indebtedness has an Average Life at the time it is Incurred
which is not less than the remaining Average Life of the Indebtedness being so
refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing
Indebtedness to refinance Indebtedness of the Company pursuant to the provisions
described in this paragraph except to the extent that such Refinancing
Indebtedness constitutes a guarantee by such Restricted Subsidiary of
Indebtedness of the Company (it being understood that such Restricted Subsidiary
may incur Indebtedness to refinance Indebtedness of the Company to the extent
that the Incurrence of such Indebtedness is otherwise permitted by the
provisions described in the preceding two paragraphs).
Any revocation of the designation of an Unrestricted Subsidiary shall be
deemed for purposes of the Limitation on Indebtedness covenant to be an
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of the
Indebtedness of such Unrestricted Subsidiary as of the time of such revocation
to the extent such Indebtedness does not already constitute Indebtedness of the
Company or one of its Restricted Subsidiaries.
Notwithstanding anything to the contrary in the foregoing, so long as Britt
remains a Restricted Subsidiary, Britt may not Incur after the Issue Date
Indebtedness (other than Indebtedness in respect of the Notes, the MGI Notes and
Indebtedness owed to the Company or MGI and Refinancing Indebtedness in respect
of the foregoing) in an aggregate principal amount exceeding $5,000,000 at any
time outstanding.
The Indenture contains no limitations on the amount of Indebtedness which
any Unrestricted Subsidiary may incur, create, assume, guarantee or otherwise
become liable.
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary, directly or indirectly, to, (i)(x) declare or pay any
dividend or make any distribution on the Company's Capital Stock or the
Company's Redeemable Stock (other than (A) in either case, dividends or
distributions payable in Capital Stock that is not convertible or exchangeable
into Redeemable Stock or Indebtedness of the Company and (B) in the case of the
Company's Redeemable Stock, dividends and distributions in an amount not
exceeding (in addition to any dividends or distributions declared or paid in
accordance with clause (A) above) the amount stated to be payable on such
Redeemable Stock pursuant to the provisions thereof) or (y) purchase, redeem or
otherwise acquire or retire for value any Capital Stock or Redeemable Stock of
the Company (each of the foregoing in clauses (x) and (y) a "Restricted
Payment"), (ii) make any Restricted Investment, (iii) make any Investment in an
Unrestricted Subsidiary (an "Unrestricted Investment"), or (iv) redeem,
repurchase, defease or otherwise acquire or retire for value (a "Repurchase"),
prior to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, Indebtedness of the Company which ranks (pursuant to its terms)
subordinate in right and priority of payment to the Notes and which was
scheduled to mature subsequent to the final stated maturity of all principal of
the Notes (other than acquisitions of such Indebtedness in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of such acquisition), if, at the
time of such Restricted Payment, Restricted Investment, Unrestricted Investment
or Repurchase: (A) a Default shall have occurred and be continuing; or (B) after
giving effect to such Restricted Payment, Restricted Investment, Unrestricted
Investment or Repurchase, by the Company or any Restricted Subsidiary, the
aggregate amount (i) expended for all such Restricted Payments and Repurchases
subsequent to the Issue Date, (ii) of all Restricted Investments then
outstanding (the amount expended for such Restricted Payments, Repurchases and
Restricted Investments subsequent to the Issue Date, the amount of any
Restricted Investments outstanding at any time, and the amount of any Restricted
Investments returned or reduced, in each case if other than in cash or a sum
certain guaranteed, to be the fair market value as determined in good faith by
the Board of Directors, whose determination shall be evidenced by a resolution
of the Board of Directors filed with the Trustee), and (iii) of all Unrestricted
Investments Outstanding, exceeds the sum of: (1) 50% of the aggregate
Consolidated Net Income of the Company accrued on a cumulative basis subsequent
to September 30, 1996 (or, in case such aggregate cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss), and (2) the aggregate net cash
proceeds, received by the Company as capital contributions to the Company
subsequent to September 30, 1996, or from the issue or sale (other than to a
Subsidiary of the Company) subsequent to September 30, 1996 of Capital Stock
(including Capital Stock issued upon the conversion of, or
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in exchange for, Indebtedness or Redeemable Stock (other than that issued
pursuant to clause (ii) of the penultimate paragraph under this description of
the Limitation on Restricted Payments covenant) and including upon exercise of
warrants or options or other rights to purchase such Capital Stock, issued
subsequent to September 30, 1996), or from the issue or sale, subsequent to
September 30, 1996 of any Indebtedness (other than that issued pursuant to
clause (ii) of the penultimate paragraph under this description of the
Limitation on Restricted Payments covenant) or, without duplication, other
security of the Company convertible or exercisable into such Capital Stock that
has been so converted or exercised.
Transactions and payments which are permitted by the provisions described
below in the second paragraph under " -- Limitation on Transactions with
Affiliates" will not be considered Restricted Payments or Restricted
Investments.
The provisions of the Limitation on Restricted Payments covenant described
above will not be violated by reason of: (i) the payment of any dividend or
distribution or the redemption of any securities within 60 days after the date
of declaration of such dividend or distribution or the giving of the formal
notice of such redemption, if at said date of declaration of such dividend or
distribution or the giving of the formal notice of such redemption, such
dividend, distribution or redemption would have complied with the first
paragraph under this description of the Limitation on Restricted Payments
covenant and so long as no Event of Default exists as of the payment date; (ii)
redemptions, repurchases, defeasances, acquisitions or retirements for value, of
indebtedness of the Company which ranks (pursuant to its terms) subordinate in
right and priority of payment to the Notes from the proceeds of Refinancing
Indebtedness permitted by the provision described above in the third paragraph
under " -- Limitation on Indebtedness"; (iii) the acquisition, redemption or
retirement of any shares of the Company's Capital Stock or any Indebtedness of
the Company in exchange for, or in connection with a substantially concurrent
issuance of, Capital Stock of the Company (provided such Capital Stock is not
exchangeable for or convertible into Redeemable Stock or Indebtedness of the
Company or any of its Subsidiaries); (iv) the repurchase of the Company's
Capital Stock or Redeemable Stock with the proceeds of a substantially
concurrent issuance of the Company's Capital Stock that is not convertible or
exchangeable into Redeemable Stock or Indebtedness of the Company; (v) the
making by Pacific Lumber or its Restricted Subsidiaries of an Unrestricted
Investment to the extent the amount of Unrestricted Investments Outstanding made
pursuant to this clause (v) does not exceed $25 million, provided that none of
the funds used by Pacific Lumber or its Restricted Subsidiaries to make any such
Unrestricted Investment is obtained from the Company or any Restricted
Subsidiary (other than Pacific Lumber or a Restricted Subsidiary of Pacific
Lumber); (vi) dividends or distributions of (A) any Kaiser Shares that are
either (x) released from the Lien of the Indenture pursuant to the provision
described in the second paragraph under " -- Security -- Release and
Substitution of Pledged Kaiser Shares" or (y) Released Kaiser Shares that are
not required to be subjected to the Lien of the Indenture upon release from the
Lien of the MGI Indenture or (B) cash, securities or other property received by
the Company upon the sale of any such Kaiser Shares or (C) any proceeds of
Kaiser Shares that are (x) released from the Lien of the Indenture or (y)
released from the Lien of the MGI Indenture and not required to be subjected to
the Lien of the Indenture upon such release; or (vii) the payment of any
dividends or distributions by the Company with fifty percent (50%) of the fair
market value (as determined in good faith by the Board of Directors, whose
determination shall be evidenced by a resolution of the Board of Directors filed
with the Trustee) of Salmon Creek Distributions received by the Company (less
50% of any income taxes payable by the Company in respect of the receipt by the
Company of such Salmon Creek Distributions, or in respect of the sale or other
disposition by the Company of any non-cash proceeds of such Salmon Creek
Distributions (to the extent that Salmon Creek Distributions dividended or
distributed by the Company are the proceeds of such sales or other
dispositions)) provided that: (x) such dividends or distributions (to the extent
made in cash) shall not exceed 50% of the amount of cash so received by the
Company (including any cash realization of any non-cash proceeds of any Salmon
Creek Distribution, but, in each case, only as, when, and to the extent,
received by the Company) in respect of Salmon Creek Distributions, and (y) such
dividends or distributions (to the extent made in kind with property received by
the Company in a Salmon Creek Distribution) shall be valued at fair market value
(as determined in good faith by the Board of Directors, whose determination
shall be evidenced by a resolution of the Board of Directors filed with the
Trustee, except to the extent the fair market value exceeds $10 million, in
which case such determination shall be made by an investment banking firm with
capital of at
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least $250 million or a nationally recognized appraiser or other expert selected
by the Company whose opinion shall be delivered, and shall be acceptable, to the
Trustee). No payment or other transfer made pursuant to the provisions described
in clauses (ii) through (vii) of this paragraph will reduce the amount available
for Restricted Payments, Restricted Investments, Unrestricted Investments or
Repurchases under the provisions described in the first paragraph under this
description of the Limitation on Restricted Payments covenant and the
application of proceeds from the issuance of Capital Stock applied pursuant to
the provision described in clause (iii) or (iv) of this paragraph will not
reduce the amount available for Restricted Payments, Restricted Investments,
Unrestricted Investments or Repurchases under the provisions described in the
first paragraph under this description of the Limitation on Restricted Payments
covenant; provided, however, that the proceeds from the issuance of Capital
Stock pursuant to the provisions described in clauses (iii) and (iv) of this
paragraph will not increase the amount available for Restricted Payments,
Unrestricted Investments, Restricted Investments and Repurchases under the
provisions described in the first paragraph under this description of the
Limitation on Restricted Payments covenant.
Notwithstanding anything to the contrary contained in the Indenture (but
subject to the covenant entitled " -- Limitation on Transactions With
Affiliates"), the Company or any of its Restricted Subsidiaries shall be
permitted to contribute any non-cash proceeds received in respect of a Salmon
Creek Distribution to one or more Unrestricted Subsidiaries and such
contribution(s) shall not constitute an Unrestricted Investment under the
Indenture.
Ownership of Capital Stock of Subsidiaries and Kaiser Shares
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of,
directly or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia
Pacific (it being understood that no issue, sale, assignment, transfer or other
disposition of any Capital Stock or Redeemable Stock of any Restricted
Subsidiary (other than Scotia Pacific) shall be deemed to violate the provision
described in this clause (i) provided that Pacific Lumber thereafter continues
to own directly all outstanding Stock of Scotia Pacific), (ii) any Capital Stock
or Redeemable Stock of MGI, Pacific Lumber, Britt or MPI if immediately
thereafter, or as a consequence thereof, the Company shall beneficially own,
directly or indirectly, less than a majority of the Voting Stock and outstanding
equity interests (on a fully diluted basis) of any such company (other than in a
transaction governed by and in compliance with the provision described above
under "-- Security -- Merger by MGI" or Section 10.13 of the MGI Indenture (as
in effect on the date of the Indenture)), (iii) any assets of Scotia Pacific for
consideration consisting in whole or in part of Capital Stock or Redeemable
Stock of another person which is not a Wholly Owned Restricted Subsidiary, (iv)
any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than
Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) (except to the Company or to
one or more Restricted Subsidiaries) or any assets of any Restricted Subsidiary
(other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) for consideration
consisting in whole or in part of Capital Stock or Redeemable Stock of another
person which is not a Wholly Owned Restricted Subsidiary unless, in the case of
this clause (iv), immediately after giving effect thereto and the receipt and
application of the proceeds therefrom, the Consolidated Cash Flow Coverage Ratio
of the Company would be greater than 1.5 to 1; provided, however, that this
provision shall permit, assuming compliance with certain provisions governing
the release of Collateral described above under "-- Security" (including the
provisions described under "-- Merger by MGI") and the provisions described
below under " -- Successor Company," in each case to the extent applicable, the
disposition in a single transaction or in a series of related transactions of
all of the Capital Stock of any Restricted Subsidiary then owned by the Company
or its Restricted Subsidiaries for a consideration consisting of cash or other
property (other than Capital Stock or Redeemable Stock of another person) which
is at least equal to the fair value (as reasonably determined by the Board of
Directors of the Company) of such Capital Stock; and provided, further, that any
entity resulting from any transaction or disposition permitted by the covenant
described in clause (iv) of this paragraph shall be or become a Restricted
Subsidiary.
The Indenture also provides that, until such time as the maximum number of
Kaiser Shares required to be pledged as Collateral pursuant to the Indenture are
included in the Collateral, the Company shall not sell, transfer, assign, pledge
or otherwise dispose of any Kaiser Shares (i) to a Subsidiary of the Company or
to
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MAXXAM or (ii) in violation of any of the provisions of the MGI Indenture. In
addition, the Indenture provides that the Company shall not sell, transfer,
assign, pledge or otherwise dispose of any Pledged Shares except pursuant to the
provisions described under "-- Security -- Release for Pledged Share Sales,"
"-- Release and Substitution of Pledged Kaiser Shares" and "-- Merger by MGI"
and under "-- Successor Company" and except for certain tax liens, liens arising
by operation of law and judgment liens.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual restriction or
encumbrance on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or Redeemable
Stock or any other interest or participation in, or measured by, its profits, in
each case, owned by the Company, or pay any Indebtedness owed to the Company or
any Restricted Subsidiary of the Company, (ii) make loans or advances to the
Company or any Restricted Subsidiary of the Company, or (iii) make any transfer
of any of its assets to the Company or a Restricted Subsidiary.
The foregoing provisions will not prohibit encumbrances or restrictions now
or hereafter existing under or by reason of: (i) the Indenture, the MGI
Indenture or the Pacific Lumber Indenture; (ii) the Credit Agreement; (iii)(A)
customary provisions restricting subletting or assignment of any lease of the
Company or any Restricted Subsidiary of the Company, or (B) customary
restrictions imposed on the transfer of copyrighted or patented materials or
provisions in agreements that restrict the assignment of such agreement or any
rights thereunder; (iv) any instrument governing Indebtedness or other
obligations of a person acquired (whether pursuant to a purchase of stock or
assets) by the Company or any Restricted Subsidiary or applicable to any assets
so acquired at the time such person became a Subsidiary of the Company or such
assets were acquired by the Company or a Restricted Subsidiary (excluding
instruments entered into by such person in connection with, or in contemplation
of, its becoming a Subsidiary of the Company or its assets being acquired by the
Company or any Restricted Subsidiary, as the case may be), which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person or the property or assets of the person so
acquired (including the Capital Stock or Redeemable Stock thereof) or any entity
formed to effect such acquisition, and, in each case, the monetary proceeds
thereof; (v) Indebtedness or other obligations existing on the Issue Date; (vi)
the subordination (pursuant to its terms) in right and priority of payment to
Indebtedness of the Company or any of its Restricted Subsidiaries of any
Indebtedness owed by the Company or any Restricted Subsidiary of the Company to
the Company or any of its other Restricted Subsidiaries, provided (A) the
Indebtedness is permitted under the Indenture and (B) the Board of Directors has
determined in good faith at the time of the creation of such encumbrance or
restriction that such encumbrance or restriction would not singly or in the
aggregate have a material adverse effect on the Holders of the Notes; (vii)
restrictions imposed by covenants contained in any refinancing of Indebtedness
or other obligations described in clauses (i), (ii), (iv), (v) and (ix) of this
paragraph, provided that such restrictions are, in the good faith determination
of the Board of Directors, on the whole, not materially more restrictive than
such restrictions contained in such refinanced Indebtedness; (viii) restrictions
imposed by applicable laws or regulations or pursuant to condemnation or eminent
domain proceedings; (ix) restrictions on Scotia Pacific and/or any of its
Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of Trust, the
Timber Note Indenture or any other agreements entered into in connection with
the Timber Notes, as the same may be amended in accordance with the provision of
the Indenture described below under "-- Amendment of Scotia Pacific Agreements";
(x) an agreement which has been entered into for the sale or disposition of all
or substantially all of the Stock or assets of a Restricted Subsidiary of the
Company, provided, however, that such encumbrances or restrictions are limited
to the Stock or assets being sold or disposed of; (xi) applicable law and
agreements with foreign governments with respect to assets located in their
respective jurisdictions; or (xii) customary provisions placing limitations on
the payment of dividends on shares of stock contained in the terms of Preferred
Stock instruments issued in compliance with the Indenture. Although there is no
single established meaning of the phrase "all or substantially all of the Stock
or assets" under the law governing the Indenture and the amount of Stock or
assets that will constitute "all or substantially all of the Stock or assets" of
a Subsidiary of the Company is not readily quantifiable, a determination as to
whether
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an agreement described in clause (x) of this paragraph has been entered into
will depend on the percentage of issued and outstanding Stock or operating and
total assets transferred, as the case may be, among other measurements, and the
facts and circumstances of the transaction. In any particular transaction, this
determination will be made by the Company, and, subject to the limitations on a
Holder's rights to institute suit with respect to the Indenture or the Notes (as
described below under "-- Events of Default; Notice and Waiver"), a Holder could
institute an action to dispute the Company's determination in any particular
transaction.
The provisions of the first paragraph under this description of the
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
covenant do not prohibit Liens not prohibited by the provisions described below
under "-- Limitation on Liens" or restrictions on the sale or other disposition
of any property securing Indebtedness, provided that such Indebtedness is
otherwise permitted by the Indenture.
Limitation on Asset Sales
The Indenture provides that neither the Company nor any Restricted
Subsidiary thereof will consummate any Asset Sale unless (except in the case of
an Asset Sale which is a Taking) (i) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal to the fair
value of the assets subject to such Asset Sale (as reasonably determined by the
Board of Directors), including the value of all non-cash consideration, and (ii)
at least 75% of the aggregate consideration (excluding indemnities) received
therefor by the Company or such Restricted Subsidiary is in the form of money or
Cash Equivalents. The amount of any liabilities of the Company or any Restricted
Subsidiary of the Company that is actually assumed by the transferee in such
Asset Sale shall be deemed to be money for purposes of determining the
percentage of money and Cash Equivalent consideration received by the Company
and its Restricted Subsidiaries.
When the Asset Sale Offer Amount (as defined below) exceeds $25,000,000,
each holder of the Notes will have the right to require the Company to apply the
total amount of such Asset Sale Offer Amount to purchase the Notes tendered
pursuant to an offer by the Company to purchase Notes at a purchase price equal
to 100% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to (but not including) the date of purchase, in accordance
with the procedures set forth in the Indenture. The Company will make such an
offer in the form, and requiring the information, specified in the Indenture to
the holders of the Notes (and to beneficial owners as required by applicable
law, including the Exchange Act and the rules and regulations thereof) within 30
days following the date that the aggregate Asset Sale Offer Amount exceeds
$25,000,000 (provided that the Company may in its discretion make such an offer
before such $25,000,000 threshold is met). The procedures pursuant to which the
Company will purchase the Notes, if a holder so elects, are substantially the
same as those described above under " -- Change of Control," provided that, if
the Asset Sale Offer Amount is insufficient to fund an offer to purchase all of
the outstanding Notes tendered into such Offer, such offer may be an offer to
purchase Notes on a pro rata basis. In no event will any Net Cash Proceeds that
are subjected to an offer to purchase Notes be required to be subjected to more
than one offer to purchase Notes.
For purposes of the foregoing requirement, "Asset Sale Offer Amount" means
the sum of the amount of Net Cash Proceeds from each Asset Sale by the Company
and its Restricted Subsidiaries (excluding the amount of Net Cash Proceeds that
has been subjected to a prior offer to purchase Notes in accordance with the
foregoing requirement) that, on the 360th day following consummation of such
Asset Sale (or the 540th day following the consummation of an Asset Sale to the
extent that such Asset Sale is by MGI and/or any Subsidiary of MGI that is a
Restricted Subsidiary (other than Pacific Lumber or any Subsidiary of Pacific
Lumber that is a Restricted Subsidiary) and is governed by the terms of the MGI
Indenture (an "MGI Asset Sale") or the 590th day following the consummation of
an Asset Sale to the extent that such Asset Sale is by Pacific Lumber and/or any
Subsidiary of Pacific Lumber that is a Restricted Subsidiary, other than Scotia
Pacific so long as any Timber Notes are outstanding, and is governed by the
terms of the Pacific Lumber Indenture (a "PL Asset Sale")), the Company and/or
its Restricted Subsidiaries have not either: (i) reinvested, or entered into
binding obligations (subject to customary closing and termination provisions) to
reinvest, in additional assets to be used in one or more lines of business
(including capital expenditures) in
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which the Company and its Restricted Subsidiaries are engaged as of the Issue
Date (or reasonably related extensions of such lines); or (ii) applied to make
repayments or purchases of the Notes, the MGI Notes or the Pacific Lumber Senior
Notes (or Indebtedness ranking pari passu in right and priority of payment with
the Notes, the MGI Notes or the Pacific Lumber Senior Notes); provided that (x)
Net Cash Proceeds of any MGI Asset Sale, to the extent not applied pursuant to
the provisions described in clauses (i) and (ii) above, shall be included in the
Asset Sale Offer Amount only to the extent permitted to be distributed or paid
as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on
the date of the Indenture) and applicable law on the earlier of (A) the 450th
day following the consummation of such MGI Asset Sale and (B) the consummation
of any offer to purchase MGI Notes which MGI is required to make with such Net
Cash Proceeds pursuant to the MGI Indenture, (y) Net Cash Proceeds of any PL
Asset Sale, to the extent not applied pursuant to the provisions described in
clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount
only to the extent (A) permitted to be distributed or paid as a dividend
pursuant to Section 4.04(a) of the Pacific Lumber Indenture and applicable law
on the earlier of (1) the 450th day following the consummation of such PL Asset
Sale and (2) the consummation of any offer to purchase Pacific Lumber Senior
Notes which Pacific Lumber is required to make with such Net Cash Proceeds
pursuant to the Pacific Lumber Indenture and (B) permitted to be distributed or
paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in
effect on the date of the Indenture) and applicable law on the earlier of (1)
the 590th day following the consummation of such PL Asset Sale and (2) the
consummation of any offer to purchase MGI Notes which MGI is required to make
with such Net Cash Proceeds pursuant to the MGI Indenture, and (z) Net Cash
Proceeds of any Primary Share Sale by MGI, to the extent not applied pursuant to
the provisions described in clauses (i) and (ii) above, shall be included in the
Asset Sale Offer Amount only to the extent permitted to be distributed or paid
as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on
the date of the Indenture) on the 270th day following the consummation of such
Primary Share Sale.
The foregoing will not apply to (i) a consolidation or merger of the
Company or a transfer, conveyance, sale or lease of all or substantially all of
the Company's assets, provided that any such transaction complies with the terms
contained in the covenant described below under " -- Successor Company," or (ii)
any transaction permitted by the covenant described above under " -- Limitation
on Restricted Payments."
Primary Share Sales generally will constitute Asset Sales, except for (i)
Primary Share Sales effected by Kaiser and (ii) Primary Share Sales by MGI to
the extent Net Proceeds thereof are distributed on the Pledged MGI Shares. Any
Net Proceeds of a Primary Share Sale that are distributed on any Pledged Shares
will be used to fund an offer to purchase Notes or optional redemption of Notes
in accordance with the provisions described above under " -- Security -- Offers
to Purchase Notes with Certain Proceeds of Collateral" and under
" -- Security -- Release of Trust Moneys to Fund Optional Redemptions."
The Company will comply with all applicable tender offer rules (including,
without limitation, Sections 13(e) and 14(e) of the Exchange Act and the Rules
and Regulations promulgated pursuant thereto) if a purchase option is triggered
under the circumstances described herein.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries, Salmon Creek (or any successor to Salmon Creek
or any transferee of substantially all of the assets of Salmon Creek so long as
such successor or transferee is a Subsidiary of the Company) or any Unrestricted
Subsidiary to which the Company or any of its Restricted Subsidiaries makes a
contribution of non-cash proceeds received in respect of a Salmon Creek
Distribution pursuant to the provision described in the last paragraph under
"Limitation on Restricted Payments" (each, a "Company Party") to, enter into any
transaction or transactions with any Affiliate of the Company, unless: (i) the
terms thereof are not less favorable to the Company Party than those that could
reasonably be obtained in a comparable transaction at such time with a person
who is not an Affiliate of the Company; (ii) such transaction shall have been
approved as meeting such standard, in good faith, by a majority of the members
of the Board of Directors; and (iii) with respect to any transaction or series
of related transactions involving payments and consideration in excess of
$10,000,000, the Company shall have obtained and made available to the Trustee
an opinion of a nationally recognized
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investment banking firm stating that the terms of such transaction or series of
transactions are fair from a financial point of view to the Company Party. The
Company will deliver to the Trustee, within 60 days after the end of each fiscal
quarter of the Company, an Officers' Certificate which will briefly describe and
specify the aggregate dollar amount of transactions (other than the transactions
set forth in the next paragraph, except in clause (vii) thereof) with Affiliates
of the Company occurring during such fiscal quarter.
The provisions contained in the foregoing paragraph do not apply to: (i)
any transactions permitted by the provisions described above in the first
paragraph, or in clauses (i), (v), (vi) and (vii) of the third paragraph, under
" -- Limitation on Restricted Payments"; (ii) the execution and delivery of,
performance of, and the making of any payments required by, the Tax Sharing
Agreements; (iii) the execution and delivery of, performance of, and the making
of any payments required by, the Bering Agreement; (iv) the making of payments
to MAXXAM for reimbursement for actual services provided thereby to the Company
and its Subsidiaries based on actual costs and an allocable share of overhead
expenses consistent with prior practices; (v) compensation, indemnification and
other benefits paid or made available to officers, directors and employees of
any Company Party for services rendered in such person's capacity as an officer,
director, or employee (including reimbursement or advancement of reasonable
out-of-pocket expenses and directors' and officers' liability insurance); (vi)
execution and delivery of, the performance of, and the making of any payments
required by, the MXM Guaranty; (vii) the execution, delivery and performance of,
and the making of any payments or the taking of any action required or
contemplated by, any agreements initially entered into by a Company Party with
one or more Affiliates, in which MAXXAM (and no other Affiliate) has an equity
interest of 30% or less (each, a "Headwaters Joint Venture") relating to the
ownership, holding, development or disposition of any non-cash or non-Cash
Equivalent property (whether an individual property or a group of properties)
received by Pacific Lumber or any of its Subsidiaries as a Salmon Creek
Distribution in connection with or relating to the transactions referred to in
or contemplated by the information set forth above under the caption "Business
of the Company -- Headwaters Agreement" (each, an "Initial Salmon Creek
Agreement") provided that each Initial Salmon Creek Agreement satisfies the
provisions described above in the foregoing paragraph and that each subsequent
agreement entered into by a Company Party and any transaction between any
Headwaters Joint Venture and any Affiliate subsequent to the execution of an
Initial Salmon Creek Agreement that relate to the subject matter of such Initial
Salmon Creek Agreement satisfies the provisions of clauses (i) and (ii)
described above in the foregoing paragraph; provided, further, that (a) each
such subsequent agreement involving payments and other consideration paid to or
received by any Company Party, or involving payments and other consideration
paid to or received from any Headwaters Joint Venture by any Affiliate, in
excess of $10.0 million shall satisfy the requirements of the first paragraph of
this " -- Limitation on Transactions with Affiliates" covenant, and (b) any
material amendment of any Initial Salmon Creek Agreement or any such subsequent
agreement shall be on terms (considered as a whole) no less favorable to any
Company Party, relative to MAXXAM, than the terms of such Initial Salmon Creek
Agreement; (viii) the execution, delivery and performance of any agreements
granting any Lien permitted by the provision described in clause (xv) under
" -- Limitation on Liens" or any amendment to any such agreement, to the extent
that such agreement or amendment thereto does not create or evidence
Indebtedness of the Company or any Restricted Subsidiary of the Company; and
(ix) the making of the loan evidenced by the Intercompany Note and any amendment
to the Intercompany Note to the extent such amendment does not materially
adversely affect the Company's ability to pay its obligations on the Notes; in
the case of clauses (iii) and (iv) of this paragraph, to the extent the
aggregate amount of payments pursuant to such clauses does not exceed $5.0
million in any calendar year, which amount shall be adjusted for each calendar
year, commencing with the calendar year beginning January 1, 1996 (each, an
"Adjustment Period"), by multiplying such amount by a fraction, the numerator of
which shall be the then most recent Producer Price Index (Lumber and Wood
Products Commodity Groups) (Standard Industrial Classification No. 2400), as
published by the United States Department of Labor, Bureau of Labor Statistics
(the "PPI Index"), in effect on the first day of such Adjustment Period, and the
denominator of which shall be the most recent PPI Index published as of January
1, 1993.
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Limitation on Liens
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will incur, assume, suffer to exist, create or otherwise cause to
be effective Liens upon any of their respective assets to secure Indebtedness
except: (i) Liens existing on the Issue Date; (ii) Liens securing all or any
Indebtedness outstanding under the Credit Agreement; (iii) Liens incurred or
pledges and deposits in connection with workers' compensation, unemployment
insurance and other social security benefits, leases, appeal bonds and other
obligations of like nature incurred by the Company or any Restricted Subsidiary
in the ordinary course of business; (iv) Liens imposed by law, including,
without limitation, mechanics', carriers', warehousemen's, materialmen's,
suppliers' and vendors' Liens, incurred by the Company or any Restricted
Subsidiary in the ordinary course of business; (v) zoning restrictions,
easements, licenses, covenants, reservations, restrictions on the use of real
property or minor irregularities of title incident thereto, which do not in the
aggregate have a material adverse effect on the operation of the business of the
Company or its Restricted Subsidiaries taken as a whole; (vi) Liens for ad
valorem, income or property taxes or assessments and similar charges either (A)
not delinquent or (B) contested in good faith by appropriate proceedings and as
to which the Company has set aside on its books reserves to the extent required
by GAAP; (vii) Liens in respect of purchase money Indebtedness incurred to
acquire assets or Stock provided that such Liens are limited to the assets or
Stock acquired with the proceeds of such Indebtedness (and the proceeds of such
assets or Stock); (viii) Liens securing Indebtedness permitted by the covenant
described above under "-- Limitation on Indebtedness" which refinances secured
Indebtedness, so long as such Liens are limited to the collateral which secures
the Indebtedness being refinanced and the proceeds of such collateral; (ix)
Liens on any assets or the Stock of any Subsidiary of the Company which assets
or Stock are acquired by the Company or a Restricted Subsidiary subsequent to
the date of the Indenture and which Liens were in existence on or prior to the
acquisition of such assets or Stock of such Subsidiary (to the extent that such
Liens were not created in contemplation of such acquisition); provided that such
Liens are limited to the assets so acquired or the Stock of such acquired
Subsidiary (or the entity organized to effect such acquisition) and the proceeds
thereof; (x) Liens securing Indebtedness permitted by the provisions described
above in clauses (vi), (viii), (ix) or (xii) of the second paragraph under
"-- Limitation on Indebtedness"; provided, in each such case, that such Liens
are limited to the assets financed with the proceeds of the Indebtedness
incurred pursuant to such provisions (and the proceeds of such assets); (xi)
Liens securing Indebtedness under any Interest Rate Protection Agreement
permitted by the provisions described above in clause (vii) of the second
paragraph under "-- Limitation on Indebtedness," provided that such Liens are
limited to the collateral which secures the Indebtedness to which such Interest
Rate Protection Agreement relates; (xii) Liens imposed pursuant to condemnation
or eminent domain or substantially similar proceedings or in connection with
compliance with environmental laws or regulations; (xiii) Liens granted pursuant
to the Timber Notes, the Timber Note Indenture or the Deed of Trust, in
connection with the Timber Notes or in connection with any of the Scotia Pacific
Agreements, or in connection with any other agreement entered into in connection
with the Timber Notes; (xiv) other Liens securing Indebtedness not exceeding
$25,000,000 in aggregate principal amount; (xv) Liens on assets referred to in
the provision described in clause (vi) of the third paragraph under
"-- Limitation on Restricted Payments" and on the proceeds of such assets; and
(xvi) Liens in favor of the Trustee pursuant to the Indenture, Liens in favor of
the trustee under and pursuant to the MGI Indenture and Liens in favor of the
trustee under and pursuant to the Pacific Lumber Indenture.
Amendment of Scotia Pacific Agreements or Intercompany Note
The Indenture provides that the Company will not permit Scotia Pacific to
agree to amend the Timber Note Indenture, the Deed of Trust, or any of the
Scotia Pacific Agreements, unless such amendment (i) is to cure any ambiguity,
omission, defect or inconsistency, or to add to the covenants of Scotia Pacific
for the benefit of the Company or the Holders or to surrender any right or power
conferred in the Master Purchase Agreement on Scotia Pacific, or (ii) does not
materially adversely affect the ability of the Company to pay principal or
interest on the Notes when due. The Indenture also provides that the Company
will not agree to any amendment or modification of the Intercompany Note unless
such amendment (i) is to cure any ambiguity, omission, defect or inconsistency,
or to add to the covenants of MAXXAM for the benefit of the
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Company or the Holders or (ii) does not materially adversely affect the ability
of the Company to pay principal or interest on the Notes when due.
Limitation on Liens on Pledged Shares
Except for certain tax Liens, Liens arising by operation of law and
judgment Liens, the Company may not permit to exist, will defend the Pledged
Shares and the Intercompany Note against, and will take such action as is
necessary to remove, any Lien or claim on or in respect of any Pledged Shares
and/or the InterCompany Note.
Declaration and Payment of Dividends by MGI
MGI shall, to the extent that there exists any consensual restriction or
encumbrance on its ability to pay dividends or make any other distributions on
its Capital Stock ("Dividend Encumbrances"), declare and pay dividends to its
stockholders to the maximum extent permitted by the instruments or other
agreements containing such Dividend Encumbrances, unless the Board of Directors
of MGI determines in good faith (whose determination shall be evidenced by a
resolution of the Board of Directors filed with the Trustee) that the
declaration or payment of such dividend would be detrimental to the capital and
other operating needs of MGI.
SUCCESSOR COMPANY
The Indenture provides that, except as permitted by the provisions
described above under "-- Security -- Merger by MGI," the Company may not
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all of its assets to, any person or group of related persons in a
single transaction or series of related transactions, or permit any of its
Restricted Subsidiaries to enter into any such transaction or transactions if
such transaction or transactions in the aggregate would result in a transfer of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries on a consolidated basis to any person other than the Company,
unless (except as permitted by the provisions contained in Article 10 of the
Indenture): (i) the resulting, surviving or transferee person (if other than the
Company) is organized and existing under the laws of the United States of
America or a State thereof or the District of Columbia and such entity expressly
assumes by supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture (in which event the Company (except in the event of a
lease of all or substantially all of the Company's assets) shall be relieved of
its obligations under the Indenture and the Notes) and such entity and/or each
other person that, upon consummation of such transaction or transactions,
obtains ownership of any portion of the Collateral (to the extent such
Collateral is not released from the Lien of the Indenture in accordance with the
terms thereof) grants a security interest in such Collateral (of like tenor to
the security interest theretofore granted on the Issue Date with respect to such
Collateral) and expressly assumes, by supplemental indenture to the Indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company with respect to such Collateral set forth in
Article 10 of the Indenture; (ii) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing, (iii) except in
the case of a merger, or a transfer of all or substantially all assets, of a
Restricted Subsidiary into or to the Company or into or to another Restricted
Subsidiary, immediately after giving effect to such transaction, the
Consolidated Cash Flow Coverage Ratio of the Company or the surviving entity
would exceed 2.0 to 1.0, (iv) the Company shall have delivered to the Trustee an
Officers' Certificate to the foregoing effect and an Opinion of Counsel, stating
that such consolidation, merger or transfer, conveyance or lease (other than the
calculation of the Consolidated Cash Flow Coverage Ratio as to which counsel
need not opine) and such supplemental indenture comply with the Indenture; and
(v) the Lien of the Indenture on the Collateral in favor of the Trustee for the
benefit of Holders of the Notes has not been materially impaired in
contravention of the provisions of the Indenture as a result of such transaction
or transactions, provided that MGI may merge or consolidate with or transfer
substantially all of its assets to a Restricted Subsidiary of the Company
pursuant to a transaction in compliance with the provisions described above
under "-- Security -- Merger by MGI." Each person that becomes a pledgor with
respect to any Collateral upon consummation of such transaction or
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transactions will succeed to, and may exercise every right and power of, the
Company with respect to such Collateral prior to such consummation with the same
effect as if such person had originally been a pledgor with respect to such
Collateral under the Indenture and each person who ceases to be such a pledgor
upon such consummation will be relieved of its obligations as a pledgor under
the Indenture. Although there is no single established meaning of the phrase
"all or substantially all of the assets" under the law governing the Indenture
and the amount of assets that will constitute "all or substantially all" of the
assets of the Company and its Restricted Subsidiaries on a consolidated basis is
not readily quantifiable, a determination as to whether such a sale, lease,
conveyance or other disposition has occurred will depend on the percentage of
operating and total assets transferred, among other measurements, and other
facts and circumstances of the transaction. Based upon the foregoing factors, it
is possible that a sale, lease, conveyance or other disposition of a significant
amount of assets by the Company would not be deemed to constitute a sale, lease,
conveyance or other disposition of "all or substantially all" of the assets of
the Company and, subject to the limitations on a Holder's rights to institute
suit with respect to the Indenture (as described under "Events of Default;
Notice and Waiver"), a Holder could institute an action to dispute the Company's
determination in any particular transaction.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that if an Event of Default occurs and is
continuing, the Trustee, or the holders of at least 25% of the aggregate
principal amount of the Notes then outstanding may declare the principal amount
of and accrued interest on all the Notes to be due and payable. In the case of
certain events of bankruptcy or insolvency the principal of and interest on all
the Notes then outstanding will automatically become and be immediately due and
payable. Under certain circumstances specified in the Indenture, the holders of
a majority in aggregate principal amount of the Notes then outstanding, by
notice to the Trustee, may rescind an acceleration and its consequences.
An "Event of Default" under the Indenture includes: (i) failure of the
Company to pay interest for a period of 30 days or principal when due on any of
the Notes; (ii) the failure of the Company to perform any other covenant or
agreement contained in the Indenture for 60 days after notice (other than a
covenant or agreement on the part of the Company, a default in whose performance
or breach is specifically addressed elsewhere in the "Event of Default"
provisions); (iii) a payment default at final maturity or acceleration of
payment of any indebtedness of the Company, or any Restricted Subsidiary
thereof, in an aggregate principal amount exceeding $10,000,000; (iv) certain
events of bankruptcy, insolvency or reorganization with respect to the Company
or any Significant Subsidiary; and (v) a final judgment or order for the payment
of money aggregating in excess of $10,000,000 (to the extent not covered by
insurance) being rendered against the Company or any Restricted Subsidiary and
not discharged within 60 days after such judgment or order becomes final and
non-appealable.
A holder of the Notes may not pursue any remedy with respect to the
Indenture or the Notes unless: (1) the holders of at least 25% of the aggregate
principal amount of the Notes then outstanding give to the Trustee written
notice stating that an Event of Default is continuing; (2) the holders of at
least 25% of the aggregate principal amount of the Notes then outstanding make a
written request to the Trustee to pursue the remedy; (3) such holders offer to
the Trustee reasonable security or indemnity against any loss, liability or
expense to be incurred in complying with such request; (4) the Trustee does not
comply with the request within 60 days after receipt of the notice, request and
offer of security or indemnity and such Event of Default has not been cured or
waived; and (5) the holders of a majority of the aggregate principal amount of
the Notes then outstanding do not give the Trustee a direction inconsistent with
the request during such 60-day period. A holder of the Notes may not use the
Indenture to prejudice the rights of another holder of the Notes or to obtain a
preference or priority over another holder of the Notes.
Where any event occurs which, with the giving of notice and the lapse of
time, would become an Event of Default under clauses (iii) or (v) above, the
Company is required under the Indenture to deliver to the Trustee, within 30
days after the occurrence thereof, an Officers' Certificate regarding that
event. Such notice must specify the status of such event and what action the
Company is taking or proposes to take with respect thereto. The Indenture
further provides that the Company must deliver an Officers' Certificate within
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120 days after the end of each fiscal year stating whether the signers know of
any Default that occurred during such period and, if so, describing the Default
and its status.
REPORTS TO HOLDERS OF THE NOTES
MAXXAM is, and the Company is not, subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act. Whether or not the Company and MAXXAM
are subject to such requirements, each of the Company and MAXXAM shall file with
the Commission (unless the Commission will not accept the same for filing) and
the Trustee, within fifteen days after it is or would have been required to file
the same with the Commission, copies of such annual reports and such
information, documents and other reports as it would file if it were subject to
the requirements of Section 13 or 15(d) of the Exchange Act. In addition, the
Company and MAXXAM have agreed that, for so long as any Notes remain
outstanding, they will furnish to the holders and to securities analysts and
prospective investors, upon request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture and the Notes may be amended,
supplemented or otherwise modified with the consent of the holders of at least a
majority (or, in the case of an amendment, supplement or other modification of
the provisions of Article 10 of the Indenture, which relates to the Collateral,
at least 66 2/3%) of the aggregate principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of at least a majority of the aggregate
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note affected thereby, no amendment, supplement,
other modification or waiver may, among other things: reduce the amount of Notes
whose holders must consent to an amendment, supplement, other modification or
waiver; reduce the rate of or extend the stated maturity of any payment of
interest on any Note; reduce the principal amount (at maturity or any other
time) of or extend the Stated Maturity of any payment of principal of any Note,
including upon redemption, or payment of the Asset Sale Purchase Price or Change
of Control Purchase Price; reduce the premium payable upon the redemption of any
Note, including upon redemption, or payment of the Asset Sale Purchase Price or
Change of Control Purchase Price; or make any Note payable in money other than
that stated in the Note. The right of any Holder to receive payment of principal
and interest in the Notes held by such Holder on or after the respective due
dates expressed therein, or to bring suit for enforcement of any such payment on
or after such respective due dates, may not be impaired or affected without such
Holder's consent; provided that no Holder shall have the right to institute any
such suit, if and to the extent that the institution or prosecution thereof or
the entry of judgment therein would, under applicable law, result in the
surrender, impairment, waiver or loss of the Lien on the Collateral created by
the Indenture. Without the consent of any holder of the Notes, the Company and
the Trustee may amend, supplement or otherwise modify the Indenture or the Notes
to cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor corporation of the obligations of the Company or
MAXXAM thereunder, to comply with certain provisions of Article 10 of the
Indenture, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to add to the covenants of the Company for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Company under the Indenture, to comply with the Trust Indenture Act or to make
any change that does not adversely affect the rights of any holder of the Notes.
DISCHARGE OF THE INDENTURE
The Indenture permits the Company to terminate the majority of its
obligations under the Indenture, other than the obligation to pay interest on
and the principal of the Notes and certain other obligations, at any time, if
(i) it irrevocably deposits in trust with the Trustee money or U.S. Government
Obligations sufficient for the payment of principal and interest on the Notes to
maturity or redemption, as the case may be, and (ii) it complies with certain
other conditions, including delivery to the Trustee of an opinion of counsel
relating to certain events of bankruptcy, and an opinion of counsel or a ruling
received from the Internal Revenue Service to the effect that holders of the
Notes will not recognize income, gain or loss for federal
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income tax purposes as a result of the exercise of such right and will be
subject to federal income tax in the same amount and in the same manner and at
the same times as would have been the case otherwise, provided that the Company
will not be required to deliver to the Trustee such an Opinion of Counsel upon
the exercise of this option within one year of either the Stated Maturity or a
date fixed for redemption of the Notes.
In addition, the Indenture permits the Company to terminate the majority of
its obligations under the Indenture (including its obligations to pay interest
on and the principal of the Notes), at any time, if all of the Notes have been
delivered to the Trustee for cancellation or if (i) the Notes mature within one
year or all of them are to be called for redemption within one year under
arrangements satisfactory to the Trustee for giving the notice of redemption and
(ii) the Company has irrevocably deposited or caused to be deposited with the
Trustee an amount sufficient to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation, for
principal and interest to the stated maturity or redemption. In such case,
holders of the Notes must look to the deposited money for payment.
CONCERNING THE TRUSTEE
First Bank National Association is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
TAX TREATMENT BY COMPANY
The Company will treat the Notes as debt for federal income tax purposes.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be represented by a
single, permanent global Note, in definitive, fully registered form without
interest coupons (the "Global New Note") and will be deposited with the Trustee
as custodian for DTC and registered in the name of Cede, or such other nominee
as DTC may designate. The Global New Note (and any New Note issued in exchange
therefor) will be subject to certain restrictions on transfer set forth therein
and in the Indenture and will bear the respective legends regarding such
restrictions set forth under the heading "Notice to Investors."
New Notes that are (i) originally issued to or transferred to institutional
"accredited investors" who are not "qualified institutional buyers" (as such
terms are defined under "Notice to Investors"), (ii) except as described below,
purchased by or transferred to Persons outside the United States pursuant to
sales in accordance with Regulation S under the Securities Act or (iii) held by
qualified institutional buyers who elect to take physical delivery of their
Notes (and which are then unable to trade through DTC) (collectively, the
"Non-Global Purchasers") will be issued in the form of registered definitive
certificates (the "Certificated New Notes"). Upon the transfer to a qualified
institutional buyer of Certificated New Notes initially issued to a Non-Global
Purchaser, such Certificated New Notes may, unless the Global New Note has
previously been exchanged for Certificated New Notes, be exchanged for an
interest in the Global New Note representing the principal amount of New Notes
being transferred. Certificated New Notes will be subject to certain
restrictions on transfer set forth therein and in the Indenture and will bear
the respective legends regarding such restrictions set forth under the heading
"Notice to Investors."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
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Upon the issuance of the Global New Note, DTC or its custodian will credit,
on its internal system, the respective principal amount of the individual
beneficial interests represented by such Global New Note to the accounts of
persons who have accounts with DTC. Such accounts initially will be designated
by or on behalf of the Initial Purchasers. Ownership of beneficial interests in
the Global New Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Ownership
of beneficial interests in the Global New Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global New Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Note represented by such Global New Note for
all purposes under the Indenture and such New Note. No beneficial owners of an
interest in the Global New Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
New Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, MAXXAM, the Trustee, nor the
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global New Note or for maintaining, supervising or reviewing
any records of such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect to the Global New Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such Global
New Note, as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in such
Global New Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in accordance with
DTC rules. If an owner of New Notes requires physical delivery of Certificated
New Notes for any reason, including to sell New Notes to persons in states that
require such delivery of such New Notes or to pledge such New Notes, such owner
must transfer its interest in the Global New Note, in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
None of the Company, MAXXAM or the Trustee will have any responsibility for
the performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global New Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated New Notes. Upon any such issuance, the Trustee is
required to register such Certificated New Notes in the name of, and cause the
same to be delivered to, such person or persons (or the nominee of any thereof).
All such Certificated New Notes would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if DTC is at any time
unwilling or unable to continue as a depositary for the Global New Note and a
successor depositary is not appointed by the Company within 90 days, the Company
will issue Certificated New Notes in exchange for the Global New Note, which, in
the case of New Notes issued in exchange for the Global New Notes will bear the
legend referred to under the heading "Notice to Investors."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material anticipated federal income
tax consequences expected to result to holders from the acquisition, ownership
and disposition of the New Notes. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative
pronouncements, all of which are subject to change, possibly with retroactive
effect. No ruling has been or will be requested by the Company from the Internal
Revenue Service (the "Service") on any matters relating to the New Notes, and
there can be no assurance that the Service will have a similar view with respect
to the tax consequences described below.
The following discussion is for general information only. The tax treatment
of a holder of the New Notes may vary depending upon such holder's particular
situation. The discussion only addresses the tax consequences to holders who
acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes
as capital assets and does not deal with special classes of holders, such as
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities, foreign corporations and persons who are not citizens or
residents of the United States, that may be subject to special rules not
discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS.
THE EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a holder thereof for federal income tax purposes.
An exchanging holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The Old Notes were issued and the New Notes will be issued without original
issue discount. Stated interest on the Old Notes and New Notes will be taxable
to a holder as ordinary interest income at the time it is accrued or paid in
accordance with such holder's method of accounting for tax purposes.
BOND PREMIUM ON THE NEW NOTES
If a holder of a New Note purchased the Old Notes for an amount in excess
of the amount payable at the maturity date (or a call date, if appropriate) of
the Old Notes, the holder may deduct such excess as amortizable bond premium
over the aggregate terms of the Old Notes and the New Notes (taking into account
earlier call dates, as appropriate), under a yield-to-maturity formula. The
deduction is available only if an election is made by the purchaser or is in
effect. This election is revocable only with the consent of the Service. The
election applies to all obligations owned or subsequently acquired by the
holder. The holder's adjusted tax basis in the Old Notes and the New Notes will
be reduced to the extent of the deduction of amortizable bond premium. Except as
may otherwise be provided in future regulations, under the Code the amortizable
bond premium is treated as an offset to interest income on the Old Notes and the
New Notes rather than as a separate deduction item.
MARKET DISCOUNT ON THE NEW NOTES
Tax consequences of a disposition of the New Notes may be affected by the
market discount provisions of the Code. These rules generally provide that if a
holder acquired the Old Notes (other than in an original issue) at a market
discount which equals or exceeds 1/4 of 1% of the stated redemption price of the
Old Notes at maturity multiplied by the number of remaining complete years to
maturity and thereafter recognizes gain upon a disposition (or makes a gift) of
the New Notes, the lesser of (i) such gain (or appreciation, in the case of a
gift) or (ii) the portion of the market discount which accrued while the Old
Notes or New Notes were held by such holder will be treated as ordinary income
at the time of the disposition (or gift). For these
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purposes, market discount means the excess (if any) of the stated redemption
price at maturity over the basis of such Old Notes or New Notes immediately
after their acquisition by the holder. A holder of the New Notes may elect to
include any market discount (whether accrued under the Old Notes or the New
Notes) in income currently rather than upon disposition of the New Notes. This
election once made applies to all market discount obligations acquired on or
after the first taxable year to which the election applies, and may not be
revoked without the consent of the Service.
A holder of any New Note who acquired the Old Note at a market discount
generally will be required to defer the deduction of a portion of the interest
on any indebtedness incurred or maintained to purchase or carry such Old Note or
New Note until the market discount is recognized upon a subsequent disposition
of such New Note. Such a deferral is not required, however, if the holder elects
to include accrued market discount in income currently.
REDEMPTION OR SALE OF THE NEW NOTES
Generally, any redemption or sale of the New Notes by a holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the extent that
such cash or property received is attributable to accrued, but previously
untaxed, interest) and the holder's tax basis in the New Notes. The tax basis of
a holder of the New Notes should generally be equal to the price paid for the
Old Notes exchanged therefor, plus any accrued market discount on the New Notes
(and the Old Notes exchanged therefor) included in the holder's income prior to
sale or redemption of the New Notes, or reduced by any amortizable bond premium
applied against the holder's income prior to sale or redemption of the New
Notes. Such gain or loss generally would be long-term capital gain or loss if
the holding period exceeded one year, except to the extent it constitutes
accrued market discount.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A 31% "backup" withholding tax and information reporting requirements apply
to certain payments of interest and original issue discount on an obligation,
and to proceeds of the sale of an obligation before maturity, to certain
non-corporate holders. The Company, and/or any paying and/or collection agent,
including a broker, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
unless the holder furnishes its taxpayer identification number (i.e., social
security number in the case of an individual) in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies (with respect to payments of interest) as to no loss of exemption from
backup withholding and meets certain other conditions. Backup withholding,
however, in any event, generally does not apply to payments to certain "exempt
recipients" such as corporations.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market making or other trading activities (other than Old
Notes acquired directly from the Company), may exchange Old Notes for New Notes
in the Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and must,
therefore, acknowledge that it will deliver a prospectus in connection with any
resale of New Notes received in the Exchange Offer. This prospectus delivery
requirement may be satisfied by the delivery by such broker-dealer of this
Prospectus, as it may be amended or supplemented from time to time. The Company
has agreed that, for a period of 180 days after the effective date of this
Prospectus, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer who receives New Notes in the Exchange Offer for use in
connection with any such sale. The Company will not receive any proceeds from
any sales of New Notes by broker-dealers. New Notes received by broker-dealers
for their own accounts pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
of New Notes by broker-dealers may be made directly to a purchaser or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. In addition, if any Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder cannot rely on the position
of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1988), and interpreted in the Commission's letters to Shearman & Sterling
(available July 2, 1993) and K-III Communications Corporation (available May 14,
1993), and similar no-action or interpretive letters issued to third parties,
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Company has agreed to
pay all expenses incident to the Exchange Offer other than commissions or
concessions of any brokers or dealers and will indemnify Eligible Holders
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer that receives New
Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior
to using the Prospectus in connection with the sale or transfer of New Notes,
and acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements herein not misleading (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented prospectus to such broker-dealer.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents filed
with the Commission under the Exchange Act:
All documents and reports subsequently filed by the Company or the
Guarantor pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to termination of the transactions
to which this Prospectus relates shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded, except as so modified or superseded, shall
not be deemed to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference,
other than exhibits to such documents unless they are specifically incorporated
by reference into such documents. Requests for such copies should be directed
to: MAXXAM Group Holdings Inc., 5847 San Felipe, Suite 2600, Houston, Texas
77057, Attention: General Counsel.
LEGAL MATTERS
The validity of the New Notes and the Guaranty will be passed upon for the
Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The audited financial statements and schedule included or incorporated by
reference in this Prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
193
<PAGE> 196
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
AUDITED FINANCIAL STATEMENTS OF THE COMPANY
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-3
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-4
Consolidated Statement of Operations for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-6
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF THE COMPANY
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-29
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-30
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-31
Condensed Notes to Consolidated Financial Statements............................... F-32
Unaudited Summary Quarterly Financial Data......................................... F-38
AUDITED FINANCIAL STATEMENTS OF MAXXAM
MAXXAM INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-39
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-40
Consolidated Statement of Operations for the Years Ended December 31,
1995, 1994 and 1993............................................................. F-41
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-42
Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-43
Notes to Consolidated Financial Statements......................................... F-44
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MAXXAM
MAXXAM INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-78
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-79
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-80
Condensed Notes to Consolidated Financial Statements............................... F-81
Unaudited Summary Quarterly Financial Data......................................... F-88
CONDENSED FINANCIAL INFORMATION OF MAXXAM
MAXXAM INC. -- Parent Only (Unconsolidated)
Audited Information:
Report of Independent Public Accountants........................................ F-89
Balance Sheet at December 31, 1995 and 1994..................................... F-90
Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993.... F-91
Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.... F-92
Notes to Financial Statements................................................... F-93
</TABLE>
F-1
<PAGE> 197
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Unaudited Information:
Balance Sheet at September 30, 1996............................................. F-94
Statement of Operations for the Nine Months Ended September 30, 1996 and 1995... F-95
Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995... F-96
Notes to Unaudited Financial Statements......................................... F-97
AUDITED FINANCIAL STATEMENTS OF KAISER
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-98
Consolidated Balance Sheets at December 31, 1995 and 1994.......................... F-99
Statement of Consolidated Income (Loss) for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-100
Statement of Consolidated Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-101
Notes to Consolidated Financial Statements......................................... F-102
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF KAISER
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets at September 30, 1996.................................. F-126
Statement of Consolidated Income for the Nine Months Ended September 30, 1996 and
1995............................................................................ F-127
Statement of Consolidated Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-128
Notes to Interim Consolidated Financial Statements................................. F-129
Unaudited Summary Quarterly Financial Data......................................... F-134
AUDITED FINANCIAL STATEMENTS OF MGI
MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-135
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-136
Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-137
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-138
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-139
Notes to Consolidated Financial Statements......................................... F-140
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MGI
MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-156
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-157
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-158
Condensed Notes to Consolidated Financial Statements............................... F-159
Unaudited Summary Quarterly Financial Data......................................... F-163
</TABLE>
F-2
<PAGE> 198
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of MAXXAM Group Holdings Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM
Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, cash flows and stockholder's equity
(deficit) for each of the three years in the period ended December 31, 1995.
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 Group
Holdings Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As explained in Notes 7 and 8 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
San Francisco, California
December 23, 1996
F-3
<PAGE> 199
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 48,396 $ 48,575
Marketable securities.............................................. 36,568 19,514
Receivables:
Trade........................................................... 20,576 23,170
Other........................................................... 1,624 7,435
Inventories........................................................ 81,181 73,375
Prepaid expenses and other current assets.......................... 7,101 3,717
--------- ---------
Total current assets....................................... 195,446 175,786
Timber and timberlands, net of depletion of $139,554 and $123,942 at
December 31, 1995 and 1994, respectively........................... 312,983 325,223
Property, plant and equipment, net................................... 101,033 104,206
Deferred financing costs, net........................................ 27,288 30,096
Deferred income taxes................................................ 67,208 70,631
Restricted cash...................................................... 31,367 32,402
Other assets......................................................... 5,542 6,122
--------- ---------
$ 740,867 $ 744,466
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................... $ 4,166 $ 3,703
Accrued interest................................................... 25,354 25,765
Accrued compensation and related benefits.......................... 9,611 10,622
Deferred income taxes.............................................. 11,489 14,231
Other accrued liabilities.......................................... 4,435 3,266
Long-term debt, current maturities................................. 14,195 13,670
--------- ---------
Total current liabilities.................................. 69,250 71,257
Long-term debt, less current maturities.............................. 764,310 768,786
Other noncurrent liabilities......................................... 33,813 30,365
--------- ---------
Total liabilities.......................................... 867,373 870,408
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares authorized;
1,000 shares issued............................................. 1 1
Additional capital................................................. 89,767 89,767
Accumulated deficit................................................ (216,274) (215,710)
--------- ---------
Total stockholder's deficit................................ (126,506) (125,942)
--------- ---------
$ 740,867 $ 744,466
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 200
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net sales:
Lumber and logs......................................... $216,898 $227,430 $ 215,743
Other................................................... 25,694 22,199 17,696
-------- -------- --------
242,592.. 249,629 233,439
-------- -------- --------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation)........................................ 127,124 129,598 134,563
Selling, general and administrative expenses............ 15,884 16,250 20,108
Depletion and depreciation.............................. 25,296 24,685 24,545
-------- -------- --------
168,304 170,533 179,216
-------- -------- --------
Operating income.......................................... 74,288 79,096 54,223
Other income (expense):
Investment, interest and other income................... 9,393 14,367 9,992
Interest expense........................................ (77,824) (77,383) (81,870)
-------- -------- --------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles........................ 5,857 16,080 (17,655)
Credit (provision) in lieu of income taxes................ (1,621) 3,150 3,584
-------- -------- --------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of changes in
accounting principles................................... 4,236 19,230 (14,071)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes............. -- -- (272,016)
-------- -------- --------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles.............. 4,236 19,230 (286,087)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312....................... -- (14,866) --
Loss on early extinguishment of debt, net of related
credit in lieu of income taxes of $16,211............ -- -- (31,467)
Cumulative effect of changes in accounting principles:
Cumulative effect of changes in accounting principles
attributable to equity in loss of Kaiser............. -- -- (240,954)
Postretirement benefits other than pensions, net of
related credit in lieu of income taxes of $1,566..... -- -- (2,348)
Accounting for income taxes............................. -- -- 22,818
-------- -------- --------
Net income (loss)......................................... $ 4,236 $ 4,364 $(538,038)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 201
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 4,236 $ 4,364 $(538,038)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation........................... 25,296 24,685 24,545
Amortization of deferred financing costs and
discounts on long-term debt........................ 13,328 12,127 7,435
Net (purchases) sales of marketable securities....... (19,533) 5,321 12,389
Net gains on marketable securities................... (4,175) (1,669) (6,414)
Loss from net assets transferred to MAXXAM, net...... -- -- 272,016
Extraordinary loss on early extinguishment of debt,
net................................................ -- -- 31,467
Cumulative effect of changes in accounting
principles, net.................................... -- -- 220,484
Decrease (increase) in inventories, net of
depletion.......................................... (7,695) 3,634 (2,077)
Increase in accounts payable......................... 463 832 471
Decrease (increase) in receivables................... 5,778 (7,660) 7,558
Decrease (increase) in prepaids and other assets..... (3,384) (528) 212
Decrease (increase) in accrued and deferred income
taxes.............................................. 2,713 (3,349) (4,095)
Increase (decrease) in other liabilities............. 7,734 (2,283) (185)
Decrease in accrued interest......................... (411) (451) (7,284)
Other................................................ 1,020 (86) 848
-------- -------- --------
Net cash provided by operating activities....... 25,370 34,937 19,332
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............... 2,500 -- --
Net proceeds from sale of assets........................ 18 1,149 256
Capital expenditures.................................... (9,852) (11,322) (11,120)
Increase in net assets transferred to MAXXAM............ -- -- (11,770)
-------- -------- --------
Net cash used for investing activities.......... (7,334) (10,173) (22,634)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on
long-term debt....................................... (14,300) (13,237) (716,551)
Net borrowings (payments) under revolving credit
agreements........................................... -- (2,900) 2,900
Incurrence of financing costs........................... (150) (213) (34,738)
Proceeds from issuance of long-term debt................ -- -- 790,000
Restricted cash deposits (withdrawals), net............. 1,035 1,160 (33,562)
Dividends paid.......................................... (4,800) -- (20,000)
-------- -------- --------
Net cash used for financing activities.......... (18,215) (15,190) (11,951)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (179) 9,574 (15,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 48,575 39,001 54,254
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 48,396 $ 48,575 $ 39,001
======== ======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable
securities........................................... $ (6,648) $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller............................................... 615 910 --
Net assets transferred to MAXXAM........................ -- -- 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.............. $ 64,907 $ 65,707 $ 80,188
Income taxes paid (refunded)............................ (5,190) 1,170 46
Tax allocation payments to MAXXAM....................... -- 397 1,722
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 202
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK ADDITIONAL EARNINGS
($1.00 PAR) CAPITAL (DEFICIT) TOTAL
----------- ---------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance, January 1, 1993........................... $ 1 $ 89,737 $ 368,495 $ 458,233
Net loss......................................... -- -- (538,038) (538,038)
Dividend......................................... -- -- (20,000) (20,000)
Gain from issuance of Kaiser Aluminum Corporation
common stock.................................. -- 30 -- 30
Net assets transferred to MAXXAM................. -- -- (30,531) (30,531)
--- ------- --------- ---------
Balance, December 31, 1993......................... 1 89,767 (220,074) (130,306)
Net income....................................... -- -- 4,364 4,364
--- ------- --------- ---------
Balance, December 31, 1994......................... 1 89,767 (215,710) (125,942)
Net income....................................... -- -- 4,236 4,236
Dividend......................................... -- -- (4,800) (4,800)
--- ------- --------- ---------
Balance, December 31, 1995......................... $ 1 $ 89,767 $(216,274) $(126,506)
=== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 203
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF MGHI
MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to
facilitate the offering of Senior Secured Notes. Subsequent to its formation,
MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM
Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further,
concurrent with the consummation of the Private Offering of $130,000 aggregate
principal amount of the Company's Senior Secured Notes due 2003 as described in
Note 6, MAXXAM transfered to the Company, as an additional capital contribution,
27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock
representing a 34.7% interest in Kaiser on a fully diluted basis. The
contribution of MGI's capital stock has been accounted for as a reorganization
of entities under common control, which requires MGHI to record the assets and
liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the
successor entity to MGI and as such, the accompanying consolidated financial
statements of MGHI and its subsidiaries (together, the "Company") reflect both
the historical operating results of MGI and MAXXAM's purchase accounting
adjustments which principally relate to MGI's timber and depreciable assets. The
purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May
1988. The contribution of the Kaiser common stock has been reflected in the
consolidated financial statements of the Company as if such contribution
occurred as of the beginning of the earliest period presented, at MAXXAM's
historical cost using the equity method of accounting. The Company conducts its
business primarily through the operations of its subsidiaries, including MGI.
FORMATION OF THE FOREST PRODUCTS GROUP
Prior to the Forest Products Group Formation (as defined below), MGI
operated in three industries: aluminum, through its majority owned subsidiary,
Kaiser, a fully integrated aluminum producer, forest products, through The
Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"),
each a wholly owned subsidiary; and real estate management and development,
through the Palmas del Mar development located in Puerto Rico ("Palmas") which
was owned by MGI's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4,
1993, contemporaneously with the consummation of the sale of the MGI Notes (as
defined in Note 6), MGI (i) transferred to MAXXAM 50 million common shares of
Kaiser held by a subsidiary of MGI, representing MGI's (and MAXXAM's) entire
interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of
MAXXAM common stock held by a subsidiary of MGI, (iii) transferred to MAXXAM
certain notes receivable, long-term investments, and other assets, each net of
related liabilities, collectively having a carrying value to MGI of
approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary
Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being
in satisfaction of a $15,000 promissory note evidencing a cash loan made by
MAXXAM to MGI in January 1993. On the same day, MAXXAM assumed approximately
$17,500 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 MAXXAM its interest
in Palmas. The foregoing transactions are collectively referred to as the
"Forest Products Group Formation." MGI presented the loss from net assets
transferred to MAXXAM pursuant to the Forest Products Group Formation (including
certain allocated costs from MAXXAM for general and administrative expenses
unrelated to MGI's forest products operations) in a manner similar to that which
would have been presented if MGI had discontinued the operations relating to
such net assets. See Note 2.
As a result of the Forest Products Group Formation, MGI and therefore the
Company is engaged in forest products operations conducted through its wholly
owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in
several principal aspects of the lumber industry, including the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into lumber
and the manufacture of lumber into a variety
F-8
<PAGE> 204
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
of finished products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which is obtained
from Pacific Lumber. Housing, construction and remodeling are the principal
markets for the Company's lumber products. Export sales generally constitute
less than 4% of forest product sales. A significant portion of forest product
sales are made to third parties located west of the Mississippi river.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the
subsequent resolution of any one of the contingent matters described in Note 10
could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the reported
amounts of the Company's consolidated assets and liabilities.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MGHI and its
subsidiaries. MGHI is a wholly owned subsidiary of MAXXAM. Intercompany balances
and transactions have been eliminated. Certain reclassifications have been made
to prior years' consolidated financial statements to be consistent with the
current year's presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, 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. Included in investment, interest and other
income for each of the three years ended December 31, 1995 were: 1995 -- net
unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net
unrealized holding losses of $1,094 and net realized gains of $2,763; and
1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized
losses and net unrealized gains of $841. 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 is primarily
determined using the last-in, first-out ("LIFO") method.
F-9
<PAGE> 205
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Timber and Timberlands
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is stated at
cost, net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
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
Restricted cash represents the amount initially deposited into an account
(the "Liquidity Account") held by the trustee under the indenture governing the
7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific
Lumber. See Note 6. The Liquidity Account is not available, except under certain
limited circumstances, for Scotia Pacific's working capital purposes; however,
it is available to pay the Rated Amortization (as defined in Note 6) and
interest on the Timber Notes if and to the extent that cash flows are
insufficient to make such payments. The required Liquidity Account balance will
generally decline as principal payments are made on the Timber Notes.
Investment, interest and other income for the years ended December 31, 1995,
1994 and 1993 includes interest of approximately $2,560, $2,638 and $2,101,
respectively, attributable to an investment rate agreement (at 7.95% per annum)
with the financial institution which holds the Liquidity Account.
At December 31, 1995 and 1994, cash and cash equivalents include $19,742
and $19,439, respectively, (the "Payment Account") which is reserved for debt
service payments on the Timber Notes (see Note 6). The Payment Account and the
Liquidity Account are each 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.
Stockholder's Equity (Deficit)
The adjustment to the Company's additional capital for the year ended
December 31, 1993 resulted from a transaction relating to Kaiser's common stock
prior to the Forest Products Group Formation. Pursuant to the terms of an
amended compensation plan, Kaiser issued 4,228 shares to certain members of its
management in 1993. As a result of this transaction, MGI's equity in Kaiser's
net assets differed from MGI's historical cost. MGI accounted for this
difference as an adjustment to additional capital.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the Timber Notes, the 10 1/2%
Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior
Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured
Discount Notes due 2003 (the "MGI Discount Notes" and together
F-10
<PAGE> 206
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
with the MGI Senior Notes, the "MGI Notes"), and on the current rates offered
for borrowings similar to the other debt. The Timber Notes, the Pacific Lumber
Senior Notes and the MGI Notes are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active market.
The estimated fair values of the Company's financial instruments, along
with the carrying amounts of the related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575
Marketable securities (held for trading
purposes)............................... 36,568 36,568 19,514 19,514
Restricted cash........................... 31,367 31,367 32,402 32,402
Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
</TABLE>
F-11
<PAGE> 207
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
2. NET ASSETS TRANSFERRED TO MAXXAM
As a result of the Forest Products Group Formation (as described in Note
1), MGI transferred all of its interest in Kaiser's common stock, the assets and
related liabilities of Palmas, and certain other net assets that were unrelated
to MGI's forest products operations, to MAXXAM. MGI did not incur any gain or
loss relating to the transfer of such assets and liabilities to MAXXAM.
The net loss from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1993
------------
<S> <C>
Net sales:
Aluminum operations................................................... $1,016,966
Real estate and other................................................. 19,654
----------
1,036,620
----------
Cost and expenses:
Aluminum operations................................................... 1,091,353
Real estate and other................................................. 28,132
----------
1,119,485
----------
Loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles................. (82,865)
Credit for income taxes................................................. 31,050
Minority interests...................................................... 3,641
----------
Loss before extraordinary item and cumulative effect of changes in
accounting principles................................................. (48,174)
Extraordinary item:
Loss on redemption of debt, net of related benefits for income taxes
and minority interests of $11,249 and $2,791, respectively......... (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of related benefits
for income taxes and minority interests of $108,271 and $29,406,
respectively....................................................... (200,670)
Accounting for income taxes........................................... (4,127)
----------
Loss from net assets transferred to MAXXAM.............................. $ (272,016)
==========
</TABLE>
F-12
<PAGE> 208
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Net assets transferred to MAXXAM are as follows as of the date of transfer:
<TABLE>
<S> <C>
Current assets:
Aluminum operations.................................................... $ 780,791
Real estate and other.................................................. 16,480
----------
797,271
----------
Current liabilities:
Aluminum operations.................................................... 477,805
Real estate and other.................................................. 28,853
----------
506,658
----------
Net current assets....................................................... 290,613
----------
Non-current assets:
Aluminum operations.................................................... 1,722,362
Real estate and other.................................................. 56,422
----------
1,778,784
----------
Non-current liabilities:
Aluminum operations.................................................... 1,790,946
Minority interests in aluminum operations.............................. 221,907
Real estate and other.................................................. 26,013
----------
2,038,866
----------
Net assets transferred to MAXXAM......................................... $ 30,531
==========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Lumber........................................................... $65,566 $61,313
Logs............................................................. 15,615 12,062
------- -------
$81,181 $73,375
======= =======
</TABLE>
During 1993, Pacific Lumber's inventory quantities were reduced. This
reduction resulted in the liquidation of Pacific Lumber's LIFO inventory
quantities carried at prevailing costs from prior years which were higher than
the current cost of inventory. The effect of this inventory liquidation
increased cost of goods sold by approximately $222 for the year ended December
31, 1993.
F-13
<PAGE> 209
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Logging roads, land and improvements.............. 15 years $ 7,929 $ 7,545
Buildings......................................... 33 years 29,661 28,209
Machinery and equipment........................... 5-15 years 121,343 118,059
Construction in progress.......................... 520 30
-------- --------
159,453 153,843
Less: accumulated depreciation.................... (58,420) (49,637)
-------- --------
$101,033 $104,206
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $9,795, $9,260 and $8,610, respectively.
5. INVESTMENT IN KAISER
Concurrent with the consummation of the offering on December 23, 1996
described in Note 6, the Company received, as a capital contribution from
MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as
collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully
integrated producer and marketer of alumina, primary aluminum and fabricated
aluminum products. Kaiser's common stock is publicly traded on the New York
Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares
represent a 39.0% equity interest in Kaiser at December 31, 1995 (34.7% on a
fully diluted basis, after giving effect to the conversion of Kaiser's
outstanding preferred stock into an equal number of common shares). The Company
follows the equity method of accounting for its investment in Kaiser.
As described in Note 1, the Company and MAXXAM are entities under common
control; accordingly, the Company has recorded its investment in Kaiser at
MAXXAM's historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company recorded
its equity share of such losses in January 1993 up to an amount of its
investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses
with respect to the results of operations attributable to Kaiser's common
stockholders have exceeded cumulative earnings. The Company is under no
obligation to provide any economic support to Kaiser, and accordingly, has not
recorded any amounts attributable to its equity in Kaiser's results of
operations for any period subsequent to January 1993. The Company will not
record its equity in Kaiser's results of operations until such time as future
earnings exceed the cumulative losses incurred.
F-14
<PAGE> 210
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The market value for the Pledged Kaiser Shares based on the price per share
quoted at the close of business on December 20, 1996 was $321,290. There can be
no assurance that such value would be realized should the Company dispose of its
investment in the Pledged Kaiser Shares. The following table contains summarized
financial information of Kaiser.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Current assets.............................................. $ 932,800 $ 842,800
Property, plant and equipment, net.......................... 1,109,600 1,133,200
Other assets................................................ 770,800 722,100
---------- ----------
Total assets...................................... $2,813,200 $2,698,100
========== ==========
Current liabilities......................................... $ 601,100 $ 583,100
Long-term debt, less current maturities..................... 749,200 751,100
Other liabilities........................................... 1,282,500 1,230,400
Minority interests.......................................... 122,700 116,200
Stockholders' equity:
Preferred................................................. 98,100 100,100
Common.................................................... (40,400) (82,800)
---------- ----------
57,700 17,300
---------- ----------
Total liabilities and stockholders' equity........ $2,813,200 $2,698,100
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................... $ 2,237,800 $ 1,781,500 $ 1,719,100
Costs and expenses.......................... (2,027,200) (1,837,700) (1,842,500)
Other expenses.............................. (108,000) (95,900) (85,100)
----------- ----------- -----------
Income (loss) before income taxes, minority
interests, extraordinary loss, and
cumulative effect of changes in accounting
principles................................ 102,600 (152,100) (208,500)
(Provision) credit for income taxes......... (37,200) 53,800 86,900
Minority interests.......................... (5,100) (3,100) (1,500)
----------- ----------- -----------
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles................................ 60,300 (101,400) (123,100)
Extraordinary loss on early extinguishment
of debt, net of taxes..................... -- (5,400) (21,800)
Cumulative effect of changes in accounting
principles, net of taxes.................. -- -- (507,300)
----------- ----------- -----------
Net income (loss)........................... 60,300 (106,800) (652,200)
Dividends on preferred stock................ (17,600) (20,100) (6,300)
----------- ----------- -----------
Net income (loss) available to common
stockholders.............................. $ 42,700 $ (126,900) $ (658,500)
=========== =========== ===========
Equity in earnings (loss) of Kaiser......... $ -- $ -- $ (240,954)
=========== =========== ===========
</TABLE>
F-15
<PAGE> 211
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The equity in loss of Kaiser of $240,954 for the year ended December 31,
1993 includes a $239,849 charge attributable to the Company's equity in Kaiser's
cumulative effect of the change in accounting for postretirement benefits other
than pensions and a $1,105 charge attributable to the Company's equity in
Kaiser's cumulative effect of the change in accounting for income taxes.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015......................................................... $350,233 $363,811
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount.............................................. 92,498 82,779
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000
Other.......................................................... 774 866
-------- --------
778,505 782,456
Less: current maturities....................................... (14,195) (13,670)
-------- --------
$764,310 $768,786
======== ========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber
Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary,
issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific 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) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A
Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes"), and (c) $41,750 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; (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility
loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi)
pay a $25,000 dividend to a subsidiary of the Company. These transactions
resulted in a pre-tax extraordinary loss of $38,001, consisting primarily of the
payment of premiums and the write-off of amortized deferred financing costs on
the Old Pacific Lumber Securities.
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179,364 of the
Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's
contract rights and certain other assets, (iii) the funds deposited in the
Payment Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathemati-
F-16
<PAGE> 212
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
cal formulas set forth in the Timber Note Indenture. The minimum amount of
principal which Scotia Pacific 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 Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific must pay through each Timber Note payment date in order to avoid
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 Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Substantially all of the Company's consolidated assets are owned by MGI;
substantially all of MGI's consolidated assets are owned by Pacific Lumber, and
a significant portion of Pacific Lumber's assets are owned by Scotia Pacific.
The Company expects that Pacific Lumber will provide a major portion of MGI's
future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific 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 flows of Scotia Pacific, and the holders of the Pacific
Lumber Senior Notes have priority over the claims and creditors of MGI
(including the holders of the MGI Senior Notes and the MGI Discount Notes) and
the Company with respect to the assets and cash flows of Pacific Lumber. Under
the terms of the Timber Note Indenture, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific'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.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, 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.
Pacific Lumber has a revolving credit agreement with a bank (as amended and
restated, the "Revolving Credit Agreement") which expires on May 31, 1998.
Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's
trade receivables and inventories, with interest computed at the bank's
reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The
Revolving Credit Agreement provides for borrowings of up to $60,000, of which
$15,000 may be used for standby letters of credit and $30,000 is restricted to
timberland acquisitions. Borrowings made pursuant to the portion of the credit
facility restricted to timberland acquisitions would also be secured by the
purchased timberlands. As of December 31, 1995, $48,090 of borrowings was
available under the Revolving Credit Agreement, of which $3,090 was available
for letters of credit and $30,000 was restricted to timberland acquisitions. No
borrowings were outstanding as of December 31, 1995, and letters of credit
outstanding amounted to $11,910. The Revolving Credit Agreement contains
covenants substantially similar to those contained in the Indenture governing
the Pacific Lumber Senior Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes
and the Revolving Credit Agreement contain various covenants which, among other
things, limit the payment of dividends and restrict transactions between Pacific
Lumber and its affiliates. As of December 31, 1995, under the most restrictive
of these covenants, approximately $15,663 of dividends could be paid by Pacific
Lumber.
F-17
<PAGE> 213
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
On August 4, 1993, MGI issued $100,000 aggregate principal amount of the
MGI Senior Notes and $126,720 aggregate principal amount (approximately $70,000
net of original issue discount) of 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 Pacific Lumber,
Britt and MPI, and by MAXXAM'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. As of December 31, 1995, under the most
restrictive of these covenants, approximately $1,899 of dividends could be paid
by MGI, of which $1,600 was paid in January 1996. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the
Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of
$33,222 and $43,941 at December 31, 1995 and 1994, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual 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 MGI's 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 $20,000 dividend to
MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000
aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000
at 100% of their principal amount plus accrued interest thereon.
The Company incurred a pre-tax extraordinary loss associated with the early
retirement of MGI's 12 3/4% Notes of $9,677 consisting of net interest cost of
$3,763, the write-off of $3,472 of unamortized deferred financing costs, a
premium of $1,500 and the write-off of $942 of unamortized original issue
discount.
Maturities
The following table of scheduled maturities of long-term debt outstanding
at December 31, 1995 reflects Scheduled Amortization with respect to the Timber
Notes:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
7.95% Scotia Pacific Timber
Collateralized Notes.......... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009
11 1/4% MGI Senior Secured
Notes......................... -- -- -- -- -- 100,000
12 1/4% MGI Senior Secured
Discount Notes................ -- -- -- -- -- 125,720
10 1/2% Pacific Lumber Senior
Notes......................... -- -- -- -- -- 235,000
Other........................... 92 93 94 94 95 306
------- ------- ------- ------- ------- --------
$14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035
======= ======= ======= ======= ======= ========
</TABLE>
Private Offering
The Company completed an offering (the "Offering") of $130,000 principal
amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured
Notes") on December 23, 1996 (the "Issue
F-18
<PAGE> 214
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Date"). Interest is payable semiannually on February 1 and August 1 of each year
beginning February 1, 1997. The MGHI Senior Secured Notes were not registered
under the Securities Act of 1933, and may not be offered or sold in the United
States absent registration or on applicable exemption from registration
requirements. The MGHI Senior Notes rank pari passu in right and priority of
payment with any future senior indebtedness of the Company, and are guaranteed
on a senior, unsecured basis by MAXXAM. The MGHI Senior Secured Notes will be
effectively subordinated to liabilities of the Company's subsidiaries, including
trade payables.
The net proceeds from the Offering on the Issue Date, after estimated
expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant
to an intercompany note (the "Intercompany Note") which will be pledged to
secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest
at the rate of 11% per annum (payable semiannually prior to the interest payment
dates applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003.
MAXXAM will be entitled to defer the payment of interest on the Intercompany
Note on any interest payment date to the extent that the Company has sufficient
available funds to satisfy its obligations on the MGHI Senior Secured Notes on
such date. Any such deferred interest will be added to the principal amount of
the Intercompany Note and be payable at maturity.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total
consolidated indebtedness would have increased from $772,877 to $902,877. The
Indentures governing the MGI Notes were amended to, among other things, provide
for the contribution of the Kaiser Shares to the Company.
Pursuant to an agreement with the initial purchasers of the MGHI Senior
Secured Notes, the Company and MAXXAM have agreed to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission within 60 days of the Issue Date with respect to a registered offer
to exchange the MGHI Senior Secured Notes for new notes with substantially
identical terms (the "Exchange Offer"), and to use their reasonable best efforts
to have the Registration Statement declared effective within 150 days of the
Issue Date and the Exchange Offer consummated within 180 days of the Issue Date.
The Exchange Date will be made only by means of a prospectus.
Restricted Net Assets of Subsidiaries
At December 31, 1995, certain debt instruments restricted the ability of
MGI to transfer assets, make loans and advances to pay dividends to the Company.
As of December 31, 1995, all of the assets of MGI and its subsidiaries are
subject to such restrictions.
7. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes. Prior to August 4, 1993, the
Company and each of its subsidiaries computed their tax liabilities or tax
benefits on a separate company basis (except as discussed in the following
paragraph), in accordance with their respective tax allocation agreements with
MAXXAM.
Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation
agreement that, among other things, amended the tax calculations with respect to
Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms
of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the
federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and
certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. The PL
Tax
F-19
<PAGE> 215
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for
its federal income tax liability computed on a separate company basis as if it
was never connected with MAXXAM. The remaining subsidiaries of MGI are each
liable to MAXXAM for their respective income tax liabilities computed on a
separate company basis as if they were never connected with MAXXAM, pursuant to
their respective tax allocation agreements.
MGI's tax allocation agreement with MAXXAM, (the "MGI Tax Allocation
Agreement"), provides that MGI's federal income tax liability is computed as if
MGI files a consolidated tax return with all of its subsidiaries except Salmon
Creek, and that such corporations were never connected with MAXXAM (the "MGI
Consolidated Tax Liability"). The federal income tax liability of MGI is the
difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of
the separate tax liabilities for MGI's subsidiaries (computed as discussed
above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax
Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay
the amount of such difference to MGI.
A federal consolidated tax liability is also computed for MGHI and its
subsidiaries, as if MGHI and its subsidiaries, except Salmon Creek, file a
consolidated tax return and that such corporations were never connected with
MAXXAM (the "MGHI Consolidated Tax Liability"). The federal income tax liability
of MGHI is the difference between the MGHI Consolidated Tax Liability and the
MGI Consolidated Tax Liability. To the extent that the MGHI Consolidated Tax
Liability is less than the MGI Consolidated Tax Liability, MAXXAM is obligated
to pay the amount of such difference to MGHI.
The credit (provision) in lieu of income taxes on income (loss) from
continuing operations before income taxes, extraordinary items and cumulative
effect of changes in accounting principles consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes.... $ (167) $ -- $ (988)
State and local....................................... (35) (55) (253)
------- ------ ------
(202) (55) (1,241)
------- ------ ------
Deferred:
Federal credit (provision) in lieu of income taxes.... (410) 1,938 5,054
State and local....................................... (1,009) 1,267 (229)
------- ------ ------
(1,419) 3,205 4,825
------- ------ ------
$(1,621) $3,150 $3,584
======= ====== ======
</TABLE>
The 1994 deferred federal credit in lieu of income taxes of $1,938 includes
a credit relating to reserves the Company no longer believed were necessary, the
1993 deferred federal credit in lieu of income taxes of $4,054 includes $2,061
for the benefit of operating loss carryforwards generated in 1993 and includes a
$1,082 benefit for increasing net deferred income tax assets (liabilities) as of
the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act
of 1993 which retroactively increased the federal statutory income tax rate from
34% to 35% for periods beginning on or after January 1, 1993.
F-20
<PAGE> 216
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
A reconciliation between the credit (provision) in lieu of income taxes and
the amount computed by applying the federal statutory income tax rate to income
(loss) from continuing operations before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles.................... $ 5,857 $16,080 $(17,655)
======= ======= ========
Amount of federal income tax based upon the statutory
rate................................................ $(2,050) $(5,628) $ 6,179
Revision of prior years' tax estimates and other
changes in valuation allowances..................... 907 7,739 (3,468)
Increase in net deferred income tax assets due to tax
rate change......................................... -- -- 1,082
State and local taxes, net of federal tax benefit..... (679) 787 (313)
Other................................................. 201 252 104
------- ------- --------
$(1,621) $ 3,150 $ 3,584
======= ======= ========
</TABLE>
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1994, the Company recorded an extraordinary loss related to the
settlement of litigation in connection with MGI's acquisition of Pacific Lumber
(see Note 10). The Company reported the loss net of related deferred income
taxes of $6,312 which is less than the federal and state statutory income tax
rates due to expenses for which no tax benefit was recognized.
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 income taxes of $16,211 which approximated the federal statutory income
tax rate in effect an the dates the transactions occurred.
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 changed the Company's method of accounting for income taxes
to an asset and liability approach from the deferral method prescribed by APB
11. 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 $22,818. 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 Pacific Lumber in 1986, MGI in 1988 and Britt in 1990. As a result of
restating these assets and liabilities, the loss from continuing operations
before income taxes, extraordinary item and cumulative effect of changes in
accounting principles for the year ended December 31, 1993 was decreased by
$514.
F-21
<PAGE> 217
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards................................ $ 83,705 $ 86,864
Timber and timberlands....................................... 41,803 46,955
Other liabilities............................................ 17,203 10,460
Postretirement benefits other than pensions.................. 2,316 2,145
Other........................................................ 327 1,818
Valuation allowances......................................... (51,595) (52,060)
-------- --------
Total deferred income tax assets, net................ 93,759 96,182
-------- --------
Deferred income tax liabilities:
Inventories.................................................. (17,313) (19,179)
Property, plant and equipment................................ (16,899) (16,952)
Other........................................................ (3,828) (3,651)
-------- --------
Total deferred income tax liabilities................ (38,040) (39,782)
-------- --------
Net deferred income tax assets................................. $ 55,719 $ 56,400
======== ========
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards. As of December 31, 1995, approximately $41,803 of the net
deferred income tax assets listed above relate to the excess of the tax basis
over financial statement basis with respect to timber and timberlands. The
Company believes that it is more likely than not that this net deferred income
tax asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis. Also included
in net deferred income tax assets as of December 31, 1995 is $32,110 which
relates 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 loss and credit carryforwards. These factors
included any limitations concerning use of the carryforwards, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
The Company has concluded that it 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.
Included in the net deferred income tax assets listed above are $50,504 and
$51,501 at December 31, 1995 and 1994, respectively, which are recorded pursuant
to the tax allocation agreements with MAXXAM.
The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
1995, under the terms of the respective tax allocation agreements. The
utilization of certain of these attributes is subject to limitations.
<TABLE>
<CAPTION>
EXPIRING
THROUGH
--------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses......................................... $224,485 2010
Net capital losses........................................... 5,177 1997
Minimum tax credit........................................... 167 --
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses......................................... $185,803 2010
</TABLE>
F-22
<PAGE> 218
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLANS
Pacific Lumber has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by The Employee Retirement Income Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........ $ 1,483 $1,643 $ 1,600
Interest cost on projected benefit obligation.......... 1,693 1,263 918
Actual loss (gain) on plan assets...................... (3,900) 10 (2,128)
Net amortization and deferral.......................... 2,460 (859) 1,359
------- ------ -------
Net periodic pension cost.............................. $ 1,736 $2,057 $ 1,749
======= ====== =======
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation.................................... $ 16,910 $ 11,809
Non-vested benefit obligation................................ 1,214 779
-------- --------
Total accumulated benefit obligation................. $ 18,124 $ 12,588
======== ========
Projected benefit obligation................................... $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt
securities................................................... (18,363) (13,184)
-------- --------
Projected benefit obligation in excess of plan assets.......... 3,478 1,863
Unrecognized net transaction asset............................. 24 29
Unrecognized net gain (loss)................................... (27) 1,475
Unrecognized prior service cost................................ (45) (50)
-------- --------
Accrued pension liability.................................... $ 3,430 $ 3,317
======== ========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.25% 8.5% 7.5%
Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
</TABLE>
Pacific Lumber has an unfunded defined benefit plan for certain
postretirement and other benefits which covers substantially all employees of
Pacific Lumber. Participants of the plan are eligible for certain health care
benefits upon termination of employment and retirement and commencement of
pension benefits. Participants make contributions for a portion of the cost of
their health care benefits.
F-23
<PAGE> 219
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are 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 $2,348, net of related income taxes of $1,566. The
deferred income tax benefit related to the adoption of SFAS 106 was recorded at
the federal and state statutory rates in effect on the date SFAS 106 was
adopted.
A summary of the components of net periodic postretirement benefit cost is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $228 $216 $153
Interest cost on accumulated postretirement benefit
obligation.................................................. 317 294 315
Net amortization and deferral................................. (53) (7) --
---- ---- ----
Net periodic postretirement benefit cost...................... $492 $503 $468
==== ==== ====
</TABLE>
The adoption of SFAS 106 increased the Company's loss from continuing
operations before extraordinary item and cumulative effect of changes in
accounting principles by $212 ($360 before tax) for the year ended December 31,
1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $ 634 $ 860
Actives eligible for benefits...................................... 726 656
Actives not eligible for benefits.................................. 3,317 2,355
------ ------
Accumulated postretirement benefit obligation.................... 4,677 3,871
Unrecognized net gain.............................................. 553 972
------ ------
Postretirement benefit liability................................. $5,230 $4,843
====== ======
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to
decrease gradually to 5.5% in 2008 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,
1995 by approximately $674 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by approximately $90.
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994,
respectively.
Subsequent to December 31, 1993, Pacific Lumber's employees were eligible
to participate in a defined contribution savings plan sponsored by MAXXAM. This
plan is designed to enhance the existing retirement programs of participating
employees. 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, Pacific Lumber's contributions consist of a matching
contribution of up to 4% of the compensation of participants for
F-24
<PAGE> 220
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
each calendar quarter. The cost to the Company of this plan was $1,281 and
$1,215 for the years ended December 31, 1995 and 1994, respectively.
Pacific Lumber is self-insured for workers' compensation benefits. Included
in accrued compensation and related benefits and other noncurrent liabilities
are accruals for workers' compensation claims amounting to $8,900 and $9,233 at
December 31, 1995 and 1994, respectively. Workers' compensation expenses
amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995,
1994 and 1993, respectively.
9. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting and data processing services. In addition, MAXXAM provides the
Company with office space and various office personnel, insurance, legal,
operating, financial and certain other services. MAXXAM's expenses incurred on
behalf of the Company are reimbursed by the Company through payments consisting
of (i) an allocation of the lease expense for the office space utilized by or on
behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses
incurred by MAXXAM, including, but not limited to, labor costs of personnel
rendering services to the Company. Charges by MAXXAM for such services were
$1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company believes that the services being rendered are on terms
not less favorable to the Company than those which would be obtainable from
unaffiliated third parties.
In 1994, in connection with the litigation settlement described in Note 10,
Pacific Lumber paid approximately $3,185 to a law firm in which a director of
Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately
$1,931 in connection with the offering of the Pacific Lumber Senior Notes and
the Timber Notes to this same law firm.
10. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against MAXXAM, the Company,
Pacific Lumber, former directors of Pacific Lumber and others concerning the
Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was
paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by
Pacific Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. In 1994, the Company recorded an extraordinary
loss of $14,866 related to the settlement and associated costs, including a
$2,000 accrual for certain contingent claims and $4,400 of related legal fees,
net of benefits for federal and state income taxes of $6,312.
The Company's forest products operations are primarily conducted by Pacific
Lumber and are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. While the Company does not expect that
Pacific Lumber's compliance with such existing laws and regulations will have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity, Pacific Lumber is subject to certain pending
matters described below, including the resolution of issues relating to the
final designation of critical habitat for the marbled murrelet, which could have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Moreover, the laws and regulations relating
to the Company's forest products operations are modified from time to time and
are subject to judicial and administrative interpretation. There can be no
assurance that certain pending or future governmental regulations, legislation
or judicial or administrative decisions would not materially and adversely
affect Pacific Lumber or its ability to harvest timber.
F-25
<PAGE> 221
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation.
Pursuant to the Headwaters Agreement described in Note 11 below (the "Headwaters
Agreement"), the Takings Litigation has been stayed by the court at the request
of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 11 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require that timber companies project timber growth and
harvest on their timberlands over a 100-year planning period and establish a
long-term sustained yield ("LTSY") harvest level that takes into account
environmental and economic considerations. The proposed sustained yield plan
("SYP") must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's
projected timber inventory is capable of sustaining the LTSY harvest level in
the last decade of the 100-year planning period. On December 17, 1996, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the
same as Pacific Lumber's average annual timber harvest over the last five years.
The proposed SYP also indicates that Pacific Lumber's average annual timber
harvest during the first decade of the SYP would approximate the LTSY harvest
level. During the second decade of the proposed SYP, Pacific Lumber's average
annual timber harvest would be approximately 8% less than that proposed for the
first decade. The SYP, when approved, will be valid for ten years. Thereafter,
revised SYPs will be prepared every decade that will address the LTSY harvest
level based upon reassessment of changes in the resource base and protection of
public resources. The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the
F-26
<PAGE> 222
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Multi-Species HCP will permit Pacific Lumber to harvest its timberlands
(including over the next two decades a substantial portion of its old growth
timberlands not transferred pursuant to the Headwaters Agreement) to achieve
maximum sustained yield. The SYP is subject to review and approval by the CDF,
and there can be no assurance that the SYP will be approved in its proposed
form. Until the SYP is reviewed and approved, Pacific Lumber is unable to
predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and submitting
corresponding amendments to its SYP; however, there can be no assurance that it
would be able to do so and the amount of such acquisitions would be limited by
Pacific Lumber's available financial resources. The Company is unable to predict
the ultimate impact the sustained yield regulations will have on its future
consolidated financial position, results of operations or liquidity. See Note 11
below for a description of certain terms of the Headwaters Agreement relating to
the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of the Company's timber harvesting plans ("THPs") and other timber
harvesting operations, and the Company expects that such groups and individuals
will continue to file such objections to certain of the Company's THPs and other
timber harvesting operations. In addition, lawsuits are pending and/or
threatened which seek to prevent the Company from implementing certain of its
approved THP's and/or which challenge other operations of the Company. These
challenges have severely restricted Pacific Lumber's ability to harvest old
growth timber on its property. To date, challenges with respect to the Company's
THPs relating to young growth timber have been limited; however, no assurance
can be given as to the extent of such challenges in the future. The Company
believes that environmentally focused challenges to its timber harvesting
operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have delayed or
prevented the Company from conducting a portion of its operations, they have not
had a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to predict
the future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate 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 on the Company's consolidated financial position,
results of operations or liquidity.
11. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
F-27
<PAGE> 223
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
12. OTHER ITEMS
Investment, Interest and Other Income
In February 1994, Pacific Lumber received a franchise tax refund of $7,243,
the substantial portion of which represents interest from the State of
California relating to tax years 1972 through 1985. This amount is included in
investment, interest and other income for the year ended December 31, 1994.
Items Related to 1992 Earthquake
In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of
$1,527 and $1,200, respectively, resulting from business interruption insurance
reimbursements for higher operating costs and the related loss of revenues
resulting from the April 1992 earthquake. Other receivables at December 31, 1994
included $1,684 related to earthquake related insurance claims.
F-28
<PAGE> 224
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 53,122 $ 48,396
Marketable securities............................................ 31,852 36,568
Receivables:
Trade......................................................... 11,466 20,576
Other......................................................... 2,429 1,624
Inventories...................................................... 78,113 81,181
Prepaid expenses and other current assets........................ 5,612 7,101
--------- ---------
Total current assets..................................... 182,594 195,446
Timber and timberlands, net of depletion of $151,273 and $139,554
at September 30, 1996 and December 31, 1995, respectively........ 303,011 312,983
Property, plant and equipment, net of accumulated depreciation of
$65,108 and $58,420 at September 30, 1996 and December 31, 1995,
respectively..................................................... 101,214 101,033
Deferred financing costs, net...................................... 24,996 27,288
Deferred income taxes.............................................. 65,162 67,208
Restricted cash.................................................... 30,453 31,367
Other assets....................................................... 5,843 5,542
--------- ---------
$ 713,273 $ 740,867
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................. $ 5,436 $ 4,166
Accrued compensation and related benefits........................ 9,791 9,611
Accrued interest................................................. 9,217 25,354
Deferred income taxes............................................ 11,489 11,489
Other accrued liabilities........................................ 3,828 4,435
Long-term debt, current maturities............................... 16,258 14,195
--------- ---------
Total current liabilities................................ 56,019 69,250
Long-term debt, less current maturities............................ 756,619 764,310
Other noncurrent liabilities....................................... 26,518 33,813
--------- ---------
Total liabilities........................................ 839,156 867,373
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares authorized;
1,000 shares issued........................................... 1 1
Additional capital............................................... 89,767 89,767
Accumulated deficit.............................................. (215,651) (216,274)
--------- ---------
Total stockholder's deficit.............................. (125,883) (126,506)
--------- ---------
$ 713,273 $ 740,867
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 225
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales:
Lumber and logs...................................................... $183,913 $161,151
Other................................................................ 15,667 19,761
-------- --------
199,580 180,912
-------- --------
Operating expenses:
Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997
Selling, general and administrative expenses......................... 11,344 12,243
Depletion and depreciation........................................... 20,175 18,957
-------- --------
146,136 127,197
-------- --------
Operating income....................................................... 53,444 53,715
Other income (expense):
Investment, interest and other income................................ 8,377 6,835
Interest expense..................................................... (58,388) (58,228)
-------- --------
Income before income taxes............................................. 3,433 2,322
Credit (provision) in lieu of income taxes............................. 1,090 (772)
-------- --------
Net income............................................................. $ 4,523 $ 1,550
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 226
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 4,523 $ 1,550
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion and depreciation........................................ 20,175 18,957
Amortization of deferred financing costs and discounts on
long-term debt................................................... 10,815 9,772
Decrease in receivables........................................... 11,478 12,683
Net sales (purchases) of marketable securities.................... 8,351 (10,542)
Decrease (increase) in inventories, net of depletion.............. 1,588 (6,067)
Increase in accounts payable...................................... 1,270 853
Decrease (increase) in prepaid expenses and other assets.......... 1,188 (1,132)
Decrease in accrued interest...................................... (16,137) (16,330)
Increase (decrease) in other liabilities.......................... (8,729) 9,618
Net gains on marketable securities................................ (3,635) (2,362)
Decrease (increase) in accrued and deferred income taxes.......... (120) 562
Other............................................................. (28) 465
-------- --------
Net cash provided by operating activities.................... 30,739 18,027
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............................ -- 2,500
Net proceeds from sale of assets..................................... 110 9
Capital expenditures................................................. (8,986) (6,624)
-------- --------
Net cash used for investing activities....................... (8,876) (4,115)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net..................................... 914 563
Repurchase of and principal payments on long-term debt............... (14,151) (14,256)
Dividends paid....................................................... (3,900) (4,800)
-------- --------
Net cash used for financing activities....................... (17,137) (18,493)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 4,726 (4,581)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 48,396 48,575
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 53,122 $ 43,994
======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities........ $ -- $ 6,648
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest........................... $ 63,710 $ 64,786
Tax allocation payments to (receipts from) MAXXAM Inc., net.......... 167 --
Income taxes paid (refunded)......................................... (1,549) (5,461)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 227
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
FORMATION OF MGHI
MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to
facilitate the offering of Senior Secured Notes. Subsequent to its formation,
MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM
Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further,
concurrent with the consummation of the Private Offering of $130,000 aggregate
principal amount of the Company's Senior Secured Notes due 2003 as described in
Note 6, MAXXAM transfered to the Company, as an additional capital contribution,
27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock
representing a 34.7% interest in Kaiser on a fully diluted basis. The
contribution of MGI's capital stock has been accounted for as a reorganization
of entities under common control, which requires MGHI to record the assets and
liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the
successor entity to MGI and as such, the accompanying financial statements of
MGHI and its subsidiaries (together, the "Company") reflect both the historical
operating results of MGI and MAXXAM's purchase accounting adjustments which
principally relate to MGI's timber and depreciable assets. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
contribution of the Kaiser common stock has been reflected in the consolidated
financial statements of the Company as if such contribution occurred as of the
beginning of the earliest period presented, at MAXXAM's historical cost using
the equity method of accounting. The Company conducts its business primarily
through the operations of its subsidiaries, including MGI.
BASIS OF PRESENTATION
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the Audited
Consolidated Financial Statements of the Company and the Notes thereto which are
contained elsewhere herein. Any capitalized terms used but not defined in the
following Condensed Notes to Consolidated Financial Statements have the same
meaning given to them in the Audited Consolidated Financial Statements of the
Company. All references to the "Company" include MGHI and its subsidiary
companies unless otherwise noted or the context indicates otherwise. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the entire
year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation. The Company is a wholly owned subsidiary of MAXXAM.
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account held by the
Trustee under the indenture governing the Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5,676 and $19,742, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
F-32
<PAGE> 228
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Lumber..................................................... $58,827 $ 65,566
Logs....................................................... 19,286 15,615
------- -------
$78,113 $ 81,181
======= =======
</TABLE>
4. INVESTMENT IN KAISER
Concurrent with the consummation of the offering on December 23, 1996
described in Note 5, the Company received, as a capital contribution from
MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as
collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully
integrated producer and marketer of alumina, primary aluminum and fabricated
aluminum products. Kaiser's common stock is publicly traded on the New York
Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares
represent a 39.0% equity interest in Kaiser at September 30, 1996 (34.7% on a
fully diluted basis, after giving effect to the conversion of Kaiser's
outstanding preferred stock into an equal number of common shares). The Company
follows the equity method of accounting for its investment in Kaiser.
As described in Note 1, the Company and MAXXAM are entities under common
control; accordingly, the Company has recorded its investment in Kaiser at
MAXXAM's historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company recorded
its equity share of such losses in January 1993 up to an amount of its
investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses
with respect to the results of operations attributable to Kaiser's common
stockholders have exceeded cumulative earnings. The Company is under no
obligation to provide any economic support to Kaiser, and accordingly, has not
recorded any amounts attributable to its equity share of Kaiser's results of
operations for any period subsequent to January 1993. The Company will not
record its equity share of Kaiser's results of operations until such time as
future earnings exceed the cumulative losses incurred.
The market value for the Pledged Kaiser Shares based on the price per share
quoted at the close of business on December 20, 1996 was $321,290. There can be
no assurance that such value would be realized should the Company dispose of its
investment in the Pledged Kaiser Shares. The following table contains summarized
financial information of Kaiser.
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current assets............................................. $ 940,400 $ 932,800
Property, plant and equipment, net......................... 1,126,400 1,109,600
Other assets............................................... 802,400 770,800
---------- ----------
Total assets..................................... $ 2,869,200 $2,813,200
========== ==========
Current liabilities........................................ $ 542,000 $ 601,100
Long-term debt, less current maturities.................... 858,400 749,200
Other liabilities.......................................... 1,286,000 1,282,500
Minority interests......................................... 119,400 122,700
Stockholders' equity:
Preferred................................................ 98,100 98,100
Common................................................... (34,700) (40,400)
---------- ----------
63,400 57,700
---------- ----------
Total liabilities and stockholders' equity....... $ 2,869,200 $2,813,200
========== ==========
</TABLE>
F-33
<PAGE> 229
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales................................................. $ 1,652,100 $ 1,646,700
Costs and expenses........................................ (1,564,700) (1,497,300)
Other expenses............................................ (65,300) (81,100)
----------- -----------
Income before income taxes and minority interests......... 22,100 68,300
Provision for income taxes................................ (8,400) (24,600)
Minority interests........................................ (2,200) (4,400)
----------- -----------
Net income................................................ 11,500 39,300
Dividends on preferred stock.............................. (6,300) (15,500)
----------- -----------
Net income available to common stockholders............... $ 5,200 $ 23,800
=========== ===========
Equity in earnings of Kaiser.............................. $ -- $ --
=========== ===========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015............................................ $ 336,130 $350,233
11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount.................................... 101,021 92,498
10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235,000 235,000
Other...................................................... 726 774
-------- --------
772,877 778,505
Less: current maturities................................... (16,258) (14,195)
-------- --------
$ 756,619 $764,310
======== ========
</TABLE>
PRIVATE OFFERING
The Company completed an offering (the "Offering") of $130,000 principal
amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured
Notes") on December 23, 1996 (the "Issue Date"). Interest is payable
semiannually on February 1 and August 1 of each year beginning February 1, 1997.
The MGHI Senior Secured Notes were not registered under the Securities Act of
1933, and may not be offered or sold in the United States absent registration or
on applicable exemption from registration requirements. The MGHI Senior Notes
rank pari passu in right and priority of payment with any future senior
indebtedness of the Company, and are guaranteed on a senior, unsecured basis by
MAXXAM. The MGHI Senior Secured Notes will be effectively subordinated to
liabilities of the Company's subsidiaries, including trade payables.
The net proceeds from the Offering on the Issue Date, after estimated
expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant
to an intercompany note (the "Intercompany Note") which will be pledged to
secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest
at the rate of 11% per annum (payable semiannually on the interest payment dates
applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003.
MAXXAM will be entitled to defer the
F-34
<PAGE> 230
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
payment of interest on the Intercompany Note on any interest payment date to the
extent that the Company has sufficient available funds to satisfy its
obligations on the MGHI Senior Secured Notes on such date. Any such deferred
interest will be added to the principal amount of the Intercompany Note and be
payable at maturity.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total
consolidated indebtedness would have increased from $772,877 to $902,877. The
Indentures governing the MGI Notes were amended to, among other things, provide
for the contribution of the Kaiser Shares to the Company.
Pursuant to an agreement with the initial purchasers of the MGHI Senior
Secured Notes, the Company and MAXXAM have agreed to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission within 60 days of the Issue Date with respect to a registered offer
to exchange the MGHI Senior Secured Notes for new notes with substantially
identical terms (the "Exchange Offer"), and to use their reasonable best efforts
to have the Registration Statement declared effective within 150 days of the
Issue Date and the Exchange Offer consummated within 180 days of the Issue Date.
The Exchange Date will be made only by means of a prospectus.
6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The credit in lieu of income taxes for the nine months ended September 30,
1996 includes a benefit of $2,620 relating to the refund of taxes previously
paid in connection with a settlement of certain federal income tax matters in
June 1996. The Company received the cash refund in August 1996.
7. CONTINGENCIES
The Company's forest products operations are primarily conducted by The
Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
endangered species and critical habitat, and air and water quality. While the
Company does not expect that Pacific Lumber's compliance with such existing laws
and regulations will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity, Pacific
Lumber is subject to certain pending matters described below, including the
resolution of issues relating to the final designation of critical habitat for
the marbled murrelet, which could have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Moreover, the laws and regulations relating to the Company's forest products
operations are modified from time to time and are subject to judicial and
administrative interpretation. There can be no assurance that certain pending or
future governmental regulations, legislation or judicial or administrative
decisions would not materially and adversely affect Pacific Lumber or its
ability to harvest timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation.
Pursuant to
F-35
<PAGE> 231
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
the Headwaters Agreement described in Note 8 below (the "Headwaters Agreement"),
the Takings Litigation has been stayed by the court at the request of the
parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such times as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by the Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 8 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
a multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require that timber companies project timber growth and
harvest on their timberlands over a 100-year planning period and establish a
long-term sustained yield ("LTSY") harvest level that takes into account
environmental and economic considerations. The proposed sustained yield plan
("SYP") must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's
projected timber inventory is capable of sustaining the LTSY harvest level in
the last decade of the 100-year planning period. On December 17, 1996, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the
same as Pacific Lumber's average annual timber harvest over the last five years.
The proposed SYP also indicates that Pacific Lumber's average annual timber
harvest during the first decade of the SYP would approximate the LTSY harvest
level. During the second decade of the proposed SYP, Pacific Lumber's average
annual timber harvest would be approximately 8% less than that proposed for the
first decade. The SYP, when approved, will be valid for ten years. Thereafter,
revised SYPs will be prepared every decade that will address the LTSY harvest
level based upon reassessment of changes in the resource base and protection of
public resources. The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, Pacific Lumber is unable to predict the impact that these
regulations will have on its future timber harvesting practices. It is possible
that the results of the review and approval process could require Pacific Lumber
to reduce its timber harvest in future years from the harvest levels set forth
in the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
The Company is unable to predict the ultimate impact the sustained yield
regulations will have on its future consolidated financial position, results of
operations or
F-36
<PAGE> 232
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
liquidity. See Note 8 below for a description of certain terms of the Headwaters
Agreement relating to the SYP.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs") and other timber harvesting operations, and the Company expects
that such groups and individuals will continue to file such objections to
certain of the Company's THPs and other timber harvesting operations. In
addition, lawsuits are pending and/or threatened which seek to prevent the
Company from implementing certain of its approved THPs and/or which challenge
other operations of the Company. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth timber
have been limited; however, no assurance can be given as to the extent of such
challenges in the future. The Company believes that environmentally focused
challenges to its timber harvesting operations are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from conducting a
portion of its operations, they have not had a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the Company's consolidated financial
position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate 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 on the Company's consolidated financial position,
results of operations or liquidity.
8. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
F-37
<PAGE> 233
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.................................... $ 59.8 $ 71.3 $ 68.5
Gross profit................................. 26.7 29.9 28.4
Operating income............................. 16.7 19.3 17.4
Net income................................... .3 4.1 .1
1995 QUARTERLY INFORMATION:
Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7
Gross profit................................. 22.5 32.6 29.8 30.6
Operating income............................. 12.7 22.0 19.0 20.6
Net income (loss)............................ (3.1) 3.3 1.3 2.7
1994 QUARTERLY INFORMATION:
Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2
Gross profit................................. 23.6 31.9 29.1 35.4
Operating income............................. 13.5 23.0 19.7 22.9
Income before extraordinary item............. 1.2 3.4 8.5 6.2
Extraordinary loss -- net.................... -- (14.9) -- --
Net income (loss)............................ 1.2 (11.5) 8.5 6.2
</TABLE>
F-38
<PAGE> 234
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, 1995 and 1994, and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, 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.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
F-39
<PAGE> 235
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1995 1994
-------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 104.2 $ 84.6
Marketable securities................................................. 45.9 40.3
Receivables:
Trade, net of allowance for doubtful accounts of $5.5 and $4.4 at
December 31, 1995 and 1994, respectively.......................... 246.2 176.8
Other.............................................................. 98.9 62.9
Inventories........................................................... 606.8 541.4
Prepaid expenses and other current assets............................. 129.7 185.3
-------- --------
Total current assets.......................................... 1,231.7 1,091.3
Property, plant and equipment, net...................................... 1,231.9 1,231.6
Timber and timberlands, net of depletion of $139.6 and $123.9 at
December 31, 1995 and 1994, respectively.............................. 313.0 325.2
Investments in and advances to unconsolidated affiliates................ 189.1 169.7
Deferred income taxes................................................... 414.0 425.6
Long-term receivables and other assets.................................. 452.6 447.4
-------- --------
$3,832.3 $3,690.8
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................................... $ 196.7 $ 161.8
Accrued interest...................................................... 58.0 62.0
Accrued compensation and related benefits............................. 166.5 138.3
Other accrued liabilities............................................. 148.4 200.2
Payable to affiliates................................................. 90.2 81.8
Long-term debt, current maturities.................................... 25.1 33.7
-------- --------
Total current liabilities..................................... 684.9 677.8
Long-term debt, less current maturities................................. 1,585.1 1,582.5
Accrued postretirement benefits......................................... 742.6 743.1
Other noncurrent liabilities............................................ 680.3 618.4
-------- --------
Total liabilities............................................. 3,692.9 3,621.8
-------- --------
Commitments and contingencies
Minority interests...................................................... 223.2 344.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible Preferred
Stock; shares issued: 1995 -- 669,701 and 1994 -- 669,957.......... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359.......................................... 5.0 5.0
Additional capital.................................................... 155.0 53.2
Accumulated deficit................................................... (208.5) (302.9)
Pension liability adjustment.......................................... (16.1) (11.4)
Treasury stock, at cost (shares held: preferred -- 845; common:
1995 -- 1,355,512 and 1994 -- 1,355,768)........................... (19.5) (19.5)
-------- --------
Total stockholders' deficit................................... (83.8) (275.3)
-------- --------
$3,832.3 $3,690.8
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 236
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS OF DOLLARS
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
Aluminum operations........................................ $2,237.8 $1,781.5 $1,719.1
Forest products operations................................. 242.6 249.6 233.5
Real estate and other operations........................... 84.8 84.6 78.5
-------- -------- --------
2,565.2 2,115.7 2,031.1
-------- -------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation
and depletion):
Aluminum operations..................................... 1,798.4 1,625.5 1,587.7
Forest products operations.............................. 127.1 129.6 134.6
Real estate and other operations........................ 65.4 62.8 65.3
Selling, general and administrative expenses............... 195.8 169.4 183.0
Depreciation and depletion................................. 120.9 121.1 120.8
Restructuring of aluminum operations....................... -- -- 35.8
-------- -------- --------
2,307.6 2,108.4 2,127.2
-------- -------- --------
Operating income (loss)...................................... 257.6 7.3 (96.1)
Other income (expense):
Investment, interest and other income (expense)............ 18.2 (2.2) 69.8
Interest expense........................................... (172.7) (167.3) (169.5)
Amortization of deferred financing costs................... (8.6) (9.6) (15.6)
-------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles...................................... 94.5 (171.8) (211.4)
Credit (provision) for income taxes.......................... (14.8) 77.1 82.5
Minority interests........................................... (22.2) (22.0) (3.0)
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principles........................ 57.5 (116.7) (131.9)
Extraordinary item:
Loss on early extinguishment of debt, net of related
benefits for minority interests of $nil in 1994 and $2.8
in 1993 and income taxes of $2.9 in 1994 and $27.5 in
1993, respectively...................................... -- (5.4) (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)............................................ $ 57.5 $ (122.1) $ (600.2)
======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles.............. $ 6.08 $ (12.35) $ (13.95)
Extraordinary item......................................... -- (.57) (5.35)
Cumulative effect of changes in accounting principles...... -- -- (44.17)
-------- -------- --------
Net income (loss).......................................... $ 6.08 $ (12.92) $ (63.47)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 237
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 57.5 $(122.1) $ (600.2)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and depletion............................................... 120.9 121.1 120.8
Minority interests....................................................... 22.2 22.0 3.0
Amortization of deferred financing costs and discounts on long-term
debt.................................................................... 19.5 19.3 21.7
Amortization of excess investment over equity in net assets of
unconsolidated affiliates.............................................. 11.4 11.6 11.9
Equity in (earnings) loss of unconsolidated affiliates................... (19.1) 15.0 4.9
Net gain on sales of real estate, mortgage loans and other assets........ (9.7) (6.5) (45.8)
Net gains on marketable securities....................................... (8.6) (4.2) (7.1)
Net sales (purchases) of marketable securities........................... (4.0) 12.9 31.1
Extraordinary loss on early extinguishment of debt, net.................. -- 5.4 50.6
Cumulative effect of changes in accounting principles, net............... -- -- 417.7
Decrease (increase) in prepaid expenses and other assets................. 84.5 (47.9) 5.4
Increase (decrease) in accounts payable.................................. 34.7 26.3 (14.1)
Decrease (increase) in receivables....................................... (103.6) 24.5 5.0
Decrease (increase) in inventories....................................... (65.3) (37.5) 10.9
Increase in accrued and deferred income taxes............................ (13.1) (77.2) (96.5)
Increase (decrease) in payable to affiliates and other liabilities....... (1.2) 37.5 110.5
Increase (decrease) in accrued interest.................................. (1.0) 8.3 14.3
Other.................................................................... 12.8 (4.0) 8.0
------- ------- ---------
Net cash provided by operating activities........................... 137.9 4.5 52.1
------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments................... 39.3 30.0 143.0
Capital expenditures........................................................ (97.7) (89.3) (86.2)
Investment in subsidiaries and joint ventures............................... (15.9) (7.4) (9.4)
Other....................................................................... (1.1) (1.2) (2.8)
------- ------- ---------
Net cash provided by (used for) investing activities................ (75.4) (67.9) 44.6
------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................................... 5.7 229.7 1,201.3
Net borrowings (payments) under revolving credit agreements and short-term
borrowings (payments).................................................... 4.4 (191.8) (107.6)
Proceeds from issuance of Kaiser capital stock.............................. 1.2 100.1 119.3
Restricted cash (deposits), net of withdrawals.............................. 1.0 1.2 (33.6)
Redemptions, repurchase of and principal payments an long-term debt......... (40.9) (39.1) (1,219.4)
Dividends paid to Kaiser's minority preferred stockholders.................. (20.5) (13.7) (5.6)
Redemption of preference stock.............................................. (8.8) (8.5) (4.2)
Incurrence of financing costs............................................... (1.8) (19.7) (47.9)
Other....................................................................... 16.8 5.9 3.0
------- ------- ---------
Net cash provided by (used for) financing activities................ (42.9) 64.1 (94.7)
------- ------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... 19.6 .7 2.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 84.6 83.9 81.9
------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 104.2 $ 84.6 $ 83.9
======= ======= =========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net margin borrowings (repayments) for marketable securities................ $ (6.9) $ 5.9 $ (.9)
Reduction of stockholders' deficit due to redemption of Kaiser preferred
stock.................................................................... 136.2 -- --
Contribution of property in exchange for joint venture interest,
net of deferred gain of $8.6............................................. 1.3 -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.................................. $ 162.8 $ 149.3 $ 149.1
Income taxes paid, net...................................................... 30.3 18.3 13.2
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 238
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK RETAINED PENSION
STOCK ------------------- ADDITIONAL EARNINGS LIABILITY TREASURY
($.50 PAR) SHARES ($.50 PAR) CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL
---------- ------ ---------- ---------- -------- ---------- -------- -------
(IN MILLIONS OF DOLLARS AND SHARES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........ $ .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)
Net loss...................... -- -- -- -- (122.1) -- -- (122.1)
Gain from issuance of Kaiser
Aluminum Corporation common
stock...................... -- -- -- 2.2 -- -- -- 2.2
Conversions of preferred stock
to common stock............ -- -- -- (.2) -- -- .2 --
Reduction of pension
liability.................. -- -- -- -- -- 12.5 -- 12.5
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31, 1994...... .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3)
--- --- ---- ------ ------- ------ ------ ------
Net income.................... -- -- -- -- 57.5 -- -- 57.5
Gain from issuance of Kaiser
Aluminum Corporation common
stock...................... -- -- -- 2.5 -- -- -- 2.5
Redemption of Kaiser Aluminum
Corporation preferred
stock...................... -- -- -- 99.3 36.9 -- -- 136.2
Additional pension
liability.................. -- -- -- -- -- (4.7) -- (4.7)
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31, 1995...... $ .3 8.7 $5.0 $155.0 $ (208.5) $(16.1) $(19.5) $ (83.8)
=== === ==== ====== ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 239
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 Company
The consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries. All references to the "Company"
include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to
50%-owned) are accounted for utilizing the equity method of accounting. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.
The Company is a holding company and, as such, conducts substantially all
of its operations through its subsidiaries. The Company operates in three
principal industries: aluminum, through its majority owned subsidiary, Kaiser
Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest
products, through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI") and
MGI's wholly owned subsidiaries, principally The Pacific Lumber Company
("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate investment
and development, managed through its wholly owned subsidiary, MAXXAM Property
Company; and other commercial operations through various other wholly owned
subsidiaries.
Description of the Company's Operations
Kaiser operates in the aluminum industry through its principal operating
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in
all principal aspects of the aluminum industry -- the mining of bauxite (the
major aluminum-bearing ore), the refining of bauxite into alumina (the
intermediate material), the production of aluminum, and the manufacture of
fabricated and semi-fabricated aluminum products. KACC's production levels of
alumina and primary aluminum exceed its internal requirements and allow it to be
a major seller of alumina and primary aluminum in domestic and international
markets. The substantial portion of the Company's consolidated assets,
liabilities, revenues, results of operations and cash flows are attributable to
Kaiser (see Note 11).
Pacific Lumber operates in several principal aspects of the lumber
industry -- the growing and harvesting of redwood and Douglas-fir timber, the
milling of logs into lumber and the manufacture of lumber into a variety of
finished products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which is obtained
from Pacific Lumber. Housing, construction and remodeling markets are the
principal markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest products sales. A significant portion of
forest products sales are made to third parties located west of the Mississippi
river.
The Company, principally through its wholly owned subsidiaries, is engaged
in the business of residential and commercial real estate investment and
development, primarily in California, Arizona, Texas and Puerto Rico. With
respect to periods after October 6, 1995, other commercial operations include
the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited
partnership which owns and operates a Class I horse racing facility in the
greater Houston metropolitan area.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties
F-44
<PAGE> 240
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
with respect to such estimates and assumptions are inherent in the preparation
of the Company's consolidated financial statements; accordingly, it is possible
that the subsequent resolution of any one of the contingent matters described in
Note 9 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the reported
amounts of the Company's consolidated assets and liabilities.
The cumulative losses of Kaiser in the first and second quarters 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 and
all of 1994, without regard to the minority interests represented by Kaiser's
other common stockholders (as described in Note 7). The Company recorded 100% of
Kaiser's earnings in 1995 and will continue to do so until such time as the
cumulative losses recorded by the Company with respect to Kaiser's minority
common stockholders are recovered.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, marketable securities were carried at the lower of cost or market. The
cost of the securities sold is determined using the first-in, first-out method.
Included in investment, interest and other income (expense) for each of the
three years ended December 31, 1995 were: 1995 -- net unrealized holding gains
of $1.9 and net realized gains of $6.8; 1994 -- net unrealized holding losses of
$1.0 and net realized gains of $5.2; and 1993 -- net realized gains of $4.2, the
recovery of $2.0 of net unrealized losses and net unrealized gains of $.9. 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.
The Company recorded pre-tax charges of approximately $19.4 in 1993 because
of reductions in the carrying value of its aluminum operations inventories
caused principally by prevailing lower prices for alumina, primary aluminum and
fabricated aluminum products.
F-45
<PAGE> 241
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products..................................... $ 91.5 $ 49.4
Primary aluminum and work in process............................. 195.9 203.1
Bauxite and alumina.............................................. 119.6 102.3
Operating supplies and repair and maintenance parts.............. 118.7 113.2
------ ------
525.7 468.0
------ ------
Forest Products Operations:
Lumber........................................................... 65.5 61.3
Logs............................................................. 15.6 12.1
------ ------
81.1 73.4
------ ------
$606.8 $541.4
====== ======
</TABLE>
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
Timber and timberlands are stated at cost, net of accumulated depletion.
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, 1995 and 1994, cash and cash equivalents includes $19.7 and
$19.4, respectively, which is reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At
December 31, 1995 and 1994, long-term receivables and other assets includes
$31.4 and $32.4, respectively, 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 primarily 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
F-46
<PAGE> 242
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
industry, all of which had resulted in declining prices in Trentwood's key
markets. Additionally, KACC implemented a plan to streamline its casting
operations, which included the shutdown of two facilities located in Ohio. This
entire restructuring was successfully completed by the end of 1995. The pre-tax
charge for this restructuring of $35.8 included $25.2 for pension, severance and
other termination benefits at Trentwood; $8.0 related to casting facilities; and
$2.6 for various other items.
Investment, Interest and Other Income (Expense)
During 1994, the Company, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against the Company, MGI,
Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's
acquisition of Pacific Lumber. Of the $52.0 settlement $33.0 was paid by
insurance carriers of the Company and Pacific Lumber, $14.8 was paid by Pacific
Lumber, and the balance was paid by other defendants and through the assignment
of certain claims. In 1994, the Company recorded a pre-tax loss of $21.2 which
consists of Pacific Lumber's $14.8 cash payment to the settlement fund, a $2.0
accrual for certain contingent claims, and $4.4 of related legal fees. Insofar
as these matters do not originate from, or relate in any manner to, its ongoing
operations, the Company recorded the settlement as a charge to investment,
interest and other income (expense). Additionally, in February 1994, Pacific
Lumber received a franchise tax refund of $7.2, the substantial portion of which
represents interest, from the state of California relating to tax years 1972
through 1985. The net effect of these transactions are included in investment,
interest and other income (expense) for the year ended December 31, 1994.
Investment, interest and other income (expense) for the years ended
December 31, 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9, respectively,
of pre-tax charges related principally to establishing additional litigation
reserves for asbestos claims and environmental reserves for potential solid
waste disposal and soil and ground water remediation matters, each pertaining to
operations which were discontinued prior to the acquisition of Kaiser by the
Company in 1988. Investment, interest and other income for the year ended
December 31, 1993 includes 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.
Foreign Currency Translation
The Company uses the United States dollar as the functional currency for
its foreign operations.
Derivative Financial Instruments
Gains and losses arising from the use of derivative financial instruments
are reflected in Kaiser's operating results concurrently with the consummation
of the underlying hedged transactions. Deferred gains or losses are included in
prepaid expenses and other current assets and other accrued liabilities. Kaiser
does not hold or issue derivative financial instruments for trading purposes
(see Note 10).
F-47
<PAGE> 243
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the publicly traded issues and
on the current rates offered for borrowings similar to the other debt. MGI's
publicly traded debt issues are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active market.
The fair value of foreign currency contracts generally reflects the estimated
amounts that Kaiser would receive to enter into similar contracts at the balance
sheet date, thereby taking into account unrealized gains or losses on open
contracts (see Note 10). The estimated fair values of the Company's financial
instruments, along with the carrying amounts of the related assets
(liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 104.2 $ 104.2 $ 84.6 $ 84.6
Marketable securities (held for
trading purposes)................... 45.9 45.9 40.3 40.3
Restricted cash....................... 31.4 31.4 32.4 32.4
Long-term debt........................ (1,610.2) (1,672.0) (1,616.2) (1,545.9)
Foreign currency contracts............ -- 1.9 -- 3.5
</TABLE>
Stock-Based Compensation
The Company applies the intrinsic value based method for accounting for
stock or stock-based compensation awards described by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note 8).
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 9,459,293 shares, 9,447,878 shares and
9,457,083 shares for the years ended December 31, 1995, 1994 and 1993,
respectively.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
KACC INVESTORS
Kaiser's investments in unconsolidated affiliates are held by 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 $284.4,
$219.7 and $206.6 for the years ended December 31, 1995, 1994 and 1993,
respectively (see Note 9). KACC received dividends of $8.1 from the investees
for the year ended December 31, 1995. No dividends were received for the years
ended December 31, 1994 or 1993. KACC's equity in earnings (loss) before income
taxes of such operations is treated as a reduction (increase) in cost of sales.
At December 31, 1995 and 1994, KACC's net receivables from these affiliates were
not material.
F-48
<PAGE> 244
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Summarized combined financial information for KACC's investees is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Current assets..................................................... $429.0 $342.3
Property, plant and equipment, net................................. 330.8 349.4
Other assets....................................................... 39.3 42.4
------ ------
Total assets............................................. $799.1 $734.1
====== ======
Current liabilities................................................ $125.4 $122.4
Long-term debt..................................................... 331.8 307.6
Other liabilities.................................................. 35.6 31.0
Stockholders' equity............................................... 306.3 273.1
------ ------
Total liabilities and stockholders' equity............... $799.1 $734.1
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales............................................. $ 685.9 $ 489.8 $ 510.3
Costs and expenses.................................... (618.7) (494.8) (527.2)
Credit (provision) for income taxes................... (18.7) (6.3) 1.9
------- ------- -------
Net income (loss)..................................... $ 48.5 $ (11.3) $ (15.0)
======= ======= =======
KACC's equity in earnings (loss) of affiliates........ $ 19.2 $ (1.9) $ (3.3)
======= ======= =======
</TABLE>
KACC's equity in earnings (loss) 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, 1995, KACC's
investment in these affiliates exceeded its equity in their net assets by $54.9.
KACC is amortizing this amount over a twelve-year period which results in an
annual charge of approximately $11.4.
OTHER INVESTEES
In 1995, pursuant to a joint venture agreement with SunCor Development
Company ("SunCor") for the purpose of developing and managing a real estate
project, the Company, through a wholly owned real estate subsidiary, contributed
950 acres of undeveloped land valued at $10.0 and cash of $1.0 in exchange for a
50% interest. SunCor, the managing partner, contributed $11.0 in cash in
exchange for its 50% interest. A subsidiary of the Company and SunCor are each
guarantors of 50% of $4.6 aggregate principal amount of the joint venture's
debt. At December 31, 1995, the joint venture had assets of $32.6, liabilities
of $10.5 and equity of $22.1. For the year ended December 31, 1995, the joint
venture incurred losses of $.2.
On July 8, 1993, the Company, through various subsidiaries, acquired
control of the general partner and became responsible for the management of
SHRP, Ltd. for an investment of $9.1. The Company's subsidiaries held an initial
equity interest in SHRP, Ltd. of 29.7%. The Company increased its equity
interest in SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in
October 1994. At December 31, 1994, SHRP, Ltd. had assets of $76.9 ($6.5
current), liabilities of $88.6 ($13.4 current) and a deficiency in net assets of
$11.7. SHRP, Ltd. incurred net losses for the years ended December 31, 1994 and
1993 of approximately $20.0 and $5.9, respectively. The Company recorded losses
with respect to its investment in SBRP, Ltd. of $13.1 and $1.6 for the year
ended December 31, 1994 and for the period from July 8, 1993 to December 31,
1993, respectively.
F-49
<PAGE> 245
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 ACQUISITION OF MAJORITY INTEREST IN SHRP, LTD.
On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together
with SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the
Company), filed voluntary petitions seeking to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code. The bankruptcy plan (the
"Plan") was confirmed on September 22, 1995, and the transactions called for by
the Plan were completed on October 6, 1995. Such transactions included cash
contributions to SHRP, Ltd. from a new investor group totaling $5.9 (of which
wholly owned subsidiaries of the Company contributed $5.8). Additionally, a
wholly owned subsidiary of the Company contributed a tract of land to SHRP, Ltd.
(with a fair market value of $2.3). The new managing general partner of the
reorganized SHRP, Ltd. is a wholly owned subsidiary of the Company. In an
unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the
Company purchased, for $7.3 (which approximated fair value), $14.6 aggregate
initial principal amount of the SHRP Notes (as defined in Note 4) and the
corresponding equity interest in SHRP Equity, Inc. (a Delaware corporation and
an additional general partner of the reorganized SHRP, Ltd.) to which the
selling noteholder was entitled. After giving effect to the previously described
transactions, wholly owned subsidiaries of the Company hold, directly or
indirectly, approximately 78.8% of the equity in the reorganized SBRP, Ltd.
Supplemental cash flows disclosure related to the acquisition of SHRP, Ltd. in
October 1995 is as follows: assets acquired of $29.3, assumed liabilities of
$20.7, and additional minority interest of $2.8.
The assets and liabilities of SHRP, Ltd. are included in the accompanying
Consolidated Balance Sheet as of December 31, 1995, and the results of SHRP,
Ltd.'s operations and cash flows for the period from October 6, 1995 to December
31, 1995 are included in the accompanying Consolidated Statements of Operations
and Cash Flows. The carrying value of SHRP, Ltd.'s assets and liabilities
following its emergence from the Chapter 11 proceedings differs in material
amounts from those of the predecessor entity. The pro forma disclosures,
assuming SHRP, Ltd. was included in the Company's consolidated results of
operations are as follows: revenue -- $2,579.3, $2,135.9; income (loss) before
extraordinary items -- $50.6, ($125.0); net income (loss) -- $50.6, ($130.4);
and earnings (loss) per common and common equivalent share -- $5.35, ($13.80),
for the years ended December 31, 1995 and 1994, respectively. The pro forma
information excludes amounts attributable to SHRP, Ltd.'s extraordinary gain of
$14.9 resulting from the restructuring transactions contained in the Plan. The
extraordinary gain was omitted because the Company believes the item would
distort normal trends.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Land and improvements.............................. 5-30 years $ 185.8 $ 176.1
Buildings.......................................... 5-45 years 272.4 259.6
Machinery and equipment............................ 3-40 years 1,388.5 1,330.8
Construction in progress........................... 63.3 45.0
-------- --------
1,910.0 1,811.5
Less: accumulated depreciation..................... (678.1) (579.9)
-------- --------
$1,231.9 $1,231.6
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $105.4, $105.7 and $104.9, respectively.
F-50
<PAGE> 246
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Corporate:
14% MAXXAM Senior Subordinated Reset Notes due
May 20, 2000................................................ $ 25.0 $ 25.0
12 1/2% MAXXAM Subordinated Debentures due December 15, 1999,
net of discount............................................. 16.5 20.9
Other.......................................................... .1 .2
Aluminum Operations:
1994 KACC Credit Agreement..................................... 13.1 6.7
9 7/8% KACC Senior Notes due February 15, 2002, net of
discount.................................................... 223.8 223.6
Alpart CARIFA Loan............................................. 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003.... 400.0 400.0
Other.......................................................... 61.2 69.2
Forest Products Operations:
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015........................................................ 350.2 363.8
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount............................................. 92.5 82.8
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235.0 235.0
Other.......................................................... .8 .9
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due September 1,
2001, net of discount....................................... 13.3 --
RTC Portfolio secured notes due December 31, 1999, interest at
prime plus 3%............................................... 8.0 10.0
MCOP Credit Agreement.......................................... .7 2.6
Other notes and contracts, primarily secured by receivables,
buildings, real estate and equipment........................ 10.0 15.5
-------- --------
1,610.2 1,616.2
Less: current maturities.................................... (25.1) (33.7)
-------- --------
$1,585.1 $1,582.5
======== ========
</TABLE>
CORPORATE
14% MAXXAM Senior Subordinated Reset Notes due 2000 (the "Reset Notes")
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% MAXXAM Subordinated Debentures due 1999 (the "12 1/2% Debentures")
The 12 1/2% Debentures, which are net of discount of $1.1 and $1.7 at
December 31, 1995 and 1994, respectively, have mandatory redemptions of $3.2 in
December 1997 and $3.3 in December 1998. The 12 1/2% Debentures are redeemable
at the Company's option, in whole or in part, at par.
F-51
<PAGE> 247
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
MAXXAM Demand Loan Agreement
On October 10, 1994, the Company entered into a demand loan and pledge
agreement (the "Custodial Trust Agreement") with Custodial Trust Company
providing for up to $25.0 in borrowings. Any amounts drawn would be payable upon
demand and be secured by Kaiser common stock owned by the Company (or such other
marketable securities acceptable to the lender) with an initial market value (as
defined therein) of approximately three times the amount borrowed. Borrowings
under the Custodial Trust Agreement would bear interest at the prime rate plus
1% per annum. The Custodial Trust Agreement contains a negative pledge on 22
million shares of Kaiser's common stock owned by the Company and provides that
the Company may sell such shares upon 24 hours notice to the Custodial Trust
Company. No borrowings were outstanding as of December 31, 1995.
ALUMINUM OPERATIONS
The 1994 KACC Credit Agreement (as amended, the "1994 KACC Credit
Agreement")
The 1994 KACC Credit Agreement consists of a $325.0 five-year secured
revolving line of credit which matures in 1999. KACC 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 $325.0 or a borrowing base
relating to eligible accounts receivable and inventory. As of December 31, 1995,
$259.3 (of which $72.4 could have been used for letters of credit) was available
to KACC under the 1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is
unconditionally guaranteed by Kaiser and by certain significant subsidiaries of
KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per
annum, at KACC's election, equal to a Reference Rate (as defined) plus 1 1/2% or
LIBOR (Reserve Adjusted) (as defined) plus 3 1/4%. Effective June 30, 1995, the
interest rate margins applicable to borrowings under the 1994 KACC Credit
Agreement may be reduced by up to 1 1/2% (non-cumulatively), based on a
financial test, determined quarterly. As of December 31, 1995, the financial
test permitted a reduction of 1 1/2% per annum in margins effective January 1,
1996. Kaiser recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in
the first quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to Kaiser's previous credit agreement (the
"1989 KACC Credit Agreement").
The 1994 KACC 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 dividends, undertake
transactions with affiliates, make capital expenditures and enter into unrelated
lines of business. The 1994 KACC Credit Agreement is secured by, among other
things, (i) mortgages on KACC's major domestic plants (excluding Kaiser's
Gramercy alumina 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 of 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 KACC Credit Agreement indebtedness.
9 7/8% KACC Senior Notes due 2002 (the "KACC Senior Notes")
Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") (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 KACC Credit Agreement immediately prior to the
effectiveness of the
F-52
<PAGE> 248
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1994 KACC Credit Agreement and for working capital and general corporate
purposes. The KACC Senior Notes are net of discount of $1.2 and $1.4 at December
31, 1995 and 1994, respectively.
12 3/4% KACC Senior Subordinated Notes due 2003 (the "KACC Senior
Subordinated Notes")
On February 1, 1993, KACC issued $400.0 of the KACC Senior Subordinated
Notes. The net proceeds from the sale of the KACC Senior Subordinated Notes were
used to retire KACC's 14 1/4% Senior Subordinated Notes due 1995, to prepay
$18.0 of the term loan under the 1989 KACC Credit Agreement and to reduce
outstanding borrowings under the revolving credit facility of the 1989 KACC
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
Senior Subordinated Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. Pursuant to the terms of the indentures governing the KACC
Senior Notes and the KACC Senior Subordinated Notes, at December 31, 1995, $66.0
was available for payment of dividends on Kaiser's common stock. However,
pursuant to the terms of the 1994 KACC Credit Agreement, at December 31, 1995,
Kaiser is precluded from paying any dividends on its common stock. Further, the
indentures governing the KACC Senior Notes and the KACC Subordinated Notes
provide that KACC must offer to purchase such notes upon the occurrence of a
Change of Control (as defined therein), and the 1994 KACC Credit Agreement
provides that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.
Alpart CARIFA Loan
In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned
subsidiary of KACC) 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. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
rate (LIBOR less 1/8 of 1%). 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
Scotia Pacific Timber Notes and 10 1/2% Pacific Lumber Senior Notes due
2003 (the "Pacific Lumber Senior Notes")
On March 23, 1993, Pacific Lumber issued $235.0 of the Pacific Lumber
Senior Notes and its newly formed wholly owned subsidiary, Scotia Pacific
Holding Company ("Scotia Pacific"), issued $385.0 of the Timber Notes. Pacific
Lumber and Scotia Pacific 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,
F-53
<PAGE> 249
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, (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 Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179.4 of the
Company's consolidated balance at December 31, 1995), (ii) substantially all of
Scotia Pacific's property and equipment, and (iii) other property including 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 available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
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 Scotia Pacific 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 Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific 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 Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, 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.
Pacific Lumber Revolving Credit Agreement (as amended and restated, the
"Pacific Lumber Credit Agreement")
Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1998, are secured by Pacific Lumber's trade receivables and inventories,
with interest computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for
borrowings of up to $60.0, of which $15.0 may be used for standby letters of
credit and $30.0 is restricted to timberland
F-54
<PAGE> 250
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisitions. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of December 31, 1995, $48.1 of borrowings was available under
the Pacific Lumber Credit Agreement, of which $3.1 was available for letters of
credit and $30.0 was restricted to timberland acquisitions. No borrowings were
outstanding as of December 31, 1995, and letters of credit outstanding amounted
to $11.9. The Pacific Lumber Credit Agreement contains covenants substantially
similar to those contained in the indenture governing the Pacific Lumber Senior
Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes,
and the Pacific Lumber Credit Agreement contain various covenants which, among
other things, limit the payment of dividends and restrict transactions between
Pacific Lumber and its affiliates. As of December 31, 1995, under the most
restrictive of these covenants, approximately $15.7 of dividends could be paid
by Pacific Lumber.
11 1/4% MGI Senior Secured Notes due 2003 (the "MGI Senior Notes") and
12 1/4% MGI Senior Secured Discount Notes due 2003 (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 and MAXXAM Properties Inc. (a wholly owned subsidiary of MGI) and
by the pledge of 28 million shares of Kaiser's common stock owned by the
Company. 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. As of December 31, 1995, under
the most restrictive of these covenants, approximately $1.9 of dividends could
be paid by MGI, of which $1.6 was paid in January 1996. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the
Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33.2
and $43.9 at December 31, 1995 and 1994, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual 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 former 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 AND OTHER OPERATIONS
11% SHRP, Ltd. Senior Secured Extendible Notes due 2001 (the "SHRP Notes")
The SHRP Notes were issued on October 6, 1995 at an aggregate principal
amount of $37.9, maturing on September 1, 2001. The SHRP Notes were recorded at
their estimated fair value which resulted in a discount of approximately $17.1.
At December 31, 1995, the aggregate principal amount (including accrued interest
thereon) of the SHRP Notes and the unamortized discount were $38.8 and $17.0,
respectively. On October 20, 1995, a wholly owned subsidiary of the Company
purchased approximately 39% of the SHRP
F-55
<PAGE> 251
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Notes from an unrelated party. Accordingly, the amount of indebtedness shown in
the accompanying table has been adjusted to reflect the elimination of the
Company's holdings. Should the Texas Legislature pass certain gaming
legislation, the SHRP Notes may be extended to September 1, 2003; such extension
would increase the rate of interest to 13% per annum. The SHRP Notes are secured
by substantially all of the assets of SHRP, Ltd., which aggregate $33.6 of the
assets reflected on the accompanying Consolidated Balance Sheet at December 31,
1995. Interest on the SHRP Notes is payable in-kind on April 1 and October 1,
and will not be payable in cash until a specified level of cash flow from
operations has been achieved. Once cash interest payments commence, subsequent
interest payments may not be paid in-kind. The indenture governing the SHRP
Notes generally precludes the payment of cash distributions until two
consecutive cash interest payments have been made.
RTC Portfolio Secured Notes due 1999 (the "RTC Portfolio Loan")
As of December 31, 1995, approximately $8.0 was outstanding pursuant to the
RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan provides
for additional borrowings of up to approximately $12.1 on or before March 31,
1996. The Company anticipates that such amount will be borrowed if such date is
not extended. Upon the sale of any secured property or loan, principal payments
are required based on the release price (as defined) of such property or loan.
The entire amount of the loan must also be paid if the principal balance
declines to less than $8.0.
The MCOP Credit Agreement (as amended, the "MCOP Credit Agreement")
On July 15, 1995, a real estate subsidiary of the Company, MCO Properties
Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank
which will expire on May 15, 1998. Borrowings under the MCOP Credit Agreement
are secured primarily by (i) MCOP's eligible receivables and real estate held
for investment or development and sale, (ii) MCOP's pledge of the common stock
of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's
subsidiaries and the Company. Further, the Company has pledged MCOP's common
stock as additional security. Interest is computed at the bank's prime rate plus
1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit Agreement
contains various covenants including a minimum net worth requirement and
limitations on the payment of dividends, investments and the incurrence of
indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0,
of which $8.5 may be used for standby letters of credit. The available credit is
subject to borrowing base limitation calculations. As of December 31, 1995,
$10.6 of additional borrowings was available under the MCOP Credit Agreement and
outstanding letters of credit amounted to $2.1.
F-56
<PAGE> 252
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
OTHER
Maturities
Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
14% MAXXAM Senior Subordinated Reset
Notes................................... $ -- $ -- $ -- $ -- $25.0 $ --
12 1/2% MAXXAM Subordinated Debentures.... -- 3.2 3.3 11.1 -- --
1994 KACC Credit Agreement................ -- -- -- 13.1 -- --
9 7/8% KACC Senior Notes.................. -- -- -- -- -- 225.0
Alpart CARIFA Loan........................ -- -- -- -- -- 60.0
12 3/4% KACC Senior Subordinated Notes.... -- -- -- -- -- 400.0
7.95% Scotia Pacific Timber Collateralized
Notes................................... 14.1 16.2 19.3 21.6 24.0 255.0
11 1/4% MGI Senior Secured Notes.......... -- -- -- -- -- 100.0
12 1/4% MGI Senior Secured Discount
Notes................................... -- -- -- -- -- 125.7
10 1/2% Pacific Lumber Senior Notes....... -- -- -- -- -- 235.0
11% SHRP, Ltd. Senior Secured Extendible
Notes................................... -- -- -- -- -- 43.4
RTC Portfolio secured notes............... -- -- -- 8.0 -- --
Other..................................... 11.0 10.2 10.1 1.6 2.0 38.0
----- ----- ----- ----- ----- --------
$25.1 $29.6 $32.7 $55.4 $51.0 $1,482.1
===== ===== ===== ===== ===== ========
</TABLE>
Capitalized Interest
Interest capitalized during the years ended December 31, 1995, 1994 and
1993 was $2.8, $3.0 and $4.4, 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, 1995, all of the assets relating to the Company's aluminum,
forest products, real estate and other operations are subject to such
restrictions. The Company could eliminate all of such restrictions with respect
to approximately $200.2 (see Note 11) of the Company's real estate assets with
the extinguishment of $18.7 of debt.
5. INCOME TAXES
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,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Domestic............................................... $(49.4) $(177.9) $(223.4)
Foreign................................................ 143.9 6.1 12.0
------ ------- -------
$ 94.5 $(171.8) $(211.4)
====== ======= =======
</TABLE>
F-57
<PAGE> 253
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 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,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $ (4.3) $ -- $ (.1)
State and local........................................ (.4) (.2) (1.3)
Foreign................................................ (40.2) (18.0) (7.9)
------ ------ ------
(44.9) (18.2) (9.3)
------ ------ ------
Deferred:
Federal................................................ 35.4 94.3 77.1
State and local........................................ (.4) .4 2.7
Foreign................................................ (4.9) .6 12.0
------ ------ ------
30.1 95.3 91.8
------ ------ ------
$(14.8) $ 77.1 $ 82.5
====== ====== ======
</TABLE>
The 1994 federal deferred credit for income taxes of $94.3 includes $36.0
for the benefit of operating loss carryforwards generated in 1994. 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 a $7.0 benefit for
increasing net deferred income tax assets (liabilities) as of the date of
enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993,
which retroactively increased the federal statutory income tax rate from 34% to
35% for periods beginning on or after January 1, 1993.
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,
--------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles.................................... $ 94.5 $(171.8) $(211.4)
====== ======= =======
Amount of federal income tax based upon the statutory
rate..................................................... $(33.1) $ 60.1 $ 74.0
Revision of prior years' tax estimates and other changes in
valuation allowances..................................... 24.2 16.7 (.6)
Percentage depletion....................................... 4.2 5.6 6.4
Foreign taxes, net of federal tax benefit.................. (6.9) (5.3) (5.0)
State and local taxes, net of federal tax benefit.......... (2.4) .1 .9
Increase in net deferred income tax assets due to tax rate
change................................................... -- 1.8 7.0
Removal of Kaiser from the Company's consolidated federal
return group............................................. -- -- 3.5
Other...................................................... (.8) (1.9) (3.7)
------ ------- -------
$(14.8) $ 77.1 $ 82.5
====== ======= =======
</TABLE>
F-58
<PAGE> 254
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The caption entitled "Revision of prior years' tax estimates and other
changes in valuation allowances," as shown in the preceding table, includes
amounts for the reversal of reserves which the Company no longer believes are
necessary, other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets. Generally, the reversal
of reserves relate to the expiration of the relevant statute of limitations with
respect to certain income tax returns, or the resolution of specific income tax
matters with the relevant tax authorities. For the years ended December 31,
1995, 1994 and 1993, the reversal of reserves which the Company believes are no
longer necessary amounted to $20.0, $20.1 and $2.9, respectively.
As shown in the Consolidated Statement of Operations for the years ended
December 31, 1994 and 1993, the Company reported extraordinary losses on the
early extinguishment of debt. The Company reported the losses net of related
deferred federal income taxes of $2.9 and $27.5, respectively, which
approximated the federal statutory income tax rate in effect on the dates the
transactions occurred.
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 changed 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. As a result of restating these assets
and liabilities, 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.
F-59
<PAGE> 255
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Certain of the deferred income tax assets and liabilities listed in the
following table are included in the Consolidated Balance Sheet in the captions
entitled prepaid expenses and other current assets, other accrued liabilities
and other noncurrent liabilities. The components of the Company's net deferred
income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions.................... $ 293.6 $ 297.2
Loss and credit carryforwards.................................. 190.5 208.8
Other liabilities.............................................. 139.0 133.5
Real estate.................................................... 58.1 71.5
Pensions....................................................... 56.0 51.0
Timber and timberlands......................................... 41.9 46.2
Foreign and state deferred income tax liabilities.............. 30.8 28.1
Property, plant and equipment.................................. 23.3 23.7
Other.......................................................... 32.5 26.7
Valuation allowances........................................... (141.5) (147.0)
------- -------
Total deferred income tax assets, net.................. 724.2 739.7
------- -------
Deferred income tax liabilities:
Property, plant and equipment.................................. (177.9) (202.7)
Investments in and advances to unconsolidated affiliates....... (66.4) (63.8)
Inventories.................................................... (15.5) (27.4)
Other.......................................................... (22.8) (20.0)
------- -------
Total deferred income tax liabilities.................. (282.6) (313.9)
------- -------
Net deferred income tax assets................................... $ 441.6 $ 425.8
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $291.8 of the net deferred income tax assets listed
above are attributable to Kaiser. Of this amount, approximately $97.7 relates 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 $194.1 at
December 31, 1995. 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
operating losses incurred in recent years. The net deferred income tax assets
listed above which are not attributable to Kaiser are approximately $149.8 as of
December 31, 1995. This amount includes approximately $91.2 which relates to the
excess of the tax basis over financial statement basis with respect to timber
and
F-60
<PAGE> 256
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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.
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 files consolidated federal income tax returns
for taxable periods beginning on or after July 1, 1993.
The following table presents the tax attributes for federal income tax
purposes at December 31, 1995 attributable to the Company and to the New Kaiser
Tax Group. The utilization of certain of these tax attributes is subject to
limitations.
<TABLE>
<CAPTION>
NEW KAISER TAX GROUP
THE COMPANY --------------------
--------------------
EXPIRING EXPIRING
THROUGH THROUGH
----------- -----------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss................ $26.4 2010 $ -- --
Prior year net operating losses................ 51.2 2009 32.9 2007
General business tax credits................... .9 2002 28.4 2008
Foreign tax credits............................ -- -- 89.7 2000
Alternative minimum tax credits................ 1.5 Indefinite 19.4 Indefinite
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss................ $21.6 2010 $ -- --
Prior year net operating losses................ 42.4 2009 17.1 2002
Foreign tax credits............................ -- -- 83.5 2000
</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.
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are 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. The deferred income tax benefit related to
the adoption of SFAS 106 was recorded at the federal statutory rate in effect on
the date SFAS 106 was adopted, before giving effect to certain valuation
allowances.
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.
F-61
<PAGE> 257
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP
is mandatory for all salaried retirees over 65 and for the United Steelworkers
of America ("USWA") retirees who retire after December 31, 1995, and when they
become 65, and voluntary for other hourly retirees of Kaiser's operations in
California, Louisiana, and Washington. The USWA contract, ratified on February
28, 1995, also contained changes to the retiree health benefits including
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower Kaiser's expenses for retiree
medical care.
Postretirement benefits other than pensions are generally provided through
contracts with various insurance carriers. The Company has not funded the
liability for these benefits, which are expected to be paid out of cash
generated by operations. A summary of the components of net periodic
postretirement benefit cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service cost-benefits earned during the year................ $ 4.9 $ 8.8 $ 7.4
Interest cost on accumulated postretirement benefit
obligation................................................ 52.7 57.5 59.0
Net amortization and deferral............................... (9.1) (3.2) --
----- ----- -----
Net periodic postretirement benefit cost.................... $48.5 $63.1 $66.4
===== ===== =====
</TABLE>
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $558.9 $568.3
Actives eligible for benefits...................................... 31.5 31.4
Actives not eligible for benefits.................................. 65.5 102.8
------ ------
Accumulated postretirement benefit obligation............ 655.9 702.5
Unrecognized prior service cost.................................... 111.1 31.8
Unrecognized net gain (loss)....................................... 22.4 55.8
------ ------
Postretirement benefit liability......................... $789.4 $790.1
====== ======
</TABLE>
The annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rates) are approximately 8.0% and 7.5%
for retirees under age 65 and over age 65, respectively, and are assumed to
decrease gradually to approximately 5.0% in 2008 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, 1995 by approximately $69.7 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost by
approximately $7.9.
The discount rates and rates of compensation increase used in determining
the accumulated postretirement benefit obligation were 7.5% and 5.0% at December
31, 1995, respectively, and 8.5% and 5.0% at December 31, 1994, 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
F-62
<PAGE> 258
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 (the "MAXXAM 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 MAXXAM Savings 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. In 1995,
Kaiser adopted the Kaiser Aluminum Total Compensation System, an unfunded
incentive compensation program, which provides incentive pay based upon
performance against plan over a three-year period.
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,
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the year.......... $ 12.1 $ 13.6 $ 13.0
Interest cost on projected benefit obligations........ 62.5 59.5 60.8
Return on assets:
Actual gain........................................ (118.7) (.8) (73.9)
Deferred gain (loss)............................... 64.6 (53.0) 15.9
Net amortization and deferral......................... 8.7 2.8 4.7
------- ------ ------
Net periodic pension cost............................. 29.2 22.1 20.5
Defined contribution plans.............................. 5.4 2.8 1.7
Non-qualified retirement and incentive plans............ 8.2 5.0 4.3
------- ------ ------
$ 42.8 $ 29.9 $ 26.5
======= ====== ======
</TABLE>
F-63
<PAGE> 259
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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,
-------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation...................................... $ 781.7 $ 684.3
Non-vested benefit obligation.................................. 31.1 42.9
------- -------
Total accumulated benefit obligation................... $ 812.8 $ 727.2
======= =======
Projected benefit obligation..................................... $ 853.1 $ 761.2
Plan assets at fair value, primarily common stocks and fixed
income obligations............................................. (623.1) (546.9)
------- -------
Projected benefit obligation in excess of plan assets............ 230.0 214.3
Unrecognized net transition obligation........................... (.6) (.9)
Unrecognized net loss............................................ (54.9) (40.4)
Unrecognized prior service cost.................................. (29.1) (31.6)
Adjustment required to recognize minimum liability............... 49.8 42.9
------- -------
Accrued pension cost................................... $ 195.2 $ 184.3
======= =======
</TABLE>
The assumptions used in accounting for the defined benefit plans were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.5% 8.5% 7.5%
Expected long-term rate of return on assets.................. 9.5% 9.5% 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 reduction to stockholders' equity. In 1995 and
1994, the pension liability adjustment increased by $4.7 and decreased by $12.5,
respectively. These adjustments were recorded net of a related deferred federal
and state income tax credit (provision) of $2.8 and ($7.3), respectively, which
approximated the federal and state statutory rates.
POSTEMPLOYMENT BENEFITS
The Company adopted Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits ("SFAS 112") as of January 1,
1993. The costs of postemployment benefits are 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.
F-64
<PAGE> 260
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. MINORITY INTERESTS
Minority interests represent the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Kaiser Aluminum Corporation:
Common stock, par $.01........................................... $ -- $ --
$.65 Depositary Shares........................................... -- 128.0
8.255% PRIDES.................................................... 98.1 100.1
Subsidiary redeemable preference stock:
KACC Series A and B Cumulative Preference Stock, par $1.......... 29.7 29.1
KACC Cumulative Convertible Preference Stock, par $100........... 1.7 1.7
KACC Minority Interests:
Alumina Partners of Jamaica...................................... 73.9 70.4
Volta Aluminium Company Limited.................................. 14.9 13.6
Kaiser LaRoche Hydrate Partners.................................. 2.5 1.4
Sam Houston Race Park, Ltd......................................... 2.4 --
------ ------
$223.2 $344.3
====== ======
</TABLE>
As a result of Kaiser's issuance of preferred stock in 1993 and 1994, the
1995 redemption of the Depositary Shares (each as described below), and the
issuance of Kaiser's common stock in connection with the LTIP (as described
below), the Company's equity interest in Kaiser has decreased to approximately
62% on a fully diluted basis, as of December 31, 1995.
KAISER PROPOSED RECAPITALIZATION
On February 5, 1996, Kaiser announced that it had filed a preliminary proxy
statement with the Securities and Exchange Commission relating to a proposed
recapitalization. Under the terms of the proposed recapitalization, the relative
ownership interest and voting power of stockholders would be unchanged as a
result of the recapitalization (except as a result of the treatment of
fractional shares). The proposed recapitalization would (i) provide for two
classes of common stock: Class A Common Shares, $.01 par value, with one vote
per share and a new lesser-voting class designated as Common Stock, $.01 par
value, with 1/10 vote per share, (ii) redesignate as Class A Common Shares the
100 million currently authorized shares of existing common stock and authorize
250 million shares to be designated as Common Stock, and (iii) change each
issued share of Kaiser's existing common stock into (a) .33 of a Class A Common
Share and (b) .67 of a share of Common Stock. Kaiser would pay cash in lieu of
fractional shares. Kaiser anticipates that both the Class A Common Shares and
the Common Stock would be approved for trading on the New York Stock Exchange.
Upon the effective date of the recapitalization, approximately 23.6 million
Class A Common Shares and 48.0 million shares of Common Stock would be issued
and outstanding. The proportionate voting power of the holders of the PRIDES
would increase immediately after the effectiveness of the recapitalization until
such shares are redeemed or converted, which would occur on or before December
31, 1997. As of January 31, 1996, holders of the existing common stock and the
PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all
stockholders. Immediately after the recapitalization, the voting power of such
holders of the PRIDES would increase to 19.6% in the aggregate, with a
corresponding reduction in the voting power of such holders of the existing
common stock. At such time as the PRIDES were redeemed or converted, the
relative voting power of such holders of the PRIDES would decrease and the
relative voting power for both such holders of the PRIDES and the existing
common stock would be approximately the same as it would have been had the
recapitalization not occurred.
F-65
<PAGE> 261
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
$.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 made capital contributions and
intercompany loans to KACC from the proceeds of the sale of the Series A Shares.
KACC used approximately $13.7 of such funds to prepay the remaining balance of
the term loan under the 1989 KACC Credit Agreement and $105.6 of such funds to
reduce outstanding borrowings under the revolving credit facility of the 1989
KACC Credit Agreement. The Depositary Shares called 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 accounted for Kaiser's issuance of the
Depositary Shares as additional minority interest.
On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A
Shares, which resulted in the simultaneous redemption of all 19,382,950
Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common
stock, (ii) cash equal to all accrued and unpaid dividends up to and including
the day immediately prior to the redemption date of $2.8, and (iii) cash in lieu
of any fractional shares of common stock that would have otherwise been
issuable.
During 1994, the Company sold 1,239,400 of the Depositary Shares for
aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. From
January through May of 1995, the Company sold the remaining Depositary Shares
that it owned for aggregate net proceeds of $7.6, resulting in pre-tax gains of
$1.3. As a result of these sales, the shares of Kaiser's common stock which were
issued upon redemption of the Series A Shares are held by minority stockholders.
The Company has recorded 100% of the losses attributable to Kaiser's common
stock since July 1993, as Kaiser's cumulative losses through that date had
eliminated Kaiser's equity with respect to its common stock. The redemption of
Kaiser's Series A Shares, together with the voluntary redemption of 181,700
shares of PRIDES in 1995, decreased Kaiser's preferred equity, and reduced
Kaiser's deficit in common equity, by $136.2. Accordingly, the Company recorded
an adjustment to reduce the minority interests reflected on its Consolidated
Balance Sheet for that same amount, with an offsetting decrease in the Company's
stockholders' deficit.
8.255% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES
During the first quarter of 1994, Kaiser consummated a public offering for
the sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of
the PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds to
make non-interest bearing loans to KACC (evidenced by notes) which are designed
to provide sufficient funds to make the required dividend payments on the PRIDES
until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $66.9 of
such net proceeds to make capital contributions 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 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 outstanding share of PRIDES will
mandatorily convert into one share of Kaiser's common stock. subject to
adjustment in certain events, and the right to receive an amount in cash equal
to all accrued and unpaid dividends thereon. Shares of PRIDES are not
redeemable, at the election of Kaiser, 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
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MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(i) the sum of $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, all accrued and unpaid dividends thereon
divided by (ii) 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 $2.1 ($.2425 per share). The Company accounted for
Kaiser's issuance of the PRIDES as, additional minority interest.
SUBSIDIARY REDEEMABLE PREFERENCE STOCK
In March 1985, KACC entered into a three-year agreement with the 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 $36.9 at December 31, 1995.
Changes in Series A and B Stock are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year........................................... 912,167 1,081,548 1,163,221
Redeemed.................................................... (174,804) (169,381) (81,673)
-------- --------- ---------
End of year................................................. 737,363 912,167 1,081,548
======== ========= =========
</TABLE>
No additional Series A or B Stock will be issued. 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, 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
1994 and 1995, KACC contributed $4.3 for each of the years ended December 31,
1993 and 1994, and will contribute $4.3 in March 1996 for the year ended
December 31, 1995.
Under the USWA labor contract effective November 1, 1990, KACC was
obligated to offer to purchase up to 40 shares of Series A Stock from each
active participant in 1994 at a price equal to its redemption value of $50 per
share. The employees could 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 40 shares of Series B Stock from active participants 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.
F-67
<PAGE> 263
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Under the USWA labor contract effective November 1, 1994, KACC was
obligated to offer to purchase up to 40 shares of Series A Stock from each
active participant in 1995 at a price equal to its redemption value of $50 per
share. KACC also agreed to offer to purchase up to an additional 80 shares from
each participant in 1998. In addition, a profitability test was satisfied for
1995; therefore, KACC will offer to purchase from each active participant an
additional 20 shares of such preference stock held in the stock ownership plan
for the benefit of substantially the same employees in 1996. The employees may
elect to receive their shares. accept cash or place the proceeds into KACC's
401(k) savings plan. KACC also will offer to make comparable purchases of Series
B Stock from active participants.
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.
KAISER STOCK INCENTIVE PLANS
Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain
key employees. All compensation vested at December 31, 1993 under the LTIP was
paid to the participants in cash or common stock of Kaiser. Under the LTIP, as
amended, 764,092 restricted shares of Kaiser common stock were distributed to
six Kaiser executives during 1993 for benefits generally earned but not vested
as of December 31, 1992. These shares generally vest at the rate of 25% per
year. Kaiser is recording the related expense of $6.5 over the four-year period
ending December 31, 1996.
In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A
total of 2,500,000 shares of Kaiser common stock were reserved for awards or for
payment of rights granted under the plan, of which 544,839 shares were available
to be awarded at December 31, 1995. During 1994, 102,564 restricted shares,
which vest at the rate of 25% per year, were distributed to two Kaiser
executives. Kaiser is recording the related expense of $1.0 over the four-year
period ending December 31, 1998.
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<PAGE> 264
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In 1993 and 1994, the Compensation Committee of Kaiser's Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These options generally will vest at
the rate of 20-25% per year. Information relating to nonqualified stock options
is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................... 1,119,680 664,400 --
Granted............................................ -- 494,800 664,400
Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920) --
Expired or forfeited............................... (38,095) (32,600) --
--------- --------- -------
Outstanding at end of year (prices ranging from
$7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year......................... 211,755 120,180 --
========= ========= =======
</TABLE>
8. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The holders of the Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock (the "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 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.
STOCK OPTION PLANS
In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan. The 1994 Omnibus Plan
replaced the Company's 1984 Phantom Share Plan (the "1984 Plan") which expired
in June 1994, although previous grants thereunder remain outstanding. In
December 1994, options to purchase 25,000 shares of common stock of the Company
were granted to an executive officer. In addition, also in December 1994,
another executive officer relinquished stock appreciation rights relating to
50,000 shares of common stock of the Company in exchange for options to purchase
45,000 shares of Class A Preferred Stock. The exercise price of these options is
$30.375 per share (the quoted market price at the date of grant). In November
1995, stock appreciation rights equivalent to 36,000 shares of common stock of
the Company were granted to certain employees with an exercise price of $45.15
(reflecting a 20% premium above the quoted market price at the date of grant).
These options (or rights, as applicable) vest at the rate of 20% per year
commencing one year from the date of grant. At December 31, 1995, 14,000 of
rights granted pursuant to the 1994 Omnibus Plan were exercisable. The Company
paid $2.7 with respect to the 1984 Plan for the year ended December 31, 1995.
Amounts paid with respect to the 1984 Plan for the years ended December 31,
F-69
<PAGE> 265
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1994 and 1993 were not significant. The following table summarizes the options
or rights outstanding and exercisable relating to the 1984 Plan and the 1994
Omnibus Plan:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year...................... 238,000 267,800 226,300
Granted............................................... 36,000 70,000 50,000
Exercised............................................. (66,100) (37,050) (8,500)
Expired or forfeited.................................. -- (62,750) --
------- ------- -------
Outstanding at end of year (prices ranging from $13.75
to $45.15 per share)................................ 207,900 238,000 267,800
======= ======= =======
Exercisable at end of year............................ 93,900 124,100 133,725
======= ======= =======
</TABLE>
Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. In May 1995 and 1994, options to purchase 900 shares and 1,500 shares of
common stock, respectively, were granted to three non-employee directors. The
exercise prices of there options are $31.60 and $36.50 per share, respectively,
based on the quoted market price at the date of grant. The options vest at the
rate of 25% per year commencing one year from the date of grant At December 31,
1995, 375 of such options were exercisable.
In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the
"MGI 1976 Plan") 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, 60,000 options granted under the MGI 1976 Plan at a price of
$10.875 per share 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 bad been exercised.
SHARES RESERVED FOR ISSUANCE
At December 31, 1995, the Company had the following shares reserved for
future issuance:
<TABLE>
<S> <C>
Common shares:
Class A Preferred Stock................................................. 668,856
1994 Omnibus Plan....................................................... 939,000
1994 Director Plan...................................................... 32,600
---------
1,640,456
=========
Class A Preferred Stock:
1994 Omnibus Plan....................................................... 955,000
=========
</TABLE>
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
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<PAGE> 266
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 exception). Each Series A Right, when
exercisable, entities 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, entities 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 Inc., a wholly owned subsidiary of Federated
Development Company ("Federated"), and Mr. Charles E. Hurwitz collectively own
99.1% of the Company's Class A Preferred Stock and 31.1 % of the Company's
common stock (resulting in combined voting control of approximately 60.7% 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. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company, principally through KACC, has financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 10), letters of credit and other guarantees. Such
purchase agreements and tolling arrangements include 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. At December 31, 1995, such indebtedness was
$88.9, with $26.7 due in 1997 and $62.2 due in 2002. KACC's share of payments,
including operating costs and certain other expenses under the agreement, was
$77.5, $85.6 and $86.7 for the years ended December 31, 1995, 1994 and 1993,
respectively. KACC also has agreements to supply alumina to and to purchase
aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1995 are
as follows: years ending December 31, 1996 -- $27.7; 1997 -- $25.5;
1998 -- $28.3; 1999 -- $33.0; 2000 -- $29.9; thereafter -- $187.3. Rental
expense for operating leases was $31.4, $29.2 and $31.3 for the years ended
December 31,
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<PAGE> 267
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995, 1994 and 1993, respectively. The minimum future rentals receivable under
noncancelable subleases at December 31, 1995 were $67.6.
ENVIRONMENTAL CONTINGENCIES
Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claim 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 on Kaiser's evaluation of these and other environmental matters.
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The following
table presents the changes in such accruals, which are primarily included in
other noncurrent liabilities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year................................ $40.1 $40.9 $46.4
Additional amounts.......................................... 3.3 2.8 1.7
Less expenditures........................................... (4.5) (3.6) (7.2)
----- ----- -----
Balance at end of year...................................... $38.9 $40.1 $40.9
===== ===== =====
</TABLE>
These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology and Kaiser's
assessment of the likely remediation action to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an
aggregate of approximately $10.0 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. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $23.0 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. While uncertainties are inherent in the final outcome of
these environmental matters, and it is impossible to determine the actual costs
that ultimately may be incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years. At December 31, 1995,
the number of claims pending was approximately 59,700,
F-72
<PAGE> 268
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
compared to 25,200 at December 31, 1994. During 1995, approximately 41,700
claims were received and approximately 7,200 were settled or dismissed. KACC
believes that, although there can be no assurance, the recent increase in
pending claims may be attributable in part to tort reform legislation in Texas
which was passed by the legislature in March 1995 and which became effective on
September 1, 1995. The legislation, among other things, is designed to restrict,
beginning September 1, 1995, the filing of cases in Texas that do not have a
sufficient nexus to that jurisdiction, and to impose, generally as of September
1, 1996, limitations relating to joint and several liability in tort cases. A
substantial portion of the asbestos-related claims that were filed and served on
KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to
September 1, 1995.
Based on past experience and reasonably anticipated future activity, KACC
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and KACC's actual
costs could exceed these estimates. KACC's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an asbestos-related cost accrual of
$160.1, before consideration of insurance recoveries, is included primarily in
other noncurrent liabilities at December 31, 1995. KACC estimates that annual
future cash payments in connection with such litigation will be approximately
$13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of
approximately $78.0 thereafter through 2008. While KACC does not believe there
is a reasonable basis for estimating such costs beyond 2008, and, accordingly,
did not accrue such costs, there is a reasonable possibility that such costs may
continue beyond 2008, and such costs may be substantial.
KACC believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. KACC believes, based on prior insurance-related recoveries with
respect to asbestos-related claims, existing insurance policies, and the advice
of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of these policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $137.9 determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
OTS CONTINGENCY AND RELATED MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated formal administrative proceedings against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and others
(the "respondents") with respect to the failure of United Savings Association of
Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc.
("UFG"). The Notice claims that the Company was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
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<PAGE> 269
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other respondents, including allegations
that through USAT it was involved in prohibited transactions with Drexel,
Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in
excess of $138.0 from the Company, civil money penalties and a removal from, and
prohibition against the Company and the other respondents engaging in, the
banking industry. The Company has concluded that it is unable to determine a
reasonable estimate of the loss (or range of loss), if any, that could result
from this contingency. Accordingly, it is impossible to assess the ultimate
impact, if any, of the outcome this matter may have on the Company's
consolidated financial position, results of operations or liquidity.
On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed
a civil action entitled Federal Deposit Insurance Corporation, as manager of the
FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action")
in the U.S. District Court for the Southern District of Texas (the "Court"). The
FDIC action did not name the Company as a defendant. The suit against Mr.
Hurwitz seeks damages in excess of $250.0 based on the allegation that Mr.
Hurwitz was a controlling shareholder, de facto senior officer and director of
USAT, and was involved in certain decisions which contributed to the insolvency
of USAT. The FDIC further alleges, among other things, that M. Hurwitz was
obligated to ensure that UFG, Federated and the Company maintained the net worth
of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to
this action. On December 8, 1995, the Company filed a motion to intervene in
this action and conditioned it on the Court joining the OTS to this action. The
Company filed with its motion to intervene a proposed complaint which alleges
that the OTS violated the Administrative Procedures Act by rejecting the
Company's bid for USAT. The Company's bylaws provide for indemnification of its
officers and directors to the fullest extent permitted by Delaware law. The
Company is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is ultimately
determined that the individual was not entitled to indemnification. In addition,
the Company's indemnity obligation can, under certain circumstances, include
amounts other than defense costs, including judgments and settlements. The
Company has concluded that it is unable to determine a reasonable estimate of
the loss (or range of loss), if any, that could result from this contingency. It
is impossible to assess the ultimate outcome of the foregoing matter or its
potential impact on the Company's consolidated financial position, results of
operations or liquidity.
The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
KACC enters into a number of financial instruments in the normal course of
business that are designed to reduce its exposure to fluctuations in foreign
exchange rates, alumina, primary aluminum and fabricated aluminum products
prices and the cost of purchased commodities.
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its affiliates in
Australia and the United Kingdom, which expose KACC to certain exchange rate
risks. In order to mitigate its exposure, KACC periodically enters into forward
foreign exchange and currency option contracts in Australian dollars and Pounds
Sterling to hedge these commitments. The forward foreign currency exchange
contracts are agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the future. At
December 31, 1995, KACC had net forward foreign exchange contracts totaling
$102.8 for the purchase of 142.4 Australian dollars through April 30, 1997.
F-74
<PAGE> 270
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, KACC has
developed strategies which include forward sales of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. Under the
principal components of KACC's price risk management strategy, which can be
modified at any time, (i) varying quantities of KACC's anticipated production
are sold forward at fixed prices, (ii) call options are purchased to allow KACC
to participate in certain higher market prices, should they materialize, for a
portion of KACC's primary aluminum and alumina sold forward, (iii) option
contracts are entered into to establish a price range KACC will receive for a
portion of its primary aluminum and alumina, and (iv) put options are purchased
to establish minimum prices KACC will receive for a portion of its primary
aluminum and alumina. In this regard, with respect to its 1996 anticipated
production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of
primary aluminum at fixed prices.
In addition, KACC enters into forward fixed price arrangements with certain
customers which provide for the delivery of a specific quantity of fabricated
aluminum products over a specified future period of time. In order to establish
the cost of primary aluminum for a portion of such sales, KACC may enter into
forward sales and options contracts. In this regard, at December 31, 1995, KACC
had purchased 53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,721
per metric ton ($.78 per pound) of primary aluminum, and forward foreign
exchange contracts was $4.1.
KACC has established margin accounts with its counterparties related to
aluminum forward sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized losses
related to these contracts. At December 31, 1995, KACC was not required to
maintain any such margin deposits. At December 31, 1994, KACC had $50.5 on
deposit with various counterparties with respect to such deposit requirements.
These amounts were included in prepaid expenses and other current assets.
KACC is exposed to credit risk in the event of non-performance by other
parties to these currency and commodity contracts, but KACC does not anticipate
non-performance by any of these counterparties given their creditworthiness.
When appropriate, KACC arranges master netting agreements.
F-75
<PAGE> 271
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
11. SEGMENT INFORMATION
The following tables present financial information by industry segment and
by geographic area at December 31, 1995 and 1994 and for the three years ended
December 31, 1995, 1994 and 1993.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
REAL
BAUXITE FOREST ESTATE AND
YEARS AND ALUMINUM PRODUCTS OTHER
ENDED ALUMINA PROCESSING OPERATIONS OPERATIONS CORPORATE TOTAL
----- ------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.................... 1995 $514.2 $1,723.6 $242.6 $ 84.8 $ -- $2,565.2
1994 432.5 1,349.0 249.6 84.6 -- 2,115.7
1993 423.4 1,295.7 233.5 78.5 -- 2,031.1
Operating income (loss)........ 1995 37.2 179.3 74.3 (13.6) (19.6) 257.6
1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3
1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1)
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 (loss) of
unconsolidated affiliates.... 1995 3.5 15.7 -- (.1) -- 19.1
1994 (4.6) 2.7 -- -- (13.1) (15.0)
1993 (2.5) (.8) -- -- (1.6) (4.9)
Depreciation and depletion..... 1995 30.0 58.4 25.3 6.2 1.0 120.9
1994 32.3 57.2 24.7 5.9 1.0 121.1
1993 33.8 57.3 24.5 4.1 1.1 120.8
Capital expenditures........... 1995 30.2 49.2 9.9 10.5 .2 100.0
1994 29.4 40.6 11.3 7.6 .4 89.3
1993 35.8 31.9 11.1 7.1 .3 86.2
Investments in and advances to
unconsolidated affiliates.... 1995 130.3 47.9 -- 10.9 -- 189.1
1994 137.1 32.6 -- -- -- 169.7
Identifiable assets............ 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3
1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
</TABLE>
Sales to unaffiliated customers exclude intersegment sales between bauxite
and alumina and aluminum processing of $159.7, $146.8 and $129.4 for the years
ended December 31, 1995, 1994 and 1993, 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 attributable to the Company's industry
segments. General and administrative expenses of Kaiser are allocated in, the
Company's industry segment presentation based upon those segments' ratio of
sales to unaffiliated customers.
F-76
<PAGE> 272
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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... 1995 $1,916.9 $ 191.7 $239.4 $217.2 $ -- $2,565.2
1994 1,597.4 169.9 180.0 168.4 -- 2,115.7
1993 1,489.8 155.4 207.5 178.4 -- 2,031.1
Sales and transfers among
geographic areas................ 1995 -- 79.6 -- 191.5 (271.1) --
1994 -- 98.7 -- 139.4.. (238.1) --
1993 -- 88.2 -- 79.6.. (167.8) --
Operating income (loss)........... 1995 79.0 9.8 83.5 85.3 -- 257.6
1994 (65.3) 9.9 18.3 44.4 -- 7.3
1993 (118.6) (11.8) 21.9 12.4 -- (96.1)
Equity in earnings (loss) of
unconsolidated affiliates....... 1995 (.3) -- -- 19.4 -- 19.1
1994 (12.9) -- -- (2.1) -- (15.0)
1993 (1.6) -- -- (3.3) -- (4.9)
Investments in and advances to
unconsolidated affiliates....... 1995 12.1 27.1 -- 149.9 -- 189.1
1994 1.2 28.8 -- 139.7 -- 169.7
Identifiable assets............... 1995 3,037.0 381.9 196.5 216.9 -- 3,832.3
1994 2,926.5 364.8 200.0 199.5 -- 3,690.8
</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 $5.3, $.8 and $4.9 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Export sales were less than 10% of total revenues during the years ended
December 31, 1995, 1994 and 1993. For the year ended December 31, 1995, sales to
any one customer did not exceed 10% of consolidated revenues. For the years
ended December 31, 1994 and 1993, the Company had bauxite and alumina sales of
$58.2 and $40.7, respectively, and aluminum processing sales of $147.7 and
$145.7, respectively, to one customer.
F-77
<PAGE> 273
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 120.5 $ 104.2
Marketable securities............................................ 50.6 45.9
Receivables:
Trade, net of allowance for doubtful accounts of $5.8 and $5.5
at September 30, 1996 and December 31, 1995, respectively.... 220.8 246.2
Other......................................................... 67.8 98.9
Inventories...................................................... 623.6 606.8
Prepaid expenses and other current assets........................ 156.5 129.7
-------- --------
Total current assets..................................... 1,239.8 1,231.7
Property, plant and equipment, net of accumulated depreciation of
$750.6 and $678.1 at September 30, 1996 and December 31, 1995,
respectively..................................................... 1,252.4 1,231.9
Timber and timberlands, net of depletion of $151.3 and $139.6 at
September 30, 1996 and December 31, 1995, respectively........... 303.0 313.0
Investments in and advances to unconsolidated affiliates........... 186.3 189.1
Deferred income taxes.............................................. 435.5 414.0
Long-term receivables and other assets............................. 466.1 452.6
-------- --------
$ 3,883.1 $3,832.3
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 170.7 $ 196.7
Accrued interest................................................. 24.8 58.0
Accrued compensation and related benefits........................ 126.2 166.5
Other accrued liabilities........................................ 170.6 148.4
Payable to affiliates............................................ 96.6 90.2
Long-term debt, current maturities............................... 26.4 25.1
-------- --------
Total current liabilities................................ 615.3 684.9
Long-term debt, less current maturities............................ 1,683.9 1,585.1
Accrued postretirement benefits.................................... 736.7 742.6
Other noncurrent liabilities....................................... 684.5 680.3
-------- --------
Total liabilities........................................ 3,720.4 3,692.9
-------- --------
Commitments and contingencies
Minority interests................................................. 217.9 223.2
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock; shares issued: 669,701....................... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,685..................................... 5.0 5.0
Additional capital............................................... 155.6 155.0
Accumulated deficit.............................................. (180.5) (208.5)
Pension liability adjustment..................................... (16.1) (16.1)
Treasury stock, at cost (shares held: preferred -- 845; common --
1,355,512).................................................... (19.5) (19.5)
-------- --------
Total stockholders' deficit.............................. (55.2) (83.8)
-------- --------
$ 3,883.1 $3,832.3
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 274
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Net sales:
Aluminum operations................................................... $1,652.1 $1,646.7
Forest products operations............................................ 199.6 180.9
Real estate and other operations...................................... 69.4 65.0
-------- --------
1,921.1 1,892.6
-------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation and
depletion):
Aluminum operations................................................ 1,394.8 1,329.8
Forest products operations......................................... 114.6 96.0
Real estate and other operations................................... 57.1 48.4
Selling, general and administrative expenses.......................... 152.9 140.5
Depreciation and depletion............................................ 92.9 91.0
-------- --------
1,812.3 1,705.7
-------- --------
Operating income........................................................ 108.8 186.9
Other income (expense):
Investment, interest and other income (expense)....................... 35.1 8.7
Interest expense...................................................... (135.5) (136.1)
-------- --------
Income (loss) before income taxes and minority interests................ 8.4 59.5
Credit (provision) for income taxes..................................... 27.1 (4.6)
Minority interests...................................................... (7.5) (19.8)
-------- --------
Net income.............................................................. $ 28.0 $ 35.1
======== ========
Net income per common and common equivalent share....................... $ 2.96 $ 3.71
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 275
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 28.0 $ 35.1
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and depletion.......................................... 92.9 91.0
Net sales of marketable securities.................................. 1.0 8.9
Minority interests.................................................. 7.5 19.8
Amortization of deferred financing costs and discounts on long-term
debt............................................................... 15.9 14.3
Amortization of excess investment over equity in net assets of
unconsolidated affiliates.......................................... 9.1 8.7
Equity in income of unconsolidated affiliates....................... (7.5) (17.1)
Net gain on sale of real estate, mortgage loans and other assets.... (17.4) (3.8)
Decrease (increase) in receivables.................................. 57.1 (72.9)
Increase (decrease) in payable to affiliates and other
liabilities........................................................ (40.5) 9.0
Increase in inventories............................................. (18.2) (68.6)
Decrease in accrued interest........................................ (31.2) (33.1)
Decrease (increase) in prepaid expenses and other assets............ (27.4) 82.9
Decrease in accounts payable........................................ (25.9) (4.8)
Increase in accrued and deferred income taxes....................... (25.9) (11.1)
Other............................................................... (4.0) (5.3)
------- ------
Net cash provided by operating activities...................... 13.5 53.0
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments.............. 35.0 24.8
Capital expenditures................................................... (108.0) (54.9)
Other.................................................................. (2.4) (9.6)
------- ------
Net cash used for investing activities......................... (75.4) (39.7)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit agreements....................... 117.3 53.0
Proceeds from issuance of long-term debt............................... 4.3 7.2
Principal payments on long-term debt................................... (32.6) (35.3)
Dividends paid to Kaiser's minority preferred stockholders............. (8.4) (18.4)
Redemption of preference stock......................................... (5.2) (8.8)
Other.................................................................. 2.8 4.6
------- ------
Net cash provided by financing activities...................... 78.2 2.3
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 16.3 15.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 104.2 84.6
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 120.5 $100.2
======= ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities.......... $ -- $ 6.9
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock..................................................... $ -- $134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest............................. $ 150.9 $154.8
Income taxes paid...................................................... 21.7 21.4
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 276
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
Annual Report on Form 10-K filed by MAXXAM Inc. with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (the "Form 10-K"). All
references to the "Company" include MAXXAM Inc. and its subsidiary companies
unless otherwise noted or the context indicates otherwise. Any capitalized terms
used but not defined in the following Condensed Notes to the Consolidated
Financial Statements have the same meaning given to them as in the Form 10-K.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation.
2. RESTRICTED CASH
Long-term receivables and other assets, as reflected on the accompanying
consolidated balance sheet, includes restricted cash in the amount of $30.5 and
$31.4 at September 30, 1996 and December 31, 1995, respectively. Such restricted
cash represents the amount deposited into an account held by the Trustee under
the indenture governing the Timber Notes of the Company's indirect wholly owned
subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5.7 and $19.7, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products............................. $ 108.4 $ 91.5
Primary aluminum and work in process..................... 190.0 195.9
Bauxite and alumina...................................... 122.5 119.6
Operating supplies and repair and maintenance parts...... 124.6 118.7
------ ------
545.5 525.7
------ ------
Forest Products Operations:
Lumber................................................... 58.8 65.5
Logs..................................................... 19.3 15.6
------ ------
78.1 81.1
------ ------
$ 623.6 $606.8
====== ======
</TABLE>
F-81
<PAGE> 277
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Corporate:
14% MAXXAM Senior Subordinated Reset Notes due
May 20, 2000............................................ $ 25.0 $ 25.0
12 1/2% MAXXAM Subordinated Debentures due December 15,
1999, net of discount................................... 16.7 16.5
Other...................................................... -- .1
Aluminum Operations:
1994 KACC Credit Agreement................................. 131.2 13.1
9 7/8% KACC Senior Notes due February 15, 2002, net of
discount................................................ 224.0 223.8
Alpart CARIFA Loan......................................... 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1,
2003.................................................... 400.0 400.0
Other...................................................... 52.1 61.2
Forest Products Operations:
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015........................................... 336.1 350.2
10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount................................... 101.0 92.5
Other...................................................... .8 .8
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due
September 1, 2001, net of discount...................... 15.6 13.3
RTC Portfolio secured notes due December 31, 1999, interest
at prime plus 3%........................................ 3.8 8.0
Other notes and contracts, secured by receivables,
buildings, real estate and equipment.................... 9.0 10.7
-------- --------
1,710.3 1,610.2
Less: current maturities..................................... (26.4) (25.1)
-------- --------
$ 1,683.9 $1,585.1
======== ========
</TABLE>
On April 24, 1996, the Securities and Exchange Commission ("SEC") declared
effective a shelf registration statement which the Company had filed with
respect to up to $200.0 aggregate principal amount of debt securities. The
Company has not determined the amount, interest rates, maturity, collateral (if
any) or other terms of such debt securities or the timing of any offering of
such debt securities. The debt securities could be secured by, or convertible
into, shares of common stock of Kaiser Aluminum Corporation ("Kaiser," a
majority-owned subsidiary of the Company) owned by the Company. In that regard,
Kaiser also filed a shelf registration statement with the SEC, which was also
declared effective on April 24, 1996, covering 10 million shares of its common
stock owned by the Company. The Company would use the net proceeds (or portions
thereof) from the sale of such debt securities to retire outstanding debt, for
working capital and general corporate purposes.
F-82
<PAGE> 278
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SUBSEQUENT EVENT -- KAISER OFFERING OF 10 7/8% SENIOR NOTES
On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the
"Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the
"10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at
maturity. The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness
under KACC's credit agreement dated as of February 15, 1994, as amended (the
"1994 KACC Credit Agreement") and KACC's 9 7/8% Senior Notes due 2002 (the
"Senior Notes") in right and priority of payment and are guaranteed on a senior,
unsecured basis by certain of Kaiser's subsidiaries (the "Subsidiary
Guarantors"). Net proceeds from the Offering on the Issuance Date, after
estimated expenses, were approximately $168.9, of which $91.7 were utilized to
reduce the outstanding borrowings under the revolving credit facility of the
1994 KACC Credit Agreement to zero. The remaining net proceeds (approximately
$77.2) were invested in short-term investments pending their application for
working capital and general corporate purposes, including capital projects.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $1,710.3 to $1,753.2,
borrowing capacity of $273.1 would have been available for use under the 1994
KACC Credit Agreement and the Company would have had available additional cash
proceeds from the Offering of $37.7.
During October 1996, the 1994 KACC Credit Agreement was amended to, among
other things, provide for the Offering of the 10 7/8% Senior Notes discussed
above and to modify certain of the financial covenants contained in the 1994
KACC Credit Agreement.
5. PER SHARE INFORMATION
Per share calculations are based on the weighted average number of common
shares outstanding in each period and, if dilutive, weighted average common
equivalent shares assumed to be issued from the exercise of common stock options
based upon the average price of the Company's common stock during the period.
6. CREDIT (PROVISION) FOR INCOME TAXES
The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) the revision of prior years' tax estimates
and other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. Revision of
prior years' tax estimates includes amounts for the reversal of reserves which
the Company no longer believes are necessary. Generally, the reversal of
reserves relate to the expiration of the relevant statute of limitations with
respect to certain income tax returns, or the resolution of specific income tax
matters with the relevant tax authorities. The credit for income taxes for the
nine months ended September 30, 1996 includes a benefit of $30.4 relating to the
reversal of reserves the Company no longer believes are necessary. The Company's
provision for income taxes for the nine months ended September 30, 1995,
reflects a benefit of $17.7 relating to the reversal of reserves the Company no
longer believes are necessary.
7. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
Kaiser and its principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based on 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 ("CER-
F-83
<PAGE> 279
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
CLA"), and, along with certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.
Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. At September
30, 1996, the balance of such accruals, which is primarily included in other
noncurrent liabilities, was $32.9. These environmental accruals represent
Kaiser's estimate of costs reasonably expected to be incurred based on presently
enacted laws and regulations currently available facts, existing technology, and
Kaiser's assessment of the likely remediation action to be taken. Kaiser expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $2.0 to $10.0 for the years 1996 through 2000 and an
aggregate of approximately $7.0 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. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved in
early 1997. While uncertainties are inherent in the final outcome of these
environmental matters, and it is impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a substantial number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that certain
of their injuries were caused by, among other things, exposure to asbestos
during, and as a result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at least 15 years. At
September 30, 1996, the number of such lawsuits pending was approximately
75,900, as compared to 59,700 at December 31, 1995. In 1995, approximately
41,700 of such claims were received and approximately 7,200 were settled or
dismissed. During the first nine months of 1996, approximately 20,000 of such
claims were received and approximately 3,800 were settled or dismissed.
Based on past experience and reasonably anticipated future activity, Kaiser
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs, and Kaiser's actual
costs could exceed these estimates. Kaiser's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an estimated asbestos-related cost
accrual of $160.0 before consideration of insurance recoveries, is included
primarily in other noncurrent liabilities at September 30, 1996. Kaiser
estimates that annual future cash payments in connection with such litigation
will be approximately $13.0 to $20.0 for each of the years 1996 through 2000,
and an aggregate of approximately $78.0 thereafter through 2008. While Kaiser
does not believe there is a reasonable basis for estimating such costs beyond
2008, and, accordingly, did not accrue such costs, there is a reasonable
possibility that such costs may continue beyond 2008, and that such costs may be
substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and the first nine months of 1996 were filed in
Texas. KACC has been advised by its regional counsel that,
F-84
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
although there can be no assurance, the increase in pending claims may have been
attributable in part to tort reform legislation in Texas. Although
asbestos-related claims are currently exempt from certain aspects of the Texas
tort reform legislation, management has been advised that efforts to remove the
asbestos-related exemption in the tort reform legislation relating to the
doctrine forum non conveniens, as well as other developments in the legislative
and legal environment in Texas, may be responsible for the accelerated pace of
new claims experienced in late 1995 and its continuance through the first nine
months of 1996, albeit at a somewhat reduced rate.
Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. Kaiser believes, based on prior insurance-related recoveries
with respect to asbestos-related claims, existing insurance policies, and the
advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of those policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3, determined on the same basis
as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at September 30, 1996.
Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from Kaiser's
underlying assumptions. While uncertainties are inherent in the final outcome of
these asbestos matters and it is impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
OTS CONTINGENCY AND RELATED MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated formal administrative proceedings against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges misconduct by the Company, Federated Development Company ("Federated," a
New York business trust wholly owned by Mr. Charles E. Hurwitz, members of his
immediate family and trusts for the benefit thereof), Mr. Hurwitz and others
(the "Respondents") with respect to the failure of United Savings Association of
Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc.
("UFG"). The Notice claims that the Company was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other Respondents, including, among
other things, allegations that through USAT it was involved in prohibited
transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things,
seeks unspecified damages in excess of $138.0 from the Company, civil money
penalties and a removal from, and prohibition against the Company and the other
Respondents engaging in, the banking industry. The Company has concluded that it
is unable to determine a reasonable estimate of the loss (or range of loss), if
any, that could result from this contingency. Accordingly, it is impossible to
assess the ultimate impact, if any, of the outcome this matter may have on the
Company's consolidated financial position, results of operations or liquidity.
On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed
a civil action entitled Federal Deposit Insurance Corporation, as manager of the
FSLIC Resolution Fund v. Charles E. Hurwitz
F-85
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern
District of Texas (the "Court"). The FDIC action did not name the Company as a
defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 based
on the allegation that Mr. Hurwitz was a controlling shareholder, de facto
senior officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the
Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz
filed a motion to join the OTS to this action. On December 8, 1995, the Company
filed a motion to intervene in this action and conditioned it on the Court
joining the OTS to this action. The Company also filed a proposed complaint with
its motion to intervene which alleges that the OTS violated the Administrative
Procedures Act by rejecting the Company's bid for USAT. The Court has scheduled
a pre-trial conference for November 19, 1996. The Company's bylaws provide for
indemnification of its officers and directors to the fullest extent permitted by
Delaware law. The Company is obligated to advance defense costs to its officers
and directors, subject to the individual's obligation to repay such amount if it
is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can, under
certain circumstances, include amounts other than defense costs, including
judgments and settlements. The Company has concluded that it is unable to
determine a reasonable estimate of the loss (or range of loss), if any, that
could result from this contingency. It is impossible to assess the ultimate
outcome of the foregoing matter or its potential impact on the Company's
consolidated financial position, results of operations or liquidity.
OTHER CONTINGENCIES
The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is impossible to determine
the actual costs that ultimately may be incurred, management currently believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
8. HEADWATERS AGREEMENT
On September 28, 1996, the Company and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP covering all of Pacific Lumber's existing
timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
third parties that any party reasonably believes will significantly delay or
impair the transactions described in the Headwaters Agreement, and (e) the
dismissal with prejudice at closing of the Takings litigation.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED 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. KACC enters
into primary aluminum hedging transactions from time to time in the normal
course of business. Primary aluminum hedging transactions are designed to
mitigate Kaiser's exposure to declines in the market price of primary aluminum,
while retaining the ability to participate in favorable environments that may
materialize. KACC has employed strategies which include forward sales and
purchases of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. At September 30, 1996, KACC had sold forward, at
fixed prices, approximately 69,000 and 93,600 tons (all references to tons in
this report refer to metric tons of 2,204.6 pounds) of primary aluminum in
excess of its projected internal fabrication requirements for 1997 and 1998,
respectively, and had purchased put options to establish a minimum price for
66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. During
October 1996, KACC purchased put options to establish a minimum price for an
additional 126,000 tons of primary aluminum in excess of its projected 1997
internal fabrication requirements and entered into options contracts that
established a price range for an additional 48,000 tons of Kaiser's 1998
surplus.
In addition, at September 30, 1996, KACC had sold forward approximately 73%
and 85% of the alumina available to it in excess of its projected internal
smelting requirements for 1997 and 1998, respectively. Virtually all of such
1997 and 1998 sales were made at prices indexed to future prices of primary
aluminum.
From time to time, KACC also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, KACC had option contracts for the purchase of
approximately 40,000 MMBtu of natural gas per day during the first quarter of
1997, and a combination of fixed price purchase and option contracts for 20,000
MMBtu of natural gas per day for the period April 1997 to December 1998. At
September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel
oil per month for the period January 1997 through December 1998.
KACC also enters into hedging transactions in the normal course of business
that are designed to reduce its exposure to fluctuations in foreign exchange
rates. At September 30, 1996, KACC had net forward foreign exchange contracts
totaling approximately $81.6 for the purchase of 110.0 Australian dollars from
January 1997 through June 1998, in respect of its commitments for 1997 and 1998
expenditures denominated in Australian dollars.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts was
approximately $46.4.
F-87
<PAGE> 283
MAXXAM INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.......................................... $612.2 $ 667.7 $641.2
Gross profit....................................... 128.5 126.8 99.3
Operating income................................... 53.2 46.0 9.6
Net income......................................... 5.8 16.9 5.3
Per common and common equivalent share:
Net income...................................... 0.61 1.79 0.56
1995 QUARTERLY INFORMATION:
Net sales.......................................... $581.3 $ 673.3 $638.0 $ 672.6
Gross profit....................................... 113.0 160.2 145.2 155.9
Operating income (loss)............................ 40.6 81.9 64.4 70.7
Net income (loss).................................. (1.0) 25.4 10.7 22.4
Per common and common equivalent share:
Net income (loss)............................... (0.11) 2.69 1.13 2.37
1994 QUARTERLY INFORMATION:
Net sales.......................................... $489.0 $ 543.8 $544.9 $ 538.0
Gross profit....................................... 55.6 78.0 79.1 85.1
Operating income (loss)............................ (15.0) 6.5 9.0 6.8
Loss before extraordinary item..................... (34.5) (43.2) (14.9) (24.1)
Extraordinary item, net............................ (5.4) -- -- --
Net loss........................................... (39.9) (43.2) (14.9) (24.1)
Per common and common equivalent share:
Loss before extraordinary item.................. (3.65) (4.57) (1.58) (2.55)
Extraordinary item, net......................... (0.57) -- -- --
Net loss........................................ (4.22) (4.57) (1.58) (2.55)
</TABLE>
F-88
<PAGE> 284
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 of MAXXAM Inc. (included on pages F-40
through F-77), and have issued our report thereon dated February 16, 1996. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The condensed financial information of MAXXAM Inc. (included on
pages F-90 through F-93) is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This condensed financial information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states 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 LLP
Houston, Texas
February 16, 1996
F-89
<PAGE> 285
MAXXAM INC.
BALANCE SHEET
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS 1995 1994
------- -------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 20.4 $ 15.5
Marketable securities.................................................. 9.3 20.8
Other current assets................................................... 1.8 4.4
------- -------
Total current assets........................................... 31.5 40.7
Deferred income taxes.................................................... 64.2 68.4
Other assets............................................................. 3.7 4.6
------- -------
$ 99.4 $ 113.7
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities............................... $ 7.4 $ 10.5
Long-term debt, current maturities..................................... .2 2.4
------- -------
Total current liabilities...................................... 7.6 12.9
Long-term debt, less current maturities.................................. 41.6 44.6
Losses recognized in excess of investment in subsidiaries................ 12.4 198.9
Notes payable to subsidiaries, net of notes receivable and advances...... 18.8 12.2
Other noncurrent liabilities............................................. 102.8 120.4
------- -------
Total liabilities.............................................. 183.2 389.0
------- -------
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A
$.05 Non-Cumulative Participating Convertible Preferred Stock;
shares issued: 1995 -- 669,701 and 1994 -- 669,957.................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized; shares
issued: 10,063,359.................................................. 5.0 5.0
Additional capital..................................................... 155.0 53.2
Accumulated deficit.................................................... (208.5) (302.9)
Pension liability adjustment........................................... (16.1) (11.4)
Treasury stock, at cost (shares held: preferred -- 845; common:
1995 -- 1,355,512 and 1994 -- 1,355,768)............................ (19.5) (19.5)
------- -------
Total stockholders' deficit.................................... (83.8) (275.3)
------- -------
$ 99.4 $ 113.7
======= =======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-90
<PAGE> 286
MAXXAM INC.
STATEMENT OF OPERATIONS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Investment, interest and other income.......................... $ 5.6 $ 12.6 $ 3.0
Interest expense............................................... (6.2) (11.7) (13.7)
General and administrative expenses............................ (18.9) (11.0) (15.4)
Equity in earnings (losses) of subsidiaries.................... 43.6 (132.0) (615.5)
------ ------- -------
Income (loss) before income taxes and cumulative effect of
changes in accounting principles............................. 24.1 (142.1) (641.6)
Credit (provision) for income taxes............................ 33.4 20.0 (3.1)
------ ------- -------
Income (loss) before cumulative effect of changes in accounting
principles................................................... 57.5 (122.1) (644.7)
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).............................................. $ 57.5 $(122.1) $(600.2)
====== ======= =======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-91
<PAGE> 287
MAXXAM INC.
STATEMENT OF CASH FLOWS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 57.5 $(122.1) $(600.2)
Adjustments to reconcile net income (loss) to net cash provided
by
(used for) operating activities:
Equity in losses (earnings) of subsidiaries................... (43.6) 132.0 615.5
Net sales of marketable securities............................ 14.5 6.8 18.3
Amortization of deferred financing costs and discounts on
long-term debt............................................... .3 .3 .5
Cumulative effect of changes in accounting principles, net.... -- -- (44.5)
Decrease in receivables....................................... .6 1.1 .8
Increase in accrued and deferred income taxes................. (18.9) (7.9) (13.1)
Increase (decrease) in accounts payable and other
liabilities.................................................. (14.5) (5.3) 24.3
Other......................................................... 2.3 (.2) 2.6
------ ------- -------
Net cash provided by (used for) operating activities..... (1.8) 4.7 4.2
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares................... 7.6 10.3 --
Dividends received from subsidiaries............................. 4.8 7.5 66.1
Investments in and net advances from (to) subsidiaries........... .4 (27.5) (22.2)
Capital expenditures............................................. (.2) (.4) (.3)
------ ------- -------
Net cash provided by (used for) investing activities..... 12.6 (10.1) 43.6
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on long-term
debt.......................................................... (5.9) (5.8) (24.3)
------ ------- -------
Net cash used for financing activities................... (5.9) (5.8) (24.3)
------ ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 4.9 (11.2) 23.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 15.5 26.7 3.2
------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 20.4 $ 15.5 $ 26.7
====== ======= =======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock............................................... $136.2 $ -- $ --
Distribution received from subsidiary of the Company's payable... 8.0 132.0 --
Assumption by the Company of subsidiary's payables to the Company
and affiliates................................................ -- (63.1) --
Net assets transferred (to) from subsidiary...................... (14.5) -- 30.5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 6.0 $ 7.0 $ 6.8
Income taxes paid (refunded)..................................... (.3) 1.1 (.5)
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-92
<PAGE> 288
MAXXAM INC.
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts by the
amounts recorded by the Company's subsidiaries pursuant to their respective tax
allocation agreements with the Company. 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 held for sale by
various 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.
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
----- -----
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000................. $25.0 $25.0
12 1/2% Subordinated Debentures due December 15, 1999, net of
discount of $1.1 and $1.7 at December 31, 1995 and 1994,
respectively....................................................... 16.5 20.9
Other................................................................ .3 1.1
----- -----
41.8 47.0
Less: current maturities............................................. (.2) (2.4)
----- -----
$41.6 $44.6
===== =====
</TABLE>
Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows: years ending December 31, 1996-$.2; 1997-$3.3; 1998-$3.3;
1999-$11.1; 2000-$25.0.
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES
At December 31, 1995, the Company's indebtedness to its subsidiaries, which
includes accrued interest, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Unsecured note payable, interest at 6%............................. $ 18.3 $ 60.9
Unsecured notes payable, interest at 7%............................ 13.7 12.9
Secured notes receivable, interest at 12% on first $15.0, at prime
plus 1% to 2% on remainder....................................... -- (43.6)
Net advances....................................................... (13.2) (18.0)
------ ------
$ 18.8 $ 12.2
====== ======
</TABLE>
In August 1995, the notes receivable reflected above were canceled to
reduce the 6% unsecured note payable by $45.5 ($43.6 plus accrued interest).
F-93
<PAGE> 289
MAXXAM INC.
BALANCE SHEET
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 37.9 $ 20.4
Marketable securities............................................ 18.7 9.3
Other current assets............................................. 1.6 1.8
------- --------
Total current assets..................................... 58.2 31.5
Deferred income taxes.............................................. 71.9 64.2
Investment in subsidiaries in excess of losses recognized.......... 18.9 --
Other assets....................................................... 3.8 3.7
------- --------
$ 152.8 $ 99.4
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities......................... $ 11.1 $ 7.4
Long-term debt, current maturities............................... -- .2
------- --------
Total current liabilities................................ 11.1 7.6
Long-term debt, less current maturities............................ 41.7 41.6
Losses recognized in excess of investment in subsidiaries.......... -- 12.4
Notes payable to subsidiaries, net of notes receivable and
advances......................................................... 62.9 18.8
Other noncurrent liabilities....................................... 92.3 102.8
------- --------
Total liabilities........................................ 208.0 183.2
------- --------
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock; shares issued: 699,701....................... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,685..................................... 5.0 5.0
Additional capital............................................... 155.6 155.0
Accumulated deficit.............................................. (180.5) (208.5)
Pension liability adjustment..................................... (16.1) (16.1)
Treasury stock, at cost (shares held: preferred -- 845;
common -- 1,355,512).......................................... (19.5) (19.5)
------- --------
Total stockholders' deficit.............................. (55.2) (83.8)
------- --------
$ 152.8 $ 99.4
======= ========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-94
<PAGE> 290
MAXXAM INC.
STATEMENT OF OPERATIONS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------ ------
(UNAUDITED)
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Investment, interest and other income.................................... $ (.2) $ 3.4
Interest expense......................................................... (4.5) (4.7)
General and administrative expenses...................................... (28.8) (13.8)
Equity in earnings of subsidiaries....................................... 15.9 26.6
------ ------
Income (loss) before income taxes........................................ (17.6) 11.5
Credit for income taxes.................................................. 45.6 23.6
------ ------
Net income............................................................... $ 28.0 $ 35.1
====== ======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-95
<PAGE> 291
MAXXAM INC.
STATEMENT OF CASH FLOWS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
----- ------
(UNAUDITED)
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $28.0 $ 35.1
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Equity in earnings of subsidiaries.................................. (15.9) (26.6)
Net sales (purchases) of marketable securities...................... (8.0) 18.6
Decrease in receivables, prepaids and other assets.................. .1 2.6
Increase in accrued and deferred income taxes....................... (8.3) (8.1)
Decrease in accounts payable and other liabilities.................. (6.8) (14.5)
Other............................................................... 1.1 .3
----- ------
Net cash provided by (used for) operating activities........... (9.8) 7.4
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares......................... -- 7.6
Dividends received from subsidiaries................................... 3.9 4.8
Investments in and net advances from subsidiaries...................... 23.9 1.9
Capital expenditures................................................... (.2) (.2)
----- ------
Net cash provided by investing activities...................... 27.6 14.1
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on long-term debt..... (.3) (5.8)
----- ------
Net cash used for financing activities......................... (.3) (5.8)
----- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 17.5 15.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 20.4 15.5
----- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $37.9 $ 31.2
===== ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock..................................................... $ -- $134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................................... $ 2.8 $ 3.1
Income taxes paid...................................................... .7 .3
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-96
<PAGE> 292
MAXXAM INC.
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts by the
amounts recorded by the Company's subsidiaries pursuant to their respective tax
allocation agreements with the Company. 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 held for sale by
various 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.
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000......... $25.0 $25.0
12 1/2% Subordinated Debentures due December 15, 1999, net of
discount of $0.9 at September 30, 1996 and $1.1 at
December 31, 1995.......................................... 16.7 16.5
Other........................................................ -- .3
----- -----
41.7 41.8
Less: current maturities..................................... -- (.2)
----- -----
$41.7 $41.6
===== =====
</TABLE>
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES
At September 30, 1996, the Company's indebtedness to its subsidiaries,
which includes accrued interest, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Unsecured note payable, interest at 6%....................... $19.1 $ 18.3
Unsecured notes payable, interest at 7%...................... 14.3 13.7
Net advances................................................. 29.5 (13.2)
----- ------
$62.9 $ 18.8
===== ======
</TABLE>
The increase in net advances is principally due to cash receipts from the
sale of real property and notes from the RTC Portfolio. There are no
restrictions which would preclude the Company's subsidiaries from declaring a
dividend of such advances to the Company.
F-97
<PAGE> 293
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum Corporation (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994, and the related statements of consolidated income and cash
flows for each of the three years in the period ended December 31, 1995. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Kaiser Aluminum Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
F-98
<PAGE> 294
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1995 1994
-------- --------
(IN MILLIONS OF
DOLLARS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 21.9 $ 17.6
Receivables:
Trade, less allowance for doubtful receivables of $5.0 in 1995 and
$4.2 in 1994....................................................... 222.9 150.7
Other.............................................................. 85.7 48.5
Inventories........................................................... 525.7 468.0
Prepaid expenses and other current assets............................. 76.6 158.0
--------- ---------
Total current assets.......................................... 932.8 842.8
Investments in and advances to unconsolidated affiliates................ 178.2 169.7
Property, plant, and equipment -- net................................... 1,109.6 1,133.2
Deferred income taxes................................................... 269.1 271.2
Other assets............................................................ 323.5 281.2
--------- ---------
Total......................................................... $2,813.2 $2,698.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 184.5 $ 152.1
Accrued interest...................................................... 32.0 32.6
Accrued salaries, wages, and related expenses......................... 105.3 77.7
Accrued postretirement medical benefit obligation -- current
portion............................................................ 46.8 47.0
Other accrued liabilities............................................. 129.4 176.9
Payable to affiliates................................................. 94.2 85.3
Long-term debt -- current portion..................................... 8.9 11.5
--------- ---------
Total current liabilities..................................... 601.1 583.1
Long-term liabilities................................................... 548.5 495.5
Accrued postretirement medical benefit obligation....................... 734.0 734.9
Long-term debt.......................................................... 749.2 751.1
Minority interests...................................................... 122.7 116.2
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares;
Series A Convertible, stated value $.10, issued and outstanding,
nil and 1,938,295 in 1995 and 1994................................ .2
PRIDES Convertible, par value $.05, issued and outstanding,
8,673,850 and 8,855,550 in 1995 and 1994.......................... .4 .4
Common stock, par value $.01, authorized 100,000,000 shares; issued
and outstanding, 71,638,514 and 58,205,083 in 1995 and 1994........ .7 .6
Additional capital.................................................... 530.3 527.8
Accumulated deficit................................................... (459.9) (502.6)
Additional minimum pension liability.................................. (13.8) (9.1)
--------- ---------
Total stockholders' equity.................................... 57.7 17.3
--------- ---------
Total......................................................... $2,813.2 $2,698.1
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-99
<PAGE> 295
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales..................................................... $2,237.8 $1,781.5 $1,719.1
-------- -------- --------
Costs and expenses:
Cost of products sold....................................... 1,798.4 1,625.5 1,587.7
Depreciation................................................ 94.3 95.4 97.1
Selling, administrative, research and development, and
general.................................................. 134.5 116.8 121.9
Restructuring of operations................................. 35.8
-------- -------- --------
Total costs and expenses............................ 2,027.2 1,837.7 1,842.5
-------- -------- --------
Operating income (loss)....................................... 210.6 (56.2) (123.4)
Other expense:
Interest expense............................................ (93.9) (88.6) (84.2)
Other -- net................................................ (14.1) (7.3) (.9)
-------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in
accounting principles....................................... 102.6 (152.1) (208.5)
(Provision) credit for income taxes........................... (37.2) 53.8 86.9
Minority interests............................................ (5.1) (3.1) (1.5)
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect
of changes in accounting principles......................... 60.3 (101.4) (123.1)
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $2.9 and $11.2 for 1994 and 1993, respectively... (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of
tax benefit of $237.7....................................... (507.3)
-------- -------- --------
Net income (loss)............................................. $ 60.3 $ (106.8) $ (652.2)
Dividends on preferred stock.................................. (17.6) (20.1) (6.3)
-------- -------- --------
Net income (loss) available to common shareholders............ $ 42.7 $ (126.9) $ (658.5)
======== ======== ========
Earnings (loss) per common and common equivalent share:
Primary:
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles............. $ .69 $ (2.09) $ (2.25)
Extraordinary loss....................................... (.09) (.38)
Cumulative effect of changes in accounting principles.... (8.84)
-------- -------- --------
Net income (loss)........................................ $ .69 $ (2.18) $ (11.47)
======== ======== ========
Fully diluted............................................... $ .72
========
Weighted average common and common equivalent shares
outstanding (000):
Primary..................................................... 62,264 58,139 57,423
======== ======== ========
Fully diluted............................................... 71,809
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-100
<PAGE> 296
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 60.3 $(106.8) $ (652.2)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation............................................. 94.3 95.4 97.1
Amortization of excess investment over equity in
unconsolidated affiliates.............................. 11.4 11.6 11.9
Amortization of deferred financing costs and discount on
long-term debt......................................... 5.4 6.2 11.2
Equity in (income) losses of unconsolidated affiliates... (19.2) 1.9 3.3
Restructuring of operations.............................. 35.8
Minority interests....................................... 5.1 3.1 1.5
Extraordinary loss on early extinguishment of
debt -- net............................................ 5.4 21.8
Cumulative effect of changes in accounting
principles -- net...................................... 507.3
(Increase) decrease in receivables....................... (109.7) 36.4 (6.1)
(Increase) decrease in inventories....................... (57.7) (41.1) 13.0
Decrease (increase) in prepaid expenses and other
assets................................................. 82.9 (60.6) (5.2)
Increase (decrease) in accounts payable.................. 32.4 25.8 (10.3)
(Decrease) increase in accrued interest.................. (.6) 9.3 19.2
Increase in payable to affiliates and accrued
liabilities............................................ 10.6 50.8 76.9
Decrease in accrued and deferred income taxes............ (7.4) (68.8) (96.4)
Other.................................................... 10.9 9.3 8.1
------- ------- ---------
Net cash provided by (used for) operating
activities........................................ 118.7 (22.1) 36.9
------- ------- ---------
Cash flows from investing activities:
Net proceeds from disposition of property and investments... 8.6 4.1 13.1
Capital expenditures........................................ (79.4) (70.0) (67.7)
Investments in joint ventures............................... (9.0)
------- ------- ---------
Net cash used for investing activities.............. (79.8) (65.9) (54.6)
------- ------- ---------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit.... (537.7) (345.1) (1,134.5)
Borrowings of long-term debt, including revolving credit.... 532.3 378.9 1,068.1
Borrowings from MAXXAM Group Inc. (see supplemental
disclosure below)........................................ 15.0
Tender premiums and other costs of early extinguishment of
debt..................................................... (27.1)
Net short-term debt repayments.............................. (.5) (4.3)
Incurrence of financing costs............................... (.8) (19.2) (12.7)
Dividends paid.............................................. (20.8) (14.8) (6.3)
Capital stock issued........................................ 1.2 100.1 119.3
Redemption of minority interests' preference stock.......... (8.8) (8.5) (4.2)
------- ------- ---------
Net cash (used for) provided by financing
activities........................................ (34.6) 90.9 13.3
------- ------- ---------
Net increase (decrease) in cash and cash equivalents during
the year.................................................... 4.3 2.9 (4.4)
Cash and cash equivalents at beginning of year................ 17.6 14.7 19.1
------- ------- ---------
Cash and cash equivalents at end of year...................... $ 21.9 $ 17.6 $ 14.7
======= ======= =========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest.................. $ 88.8 $ 73.1 $ 53.7
Income taxes paid........................................... 35.7 16.0 13.5
Tax allocation payments from MAXXAM Inc..................... (3.9)
Supplemental disclosure of non-cash financing activities:
Exchange of the borrowings from
MAXXAM Group Inc. for capital stock...................... $ 15.0
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-101
<PAGE> 297
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority-owned
subsidiaries. The Company is a direct subsidiary of MAXXAM Inc. ("MAXXAM") and
conducts its operations through its wholly owned subsidiary, Kaiser Aluminum &
Chemical Corporation ("KACC"). KACC operates in all principal aspects of the
aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the
refining of bauxite into alumina (the intermediate material), the production of
primary aluminum, and the manufacture of fabricated and semi-fabricated aluminum
products. Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina and
primary aluminum to domestic and international third parties (see Note 10).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amount of revenues and expenses
during the reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a material effect
on the reported amounts of the Company's consolidated financial position and
results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method. Intercompany balances and transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to the
current presentation.
CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted 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 of January 1, 1993. The
costs of postretirement benefits other than pensions and postemployment benefits
are now accrued over the period 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 changes in accounting
principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to
results of operations of $497.7 and $7.3, net of related income taxes of $234.2
and $3.5, respectively. These deferred income tax benefits were recorded at the
federal statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time charges 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.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"), as of January 1, 1993. The adoption of
SFAS 109 changed 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
F-102
<PAGE> 298
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
financial statement and tax bases of assets and liabilities using enacted tax
rates. The cumulative effect of the change in accounting principle reduced the
Company's results of operations by $2.3. The adoption 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 acquisition
by MAXXAM in October 1988. As a result of restating these assets and
liabilities, the loss before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
CASH AND CASH EQUIVALENTS
The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
INVENTORIES
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not in excess
of LIFO cost. Other inventories, 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. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
<S> <C> <C>
Finished fabricated products......................................... $ 91.5 $ 49.4
Primary aluminum and work in process................................. 195.9 203.1
Bauxite and alumina.................................................. 119.6 102.3
Operating supplies and repair and maintenance parts.................. 118.7 113.2
------ ------
$525.7 $468.0
====== ======
</TABLE>
DEPRECIATION
Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of assets. The
principal estimated useful lives by class of assets are:
<TABLE>
<S> <C>
Land improvements..................................................... 8 to 25 years
Buildings............................................................. 15 to 45 years
Machinery and equipment............................................... 10 to 22 years
</TABLE>
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for a
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for this plan (see Note 6).
OTHER EXPENSE
Other expense in 1995, 1994, and 1993 includes $17.8, $16.5 and $17.9 of
pre-tax charges related principally to establishing additional: (i) litigation
reserves for asbestos claims, and (ii) environmental reserves for potential soil
and ground water remediation matters, each pertaining to operations which were
discontinued prior to the acquisition of the Company by MAXXAM in 1988.
F-103
<PAGE> 299
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Amortization of deferred financing
costs of $5.3, $6.0, and $11.2 for the years ended December 31, 1995, 1994, and
1993, respectively, are included in interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for
its foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains and losses arising from the use of derivative financial instruments
are reflected in the Company's operating results concurrently with the
consummation of the underlying hedged transactions. Deferred gains or losses as
of December 31, 1995, are included in Prepaid expenses and other current assets
and Other accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the related assets
or liabilities. Unless otherwise noted, the carrying amount of all financial
instruments is a reasonable estimate of fair value.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Debt................................................... $758.1 $806.3 $762.6 $747.6
Foreign currency contracts............................. 1.9 3.5
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Debt -- The quoted market prices were used for the Senior Notes and
12 3/4% Notes (see Note 4). The fair value of all other debt is based on
discounting the future cash flows using the current rate for debt of
similar maturities and terms.
Foreign Currency Contracts -- The fair value generally reflects the
estimated amounts that the Company would receive to enter into similar
contracts at the reporting date, thereby taking into account unrealized
gains or losses on open contracts (see Note 9).
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary earnings (loss) per common and common equivalent share are computed
by dividing net income (loss) available to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
period. Fully diluted earnings per common and common equivalent share are
computed as if the Series A Shares and 181,700 shares of PRIDES (the "Converted
PRIDES") had been converted to common shares at the beginning of the period.
Accordingly, for purposes of the fully diluted calculations, the dividends
attributable to the Series A Shares and the Converted PRIDES ($9.2 for the year
ended December 31, 1995) have not been deducted from net income, and the
weighted average number of common and common equivalent shares outstanding
includes the shares issued upon conversion of the Series A Shares and the
Converted PRIDES as if they had been outstanding for the entire period. As a
result
F-104
<PAGE> 300
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
of the redemption of the Series A Shares and conversion of the Converted PRIDES
during the 1995 period, fully diluted earnings per share are presented for such
period, even though the result is antidilutive. For the years ended December 31,
1994 and 1993, common equivalent shares attributable to the preferred stock and
non-qualified stock options were excluded from the calculation of weighted
average shares because they were antidilutive.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminum Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company
(49.0% owned). The equity in earnings (losses) before income taxes of such
operations is treated as a reduction (increase) in cost of products sold. At
December 31, 1995 and 1994, KACC's net receivables from these affiliates were
not material.
SUMMARY OF COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
<S> <C> <C>
Current assets............................................................... $429.0 $342.3
Property, plant, and equipment -- net........................................ 330.8 349.4
Other assets................................................................. 39.3 42.4
------ ------
Total assets....................................................... $799.1 $734.1
====== ======
Current liabilities.......................................................... $125.4 $122.4
Long-term debt............................................................... 331.8 307.6
Other liabilities............................................................ 35.6 31.0
Stockholders' equity......................................................... 306.3 273.1
------ ------
Total liabilities and stockholders' equity......................... $799.1 $734.1
====== ======
</TABLE>
SUMMARY OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Net sales............................................................ $685.9 $489.8 $510.3
Costs and expenses................................................... (618.7) (494.8) (527.2)
(Provision) credit for income taxes.................................. (18.7) (6.3) 1.9
------ ------ ------
Net income (loss).................................................... $ 48.5 $(11.3) $(15.0)
====== ====== ======
Company's equity in income (loss).................................... $ 19.2 $ (1.9) $ (3.3)
====== ====== ======
</TABLE>
The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity method
accounting adjustments. At December 31, 1995, KACC's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $54.9. The Company is amortizing this amount over a 12-year
period, which results in an annual amortization charge of approximately $11.4.
The Company and its affiliates have interrelated operations. KACC provides
some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the
F-105
<PAGE> 301
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisition and processing of bauxite, alumina, and primary aluminum. Purchases
from these affiliates were $284.4, $219.7, and $206.6 in the years ended
December 31, 1995, 1994, and 1993, respectively. Dividends of $8.1, nil, and nil
were received from investees in the years ended December 31, 1995, 1994, and
1993, respectively.
In 1995, a subsidiary of the Company invested $9.0 in a foreign joint
venture. This amount is included in Investments in and advances to
unconsolidated affiliates.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Land and improvements............................................. $ 151.8 $ 153.5
Buildings......................................................... 198.5 196.8
Machinery and equipment........................................... 1,337.6 1,285.0
Construction in progress.......................................... 59.6 45.0
-------- --------
1,747.5 1,680.3
Accumulated depreciation.......................................... 637.9 547.1
-------- --------
Property, plant, and equipment -- net........................... $1,109.6 $1,133.2
======== ========
</TABLE>
4. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
2001 ---------------
AND 1995 1994
1996 1997 1998 1999 2000 AFTER TOTAL TOTAL
---- ---- ---- ----- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 Credit Agreement (9.00% at December
31, 1995)................................ $13.1 $ 13.1 $ 6.7
9 7/8% Senior Notes, net................... $223.8 223.8 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00% -- 7.75%).. $1.2 $1.3 $1.4 .2 $.2 32.6 36.9 38.1
Alpart CARIFA Loan (fixed and variable
rates)................................... 60.0 60.0 60.0
Alpart Term Loan (8.95%)................... 6.3 6.2 12.5 18.7
12 3/4% Senior Subordinated Notes.......... 400.0 400.0 400.0
Other borrowings (fixed and variable
rates)................................... 1.4 1.4 7.7 .3 .2 .8 11.8 15.5
---- ---- ---- ----- --- ------ ------ ------
Total............................. $8.9 $8.9 $9.1 $13.6 $.4 $717.2 $758.1 $762.6
==== ==== ==== ===== === ======
Less current portion....................... 8.9 11.5
------ ------
Long-term debt.................... $749.2 $751.1
====== ======
</TABLE>
1994 CREDIT AGREEMENT
On February 17, 1994, the Company and KACC entered into a credit agreement
with BankAmerica Business Credit, Inc. and certain other lenders (as amended,
the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $325.0
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) in an aggregate amount equal to the lesser of
$325.0 or a borrowing base relating to eligible accounts receivable plus
eligible inventory. The Company recorded a pre-tax extraordinary loss of $8.3
($5.4 after taxes) in the
F-106
<PAGE> 302
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
first quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the previous credit agreement. As of
December 31, 1995, $259.3 (of which $72.4 could have been used for letters of
credit) was available to KACC under the 1994 Credit Agreement. The 1994 Credit
Agreement is unconditionally guaranteed by the Company and by certain
significant subsidiaries of KACC. Loans under the 1994 Credit Agreement bear
interest at a rate per annum, at KACC's election, equal to a Reference Rate (as
defined) plus 1 1/2% or LIBO Rate (Reserve Adjusted) (as defined) 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 on a financial test, determined quarterly. As of December 31, 1995, the
financial test permitted a reduction of 1 1/2% per annum in margins effective
January 1, 1996.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability to, among
other things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures, and enter into
unrelated lines of business. Neither the Company nor KACC currently is permitted
to pay dividends on its common stock. 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.
SENIOR NOTES
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 7), KACC issued $225.0 of
its 9 7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the
offering of the 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.
GRAMERCY SOLID WASTE DISPOSAL REVENUE BONDS
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana
Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate
principal amount of its 7 3/4% Bonds due August 1, 2022 (the "Bonds") to finance
the construction of certain solid waste disposal facilities at KACC's Gramercy
plant. The proceeds from the sale of the Bonds were deposited into a
construction fund and may be withdrawn, from time to time, pursuant to the terms
of the Sale Agreement and the Bond indenture. At December 31, 1995, $3.8
remained in the construction fund. The Sale Agreement requires KACC to make
payments to the Louisiana Parish in installments due on the dates and in the
amounts required to permit the Louisiana Parish to satisfy all of its payment
obligations under the Bonds.
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. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
Rate (LIBOR less 1/8 of 1%). 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%.
F-107
<PAGE> 303
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 in 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 the Company's minority partner in Alpart).
SENIOR SUBORDINATED NOTES
On February 1, 1993, KACC issued $400.0 of its 12 3/4% Senior Subordinated
Notes due 2003 (the "12 3/4% Notes"). The net proceeds from the sale of the
12 3/4% Notes were used to retire the 14 1/4% Senior Subordinated Notes due 1995
(the "14 1/4% Notes"), to prepay $18.0 of the term loan, 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
in the first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14 1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the 12 3/4%
Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC.
The indentures governing the Senior Notes and the 12 3/4% Notes (the
"Indentures") restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability, to incur
debt, undertake transactions with affiliates, and pay dividends. Further, the
Indentures provide that KACC must offer to purchase the Senior Notes and the
12 3/4% Notes, respectively, upon the occurrence of a Change of Control (as
defined therein), and the 1994 Credit Agreement provides that the occurrence of
a Change in Control (as defined therein) shall constitute an Event of Default
thereunder.
CAPITALIZED INTEREST
Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4,
respectively.
RESTRICTED NET ASSETS OF SUBSIDIARY
Certain debt instruments restrict the ability of KACC to transfer assets,
make loans and advances, and pay dividends to the Company. The restricted net
assets of KACC totaled $24.0 at December 31, 1995.
5. INCOME TAXES
Income (loss) before income taxes, minority interests, extraordinary loss,
and cumulative effect of changes in accounting principles by geographic area is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Domestic............................................... $(55.9) $(168.4) $(232.0)
Foreign................................................ 158.5 16.3 23.5
------ ------- -------
Total........................................ $102.6 $(152.1) $(208.5)
====== ======= =======
</TABLE>
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 also subject to domestic income taxes.
F-108
<PAGE> 304
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The (provision) credit for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect of changes
in accounting principles consists of:
<TABLE>
<CAPTION>
FEDERAL FOREIGN STATE TOTAL
------- ------- ----- ------
<S> <C> <C> <C> <C>
1995
Current........................................ $(4.3) $ (40.2) $ (.1) $(44.6)
Deferred....................................... 15.2 (4.9) (2.9) 7.4
----- ------ ----- ------
Total.................................. $10.9 $ (45.1) $(3.0) $(37.2)
===== ====== ===== ======
1994
Current........................................ $ (18.0) $ (.1) $(18.1)
Deferred....................................... $71.2 .6 .1 71.9
----- ------ ----- ------
Total.................................. $71.2 $ (17.4) -- $ 53.8
===== ====== ===== ======
1993
Current........................................ $12.6 $ (7.9) $ (.1) $ 4.6
Deferred....................................... 68.5 12.0 1.8 82.3
----- ------ ----- ------
Total.................................. $81.1 $ 4.1 $ 1.7 $ 86.9
===== ====== ===== ======
</TABLE>
The 1994 federal deferred credit for income taxes of $71.2 includes $29.3
for the benefit of operating loss carryforwards generated in 1994. The 1993
federal deferred credit for income taxes of $68.5 includes $29.2 for the benefit
of operating loss carryforwards generated in 1993 and a $3.4 benefit for
increasing net deferred income tax assets (liabilities) as of the date of
enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993,
which retroactively increased the federal statutory income tax rate from 34% to
35% for periods beginning on or after January 1, 1993.
A reconciliation between the (provision) credit for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Amount of federal income tax (provision) credit based on the
statutory rate............................................... $(35.9) $53.2 $73.0
Percentage depletion........................................... 4.2 5.6 6.4
Revision of prior years' tax estimates and other changes in
valuation allowances......................................... 1.5 .2 3.9
Foreign taxes, net of federal tax benefit...................... (5.4) (5.3) (2.6)
Increase in net deferred income tax assets due to tax rate
change....................................................... 1.8 3.4
Other.......................................................... (1.6) (1.7) 2.8
------ ----- -----
(Provision) credit for income taxes............................ $(37.2) $53.8 $86.9
====== ===== =====
</TABLE>
As shown in the Statements of Consolidated Income (Loss) for the years
ended December 31, 1994 and 1993, the Company reported extraordinary losses
related to the early extinguishment of debt. The Company reported the 1994
extraordinary loss net of related deferred federal income taxes of $2.9 and
reported the 1993 extraordinary loss net of related current federal income taxes
of $11.2, which approximated the federal statutory rate in effect on the dates
the transactions occurred.
F-109
<PAGE> 305
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company adopted SFAS 109 as of January 1, 1993, as discussed in Note 1.
The components of the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions.................... $ 289.9 $ 293.7
Loss and credit carryforwards.................................. 156.1 187.6
Other liabilities.............................................. 107.8 109.6
Pensions....................................................... 56.0 51.0
Foreign and state deferred income tax liabilities.............. 30.8 28.1
Property, plant, and equipment................................. 22.9 23.1
Inventories.................................................... 1.8
Other.......................................................... 10.7 3.5
Valuation allowances........................................... (128.5) (133.9)
------- -------
Total deferred income tax assets -- net................ 547.5 562.7
------- -------
Deferred income tax liabilities:
Property, plant, and equipment................................. (179.8) (203.2)
Investments in and advances to unconsolidated affiliates....... (66.4) (63.8)
Inventories.................................................... (8.3)
Other.......................................................... (9.5) (6.4)
------- -------
Total deferred income tax liabilities.................. (255.7) (281.7)
------- -------
Net deferred income tax assets................................... $ 291.8 $ 281.0
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $97.7 of the net deferred income tax assets listed above
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 and the year the carryforwards expire, as well as 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, based
on the cyclical nature of its business, its history of prior operating earnings,
and its expectations for future years, that it 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 the Company's net deferred income tax assets at
December 31, 1995, is approximately $194.1. 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 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the ability to
carry forward such loss for 15 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 the operating losses incurred in recent years.
As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of the net
deferred income tax assets listed above are included on the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax assets and liabilities listed
above are included on the Consolidated Balance Sheets in the captions entitled
Other accrued liabilities and Long-term liabilities.
F-110
<PAGE> 306
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company and its subsidiaries were included in the consolidated federal
income tax returns of MAXXAM for the period from October 28, 1988, through June
30, 1993. As a consequence of the issuance of the Depositary Shares on June 30,
1993, as discussed in Note 7, the Company and its subsidiaries are no longer
included in the consolidated federal income tax returns of MAXXAM. The Company
and its subsidiaries have become members of a new consolidated return group of
which the Company is the common parent corporation (the "New Kaiser Tax Group").
The New Kaiser Tax Group files consolidated federal income tax returns for
taxable periods beginning on or after July 1, 1993.
The tax allocation agreement between the Company and MAXXAM (the "Company
Tax Allocation Agreement") and the tax allocation agreement between KACC and
MAXXAM (the "KACC Tax Allocation Agreement") (collectively, the "Tax Allocation
Agreements"), terminated pursuant to their terms, effective for taxable periods
beginning after June 30, 1993. Any unused federal income tax attribute
carryforwards under the terms of the Tax Allocation Agreements were eliminated
and are not available to offset federal income tax liabilities for taxable
periods beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993
consolidated federal income tax return, the tax attribute carryforwards of the
MAXXAM consolidated return group as of December 31, 1993, were apportioned in
part to the New Kaiser Tax Group, based on the provisions of the relevant
consolidated return regulations. The benefit of such tax attribute carryforwards
apportioned to the New Kaiser Tax Group approximated the benefit of tax
attribute carryforwards eliminated under the Tax Allocation Agreements. To the
extent the New Kaiser Tax Group generates unused tax losses or tax credits for
periods beginning on or after July 1, 1993, such amounts will not be available
to obtain refunds of amounts paid by the Company or KACC to MAXXAM for periods
ending on or before June 30, 1993, pursuant to the Tax Allocation Agreements.
KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which
became effective as of October 28, 1988. Under the terms of the KACC Tax
Allocation Agreement, MAXXAM computed the federal income tax liability for KACC
and its subsidiaries (collectively, the "Subgroup") as if the Subgroup were a
separate affiliated group of corporations which was never connected with MAXXAM.
During 1991, the Company and MAXXAM entered into the Company Tax Allocation
Agreement, which became effective as of January 1, 1991. Under the terms of the
Company Tax Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including KACC and its
subsidiaries, were a separate affiliated group of corporations which was never
connected with MAXXAM. The federal income tax liability of the Company was the
difference between the tentative federal income tax liability and the liability
computed under the KACC Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements will continue to govern for
periods ended prior to July 1, 1993. Therefore, payments or refunds may still be
required by or payable to the Company or KACC under the terms of their
respective tax allocation agreements for these periods due to the final
resolution of audits, amended returns, and related matters. However, the 1994
Credit Agreement prohibits the payment by KACC to MAXXAM of any amounts due
under the KACC Tax Allocation Agreement, except for certain payments that are
required as a result of audits and only to the extent of any amounts paid after
February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement.
F-111
<PAGE> 307
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1995. The utilization of certain of these
tax attributes is subject to limitations:
<TABLE>
<CAPTION>
EXPIRING
THROUGH
-----------
<S> <C> <C>
Regular tax attribute carryforwards:
Net operating losses........................................... $32.9 2007
General business tax credits................................... 28.4 2008
Foreign tax credits............................................ 89.7 2000
Alternative minimum tax credits................................ 19.4 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses........................................... $17.1 2002
Foreign tax credits............................................ 83.5 2000
</TABLE>
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS
RETIREMENT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service. The Company's funding policies
meet or exceed all regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets are as follows:
<TABLE>
<CAPTION>
PLANS WITH
ACCUMULATED BENEFITS
EXCEEDING ASSETS(1)
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation:
Vested employees............................................. $ 753.0 $ 663.9
Nonvested employees.......................................... 28.7 41.1
------ ------
Accumulated benefit obligation............................... 781.7 705.0
Additional amounts related to projected salary increases....... 34.2 30.0
------ ------
Projected benefit obligation................................... 815.9 735.0
Plan assets (principally common stocks and fixed income
obligations) at fair value................................... (592.3) (524.6)
------ ------
Plan assets less than projected benefit obligation............. 223.6 210.4
Unrecognized net losses........................................ (54.7) (42.5)
Unrecognized net obligations................................... (.5) (.8)
Unrecognized prior-service cost................................ (28.2) (30.9)
Adjustment required to recognize minimum liability............. 49.8 42.9
------ ------
Accrued pension obligation included in the Consolidated Balance
Sheets (principally in Long-term liabilities)................ $ 190.0 $ 179.1
====== ======
</TABLE>
- ---------------
(1) Includes plans with assets exceeding accumulated benefits by approximately
$.1 and $.3 in 1995 and 1994, respectively.
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax credit
(charge) to equity of $(4.7) and $12.5 at December 31,
F-112
<PAGE> 308
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 and 1994, respectively, for the reduction (excess) of the minimum liability
over the unrecognized net obligation and prior-service cost. These amounts were
recorded net of the related income tax (provision) credit of $2.8 and $(7.3) as
of December 31, 1995 and 1994, respectively, which approximated the federal and
state statutory rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 10.0 $ 11.2 $ 10.8
Interest cost on projected benefit obligation............... 59.8 57.3 59.2
Return on assets:
Actual gain............................................... (112.2) (.8) (70.3)
Deferred gain (loss)...................................... 64.6 (53.0) 15.9
Net amortization and deferral............................... 4.2 4.1 2.3
------ ----- -----
Net periodic pension cost................................... $ 26.4 $ 18.8 $ 17.9
====== ===== =====
</TABLE>
Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................... 7.5% 8.5 % 7.5%
Expected long-term rate of return on assets..................... 9.5% 9.5 % 10.0%
Rate of increase in compensation levels......................... 5.0% 5.0 % 5.0%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. These
benefits are provided through contracts with various insurance carriers. The
Company has not funded the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company adopted SFAS 106 to
account for postretirement benefits other than pensions as of January 1, 1993,
as discussed in Note 1.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for USWA retirees who
retire after December 31, 1995, when they become 65, and voluntary for other
hourly retirees of the Company's operations in the states of California,
Louisiana, and Washington. The USWA contract, ratified on February 28, 1995,
also contained changes to the retiree health benefits. These changes included
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower the Company's expenses for
retiree medical care.
F-113
<PAGE> 309
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company's accrued postretirement benefit obligation is composed of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees......................................................... $557.6 $566.2
Active employees eligible for postretirement benefits............ 30.7 30.2
Active employees not eligible for postretirement benefits........ 61.1 98.7
------ ------
Accumulated postretirement benefit obligation.................... 649.4 695.1
Unrecognized net gains............................................. 20.5 55.0
Unrecognized gains related to prior-service costs.................. 110.9 31.8
------ ------
Accrued postretirement benefit obligation.......................... $780.8 $781.9
====== ======
</TABLE>
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service cost.................................................... $ 4.5 $ 8.2 $ 7.1
Interest cost................................................... 52.3 56.9 58.5
Amortization of prior service cost.............................. (8.9) (3.2)
----- ----- -----
Net periodic postretirement benefit cost........................ $47.9 $61.9 $65.6
===== ===== =====
</TABLE>
The 1996 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) are 8.0% and 7.5% for retirees
under 65 and over 65, respectively, and are assumed to decrease gradually to
5.0% in 2007 and remain at that level thereafter. The health care cost trend
rate has a significant effect on the amounts reported. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1995, by
approximately $68.7 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by approximately
$7.8. The weighted average discount rate used to determine the accumulated
postretirement benefit obligation at December 31, 1995 and 1994, was 7.5% and
8.5%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement. The Company adopted SFAS 112 to account for
postemployment benefits as of January 1, 1993, as discussed in Note 1.
INCENTIVE PLANS
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company,
KACC, and their consolidated subsidiaries. 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 the Company as of December 31, 1993.
Under the LTIP, as amended, 764,092 restricted shares were distributed to six
Company executives during 1993 for benefits generally earned but not vested as
of December 31, 1992. These shares generally will vest at the rate of 25% per
year. The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company adopted the Kaiser 1993
Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock
were reserved for awards or for payment of rights granted under the Plan, of
F-114
<PAGE> 310
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
which 544,839 shares were available to be awarded at December 31, 1995. Under
the Kaiser 1993 Omnibus Stock Incentive Plan, 102,564 restricted shares were
distributed to two Company executives during 1994, which will vest at the rate
of 25% per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These options generally will vest at
the rate of 20-25% per year. Information relating to nonqualified stock options
is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................... 1,119,680 664,400
Granted............................................ 494,800 664,400
Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920)
Expired or forfeited............................... (38,095) (32,600)
--------- --------- -------
Outstanding at end of year (prices ranging from
$7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year......................... 211,755 120,180
========= =========
</TABLE>
In 1995, the Company adopted the Kaiser Aluminum Total Compensation System,
an unfunded incentive compensation program. The program provides incentive pay
based on performance against plan over a three-year period. KACC also has a
supplemental savings and retirement plan for salaried employees, under which the
participants contribute a percentage of their base salaries.
The Company's expense for the above plans was $11.9, $6.1, and $5.3 for the
years ended December 31, 1995, 1994, and 1993, respectively.
F-115
<PAGE> 311
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Changes in stockholders' equity and minority interests were:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
MINORITY INTERESTS -----------------------------------------------------------
------------------ RETAINED ADDITIONAL
REDEEMABLE EARNINGS MINIMUM
PREFERENCE PREFERRED COMMON ADDITIONAL (ACCUMULATED PENSION
STOCK OTHER STOCK STOCK CAPITAL DEFICIT) LIABILITY
---------- ----- --------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992........ $ 32.8 $72.1 $ .6 $288.5 $ 282.8 $ (6.7)
Net loss........................ (652.2)
Redeemable preference stock:
Accretion..................... 4.8
Stock redemption.............. (4.0)
Conversions (1,967 preference
shares into cash)............. (.2)
Common stock issued............. 3.3
Preferred stock issued.......... $.2 134.1
Dividends on preferred stock.... (6.3)
Minority interest in
majority-owned subsidiaries... (.5)
Additional minimum pension
liability..................... (14.9)
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1993........ 33.6 71.4 .2 .6 425.9 (375.7) (21.6)
Net loss........................ (106.8)
Redeemable preference stock:
Accretion..................... 4.0
Stock redemption.............. (8.5)
Common stock issued............. 2.2
Preferred stock issued.......... .4 99.7
Dividends on preferred stock.... (20.1)
Minority interest in
majority-owned subsidiaries... 15.7
Reduction of minimum pension
liability..................... 12.5
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1994........ 29.1 87.1 .6 .6 527.8 (502.6) (9.1)
Net income...................... 60.3
Redeemable preference stock:
Accretion..................... 3.9
Stock redemption.............. (8.7)
Stock repurchase.............. 5.4
Conversions (1,222 preference
shares into cash)............. (.1)
Common stock issued upon
redemption and conversion of
preferred stock............... (.2) .1 1.1
Dividends on preferred stock.... (17.6)
Minority interest in
majority-owned subsidiaries... 6.0
Incentive plans accretion....... 1.4
Additional minimum pension
liability..................... (4.7)
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1995........ $ 29.7 $93.0 $.4 $ .7 $530.3 $ (459.9) $(13.8)
===== ===== === === ====== ======= ======
</TABLE>
F-116
<PAGE> 312
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
REDEEMABLE PREFERENCE STOCK
In March 1985, KACC entered into a three-year agreement with the USWA
whereby shares of a new series of "Cumulative (1985 Series A) Preference 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 "Cumulative
(1985 Series B) Preference Stock." Series A Stock and Series B Stock ("Series A
and B Stock") each have a par value of $1 per share and a liquidation and
redemption value of $50 per share plus accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were recorded at
fair market value when issued, based on independent appraisals, with a
corresponding charge to compensation cost. Carrying values have been increased
each year to recognize accretion of redemption values and, in certain years,
there have been other increases for reasons described below. Changes in Series A
and B Stock are shown below.
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year........................................... 912,167 1,081,548 1,163,221
Redeemed.................................................... (174,804) (169,381) (81,673)
------- ------- ---------
End of year................................................. 737,363 912,167 1,081,548
======= ======= =========
</TABLE>
No additional Series A or B Stock will be issued. While held by the plan
trustee, Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in cash at the option of
KACC on or after March 1, 1991, in 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 Stocks are entitled to an annual cash dividend of $5 per share,
payable quarterly, when and as declared by the Board of Directors.
Redemption fund agreements require KACC to make annual payments by March 31
each year based on a formula tied to 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
1994 and 1995, KACC contributed $4.3 for each of the years 1993 and 1994, and
will contribute $4.3 in March 1996 for 1995.
Under the USWA labor contract effective November 1, 1994, KACC is obligated
to offer to purchase up to 40 shares of Series A Stock from each active
participant in 1995 at a price equal to its redemption value of $50 per share.
KACC also agreed to offer to purchase up to an additional 80 shares from each
participant in 1998. In addition, a profitability test was satisfied for 1995;
therefore, KACC will offer to purchase from each active participant an
additional 20 shares of such preference stock held in the stock ownership plan
for the benefit of substantially the same employees in 1996. The employees could
elect to receive their shares, accept cash, or place the proceeds into KACC's
401(k) savings plan. KACC will provide comparable purchases of Series B Stock
from active participants.
The Series A and B Stock is distributed in the event of death, retirement,
or in other specified circumstances. KACC also may 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 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 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.
F-117
<PAGE> 313
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 common stock if KACC
is in default on any dividends payable on the Series A and B Stock.
PREFERENCE STOCK
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and payment of
dividends. At December 31, 1995, such provisions were less restrictive as to the
payment of cash dividends than the 1994 Credit Agreement provisions. KACC has
the option to redeem the $100 Preference Stocks at par value plus accrued
dividends. KACC does not intend to issue any additional shares of the $100
Preference Stocks.
The 4 1/8% and 4 3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84,
$78.38, and $76.46, respectively. KACC records the $100 Preference Stock at
their exchange amounts for financial statement presentation and the Company
includes such amounts in minority interests. The outstanding shares of KACC
preference stock were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------ ------
<S> <C> <C>
4 1/8%........................................................... 3,237 3,657
4 3/4% (1957 Series)............................................. 2,342 2,605
4 3/4% (1959 Series)............................................. 13,162 13,534
4 3/4% (1966 Series)............................................. 3,473 3,640
</TABLE>
PREFERRED STOCK
Series A Convertible -- In 1993, Kaiser issued 19,382,950 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"). On September 19, 1995, the Company redeemed all 1,938,295
Series A Shares, which resulted in the simultaneous redemption of all Depositary
Shares in exchange for (i) 13,126,521 shares of the Company's common stock and
(ii) $2.8 in cash comprised of (a) an amount equal to all accrued and unpaid
dividends up to and including the day immediately prior to redemption date and
(b) cash in lieu of any fractional shares of common stock that would have
otherwise been issuable.
PRIDES Convertible -- In the first quarter of 1994, the Company consummated
the public offering of 8,855,550 shares of the PRIDES. The net proceeds from the
sale of the shares of PRIDES were approximately $100.1. The Company used such
net proceeds to make non-interest-bearing loans to KACC in the aggregate
principal amount of $33.2 (the aggregate dividends scheduled to accrue on the
shares of PRIDES from the issuance date until December 31, 1997, the date on
which the outstanding PRIDES will be mandatorily converted into shares of the
Company's common stock), evidenced by intercompany notes, and used the balance
of such net proceeds to make capital contributions to KACC in the aggregate
amount of $66.9.
Holders of shares of PRIDES are entitled to receive (when, as, and if the
Board of Directors declares dividends on the PRIDES) cumulative preferential
cash dividends at a rate per annum of 8.255% of the per share offering price
(equivalent to $.97 per annum for each share of PRIDES), from the date of
initial issuance, payable quarterly in arrears on the last day of March, June,
September, and December of each year.
F-118
<PAGE> 314
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 common stock and together with the holders of any other classes or series of
stock 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 one share of the Company's common stock, subject to adjustment in
certain events, and the right to receive an amount in cash equal to all accrued
and unpaid dividends thereon (other than previously declared dividends payable
to a holder of record on a prior date).
Shares of PRIDES are not redeemable at the election of the Company, prior
to December 31, 1996. At any time and from time to time on or after December 31,
1996, the Company 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 common stock equal to (A) the sum of
$11.9925, declining after December 31, 1996, to $11.75 until December 31, 1997,
plus, in the event the Company does not elect to pay cash dividends to the
redemption date, 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 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 common stock (equivalent to a conversion price
of $14.10 per share of common stock), subject to adjustment in certain events.
The number of shares of 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 the common stock from time to time.
DIVIDENDS ON COMMON STOCK
The indentures governing the Senior Notes and the 12 3/4% Notes restrict,
among other things, KACC's ability, and the 1994 Credit Agreement restricts,
among other things, Kaiser's and KACC's ability, to incur debt, undertake
transactions with affiliates, and pay dividends. Under the most restrictive of
these covenants, neither the Company nor KACC currently is permitted to pay
dividends on its common stock.
At December 31, 1995, 28,000,000 shares of the Company's common stock owned
by MAXXAM were pledged as security for debt of a wholly owned subsidiary of
MAXXAM, consisting of $100.0 aggregate principal amount of 11 1/4% Senior
Secured Notes due 2003 and $125.7 aggregate principal amount of 12 1/4% Senior
Secured Discount Notes due 2003.
PROPOSED RECAPITALIZATION
On February 5, 1996, the Company announced that it filed with the SEC a
preliminary proxy statement relating to a proposed recapitalization and a
special meeting of stockholders to consider and vote upon the proposal. The
proposed recapitalization would: (i) provide for two classes of common stock:
Class A Common Shares, $.01 par value, with one vote per share and a new
lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote
per share: (ii) redesignate as Class A Common Shares the 100 million currently
authorized shares of existing common stock and authorize an additional 250
million shares to be designated as Common Stock; and (iii) change each issued
share of the Company's existing common stock, par value $.01 per share, into (a)
.33 of a Class A Common Share and (b) .67 of a share of Common Stock. The
Company would pay cash in lieu of fractional shares. The Company anticipates
that both the Class A Common Shares and the Common Stock will be approved for
trading on the New York Stock Exchange. Upon the effective date of the
recapitalization, approximately 23,640,000 Class A Common Shares and 47,998,000
shares of Common Stock would be issued and outstanding. The proportionate voting
power of the
F-119
<PAGE> 315
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
holders of the PRIDES will increase immediately after the effectiveness of the
recapitalization until such shares are redeemed or converted, which will occur
on or before December 31, 1997. As of January 31, 1996, holders of the existing
common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total
voting power of all stockholders. Immediately after the recapitalization, the
voting power of such holders of the PRIDES will increase to 19.6% in the
aggregate, with a corresponding reduction in the voting power of such holders of
the existing common stock. At such time as the PRIDES are redeemed or converted,
the relative voting power of such holders of the PRIDES will decrease and the
relative voting power for both such holders of the PRIDES and the existing
common stock will be approximately the same as it would have been had the
recapitalization not occurred.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts (see Note 9),
letters of credit, and guarantees. Such purchase agreements and tolling
arrangements include 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 QAL. The aggregate
minimum amount of required future principal payments at December 31, 1995, is
$88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The KACC share
of payments, including operating costs and certain other expenses under the
agreement, was $77.5, $85.6, and $86.7 for the years ended December 31, 1995,
1994, and 1993, respectively. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1995, are
as follows: years ending December 31, 1996 -- $22.7; 1997 -- $21.6;
1998 -- $24.6; 1999 -- $29.7; 2000 -- $27.3; thereafter -- $187.0. The future
minimum rentals receivable under noncancelable subleases was $67.0 at December
31, 1995.
Rental expenses were $29.0, $26.8, and $29.0 for the years ended December
31, 1995, 1994, and 1993, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental laws, and
to claims and litigation based upon such laws. KACC currently is 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 on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and ground-
F-120
<PAGE> 316
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
water remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for the years
ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of period.................................. $40.1 $40.9 $46.4
Additional amounts.............................................. 3.3 2.8 1.7
Less expenditures............................................... (4.5) (3.6) (7.2)
----- ----- -----
Balance at end of period........................................ $38.9 $40.1 $40.9
===== ===== =====
</TABLE>
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the Company's
assessment of the likely remediation action to be taken. The Company expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an
aggregate of approximately $10.0 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. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $23.0 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties should not have a material adverse effect
on the Company's consolidated financial position, results of operations, or
liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years.
The following table presents the changes in number of such claims pending
for the years ended December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
Number of claims at beginning of period............................. 25,200 23,400 13,500
Claims received..................................................... 41,700 14,300 11,400
Claims settled or dismissed......................................... (7,200) (12,500) (1,500)
------ ------ ------
Number of claims at end of period................................... 59,700 25,200 23,400
====== ====== ======
</TABLE>
KACC has been advised by its regional counsel that, although there can be
no assurance, the recent increase in pending claims may be attributable in part
to tort reform legislation in Texas which was passed by the legislature in March
1995 and which became effective on September 1, 1995. The legislation, among
other things, is designed to restrict, beginning September 1, 1995, the filing
of cases in Texas that do not have a sufficient nexus to that jurisdiction, and
to impose, generally as of September 1, 1996, limitations relating to
F-121
<PAGE> 317
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
joint and several liability in tort cases. A substantial portion of the
asbestos-related claims that were filed and served on KACC between June 30,
1995, and November 30, 1995, were filed in Texas prior to September 1, 1995.
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed and settled through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31, 1995.
The Company estimates that annual future cash payments in connection with such
litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been recorded
for such costs which may be incurred beyond 2008, there is a reasonable
possibility that such costs may continue beyond 2008, and such costs may be
substantial.
The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery of
$137.9, determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in Other assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
KACC enters into a number of financial instruments in the normal course of
business that are designed to reduce its exposure to fluctuations in foreign
exchange rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
F-122
<PAGE> 318
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its affiliates in
Australia and the United Kingdom, which expose KACC to certain exchange rate
risks. In order to mitigate its exposure, KACC periodically enters into forward
foreign exchange and currency option contracts in Australian dollars and Pounds
Sterling to hedge these commitments. The forward foreign currency exchange
contracts are agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the future. At
December 31, 1995, KACC had net forward foreign exchange contracts totaling
approximately $102.8 for the purchase of 142.4 Australian dollars through April
30, 1997.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, KACC has
developed strategies which include forward sales of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. Under the
principal components of KACC's price risk management strategy, which can be
modified at any time, (i) varying quantities of KACC's anticipated production
are sold forward at fixed prices; (ii) call options are purchased to allow KACC
to participate in certain higher market prices, should they materialize, for a
portion of KACC's primary aluminum and alumina sold forward; (iii) option
contracts are entered into to establish a price range KACC will receive for a
portion of its primary aluminum and alumina; and (iv) put options are purchased
to establish minimum prices KACC will receive for a portion of its primary
aluminum and alumina. In this regard, in respect of its 1996 anticipated
production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of
primary aluminum at fixed prices.
In addition, KACC enters into forward fixed price arrangements with certain
customers which provide for the delivery of a specific quantity of fabricated
aluminum products over a specified future period of time. In order to establish
the cost of primary aluminum for a portion of such sales, KACC may enter into
forward and option contracts. In this regard, at December 31, 1995 KACC had
purchased 53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,721
per metric ton ($.78 per pound) of aluminum, and forward foreign exchange
contracts was $4.1.
KACC is exposed to credit risk in the event of non-performance by other
parties to these currency and commodity contracts, but KACC does not anticipate
non-performance by any of these counterparties, given their creditworthiness.
When appropriate, KACC arranges master netting agreements.
10. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
Sales and transfers among geographic areas are made on a basis intended to
reflect the market value of products.
The aggregate foreign currency gain included in determining net income was
$5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Sales of more than 10% of total revenue to a single customer were nil in
1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and $145.7 of
aluminum processing for the years ended December 31, 1994, and 1993,
respectively.
Export sales were less than 10% of total revenue during the years ended
December 31, 1995, 1994, and 1993, respectively.
F-123
<PAGE> 319
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Geographical area information relative to operations is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OTHER
DECEMBER 31, DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL
------------ -------- --------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers................ 1995 $1,589.5 $ 191.7 $239.4 $217.2 $2,237.8
1994 1,263.2 169.9 180.0 168.4 1,781.5
1993 1,177.8 155.4 207.5 178.4 1,719.1
Sales and transfers among
geographic areas......... 1995 $ 79.6 $191.5 $ (271.1)
1994 98.7 139.4 (238.1)
1993 88.2 79.6 (167.8)
Equity in income (losses)
of unconsolidated
affiliates............... 1995 $ (.2) $ 19.4 $ 19.2
1994 .2 (2.1) (1.9)
1993 (3.3) (3.3)
Operating income (loss).... 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6
1994 (128.8) 9.9 18.3 44.4 (56.2)
1993 (145.9) (11.8) 21.9 12.4 (123.4)
Investment in and advances
to unconsolidated
affiliates............... 1995 $ 1.2 $ 27.1 $149.9 $ 178.2
1994 1.2 28.8 139.7 169.7
Identifiable assets........ 1995 $2,017.9 $ 381.9 $196.5 $216.9 $2,813.2
1994 1,933.8 364.8 200.0 199.5 2,698.1
</TABLE>
F-124
<PAGE> 320
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Financial information by industry segment at December 31, 1995 and 1994,
and for the years ended December 31, 1995, 1994, and 1993, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED BAUXITE & ALUMINUM
DECEMBER 31, ALUMINA PROCESSING CORPORATE TOTAL
------------ --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers......................... 1995 $ 514.2 $1,723.6 $2,237.8
1994 432.5 1,295.7 1,781.5
1993 423.4 1,349.0 1,719.1
Intersegment sales.................. 1995 $ 159.7 $ 159.7
1994 146.8 146.8
1993 129.4 129.4
Equity in income (losses) of
unconsolidated affiliates......... 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2
1994 (4.7) 2.6 .2 (1.9)
1993 (2.5) (.8) (3.3)
Operating income (loss)............. 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6
1994 19.8 (8.4) (67.6) (56.2)
1993 (4.5) (46.3) (72.6) (123.4)
Effect of changes in accounting
principles on operating income
(loss)
SFAS 106.......................... 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2)
SFAS 109.......................... 1993 (7.7) (7.8) .3 (15.2)
Depreciation........................ 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3
1994 33.5 59.1 2.8 95.4
1993 35.3 59.9 1.9 97.1
Capital expenditures................ 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4
1994 28.9 39.9 1.2 70.0
1993 35.3 31.2 1.2 67.7
Investment in and advances to
unconsolidated affiliates......... 1995 $ 129.9 $ 47.1 $ 1.2 $ 178.2
1994 136.6 31.9 1.2 169.7
Identifiable assets................. 1995 $ 746.0 $1,341.2 $ 726.0 $2,813.2
1994 749.6 1,242.3 706.2 2,698.1
</TABLE>
F-125
<PAGE> 321
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 21.6 $ 21.9
Receivables...................................................... 261.6 308.6
Inventories...................................................... 545.5 525.7
Prepaid expenses and other current assets........................ 111.7 76.6
-------- --------
Total current assets.......................................... 940.4 932.8
Investments in and advances to unconsolidated affiliates........... 174.6 178.2
Property, plant, and equipment -- net.............................. 1,126.4 1,109.6
Deferred income taxes.............................................. 284.7 269.1
Other assets....................................................... 343.1 323.5
-------- --------
Total.................................................... $ 2,869.2 $2,813.2
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 160.5 $ 184.5
Accrued interest................................................. 13.6 32.0
Accrued salaries, wages, and related expenses.................... 64.9 105.3
Accrued postretirement medical benefit obligation -- current
portion....................................................... 46.8 46.8
Other accrued liabilities........................................ 151.7 129.4
Payable to affiliates............................................ 95.6 94.2
Long-term debt -- current portion................................ 8.9 8.9
-------- --------
Total current liabilities..................................... 542.0 601.1
Long-term liabilities.............................................. 558.3 548.5
Accrued postretirement medical benefit obligation.................. 727.7 734.0
Long-term debt..................................................... 858.4 749.2
Minority interests................................................. 119.4 122.7
Stockholders' equity:
Preferred stock.................................................. .4 .4
Common stock..................................................... .7 .7
Additional capital............................................... 530.8 530.3
Accumulated deficit.............................................. (454.7) (459.9)
Additional minimum pension liability............................. (13.8) (13.8)
-------- --------
Total stockholders' equity.................................... 63.4 57.7
-------- --------
Total.................................................... $ 2,869.2 $2,813.2
======== ========
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-126
<PAGE> 322
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
Net sales.............................................................. $1,652.1 $1,646.7
-------- --------
Costs and expenses:
Cost of products sold................................................ 1,394.8 1,329.8
Depreciation......................................................... 72.5 71.1
Selling, administrative, research and development, and general....... 97.4 96.4
-------- --------
Total costs and expenses.......................................... 1,564.7 1,497.3
-------- --------
Operating income....................................................... 87.4 149.4
Other income (expense):
Interest expense..................................................... (68.3) (71.3)
Other -- net......................................................... 3.0 (9.8)
-------- --------
Income before income taxes and minority interests...................... 22.1 68.3
Provision for income taxes............................................. (8.4) (24.6)
Minority interests..................................................... (2.2) (4.4)
-------- --------
Net income............................................................. 11.5 39.3
Dividends on preferred stock........................................... (6.3) (15.5)
-------- --------
Net income available to common shareholders............................ $ 5.2 $ 23.8
======== ========
Earnings per common and common equivalent share:
Primary.............................................................. $ .07 $ .40
======== ========
Fully diluted........................................................ $ .46
========
Weighted average common and common equivalent shares outstanding (000):
Primary........................................................... 71,843 59,015
Fully diluted..................................................... 71,613
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-127
<PAGE> 323
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 11.5 $ 39.3
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation......................................................... 72.5 71.1
Amortization of excess investment over equity in net assets of
unconsolidated affiliates........................................... 8.7 8.7
Amortization of deferred financing costs and discount on long-term
debt................................................................ 4.1 4.1
Equity in income of unconsolidated affiliates........................ (7.5) (17.2)
Minority interests................................................... 2.2 4.4
Decrease (increase) in receivables................................... 41.0 (86.6)
Increase in inventories.............................................. (19.8) (62.6)
(Increase) decrease in prepaid expenses and other assets............. (38.1) 70.5
Decrease in accounts payable......................................... (24.1) (5.2)
Decrease in accrued interest......................................... (18.4) (18.0)
(Decrease) increase in payable to affiliates and accrued
liabilities......................................................... (23.1) 12.3
Decrease in accrued and deferred income taxes........................ (18.6) (8.5)
Other................................................................ 4.6 7.8
------ ------
Net cash (used for) provided by operating activities............... (5.0) 20.1
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments............... 1.6 6.9
Expenditures for property, plant, and equipment......................... (90.8) (44.2)
Investments in unconsolidated affiliates................................ (.3) (9.0)
Redemption fund for minority interests' preference stock................ (1.3) (.2)
------ ------
Net cash used for investing activities............................. (90.8) (46.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit facility, net............ 118.1 55.6
Repayments of long-term debt............................................ (9.0) (8.5)
Incurrence of financing costs........................................... -- (.8)
Dividends paid.......................................................... (8.4) (18.7)
Capital stock issued.................................................... -- 1.2
Redemption of minority interests' preference stock...................... (5.2) (8.8)
------ ------
Net cash provided by financing activities............................ 95.5 20.0
------ ------
Net decrease in cash and cash equivalents during the period............... (.3) (6.4)
Cash and cash equivalents at beginning of period.......................... 21.9 17.6
------ ------
Cash and cash equivalents at end of period................................ $ 21.6 $ 11.2
====== ======
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest.............................. $ 82.7 $ 85.2
Income taxes paid....................................................... 22.4 26.6
Tax allocation payments to MAXXAM Inc................................... 1.1 --
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-128
<PAGE> 324
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc.
("MAXXAM"). MAXXAM owns approximately 62% of the Company's common stock,
assuming the conversion of each outstanding share of 8.255% PRIDES, Convertible
Preferred Stock (the "PRIDES"), into one share of the Company's common stock,
with the remaining approximately 38% publicly held. The Company operates through
its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, these financial statements do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1995. In the opinion of management, the unaudited
interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature, necessary for a fair
statement of the results for the interim periods presented.
Operating results for the nine month period ended September 30, 1996, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
2. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- ----------
<S> <C> <C>
Finished fabricated aluminum products..................... $ 108.4 $ 91.5
Primary aluminum and work in process...................... 190.0 195.9
Bauxite and alumina....................................... 122.5 119.6
Operating supplies and repair and maintenance parts....... 124.6 118.7
------ ------
Total........................................... $ 545.5 $525.7
====== ======
</TABLE>
Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO
cost.
3. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary -- Earnings per common and common equivalent share are computed by
deducting preferred stock dividends from net income in order to determine net
income available to common shareholders. This amount is then divided by the
weighted average number of common and common equivalent shares outstanding
during the period. The impact of outstanding stock options on the weighted
average number of common and common equivalent shares for the nine months ended
September 30, 1996 and 1995, was immaterial.
Fully Diluted -- The PRIDES were excluded from the calculation of the
weighted average number of common and common equivalent shares outstanding for
all periods presented because they were antidilutive. For the nine months ended
September 30, 1995, a dividend of $9.1, attributable to the Company's Mandatory
Conversion Premium Dividend Preferred Stock (the "Series A Shares") which were
exchanged for approximately 13.1 million shares of the Company's common stock
and certain cash payments on September 19, 1995, have not been deducted from net
income and the weighted average number of common and
F-129
<PAGE> 325
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
common equivalent shares outstanding have been adjusted to reflect the shares of
common stock issued in the exchange as if they had been outstanding for the
entire period. As a result of the conversion of the Series A Shares, fully
diluted earnings per share for the 1995 period are presented even though the
results are antidilutive.
4. CONTINGENCIES
Environmental Contingencies -- The Company and KACC are subject to a number
of environmental laws, to fines or penalties assessed for alleged breaches of
the environmental laws, and to claims and litigation based upon such laws. KACC
currently is 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 the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
September 30, 1996, the balance of such accruals, which is primarily included in
Long-term liabilities, was $32.9. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts, existing
technology, and the Company's assessment of the likely remediation action to be
taken. The Company expects that these remediation actions will be taken over the
next several years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0 to $10.0 for the years 1996
through 2000 and an aggregate of approximately $7.0 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. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved in
early 1997. While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently believes that the
resolution of such uncertainties should not have a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.
Asbestos Contingencies -- KACC is a defendant in a number of lawsuits, some
of which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at least 15
years. At September 30, 1996, the number of such lawsuits pending was
approximately 75,900 as compared to 59,700 at December 31, 1995. During the year
1995, approximately 41,700 of such claims were received and 7,200 were settled
or dismissed. During the nine months ended September 30, 1996, approximately
20,000 of such claims were received and 3,800 were settled or dismissed.
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed and settled through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice
F-130
<PAGE> 326
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current
state of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $160.0, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at September 30,
1996. The Company estimates that annual future cash payments in connection with
such litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been recorded
for such costs which may be incurred beyond 2008, there is a reasonable
possibility that such costs may continue beyond 2008, and such costs may be
substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and 1996 were filed in Texas. KACC has been advised
by its counsel that, although there can be no assurance, the increase in pending
claims may have been attributable in part to tort reform legislation in Texas.
Although asbestos-related claims are currently exempt from certain aspects of
the Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation, relating
to the doctrine of forum non conveniens, as well as other developments in the
legislative and legal environment in Texas, may be responsible for the
accelerated pace of new claims experienced in late 1995 and its continuance in
1996, albeit at a somewhat reduced rate.
The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. The Company believes, based on prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance policies,
and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable
insurance coverage law relating to the terms and conditions of those policies,
that substantial recoveries from the insurance carriers are probable.
Accordingly, an estimated aggregate insurance recovery of $142.3, determined on
the same basis as the asbestos-related cost accrual, is recorded primarily in
Other assets at September 30, 1996.
Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from the
Company's underlying assumptions. While uncertainties are inherent in the final
outcome of these asbestos matters and it is presently impossible to determine
the actual costs that ultimately may be incurred and insurance recoveries that
will be received, management currently believes that, based on the factors
discussed in the preceding paragraphs, the resolution of the asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Other Contingencies -- The Company and KACC are involved in various other
claims, lawsuits, and other proceedings relating to a wide variety of matters.
While uncertainties are inherent in the final outcome of such matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
The Company'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
F-131
<PAGE> 327
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
products sold. KACC enters into primary aluminum hedging transactions from time
to time in the normal course of business. Primary aluminum hedging transactions
are designed to mitigate the Company's exposure to declines in the market price
of primary aluminum, while retaining the ability to participate in favorable
environments that may materialize. KACC has employed strategies which include
forward sales and purchases of primary aluminum at fixed prices and the purchase
or sale of options for primary aluminum. At September 30, 1996, KACC had sold
forward, at fixed prices, approximately 69,000 and 93,600 tons* of primary
aluminum in excess of its projected internal fabrication requirements for 1997
and 1998, respectively, and had purchased put options to establish a minimum
price for 66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively.
During October 1996, KACC purchased put options to establish a minimum price for
an additional 126,000 tons of primary aluminum in excess of its projected 1997
internal fabrication requirements and entered into options contracts that
established a price range for an additional 48,000 tons of the Company's 1998
surplus.
In addition, at September 30, 1996, KACC had sold forward approximately 73%
and 85% of the alumina available to it in excess of its projected internal
smelting requirements for 1997 and 1998, respectively. Virtually all of such
1997 and 1998 sales were made at prices indexed to future prices of primary
aluminum.
From time to time, KACC also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, KACC had option contracts for the purchase of
approximately 40,000 MMBtu of natural gas per day during the first quarter of
1997, and a combination of fixed price purchase and option contracts for 20,000
MMBtu of natural gas per day for the period April 1997 to December 1998. At
September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel
oil per month for the period January 1997 through December 1998.
KACC also enters into hedging transactions in the normal course of business
that are designed to reduce its exposure to fluctuations in foreign exchange
rates. At September 30, 1996, KACC had net forward foreign exchange contracts
totaling approximately $81.6 for the purchase of 110.0 Australian dollars from
January 1997 through June 1998, in respect of its commitments for 1997 and 1998
expenditures denominated in Australian dollars.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $46.4.
See Note 9 of the Notes to Consolidated Financial Statements of Kaiser for
the year ended December 31, 1995.
6. SUBSEQUENT EVENTS
On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the
"Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the
"10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at
maturity. The 10 7/8% Senior Notes were not registered under the Securities Act
of 1933, and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements. The 10 7/8% Senior
Notes rank pari passu with outstanding indebtedness under KACC's Credit
Agreement dated as of February 15, 1994, as amended (the "Credit Agreement") and
KACC's 9 7/8% Senior Notes due 2002 (the 9 7/8% Senior Notes) in right and
priority of payment and are guaranteed on a senior, unsecured basis by certain
of the Company's subsidiaries (the "Subsidiary Guarantors"). Net proceeds from
the Offering on the Issuance Date, after estimated expenses, were approximately
- ---------------
* All references to tons in this report refer to metric tons of 2,204.6 pounds.
F-132
<PAGE> 328
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
$168.9, of which $91.7 were utilized to reduce the outstanding borrowings under
the revolving credit facility of the Credit Agreement to zero. The remaining net
proceeds (approximately $77.2) were invested in short-term investments pending
their application for working capital and general corporate purposes, including
capital projects. Pursuant to an agreement with the initial purchasers of the
10 7/8% Senior Notes, KACC and the Subsidiary Guarantors agreed to file a
registration statement (the "Registration Statement") with the Securities &
Exchange Commission within 30 days of the Issuance Date with respect to a
registered offer to exchange the 10 7/8% Senior Notes for new notes with
substantially identical terms (the "Exchange Offer"), and to use their
reasonable best efforts to have the Registration Statement declared effective
within 90 days of the Issuance Date and the Exchange Offer consummated within
130 days of the Issuance Date. The Exchange Offer will be made only by means of
a prospectus.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $867.3 to $910.2, borrowing
capacity of $273.1 would have been available for use under the Credit Agreement
and the Company would have had available additional cash proceeds from the
Offering of $37.7.
During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the 10 7/8% Senior Notes discussed above and
to modify certain of the financial covenants contained in the Credit Agreement.
F-133
<PAGE> 329
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales................................. $531.1 $567.6 $553.4
Gross profit.............................. 97.4 91.5 68.4
Operating income.......................... 40.3 36.6 10.5
Net income (loss)......................... 9.9 8.2 (6.6)
Per common and common equivalent share:
Net income (loss)...................... 0.11 0.09 (0.12)
1995 QUARTERLY INFORMATION:
Net Sales................................. $513.0 $583.4 $550.3 $591.1
Gross profit.............................. 86.3 119.6 111.0 122.5
Operating income.......................... 32.6 63.6 53.2 61.2
Net income................................ 3.5 23.3 12.5 21.0
Per common and common equivalent share:
Net income (loss)...................... (0.03)(2) 0.31 0.13 0.26
1994 QUARTERLY INFORMATION:
Net sales................................. $415.1 $459.5 $461.1 $445.8
Gross profit.............................. 27.3 40.5 45.1 43.1
Operating income (loss)................... (25.6) (14.2) (6.9) (9.5)
Loss before extraordinary item............ (29.3) (23.6) (20.8) (27.7)(1)
Extraordinary loss-net.................... (5.4) -- -- --
Net loss.................................. (34.7) (23.6) (20.8) (27.7)(1)
PER COMMON AND COMMON EQUIVALENT SHARE:
Loss before extraordinary loss............ (0.58) (0.50) (0.45) (0.57)
Extraordinary loss-net.................... (0.09) -- -- --
Net loss.................................. (0.67) (0.50) (0.45) (0.57)
</TABLE>
- ---------------
(1) Includes pre-tax charges of approximately $10.3 and $10.8 principally
related to establishing additional litigation and environmental reserves in
the fourth quarters of 1994 and 1993, respectively.
(2) After deduction of $5.3 dividends on preferred stock from net income.
F-134
<PAGE> 330
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of MAXXAM Group Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM
Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.)
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and stockholder's equity (deficit) for each
of the three years in the period ended December 31, 1995. These financial
statements and the schedule referred to below 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 Group
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As explained in Notes 6 and 7 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
San Francisco, California
January 19, 1996
F-135
<PAGE> 331
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 48,396 $ 48,575
Marketable securities.............................................. 36,568 19,514
Receivables:
Trade........................................................... 20,576 23,170
Other........................................................... 1,624 7,435
Inventories........................................................ 77,904 70,098
Prepaid expenses and other current assets.......................... 7,101 3,717
--------- ---------
Total current assets....................................... 192,169 172,509
Timber and timberlands, net of depletion of $204,856 and $188,003 at
December 31, 1995 and 1994, respectively........................... 337,390 350,871
Property, plant and equipment, net................................... 100,142 103,183
Deferred financing costs, net........................................ 27,288 30,096
Deferred income taxes................................................ 58,485 61,498
Restricted cash...................................................... 31,367 32,402
Other assets......................................................... 5,542 6,122
--------- ---------
$ 752,383 $ 756,681
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................... $ 4,166 $ 3,703
Accrued interest................................................... 25,354 25,765
Accrued compensation and related benefits.......................... 9,611 10,622
Deferred income taxes.............................................. 10,244 12,986
Other accrued liabilities.......................................... 4,435 3,266
Long-term debt, current maturities................................. 14,195 13,670
--------- ---------
Total current liabilities.................................. 68,005 70,012
Long-term debt, less current maturities.............................. 764,310 768,786
Other noncurrent liabilities......................................... 33,813 30,365
--------- ---------
Total liabilities.......................................... 866,128 869,163
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $.08 1/3 par value; 1000 shares authorized; 100
shares issued................................................... -- --
Additional capital................................................. 81,287 81,287
Accumulated deficit................................................ (195,032) (193,769)
--------- ---------
Total stockholder's deficit................................ (113,745) (112,482)
--------- ---------
$ 752,383 $ 756,681
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE> 332
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net sales:
Lumber and logs......................................... $216,898 $227,430 $ 215,743
Other................................................... 25,694 22,199 17,696
-------- -------- ---------
242,592 249,629 233,439
-------- -------- ---------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation)........................................ 127,124 129,598 134,563
Selling, general and administrative..................... 15,884 16,250 20,108
Depletion and depreciation.............................. 26,405 25,946 25,811
-------- -------- ---------
169,413 171,794 180,482
-------- -------- ---------
Operating income.......................................... 73,179 77,835 52,957
Other income (expense):
Investment, interest and other income................... 9,393 14,367 9,718
Interest expense........................................ (77,824) (77,383) (80,339)
-------- -------- ---------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles........................ 4,748 14,819 (17,664)
Credit (provision) in lieu of income taxes................ (1,211) 3,616 3,355
-------- -------- ---------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of changes in
accounting principles................................... 3,537 18,435 (14,309)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes............. -- -- (512,970)
-------- -------- ---------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles.............. 3,537 18,435 (527,279)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312....................... -- (14,866) --
Loss on early extinguishment of debt, net of related
credit in lieu of income taxes of $8,856............. -- -- (17,189)
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of
related credit in lieu of income taxes of $1,566..... -- -- (2,348)
Accounting for income taxes............................. -- -- 14,916
-------- -------- ---------
Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE> 333
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation............................. 26,405 25,946 25,811
Amortization of deferred financing costs and discounts
on long-term debt.................................... 13,328 12,127 7,435
Net (purchases) sales of marketable securities......... (19,533) 5,321 12,389
Net losses (gains) on marketable securities............ (4,175) (1,669) (6,414)
Loss (income) from net assets transferred to MAXXAM,
net.................................................. -- -- 512,970
Extraordinary loss on early extinguishment of debt,
net.................................................. -- -- 17,189
Cumulative effect of changes in accounting principles,
net.................................................. -- -- (12,568)
Decrease (increase) in inventories, net of depletion... (7,695) 3,634 (2,077)
Increase (decrease) in accounts payable................ 463 832 471
Decrease (increase) in receivables..................... 5,778 (7,660) 7,558
Decrease (increase) in prepaids and other assets....... (3,384) (528) 212
Increase in accrued and deferred income taxes.......... 2,303 (3,815) (5,123)
Decrease in other liabilities.......................... 7,734 (2,283) (185)
Decrease in accrued interest........................... (411) (451) (7,284)
Other.................................................. 1,020 (86) 848
-------- -------- ---------
Net cash provided by operating activities......... 25,370 34,937 19,332
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate................. 2,500 -- --
Net proceeds from sale of assets.......................... 18 1,149 256
Capital expenditures...................................... (9,852) (11,322) (11,120)
Increase in net assets transferred to MAXXAM.............. -- -- (11,770)
-------- -------- ---------
Net cash used for investing activities............ (7,334) (10,173) (22,634)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on
long-term debt......................................... (14,300) (13,237) (716,551)
Net borrowings (payments) under revolving credit
agreements............................................. -- (2,900) 2,900
Incurrence of financing costs............................. (150) (213) (34,738)
Proceeds from issuance of long-term debt.................. -- -- 790,000
Restricted cash deposits, net............................. 1,035 1,160 (33,562)
Dividends paid............................................ (4,800) -- (20,000)
-------- -------- ---------
Net cash used for financing activities............ (18,215) (15,190) (11,951)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (179) 9,574 (15,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 48,575 39,001 54,254
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 48,396 $ 48,575 $ 39,001
======== ======== =========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable
securities............................................. $ (6,648) $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller................................................. 615 910 --
Net assets transferred to MAXXAM.......................... -- -- 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest................ $ 64,907 $ 65,707 $ 80,188
Income taxes paid (refunded).............................. (5,190) 1,170 46
Tax allocation payments to MAXXAM......................... -- 397 1,722
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE> 334
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED
($.08 1/3 ADDITIONAL EARNINGS
PAR) CAPITAL (DEFICIT) TOTAL
----------- ---------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance, January 1, 1993........................ $-- $ 81,257 $ 385,093 $ 466,350
Net loss...................................... -- -- (531,900) (531,900)
Dividend...................................... -- -- (20,000) (20,000)
Gain from issuance of Kaiser Aluminum
Corporation common stock................... -- 30 -- 30
Net assets transferred to MAXXAM.............. -- -- (30,531) (30,531)
--- ------- --------- ---------
Balance, December 31, 1993...................... -- 81,287 (197,338) (116,051)
Net income.................................... -- -- 3,569 3,569
--- ------- --------- ---------
Balance, December 31, 1994...................... -- 81,287 (193,769) (112,482)
Net income.................................... -- -- 3,537 3,537
Dividend...................................... -- -- (4,800) (4,800)
--- ------- --------- ---------
Balance, December 31, 1995...................... $-- $ 81,287 $(195,032) $(113,745)
=== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE> 335
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS 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 Group
Inc. ("MGI") and its subsidiaries, collectively referred to herein as the
"Company." MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
Intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.
The Company conducts its business primarily through the operations of its
subsidiaries. Prior to the Forest Products Group Formation (as defined below),
the Company operated in three industries: aluminum, through its majority owned
subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum
producer; forest products, through The Pacific Lumber Company ("Pacific Lumber")
and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real
estate management and development, through the Palmas del Mar development
located in Puerto Rico ("Palmas") which was owned by the Company's subsidiary,
MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the
consummation of the sale of the MGI Notes (as defined in Note 5), the Company
(i) transferred to MAXXAM 50 million common shares of Kaiser held by a
subsidiary of the Company, representing the Company's (and MAXXAM's) entire
interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of
MAXXAM common stock held by a subsidiary of the Company, (iii) transferred to
MAXXAM certain notes receivable, long-term investments, and other assets, each
net of related liabilities, collectively having a carrying value to the Company
of approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary
Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being
in satisfaction of a $15,000 promissory note evidencing a cash loan made by
MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed
approximately $17,500 of certain liabilities of the Company that were unrelated
to the Company's forest products operations or were related to operations which
have been disposed of by the Company. Additionally, on September 28, 1993, the
Company transferred to MAXXAM its interest in Palmas. The foregoing transactions
are collectively referred to as the "Forest Products Group Formation." The
Company presented the loss from net assets transferred to MAXXAM pursuant to the
Forest Products Group Formation (including certain allocated costs from MAXXAM
for general and administrative expenses unrelated to the Company's forest
products operations) in a manner similar to that which would have been presented
if the Company had discontinued the operations relating to such net assets. See
Note 2.
As a result of the Forest Products Group Formation, the Company is engaged
in forest products operations conducted through its wholly owned subsidiaries,
Pacific Lumber and Britt. Pacific Lumber is engaged in several principal aspects
of the lumber industry, including the growing and harvesting of redwood and
Douglas-fir timber, the milling of logs into lumber and the manufacture of
lumber into a variety of finished products. Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial portion of
which is obtained from Pacific Lumber. Housing, construction and remodeling are
the principal markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest product sales. A significant portion of forest
product sales are made to third parties located west of the Mississippi river.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with
F-140
<PAGE> 336
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent resolution
of any one of the contingent matters described in Note 9 could differ materially
from current estimates. The results of an adverse resolution of such
uncertainties could have a material effect on the reported amounts of the
Company's consolidated assets and liabilities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, 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. Included in investment, interest and other
income for each of the three years ended December 31, 1995 were: 1995 -- net
unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net
unrealized holding losses of $1,094 and net realized gains of $2,763; and
1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized
losses and net unrealized gains of $841. 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 is primarily
determined using the last-in, first-out ("LIFO") method.
Timber and Timberlands
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is stated at
cost, net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
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
Restricted cash represents the amount initially deposited into an account
(the "Liquidity Account") held by the trustee under the indenture governing the
7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific
Lumber. See Note 5. The Liquidity Account is not available, except under certain
limited circumstances, for Scotia
F-141
<PAGE> 337
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Pacific's working capital purposes; however, it is available to pay the Rated
Amortization (as defined in Note 5) and interest on the Timber Notes if and to
the extent that cash flows are insufficient to make such payments. The required
Liquidity Account balance will generally decline as principal payments are made
on the Timber Notes. Investment, interest and other income for the years ended
December 31, 1995, 1994 and 1993 includes interest of approximately $2,560,
$2,638 and $2,101, respectively, attributable to an investment rate agreement
(at 7.95% per annum) with the financial institution which holds the Liquidity
Account.
At December 31, 1995 and 1994, cash and cash equivalents include $19,742
and $19,439, respectively, (the "Payment Account") which is reserved for debt
service payments on the Timber Notes (see Note 5). The Payment Account and the
Liquidity Account are each 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.
Stockholder's Equity (Deficit)
The adjustment to the Company's additional capital for the year ended
December 31, 1993 resulted from a transaction relating to Kaiser's common stock
prior to the Forest Products Group Formation. Pursuant to the terms of an
amended compensation plan, Kaiser issued 4,228 shares to certain members of its
management in 1993. As a result of this transaction, the Company's equity in
Kaiser's net assets differed from the Company's historical cost. The Company
accounted for this difference as an adjustment to additional capital.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the Timber Notes, the 10 1/2%
Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior
Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured
Discount Notes due 2003 (the "MGI Discount Notes"), and on the current rates
offered for borrowings similar to the other debt. The Timber Notes, the Pacific
Lumber Senior Notes, the MGI Senior Notes and the MGI Discount Notes are thinly
traded financial instruments; accordingly, their market prices at any balance
sheet date may not be representative of the prices which would be derived from a
more active market.
The estimated fair values of the Company's financial instruments, along
with the carrying amounts of the related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575
Marketable securities (held for trading
purposes)............................... 36,568 36,568 19,514 19,514
Restricted cash........................... 31,367 31,367 32,402 32,402
Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
</TABLE>
F-142
<PAGE> 338
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
2. NET ASSETS TRANSFERRED TO MAXXAM
As a result of the Forest Products Group Formation (as described in Note
1), the Company transferred all of its interest in Kaiser's common stock, the
assets and related liabilities of Palmas, and certain other net assets that were
unrelated to the Company's forest products operations, to MAXXAM. The Company
did not incur any gain or loss relating to the transfer of such assets and
liabilities to MAXXAM.
The net loss from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1993
------------
<S> <C>
Net sales:
Aluminum operations................................................... $1,016,966
Real estate and other................................................. 19,654
----------
1,036,620
----------
Costs and expenses:
Aluminum operations................................................... 1,091,353
Real estate and other................................................. 28,132
----------
1,119,485
----------
Loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles................. (82,865)
Credit for income taxes................................................. 31,050
Minority interests...................................................... 3,641
----------
Loss before extraordinary item and cumulative effect of changes in
accounting principles................................................. (48,174)
Extraordinary item:
Loss on redemption of debt, net of related benefits for income taxes
and minority interests of $11,249 and $2,791, respectively......... (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of related benefits
for income taxes and minority interests of $237,682 and $64,554,
respectively....................................................... (440,519)
Accounting for income taxes........................................... (5,232)
----------
Loss from net assets transferred to MAXXAM.............................. $ (512,970)
==========
</TABLE>
F-143
<PAGE> 339
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Net assets transferred to MAXXAM are as follows as of the date of transfer:
<TABLE>
<S> <C>
Current assets:
Aluminum operations.................................................... $ 780,791
Real estate and other.................................................. 16,480
----------
797,271
----------
Current liabilities:
Aluminum operations.................................................... 477,805
Real estate and other.................................................. 28,853
----------
506,658
----------
Net current assets....................................................... 290,613
----------
Non-current assets:
Aluminum operations.................................................... 1,722,362
Real estate and other.................................................. 56,422
----------
1,778,784
----------
Non-current liabilities:
Aluminum operations.................................................... 1,790,946
Minority interests in aluminum operations.............................. 221,907
Real estate and other.................................................. 26,013
----------
2,038,866
----------
Net assets transferred to MAXXAM......................................... $ 30,531
==========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Lumber........................................................... $59,563 $55,310
Logs............................................................. 18,341 14,788
------- -------
$77,904 $70,098
======= =======
</TABLE>
During 1993, Pacific Lumber's inventory quantities were reduced. This
reduction resulted in the liquidation of Pacific Lumber's LIFO inventory
quantities carried at prevailing costs from prior years which were higher than
the current cost of inventory. The effect of this inventory liquidation
increased cost of goods sold by approximately $222 for the year ended December
31, 1993.
F-144
<PAGE> 340
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Logging roads, land and improvements............. 15 years $ 7,929 $ 7,545
Buildings........................................ 33 years 29,661 28,209
Machinery and equipment.......................... 5 - 15 years 129,764 126,480
Construction in progress......................... 520 30
-------- --------
167,874 162,264
Less: accumulated depreciation................... (67,732) (59,081)
-------- --------
$100,142 $103,183
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $9,663, $9,269 and $8,670, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015......................................................... $350,233 $363,811
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount.............................................. 92,498 82,779
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000
Other.......................................................... 774 866
-------- --------
778,505 782,456
Less: current maturities....................................... (14,195) (13,670)
-------- --------
$764,310 $768,786
======== ========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber
Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary,
issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific 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) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A
Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes"), and (c) $41,750 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; (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility
loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi)
pay a $25,000 dividend to a subsidiary of the Company. These transactions
resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the
payment of premiums and the write-off of unamortized deferred financing costs on
the Old Pacific Lumber Securities.
F-145
<PAGE> 341
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179,364 of the
Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's
contract rights and certain other assets, (iii) the funds deposited in the
Payment Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
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 Scotia Pacific 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 Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific must pay through each Timber Note payment date in order to avoid
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 Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Substantially all of the Company's consolidated assets are owned by Pacific
Lumber and a significant portion of Pacific Lumber's assets are owned by Scotia
Pacific. The Company expects that Pacific Lumber will provide a major portion of
the Company's future operating cash flow. Pacific Lumber is dependent upon
Scotia Pacific 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 flows of Scotia Pacific, and the holders of
the Pacific Lumber Senior Notes have priority over the claims and creditors of
the Company with respect to the assets and cash flows of Pacific Lumber. Under
the terms of the Timber Note Indenture, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific'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.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, 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.
Pacific Lumber has a revolving credit agreement with a bank (as amended and
restated, the "Revolving Credit Agreement") which expires on May 31, 1998.
Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's
trade receivables and inventories, with interest computed at the bank's
reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The
Revolving Credit Agreement provides for borrowings of up to $60,000, of which
$15,000 may be used for standby letters of credit and $30,000 is restricted to
timberland acquisitions. Borrowings made pursuant to the portion of the credit
facility restricted to timberland
F-146
<PAGE> 342
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisitions would also be secured by the purchased timberlands. As of December
31, 1995, $48,090 of borrowings was available under the Revolving Credit
Agreement, of which $3,090 was available for letters of credit and $30,000 was
restricted to timberland acquisitions. No borrowings were outstanding as of
December 31, 1995, and letters of credit outstanding amounted to $11,910. The
Revolving Credit Agreement contains covenants substantially similar to those
contained in the indenture governing the Pacific Lumber Senior Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes
and the Revolving Credit Agreement contain various covenants which, among other
things, limit the payment of dividends and restrict transactions between Pacific
Lumber and its affiliates. As of December 31, 1995, under the most restrictive
of these covenants, approximately $15,663 of dividends could be paid by Pacific
Lumber.
On August 4, 1993, the Company issued $100,000 aggregate principal amount
of the MGI Senior Notes and $126,720 aggregate principal amount (approximately
$70,000 net of original issue discount) of 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 the Company's pledge of 100% of the common
stock of Pacific Lumber, Britt and MPI, and by MAXXAM'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 the Company to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments. As of December
31, 1995, under the most restrictive of these covenants, approximately $1,899 of
dividends could be paid by the Company, of which $1,600 was paid in January
1996. The MGI Notes are senior indebtedness of the Company; however, they are
effectively subordinate to the liabilities of the Company's subsidiaries, which
include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount
Notes are net of discount of $33,222 and $43,941 at December 31, 1995 and 1994,
respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.
The Company 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. The
Company 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 $20,000
dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993,
$20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes
due 2000 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 of $9,677 consisting of net interest cost of
$3,763, the write-off of $3,472 of unamortized deferred financing costs, a
premium of $1,500 and the write-off of $942 of unamortized original issue
discount.
F-147
<PAGE> 343
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Maturities
The following table of scheduled maturities of long-term debt outstanding
at December 31, 1995 reflects Scheduled Amortization with respect to the Timber
Notes:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
7.95% Scotia Pacific Timber
Collateralized Notes........... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009
11 1/4% MGI Senior Secured
Notes.......................... -- -- -- -- -- 100,000
12 1/4% MGI Senior Secured
Discount Notes................. -- -- -- -- -- 125,720
10 1/2% Pacific Lumber Senior
Notes.......................... -- -- -- -- -- 235,000
Other............................ 92 93 94 94 95 306
------- ------- ------- ------- ------- --------
$14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035
======= ======= ======= ======= ======= ========
</TABLE>
Restricted Net Assets of Subsidiaries
At December 31, 1995, certain debt instruments restricted the ability of
Pacific Lumber to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 1995, all of the assets of Pacific Lumber and
its subsidiaries are subject to such restrictions.
6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes. Prior to August 4, 1993, the
Company and each of its subsidiaries computed their tax liabilities or tax
benefits on a separate company basis (except as discussed in the following
paragraph), in accordance with their respective tax allocation agreements with
MAXXAM.
Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation
agreement that, among other things, amended the tax calculations with respect to
Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms
of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the
federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and
certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. The PL
Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed on a separate company basis as if
it was never connected with MAXXAM. The remaining subsidiaries of MGI are each
liable to MAXXAM for their respective income tax liabilities computed on a
separate company basis as if they were never connected with MAXXAM, pursuant to
their respective tax allocation agreements.
MGI's tax allocation agreement with MAXXAM, (as amended on August 4, 1993,
the "Tax Allocation Agreement"), provides that the Company's federal income tax
liability is computed as if MGI files a consolidated tax return with all of its
subsidiaries except Salmon Creek, and that such corporations were never
connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income
tax liability of MGI is the difference between (i) the MGI Consolidated Tax
Liability and (ii) the sum of the separate tax liabilities for the Company's
subsidiaries (computed as discussed above), but excluding Salmon Creek. To the
F-148
<PAGE> 344
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
extent that the MGI Consolidated Tax Liability is less than the aggregate
amounts in (ii), MAXXAM is obligated to pay the amount of such difference to
MGI.
The credit (provision) in lieu of income taxes on income (loss) from
continuing operations before income taxes, extraordinary items and cumulative
effect of changes in accounting principles consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes... $ (167) $ -- $ (988)
State and local...................................... (35) (55) (253)
------- ------ -------
(202) (55) (1,241)
------- ------ -------
Deferred:
Federal credit (provision) in lieu of income taxes... (33) 2,366 4,825
State and local...................................... (976) 1,305 (229)
------- ------ -------
(1,009) 3,671 4,596
------- ------ -------
$(1,211) $3,616 $ 3,355
======= ====== =======
</TABLE>
The 1994 deferred federal credit in lieu of income taxes of $2,366 includes
a credit relating to reserves the Company no longer believes are necessary. The
1993 deferred federal credit in lieu of income taxes of $4,825 includes $2,601
for the benefit of operating loss carryforwards generated in 1993 and includes
an $850 benefit for increasing net deferred income tax assets (liabilities) as
of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation
Act of 1993 which retroactively increased the federal statutory income tax rate
from 34% to 35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) in lieu of income taxes and
the amount computed by applying the federal statutory income tax rate to income
(loss) from continuing operations before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations before
income taxes, extraordinary items and cumulative
effect of changes in accounting principles......... $ 4,748 $14,819 $(17,664)
======= ======= ========
Amount of federal income tax based upon the
statutory rate..................................... $(1,662) $(5,187) $ 6,182
Revision of prior years' tax estimates and other
changes in valuation allowances.................... 907 7,739 (3,468)
Increase in net deferred income tax assets due to tax
rate change ....................................... -- -- 850
State and local taxes, net of federal tax benefit.... (657) 812 (313)
Other................................................ 201 252 104
------- ------- --------
$(1,211) $ 3,616 $ 3,355
======= ======= ========
</TABLE>
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1994, the Company recorded an extraordinary loss related to the
settlement of litigation in connection with the
F-149
<PAGE> 345
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Company's acquisition of Pacific Lumber (see Note 9). The Company reported the
loss net of related deferred income taxes of $6,312 which is less than the
federal and state statutory income tax rates due to expenses for which no tax
benefit was recognized.
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 income taxes of $8,856 which approximated the federal statutory income
tax rate in effect on the dates the transactions occurred.
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 changed the Company's method of accounting for income taxes
to an asset and liability approach from the deferral method prescribed by APB
11. 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 $14,916. 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 Pacific Lumber in 1986 and Britt in 1990. As a result of restating these
assets and liabilities, the loss from continuing operations before income taxes,
extraordinary item and cumulative effect of changes in accounting principles for
the year ended December 31, 1993 was decreased by $377.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards................................ $ 83,705 $ 86,864
Timber and timberlands....................................... 32,528 37,209
Other liabilities............................................ 17,203 10,460
Postretirement benefits other than pensions.................. 2,316 2,145
Other........................................................ 327 1,818
Valuation allowances......................................... (51,595) (52,060)
-------- --------
Total deferred income tax assets, net................ 84,484 86,436
-------- --------
Deferred income tax liabilities:
Inventories.................................................. (16,068) (17,934)
Property, plant and equipment................................ (16,560) (16,563)
Other........................................................ (3,615) (3,427)
-------- --------
Total deferred income tax liabilities................ (36,243) (37,924)
-------- --------
Net deferred income tax assets................................. $ 48,241 $ 48,512
======== ========
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards. As of December 31, 1995, approximately $32,528 of the net
deferred income tax assets listed above relate to the excess of the tax basis
over financial statement basis with respect to timber and timberlands. The
Company believes that it is more likely than not that this net deferred income
tax asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis. Also included
in net deferred income tax assets as of December 31, 1995 is $32,110 which
relates to the benefit of loss and credit
F-150
<PAGE> 346
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
carryforwards, net of valuation allowances. The Company evaluated all
appropriate factors to determine the proper valuation allowances for loss and
credit carryforwards. These factors included any limitations concerning use of
the carryforwards, the year the carryforwards expire and the levels of taxable
income necessary for utilization. The Company has concluded that it 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.
Included in the net deferred income tax assets listed above are $43,731 and
$44,351 at December 31, 1995 and 1994, respectively, which are recorded pursuant
to the tax allocation agreements with MAXXAM.
The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
1995, under the terms of the respective tax allocation agreements. The
utilization of certain of these attributes is subject to limitations.
<TABLE>
<CAPTION>
EXPIRING
THROUGH
-------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses.................................................. $224,485 2010
Net capital losses.................................................... 5,177 1997
Minimum tax credit.................................................... 167 --
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses.................................................. $185,803 2010
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by The Employee Retirement Income Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year................ $ 1,483 $1,643 $ 1,600
Interest cost on projected benefit obligation.................. 1,693 1,263 918
Actual loss (gain) on plan assets.............................. (3,900) 10 (2,128)
Net amortization and deferral.................................. 2,460 (859) 1,359
------- ------ -------
Net periodic pension cost...................................... $ 1,736 $2,057 $ 1,749
======= ====== =======
</TABLE>
F-151
<PAGE> 347
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation.................................... $ 16,910 $ 11,809
Non-vested benefit obligation................................ 1,214 779
-------- --------
Total accumulated benefit obligation................. $ 18,124 $ 12,588
======== ========
Projected benefit obligation................................... $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt
securities................................................... (18,363) (13,184)
-------- --------
Projected benefit obligation in excess of plan assets.......... 3,478 1,863
Unrecognized net transition asset.............................. 24 29
Unrecognized net gain (loss)................................... (27) 1,475
Unrecognized prior service cost................................ (45) (50)
-------- --------
Accrued pension liability............................ $ 3,430 $ 3,317
======== ========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.25% 8.5% 7.5%
Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
</TABLE>
The Company has an unfunded defined benefit plan for certain postretirement
and other benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
termination of employment and retirement and commencement of pension benefits.
Participants make contributions for a portion of the cost of their health care
benefits.
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are 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 $2,348, net of related income taxes of $1,566. The
deferred income tax benefit related to the adoption of SFAS 106 was recorded at
the federal and state statutory rates in effect on the date SFAS 106 was
adopted.
A summary of the components of net periodic postretirement benefit cost is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $228 $216 $153
Interest cost on accumulated postretirement benefit
obligation.................................................. 317 294 315
Net amortization and deferral................................. (53) (7) --
---- ---- ----
Net periodic postretirement benefit cost...................... $492 $503 $468
==== ==== ====
</TABLE>
F-152
<PAGE> 348
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The adoption of SFAS 106 increased the Company's loss from continuing
operations before extraordinary item and cumulative effect of changes in
accounting principles by $212 ($360 before tax) for the year ended December 31,
1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $ 634 $ 860
Actives eligible for benefits...................................... 726 656
Actives not eligible for benefits.................................. 3,317 2,355
------ ------
Accumulated postretirement benefit obligation.................... 4,677 3,871
Unrecognized net gain.............................................. 553 972
------ ------
Postretirement benefit liability................................. $5,230 $4,843
====== ======
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to
decrease gradually to 5.5% in 2008 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,
1995 by approximately $674 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by approximately $90.
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994,
respectively.
Subsequent to December 31, 1993, Pacific Lumber's employees were eligible
to participate in a defined contribution savings plan sponsored by MAXXAM. This
plan is designed to enhance the existing retirement programs of participating
employees. 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, Pacific Lumber's contributions consist of a matching
contribution of up to 4% of the compensation of participants for each calendar
quarter. The cost to the Company of this plan was $1,281 and $1,215 for the
years ended December 31, 1995 and 1994, respectively.
Pacific Lumber is self-insured for workers' compensation benefits. Included
in accrued compensation and related benefits and other noncurrent liabilities
are accruals for workers' compensation claims amounting to $8,900 and $9,233 at
December 31, 1995 and 1994, respectively. Workers' compensation expenses
amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995,
1994 and 1993, respectively.
8. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting and data processing services. In addition, MAXXAM provides the
Company with office space and various office personnel, insurance, legal,
operating, financial and certain other services. MAXXAM's expenses incurred on
behalf of the Company are reimbursed by the Company through payments consisting
of (i) an allocation of the lease expense for the office space utilized by or on
behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses
incurred by MAXXAM, including, but not limited to, labor costs of MAXXAM
personnel rendering services to the Company. Charges by MAXXAM for such services
were $1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and
1993, respectively. The Company
F-153
<PAGE> 349
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
believes that the services being rendered are on terms not less favorable to the
Company than those which would be obtainable from unaffiliated third parties.
In 1994, in connection with the litigation settlement described in Note 9,
Pacific Lumber paid approximately $3,185 to a law firm in which a director of
Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately
$1,931 in connection with the offering of the Pacific Lumber Senior Notes and
the Timber Notes to this same law firm.
9. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against MAXXAM, the Company,
Pacific Lumber, former directors of Pacific Lumber and others concerning the
Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was
paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by
Pacific Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. In 1994, the Company recorded an extraordinary
loss of $14,866 related to the settlement and associated costs, including a
$2,000 accrual for certain contingent claims and $4,400 of related legal fees,
net of benefits for federal and state income taxes of $6,312.
The Company's operations are subject to a variety of California and federal
laws and regulations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality. The Company does not expect that
compliance with such existing laws and regulations will have a material adverse
effect on its future consolidated operating results, financial position or
liquidity; however, these laws are modified from time to time and there can be
no assurance that certain pending or future legislation, governmental
regulations or judicial or administrative decisions would not adversely affect
the Company or its ability to sell lumber, logs or timber.
In 1995, the U.S. Fish and Wildlife Service (the "USFWS") published its
proposed final designation of critical habitat for the marbled murrelet (the
"Proposed Designation"), seeking to designate over four million acres as
critical habitat for the marbled murrelet, including approximately 33,000 acres
of Pacific Lumber's timberlands. The Proposed Designation was subject to a
60-day comment period and Pacific Lumber filed comments vigorously opposing the
Proposed Designation. The USFWS has not yet published its final designation of
critical habitat for the marbled murrelet. Pacific Lumber is unable to predict
when or if it would be able to harvest on any acreage finally designated as
critical habitat. Furthermore, it is impossible to determine the future adverse
impact of such designation on the Company's consolidated financial position,
results of operations or liquidity until such time as the Proposed Designation
is finalized and related regulatory and legal issues are fully resolved.
However, if Pacific Lumber is unable to harvest, or is severely limited in
harvesting, on timberlands designated as marbled murrelet critical habitat, such
restrictions could have a material adverse effect on the Company's liquidity,
consolidated financial position and results of operations. If Pacific Lumber is
unable to harvest or is severely limited in harvesting, it intends to seek full
compensation from the appropriate governmental agencies on the grounds that such
restrictions constitute a taking.
There continue to be other regulatory actions and lawsuits seeking to have
various other species listed as threatened or endangered under the federal
Endangered Species Act and/or the California Endangered Species Act and to
designate critical habitat for such species. It is uncertain what impact, if
any, such listings and/or designations of critical habitat will have on the
Company's consolidated financial position, results of operations or liquidity.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require timber companies to project the average annual growth
they will have on their timberlands during the last decade of a 100-year
planning period
F-154
<PAGE> 350
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
("Projected Annual Growth"). During any rolling ten-year period, the average
annual harvest over such ten-year period may not exceed Projected Annual Growth.
The first ten-year period began in May 1994. Pacific Lumber is required to
submit, by October 1996, a plan setting forth, among other things, its Projected
Annual Growth. Pacific Lumber has not completed its analysis of the projected
productivity of its timberlands and is therefore unable to predict the impact
that these regulations will have on its future timber harvesting practices;
however, the final results of this analysis could require Pacific Lumber to
reduce (or permit it to increase) its timber harvest in future years from the
average annual harvest that it has experienced in recent years. Pacific Lumber
believes that it would be able to mitigate the effect of any required reduction
in harvest level by acquisitions of additional timberlands and by increasing the
productivity of its timberlands. The Company is unable to predict the ultimate
impact the sustained yield regulations will have on its future consolidated
financial position, results of operations or liquidity.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs"), and the Company expects that such groups and individuals will
continue to file objections to certain of the Company's THPs. In addition,
lawsuits are pending which seek to prevent the Company from implementing certain
of its approved THPs and other timber operations. These challenges have severely
restricted Pacific Lumber's ability to harvest virgin old growth redwood timber
on its property (and, to a lesser extent, its residual old growth timber). To
date, challenges with respect to the Company's THPs relating to young growth and
residual old growth have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from conducting a
portion of its operations, to date such challenges have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. It is, however, impossible to predict the future nature
or degree of such challenges or their ultimate impact on the consolidated
financial position, results of operations or liquidity of the Company.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate 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 on the Company's consolidated
financial position, results of operations or liquidity.
10. OTHER ITEMS
Investment, Interest and Other Income
In February 1994, Pacific Lumber received a franchise tax refund of $7,243,
the substantial portion of which represents interest, from the State of
California relating to tax years 1972 through 1985. This amount is included in
investment, interest and other income for the year ended December 31, 1994.
Items Related to 1992 Earthquake
In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of
$1,527 and $1,200, respectively, resulting from business interruption insurance
reimbursements for higher operating costs and the related loss of revenues
resulting from the April 1992 earthquake. Other receivables at December 31, 1994
included $1,684 related to earthquake related insurance claims.
F-155
<PAGE> 351
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 53,122 $ 48,396
Marketable securities............................................ 31,852 36,568
Receivables:
Trade......................................................... 11,466 20,576
Other......................................................... 2,429 1,624
Inventories...................................................... 74,836 77,904
Prepaid expenses and other current assets........................ 5,612 7,101
------------- ------------
Total current assets..................................... 179,317 192,169
Timber and timberlands, net of depletion of $217,507 and $204,856
at September 30, 1996 and December 31, 1995, respectively........ 326,486 337,390
Property, plant and equipment, net of accumulated depreciation of
$74,321 and $67,732 at September 30, 1996 and December 31, 1995,
respectively..................................................... 100,422 100,142
Deferred financing costs, net...................................... 24,996 27,288
Deferred income taxes.............................................. 56,747 58,485
Restricted cash.................................................... 30,453 31,367
Other assets....................................................... 5,843 5,542
------------- ------------
$ 724,264 $ 752,383
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................. $ 5,436 $ 4,166
Accrued compensation and related benefits........................ 9,791 9,611
Accrued interest................................................. 9,217 25,354
Deferred income taxes............................................ 10,244 10,244
Other accrued liabilities........................................ 3,828 4,435
Long-term debt, current maturities............................... 16,258 14,195
------------- ------------
Total current liabilities................................ 54,774 68,005
Long-term debt, less current maturities............................ 756,619 764,310
Other noncurrent liabilities....................................... 26,518 33,813
------------- ------------
Total liabilities........................................ 837,911 866,128
------------- ------------
Contingencies
Stockholder's deficit:
Common stock, $.08 1/3 par value; 1,000 shares authorized; 100
shares issued................................................. -- --
Additional capital............................................... 81,287 81,287
Accumulated deficit.............................................. (194,934) (195,032)
------------- ------------
Total stockholder's deficit.............................. (113,647) (113,745)
------------- ------------
$ 724,264 $ 752,383
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE> 352
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales:
Lumber and logs...................................................... $183,913 $161,151
Other................................................................ 15,667 19,761
-------- --------
199,580 180,912
-------- --------
Operating expenses:
Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997
Selling, general and administrative expenses......................... 11,344 12,243
Depletion and depreciation........................................... 21,008 19,785
-------- --------
146,969 128,025
-------- --------
Operating income....................................................... 52,611 52,887
Other income (expense):
Investment, interest and other income................................ 8,377 6,835
Interest expense..................................................... (58,388) (58,228)
-------- --------
Income (loss) before income taxes...................................... 2,600 1,494
Credit (provision) in lieu of income taxes............................. 1,398 (466)
-------- --------
Net income (loss)...................................................... $ 3,998 $ 1,028
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE> 353
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 3,998 $ 1,028
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion and depreciation......................................... 21,008 19,785
Amortization of deferred financing costs and discounts on long-term
debt.............................................................. 10,815 9,772
Decrease in receivables............................................ 11,478 12,683
Net sales (purchases) of marketable securities..................... 8,351 (10,542)
Decrease (increase) in inventories, net of depletion............... 1,588 (6,067)
Increase in accounts payable....................................... 1,270 853
Decrease (increase) in prepaid expenses and other current assets... 1,188 (1,132)
Decrease in accrued interest....................................... (16,137) (16,330)
Increase (decrease) in other liabilities........................... (8,729) 9,618
Net gains on marketable securities................................. (3,635) (2,362)
Decrease (increase) in accrued and deferred income taxes........... (428) 256
Other.............................................................. (28) 465
-------- --------
Net cash provided by operating activities..................... 30,739 18,027
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............................. -- 2,500
Net proceeds from sale of assets...................................... 110 9
Capital expenditures.................................................. (8,986) (6,624)
-------- --------
Net cash used for investing activities........................ (8,876) (4,115)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net...................................... 914 563
Repurchase of and principal payments on long-term debt................ (14,151) (14,256)
Dividends paid........................................................ (3,900) (4,800)
-------- --------
Net cash used for financing activities........................ (17,137) (18,493)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 4,726 (4,581)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 48,396 48,575
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 53,122 $ 43,994
======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities......... $ - $ 6,648
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest............................ $ 63,710 $ 64,786
Tax allocation payments to (receipts from) MAXXAM Inc., net........... 167 --
Income taxes paid (refunded).......................................... (1,549) (5,461)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE> 354
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the Audited
Consolidated Financial Statements of MAXXAM Group Inc. and the Notes thereto
contained elsewhere herein. Any capitalized terms used but not defined in the
following Condensed Notes to Consolidated Financial Statements have the same
meaning given to them in the Audited Consolidated Financial Statement of MAXXAM
Group Inc. All references to the "Company" include MAXXAM Group Inc. and its
subsidiary companies unless otherwise noted or the context indicates otherwise.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation. The Company is a wholly owned subsidiary of MAXXAM
Inc. ("MAXXAM").
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account held by the
Trustee under the indenture governing the Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5,676 and $19,742, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Lumber...................................................... $52,824 $ 59,563
Logs........................................................ 22,012 18,341
------- -------
$74,836 $ 77,904
======= =======
</TABLE>
F-159
<PAGE> 355
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015............................................. $ 336,130 $350,233
10 1/2% Pacific Lumber Senior Notes due March 1, 2003....... 235,000 235,000
11 1/4% MGI Senior Secured Notes due August 1, 2003......... 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount..................................... 101,021 92,498
Other....................................................... 726 774
-------- --------
772,877 778,505
Less: current maturities.................................... (16,258) (14,195)
-------- --------
$ 756,619 $764,310
======== ========
</TABLE>
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The credit in lieu of income taxes for the nine months ended September 30,
1996 includes a benefit of $2,620 relating to the refund of taxes previously
paid in connection with a settlement of certain federal income tax matters in
June 1996. The Company received the cash refund in August 1996.
6. CONTINGENCIES
The Company's forest products operations are primarily conducted by The
Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
endangered species and critical habitat, and air and water quality. While the
Company does not expect that Pacific Lumber's compliance with such existing laws
and regulations will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity, Pacific
Lumber is subject to certain pending matters described below, including the
resolution of issues relating to the final designation of critical habitat for
the marbled murrelet, which could have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Moreover, the laws and regulations relating to the Company's forest products
operations are modified from time to time and are subject to judicial and
administrative interpretation. There can be no assurance that certain pending or
future governmental regulations, legislation or judicial or administrative
decisions would not materially and adversely affect Pacific Lumber or its
ability to harvest timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation")
F-160
<PAGE> 356
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
alleging that certain portions of its timberlands have been "taken" and seeking
just compensation. Pursuant to the Headwaters Agreement described in Note 7
below (the "Headwaters Agreement"), the Takings Litigation has been stayed by
the court at the request of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 7 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
a multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require the projected harvest by timber companies, over time,
be capable of sustaining the average annual yield achieved during the last
decade of the planning horizon, which is currently a 100-year planning period
("Projected Annual Growth"). During any rolling ten-year period, the average
annual harvest over such ten-year period may not exceed Projected Annual Growth.
The regulatory deadline for Pacific Lumber to submit a proposed sustained yield
plan ("SYP") setting forth, among other things, its Projected Annual Growth is
November 15, 1996. However, the BOF has adopted and sent to the Office of
Administrative Law for its consideration a regulation to extend the deadline to
November 15, 1997. This review is expected to be completed in the near future.
Pacific Lumber has not completed its analysis of the projected productivity of
its timberlands (including enhancements to productivity which could be achieved
by a variety of methods). Until an SYP is submitted, reviewed and fully
approved, Pacific Lumber is unable to predict the impact that these regulations
will have on its future timber harvesting practices; however, it is possible
that the final results of this analysis could require Pacific Lumber to reduce
its timber harvest in future years from the average annual harvest that it has
experienced in recent years. Pacific Lumber believes it would be able to
mitigate the effect of any required reduction in harvest level by acquisitions
of additional timberlands, although there can be no assurance that it would be
able to do so. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position, results
of operations or liquidity. See Note 7 below for a description of certain terms
of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs") and other timber harvesting operations, and the Company expects
that such groups and individuals will continue to file such objections to
certain of the Company's THPs and other timber harvesting operations. In
addition, lawsuits are pending and/or threatened which seek to prevent the
Company from implementing certain of its approved THPs and/or which challenge
other operations by the Company. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth timber
have been limited; however, no assurance can be given as to the extent of such
challenges in the
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MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
future. The Company believes that environmentally focused challenges to its
timber harvesting operations are likely to occur in the future, particularly
with respect to virgin and residual old growth timber. Although such challenges
have delayed or prevented the Company from conducting a portion of its
operations, they have not had a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the Company's consolidated financial
position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate 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 on the Company's consolidated financial position,
results of operations or liquidity.
7. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
F-162
<PAGE> 358
MAXXAM GROUP INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.................................... $ 59.8 $ 71.3 $ 68.5
Gross profit................................. 26.7 29.9 28.4
Operating income............................. 16.4 19.0 17.2
Net income................................... .1 3.9 0
1995 QUARTERLY INFORMATION:
Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7
Gross profit................................. 22.5 32.6 29.8 30.6
Operating income............................. 12.4 21.8 18.7 20.3
Net income (loss)............................ (3.3) 3.2 1.1 2.5
1994 QUARTERLY INFORMATION:
Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2
Gross profit................................. 23.6 31.9 29.1 35.4
Operating income............................. 13.2 22.6 19.4 22.6
Income before extraordinary item............. 1.0 3.1 8.3 6.0
Extraordinary item -- net.................... -- (14.9) -- --
Net income (loss)............................ 1.0 (11.7) 8.3 6.0
</TABLE>
F-163
<PAGE> 359
===============================================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Mail:
FIRST BANK NATIONAL ASSOCIATION
180 E. 5TH STREET
ST. PAUL, MINNESOTA 55101
ATTENTION: RICHARD PROKOSCH,
TRUST OFFICER
By Hand/Overnight Express:
FIRST BANK NATIONAL ASSOCIATION
180 E. 5TH STREET
ST. PAUL, MINNESOTA 55101
ATTENTION: RICHARD PROKOSCH,
TRUST OFFICER
Facsimile Transmission:
(612) 244-0711
To confirm receipt:
(612) 244-0721
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL)
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
===============================================================================
===============================================================================
OFFER TO EXCHANGE ALL OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
($130,000,000 PRINCIPAL AMOUNT) FOR
12% SERIES B SENIOR SECURED NOTES DUE 2003.
MAXXAM GROUP
HOLDINGS INC.
------------------------
PROSPECTUS
------------------------
, 1997
===============================================================================
<PAGE> 360
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MAXXAM Group Holdings Inc. (the "Company"), and MAXXAM Inc. (collectively,
with the Company, the "Registrants") are Delaware corporations. Reference is
made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"),
which enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions), or (iv) for any transaction from which the director derived an
improper personal benefit. The certificates of incorporation of each of the
Registrants contain provisions permitted by Section 102(b)(7) of the DGCL.
Reference also is made to Section 145 of the DGCL which provides that a
corporation may indemnify any person, including officers and directors, who was
or is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise, if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. A Delaware corporation may indemnify its officers, directors,
employees and agents in an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer, director, employee or agent is adjudged to be
liable to the corporation. Where an officer, director, employee or agent is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer, director, employee or agent actually and reasonably incurred in
connection therewith.
The certificates of incorporation and by-laws of each of the Registrants
provide for indemnification of their respective directors, officers and
employees to the fullest extent authorized by law.
Subject to certain limitations and exceptions, each of the Registrants has
insurance coverage for losses by any person who is or hereafter may be a
director or officer of such Registrant arising from claims against that person
for any wrongful act in his capacity as a director or officer of such Registrant
or any of its subsidiaries. The policy also provides for reimbursement to the
Registrants for indemnification given by the Registrants pursuant to common or
statutory law or certificates of incorporation or by-laws to any such person
arising from any such claims.
The foregoing discussion is qualified in its entirety by reference to the
DGCL, and the referenced certificates of incorporation and by-laws.
II-1
<PAGE> 361
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
*3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the
Company" or "MGHI"), dated November 4, 1996.
*3.2 -- By-laws of MGHI, dated November 4, 1996.
3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"),
dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1
to MAXXAM's Annual Report on Form 10-K for the year ended December
31, 1989; the "MAXXAM 1989 Form 10-K").
3.4 -- Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and Other Rights of MAXXAM's Class B Junior
Participating Preference Stock (incorporated herein by reference to
Exhibit 3.2 to the MAXXAM 1989 Form 10-K).
3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock of MAXXAM, dated July 6,
1994 (incorporated herein by reference to Exhibit 4(c) to the
Registration Statement of MAXXAM on Form S-8, Registration No.
33-54479).
3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein
by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1988).
3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI")
(incorporated herein by reference to Exhibit 3.1E to MGI's definitive
proxy statement dated October 24, 1984).
3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of September 28, 1988 (incorporated herein by reference to
Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 (the "MGI 1988 Form 10-K")).
3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of June 1, 1989 (incorporated herein by reference to Exhibit
3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to
MGI's Current Report on Form 8-K dated July 10, 1986).
*4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the
Company, as Issuer, MAXXAM, as Guarantor, and First Bank National
Association, as Trustee, regarding the Notes.
*4.2 -- Purchase Agreement, dated December 17, 1996, among the Company,
MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, regarding the Notes.
*4.3 -- Registration Rights Agreement, dated December 23, 1996, among the
Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, regarding the
Notes.
4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding
MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
</TABLE>
II-2
<PAGE> 362
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical
Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due
December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1980).
4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996, between
Custodial Trust Company and MAXXAM (incorporated herein by reference
to Exhibit 4 to MAXXAM's Quarterly Report on Form 10-Q for the year
ended June 30, 1996).
4.7 -- Indenture, dated as of August 4, 1993, between Shawmut Bank, N.A. and
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
year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form
10-K").
4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum &
Chemical Corporation ("KACC"), certain related corporations and State
Street Bank and Trust Company (as successor trustee to The First
National Bank of Boston; "State Street"), 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 year ended December 31,
1993, File No. 1-3605; the "KACC 1993 Form 10-K").
4.9 -- 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).
4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and State Street, Trustee,
regarding KACC's 12 3/4% Senior Subordinated Notes due 2003
(incorporated herein by reference to Exhibit 4.3 to KACC's Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
1-3605; the "KACC 1995 Form 10-K").
4.11 -- 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 the KACC 1993 Form 10-K).
4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002
(incorporated hereby by reference to Exhibit 4.5 to the KACC 1995
Form 10-K).
4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC
Credit Agreement"), among Kaiser Aluminum Corporation ("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).
4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Kaiser for the quarter ended June
30, 1994, File No. 1-9447).
4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.6 to the
Annual Report on Form 10-K of Kaiser for the year ended December 31,
1994, File No. 1-9447).
</TABLE>
II-3
<PAGE> 363
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, File No. 1-9447).
4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC
Credit Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-9447).
4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.11 to the
1995 KACC Form 10-K).
4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 1-3605).
**4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit
Agreement.
4.21 -- 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").
4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and
filed in the state of Delaware Office of the Secretary of State on
October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to
Kaiser's Annual Report on Form 10-K for the year ended December 31,
1995, File No. 1-9447).
4.23 -- 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).
4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased
Dividend Equity Securities of Kaiser, dated February 17, 1994
(incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-9447; the "Kaiser 1993 Form 10-K).
4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber
Company ("Pacific Lumber") and State Street (as successor trustee to
The First National Bank of Boston) regarding Pacific Lumber's 10 1/2%
Senior Notes due 2003 (incorporated herein by reference to Exhibit
4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-9204).
4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding
Company ("Scotia Pacific") and State Street, as Trustee, regarding
Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's
Annual Report on Form 10-K for the year ended December 31, 1993, File
No. 33-55538; the "Scotia Pacific 1993 Form 10-K").
4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment, dated as of March 23, 1993, among
Scotia Pacific, State Street, as Trustee, and State Street, as the
Collateral Agent (incorporated herein by reference to Exhibit 4.2 to
the Scotia Pacific 1993 Form 10-K).
4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995,
between Pacific Lumber and Bank of America National Trust and Savings
Association (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended
September 30, 1995; File No. 1-9204).
</TABLE>
II-4
<PAGE> 364
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and
Fixture Filing (incorporated herein by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter
ended September 30, 1995; File No. 1-9204).
4.30 -- Second Amended and Restated Credit and Security Agreement, dated July
15, 1995, among the First National Bank of Boston, MCO Properties,
Inc., Westcliff Development Corporation, Horizon Corporation, Horizon
Properties Corporation and MCO Properties L.P. (incorporated by
reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-3924).
4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam
Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP
General Partner, Inc. and First Bank National Association, Trustee
(incorporated herein by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the
"SHRP 1995 Second Quarter Form 10-Q").
4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary
guarantors (the "Subsidiary Guarantors"), and First Trust National
Association, as Trustee regarding KACC's 10 7/8% Senior Notes due
2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File
No. 1-9447).
Note: Pursuant to Regulation sec. 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.
**5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the
Notes and the Guaranty.
*10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between
MAXXAM and the Company.
10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993
(incorporated herein by reference to Exhibit 10.6 to the Amendment
No. 3 to the Registration Statement on Form S-2 of the Company,
Registration No. 33-64042; the "MGI Registration Statement").
10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the
Company, 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).
10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December
21, 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).
</TABLE>
II-5
<PAGE> 365
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to the
Registration Statement of Kaiser on Form S-1, Registration No.
33-37895).
10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon
Creek Corporation and MAXXAM, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.1 to Amendment No. 3
to the Form S-1 Registration Statement of Scotia Pacific,
Registration No. 33-55538).
10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.,
dated as of July 3, 1990 (incorporated herein by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
*10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by
MAXXAM in favor of the Company.
10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated
herein by reference to Exhibit HHH to the Final Agreement to the
Schedule 13D of MGI and others in respect of the common stock of
MAXXAM).
10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM
(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 -- Power Purchase Agreement, dated January 17, 1986, between Pacific
Lumber and Pacific Gas and Electric Company (incorporated herein by
reference to Exhibit 10(n) to Pacific Lumber's Registration Statement
on Form S-1, Registration No. 33-5549).
10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.1 to the Scotia
Pacific 1993 Form 10-K).
10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.2 to the Scotia
Pacific 1993 Form 10-K).
10.14 -- Additional Services Agreement between Pacific Lumber and Scotia
Pacific (incorporated herein by reference to Exhibit 10.3 to the
Scotia Pacific 1993 Form 10-K).
10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation (incorporated herein by reference to Exhibit
10.4 to the Scotia Pacific 1993 Form 10-K).
10.16 -- Environmental Indemnification Agreement between Pacific Lumber and
Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to
the Scotia Pacific 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 Amendment No. 2 to the Form S-2 Registration Statement of Pacific
Lumber; Registration Statement No. 33-56332).
10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO
Properties Inc. ("MCOP") and Federated Development Company
(incorporated herein by reference from Exhibit 10(ff) to MGI's
Registration Statement on Form S-4 on Form S-2, Registration No.
33-42300; the "MGI 1991 Registration Statement").
</TABLE>
II-6
<PAGE> 366
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
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 MAXXAM'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 MAXXAM's Registration Statement on Form S-4,
Registration No. 33-20096).
10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E.
Hurwitz and MPI (incorporated herein by reference to Exhibit C to
Schedule 13-D, dated November 14, 1987, filed by the Company with
respect to MAXXAM's common stock; the "Put and Call Agreement").
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 the Company relating to MAXXAM'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 MAXXAM's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988, File
No. 1-3924).
10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and
among the Company, MAXXAM and certain related corporations
(incorporated herein by reference to Exhibit 10.23 to Amendment No. 5
to the MGI Registration).
10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific
Lumber Company (on behalf of itself, its subsidiaries and its
affiliates), the United States of America and the State of California
(incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated September 28, 1996).
10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between
MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM'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 MAXXAM's common stock).
10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam
Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated
herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter
10-Q).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29,
1994; "MAXXAM's 1994 Proxy Statement").
10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee
Incentive Plan (incorporated herein by reference to Exhibit 10.30 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.32 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
</TABLE>
II-7
<PAGE> 367
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.1 to
MAXXAM's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.34 -- Revised Capital Accumulation Plan effective January 1, 1988
(incorporated herein by reference to Exhibit 10.27 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom
Share Plan") (incorporated herein by reference to Exhibit 10.6 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1990; MAXXAM's 1990 Form 10-K").
10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom
Share Plan (incorporated herein by reference to Exhibit 10.7 to
MAXXAM's 1990 Form 10-K).
10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share
Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10(ii) to the 1991 MGI Registration Statement).
10.39 -- Form of Company Deferred Compensation Agreement (incorporated herein
by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.40 -- 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).
10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.41 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.42 -- 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).
10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated
herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995
First Quarter Form 10-Q").
10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated
herein by reference to Exhibit 99 to the Proxy Statement, dated April
26, 1995, filed by Kaiser, File No. 1-9447).
10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and
Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated
herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K).
10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note
(incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM
(the "1990 Pierno Note") (incorporated herein by reference to Exhibit
10.31 to MAXXAM's 1990 Form 10-K).
</TABLE>
II-8
<PAGE> 368
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note
(incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.49 -- 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 MAXXAM's 1990 Form 10-K).
10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert
E. Cole (incorporated herein by reference to Exhibit 10.63 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1993).
*12.1 -- Computation of consolidated ratio of earnings to fixed charges of the
Company.
*12.2 -- Computation of consolidated ratio of earnings to fixed charges of
MAXXAM.
*21.1 -- Subsidiaries of the Company.
*21.2 -- Subsidiaries of MAXXAM.
*23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in
Exhibit 5).
*23.3 -- Consent of Thelen, Marrin, Johnson & Bridges.
*23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash.
*25 -- Form T-1 Statement of Eligibility of First Trust National
Association, as trustee.
*27 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
All other schedules are omitted because the required information is
included in the Consolidated Financial Statements or the Notes thereto or is
otherwise inapplicable.
ITEM 22. UNDERTAKINGS
(a) (i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(ii) "The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
II-9
<PAGE> 369
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof."
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-10
<PAGE> 370
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, MAXXAM GROUP HOLDINGS INC., HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 24TH DAY OF DECEMBER,
1996.
MAXXAM GROUP HOLDINGS INC.
By: /s/ CHARLES E. HURWITZ
------------------------------------------
Charles E. Hurwitz, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Anthony R. Pierno, Byron L. Wade, Bernard
L. Birkel and Karen Bryant, and each of them, his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments, including any post-effective amendments, to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the above premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof. This Power of Attorney may
be executed in multiple counterparts, each of which shall be deemed an original,
but which taken together shall constitute one instrument.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ CHARLES E. HURWITZ Chairman of the Board, Chief December 24, 1996
- --------------------------------------------- Executive Officer and
Charles E. Hurwitz President (Principal
Executive Officer)
/s/ PAUL N. SCHWARTZ Vice President, Chief December 24, 1996
- --------------------------------------------- Financial Officer and
Paul N. Schwartz Director (Principal
Financial Officer)
/s/ GARY L. CLARK Vice President (Principal December 24, 1996
- --------------------------------------------- Accounting Officer)
Gary L. Clark
/s/ JOHN A. CAMPBELL Vice President and Director December 24, 1996
- ---------------------------------------------
John A. Campbell
/s/ JOHN T. LA DUC Vice President and Director December 24, 1996
- ---------------------------------------------
John T. La Duc
/s/ ANTHONY R. PIERNO Vice President, General December 24, 1996
- --------------------------------------------- Counsel and Director
Anthony R. Pierno
/s/ WILLIAM S. RIEGEL Vice President and Director December 24, 1996
- ---------------------------------------------
William S. Riegel
</TABLE>
II-11
<PAGE> 371
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, MAXXAM INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY
OF HOUSTON, STATE OF TEXAS, ON THE 24TH DAY OF DECEMBER, 1996.
MAXXAM INC.
By: /s/ CHARLES E. HURWITZ
------------------------------------------
Charles E. Hurwitz, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Anthony R. Pierno, Byron L. Wade, Bernard
L. Birkel and Karen Bryant, and each of them, his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments, including any post-effective amendments, to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the above premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof. This Power of Attorney may
be executed in multiple counterparts, each of which shall be deemed an original,
but which taken together shall constitute one instrument.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ CHARLES E. HURWITZ Chairman of the Board, Chief December 24, 1996
- --------------------------------------------- Executive Officer and
Charles E. Hurwitz President (Principal
Executive Officer)
/s/ PAUL N. SCHWARTZ Executive Vice President and December 24, 1996
- --------------------------------------------- Chief Financial Officer
Paul N. Schwartz (Principal Financial
Officer)
/s/ TERRY L. FREEMAN Assistant Controller December 24, 1996
- --------------------------------------------- (Principal Accounting
Terry L. Freeman Officer)
/s/ ROBERT J. CRUIKSHANK Director December 24, 1996
- ---------------------------------------------
Robert J. Cruikshank
/s/ EZRA G. LEVIN Director December 24, 1996
- ---------------------------------------------
Ezra G. Levin
/s/ STANLEY D. ROSENBERG Director December 24, 1996
- ---------------------------------------------
Stanley D. Rosenberg
</TABLE>
II-12
<PAGE> 372
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
*3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the
Company" or "MGHI"), dated November 4, 1996.
*3.2 -- By-laws of MGHI, dated November 4, 1996.
3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"),
dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1
to MAXXAM's Annual Report on Form 10-K for the year ended December
31, 1989; the "MAXXAM 1989 Form 10-K").
3.4 -- Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and Other Rights of MAXXAM's Class B Junior
Participating Preference Stock (incorporated herein by reference to
Exhibit 3.2 to the MAXXAM 1989 Form 10-K).
3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock of MAXXAM, dated July 6,
1994 (incorporated herein by reference to Exhibit 4(c) to the
Registration Statement of MAXXAM on Form S-8, Registration No.
33-54479).
3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein
by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1988).
3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI")
(incorporated herein by reference to Exhibit 3.1E to MGI's definitive
proxy statement dated October 24, 1984).
3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of September 28, 1988 (incorporated herein by reference to
Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 (the "MGI 1988 Form 10-K")).
3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of June 1, 1989 (incorporated herein by reference to Exhibit
3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to
MGI's Current Report on Form 8-K dated July 10, 1986).
*4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the
Company, as Issuer, MAXXAM, as Guarantor, and First Bank National
Association, as Trustee, regarding the Notes.
*4.2 -- Purchase Agreement, dated December 17, 1996, among the Company,
MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, regarding the Notes.
*4.3 -- Registration Rights Agreement, dated December 23, 1996, among the
Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, regarding the
Notes.
4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding
MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
</TABLE>
<PAGE> 373
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical
Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due
December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1980).
4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996, between
Custodial Trust Company and MAXXAM (incorporated herein by reference
to Exhibit 4 to MAXXAM's Quarterly Report on Form 10-Q for the year
ended June 30, 1996).
4.7 -- Indenture, dated as of August 4, 1993, between Shawmut Bank, N.A. and
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
year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form
10-K").
4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum &
Chemical Corporation ("KACC"), certain related corporations and State
Street Bank and Trust Company (as successor trustee to The First
National Bank of Boston; "State Street"), 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 year ended December 31,
1993, File No. 1-3605; the "KACC 1993 Form 10-K").
4.9 -- 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).
4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and State Street, Trustee,
regarding KACC's 12 3/4% Senior Subordinated Notes due 2003
(incorporated herein by reference to Exhibit 4.3 to KACC's Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
1-3605; the "KACC 1995 Form 10-K").
4.11 -- 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 the KACC 1993 Form 10-K).
4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002
(incorporated hereby by reference to Exhibit 4.5 to the KACC 1995
Form 10-K).
4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC
Credit Agreement"), among Kaiser Aluminum Corporation ("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).
4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Kaiser for the quarter ended June
30, 1994, File No. 1-9447).
4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.6 to the
Annual Report on Form 10-K of Kaiser for the year ended December 31,
1994, File No. 1-9447).
</TABLE>
<PAGE> 374
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, File No. 1-9447).
4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC
Credit Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-9447).
4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.11 to the
1995 KACC Form 10-K).
4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 1-3605).
**4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit
Agreement.
4.21 -- 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").
4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and
filed in the state of Delaware Office of the Secretary of State on
October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to
Kaiser's Annual Report on Form 10-K for the year ended December 31,
1995, File No. 1-9447).
4.23 -- 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).
4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased
Dividend Equity Securities of Kaiser, dated February 17, 1994
(incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-9447; the "Kaiser 1993 Form 10-K).
4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber
Company ("Pacific Lumber") and State Street (as successor trustee to
The First National Bank of Boston) regarding Pacific Lumber's 10 1/2%
Senior Notes due 2003 (incorporated herein by reference to Exhibit
4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-9204).
4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding
Company ("Scotia Pacific") and State Street, as Trustee, regarding
Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's
Annual Report on Form 10-K for the year ended December 31, 1993, File
No. 33-55538; the "Scotia Pacific 1993 Form 10-K").
4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment, dated as of March 23, 1993, among
Scotia Pacific, State Street, as Trustee, and State Street, as the
Collateral Agent (incorporated herein by reference to Exhibit 4.2 to
the Scotia Pacific 1993 Form 10-K).
4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995,
between Pacific Lumber and Bank of America National Trust and Savings
Association (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended
September 30, 1995; File No. 1-9204).
</TABLE>
<PAGE> 375
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and
Fixture Filing (incorporated herein by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter
ended September 30, 1995; File No. 1-9204).
4.30 -- Second Amended and Restated Credit and Security Agreement, dated July
15, 1995, among the First National Bank of Boston, MCO Properties,
Inc., Westcliff Development Corporation, Horizon Corporation, Horizon
Properties Corporation and MCO Properties L.P. (incorporated by
reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-3924).
4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam
Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP
General Partner, Inc. and First Bank National Association, Trustee
(incorporated herein by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the
"SHRP 1995 Second Quarter Form 10-Q").
4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary
guarantors (the "Subsidiary Guarantors"), and First Trust National
Association, as Trustee regarding KACC's 10 7/8% Senior Notes due
2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File
No. 1-9447).
Note: Pursuant to Regulation sec. 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.
**5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the
Notes and the Guaranty.
*10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between
MAXXAM and the Company.
10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993
(incorporated herein by reference to Exhibit 10.6 to the Amendment
No. 3 to the Registration Statement on Form S-2 of the Company,
Registration No. 33-64042; the "MGI Registration Statement").
10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the
Company, 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).
10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December
21, 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).
</TABLE>
<PAGE> 376
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to the
Registration Statement of Kaiser on Form S-1, Registration No.
33-37895).
10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon
Creek Corporation and MAXXAM, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.1 to Amendment No. 3
to the Form S-1 Registration Statement of Scotia Pacific,
Registration No. 33-55538).
10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.,
dated as of July 3, 1990 (incorporated herein by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
*10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by
MAXXAM in favor of the Company.
10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated
herein by reference to Exhibit HHH to the Final Agreement to the
Schedule 13D of MGI and others in respect of the common stock of
MAXXAM).
10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM
(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 -- Power Purchase Agreement, dated January 17, 1986, between Pacific
Lumber and Pacific Gas and Electric Company (incorporated herein by
reference to Exhibit 10(n) to Pacific Lumber's Registration Statement
on Form S-1, Registration No. 33-5549).
10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.1 to the Scotia
Pacific 1993 Form 10-K).
10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.2 to the Scotia
Pacific 1993 Form 10-K).
10.14 -- Additional Services Agreement between Pacific Lumber and Scotia
Pacific (incorporated herein by reference to Exhibit 10.3 to the
Scotia Pacific 1993 Form 10-K).
10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation (incorporated herein by reference to Exhibit
10.4 to the Scotia Pacific 1993 Form 10-K).
10.16 -- Environmental Indemnification Agreement between Pacific Lumber and
Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to
the Scotia Pacific 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 Amendment No. 2 to the Form S-2 Registration Statement of Pacific
Lumber; Registration Statement No. 33-56332).
10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO
Properties Inc. ("MCOP") and Federated Development Company
(incorporated herein by reference from Exhibit 10(ff) to MGI's
Registration Statement on Form S-4 on Form S-2, Registration No.
33-42300; the "MGI 1991 Registration Statement").
</TABLE>
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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 MAXXAM'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 MAXXAM's Registration Statement on Form S-4,
Registration No. 33-20096).
10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E.
Hurwitz and MPI (incorporated herein by reference to Exhibit C to
Schedule 13-D, dated November 14, 1987, filed by the Company with
respect to MAXXAM's common stock; the "Put and Call Agreement").
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 the Company relating to MAXXAM'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 MAXXAM's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988, File
No. 1-3924).
10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and
among the Company, MAXXAM and certain related corporations
(incorporated herein by reference to Exhibit 10.23 to Amendment No. 5
to the MGI Registration).
10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific
Lumber Company (on behalf of itself, its subsidiaries and its
affiliates), the United States of America and the State of California
(incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated September 28, 1996).
10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between
MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM'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 MAXXAM's common stock).
10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam
Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated
herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter
10-Q).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29,
1994; "MAXXAM's 1994 Proxy Statement").
10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee
Incentive Plan (incorporated herein by reference to Exhibit 10.30 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.32 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
</TABLE>
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<TABLE>
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10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.1 to
MAXXAM's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.34 -- Revised Capital Accumulation Plan effective January 1, 1988
(incorporated herein by reference to Exhibit 10.27 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom
Share Plan") (incorporated herein by reference to Exhibit 10.6 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1990; MAXXAM's 1990 Form 10-K").
10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom
Share Plan (incorporated herein by reference to Exhibit 10.7 to
MAXXAM's 1990 Form 10-K).
10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share
Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10(ii) to the 1991 MGI Registration Statement).
10.39 -- Form of Company Deferred Compensation Agreement (incorporated herein
by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.40 -- 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).
10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.41 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.42 -- 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).
10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated
herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995
First Quarter Form 10-Q").
10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated
herein by reference to Exhibit 99 to the Proxy Statement, dated April
26, 1995, filed by Kaiser, File No. 1-9447).
10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and
Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated
herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K).
10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note
(incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM
(the "1990 Pierno Note") (incorporated herein by reference to Exhibit
10.31 to MAXXAM's 1990 Form 10-K).
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10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note
(incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.49 -- 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 MAXXAM's 1990 Form 10-K).
10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert
E. Cole (incorporated herein by reference to Exhibit 10.63 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1993).
*12.1 -- Computation of consolidated ratio of earnings to fixed charges of the
Company.
*12.2 -- Computation of consolidated ratio of earnings to fixed charges of
MAXXAM.
*21.1 -- Subsidiaries of the Company.
*21.2 -- Subsidiaries of MAXXAM.
*23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in
Exhibit 5).
*23.3 -- Consent of Thelen, Marrin, Johnson & Bridges.
*23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash.
*25 -- Form T-1 Statement of Eligibility of First Trust National
Association, as trustee.
*27 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MAXXAM GROUP HOLDINGS INC.
---------------------
FIRST. The name of this corporation shall be:
MAXXAM GROUP HOLDINGS INC.
SECOND. Its registered office in the State of Delaware is to be located
at 1013 Centre Road, in the City of Wilmington, County of New Castle and its
registered agent at such address is CORPORATION SERVICE COMPANY.
THIRD. The purpose or purposes of the corporation shall be:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which this corporation is
authorized to issue is:
Three Thousand (3,000) Shares With A Par Value Of One Dollar ($1.00)
Per Share amounting to Three Thousand Dollars ($3000).
FIFTH. The name and address of the incorporator is as follows:
Robert Matera
Corporation Service Company
1013 Centre Road
Wilmington, DE 19805
SIXTH. The Board of Directors shall have the power to adopt, amend or
repeal the by-laws.
<PAGE> 2
SEVENTH. No director shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director
shall be liable to the extent provided by applicable law, (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) pursuant to Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Seventh shall apply to or have any effect on the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinbefore named, has executed, signed and acknowledged this certificate of
incorporation this fourth day of November, A.D., 1996.
/s/ ROBERT MATERA
----------------------
Robert Matera
Incorporator
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
MAXXAM GROUP HOLDINGS INC.
(a Delaware corporation)
__________________
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates
representing stock in the corporation shall be signed by, or in the name of,
the corporation by the Chairman or Vice Chairman of the Board of Directors, if
any, or by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on any such certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more
than one class of stock or more than one series of any class of stock, and
whenever the corporation shall issue any shares of its stock as partly paid
stock, the certificates representing shares of any such class or series or of
any such partly paid stock shall set forth thereon the statements prescribed by
the General Corporation Law of the State of Delaware (the "General Corporation
Law"). Any restrictions on the transfer or registration of transfer of any
shares of stock of any class or series shall be noted conspicuously on the
certificate representing such shares.
The corporation may issue a new certificate of stock or
uncertificated shares in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors may
require the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions
imposed by the General Corporation Law, the Board of Directors of the
corporation may provide by resolution or resolutions that some or all of any or
all classes or series of the stock of the corporation shall be uncertificated
shares. Within a reasonable time after the issuance or transfer of any
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<PAGE> 2
uncertificated shares, the corporation shall send to the registered owner
thereof any written notice prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but
shall not be required to, issue fractions of a share. If the corporation does
not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined, or (3) issue scrip or warrants in registered form
(either represented by a certificate or uncertificated) or bearer form
(represented by a certificate) which shall entitle the holder to receive a full
share upon surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share or an uncertificated fractional share shall,
but scrip or warrants shall not unless otherwise provided therein, entitle the
holder to exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the corporation in the event of
liquidation. The Board of Directors may cause scrip or warrants to be issued
subject to the conditions that they shall become void if not exchanged for
certificates representing the full shares or uncertificated full shares before
a specified date, or subject to the conditions that the shares for which scrip
or warrants are exchangeable may be sold by the corporation and the proceeds
thereof distributed to the holders of scrip or warrants, or subject to any
other conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if
any, transfers or registration of transfers of shares of stock of the
corporation shall be made only on the stock ledger of the corporation by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the corporation or with
a transfer agent or a registrar, if any, and, in the case of shares represented
by certificates, on surrender of the certificate or certificates for such
shares of stock properly endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days before
the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting. In order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the Board of Directors may fix a record date, which record
date shall not precede the
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<PAGE> 3
date upon which the resolution fixing the record date is adopted by the Board
of Directors, and which date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining the stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by the General Corporation Law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board of Directors
and prior to action by the Board of Directors is required by the General
Corporation Law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action. In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect
of the right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of a
meeting, as the case may be, the term "share" or "shares" or "share of stock"
or "shares of stock" or "stockholder" or "stockholders" refers to an
outstanding share or shares of stock and to a holder or holders of record of
outstanding shares of stock when the corporation is authorized to issue only
one class of shares of stock, and said reference is also intended to include
any outstanding share or shares of stock and any holder or holders of record of
outstanding shares of stock of any class upon which or upon whom the
certificate of incorporation confers such rights where there are two or more
classes or series of shares of stock or upon which or upon whom the General
Corporation Law confers such rights notwithstanding that the certificate of
incorporation may provide for more than one class or series of shares of stock,
one or more of which are limited or denied such rights thereunder; provided,
however, that no such right shall vest in the event of an increase or a
decrease in the authorized number of shares of stock of any class or series
which is otherwise denied voting rights under the provisions of the certificate
of incorporation, except as any provision of law may otherwise require.
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<PAGE> 4
7. STOCKHOLDER MEETINGS
TIME. The annual meeting shall be held on the date and at the
time fixed, from time to time, by the directors, provided, that the first
annual meeting shall be held on a date within thirteen months after the
organization of the corporation, and each successive annual meeting shall be
held on a date within thirteen months after the date of the preceding annual
meeting. A special meeting shall be held on the date and at the time fixed by
the directors.
PLACE. Annual meetings and special meetings shall be held at
such place, within or without the State of Delaware, as the directors may, from
time to time, fix. Whenever the directors shall fail to fix such place, the
meeting shall be held at the registered office of the corporation in the State
of Delaware.
CALL. Annual meetings and special meetings may be called by
the directors or by any officer instructed by the directors to call the
meeting.
NOTICE OR WAIVER OF NOTICE. Written notice of all meetings
shall be given, stating the place, date, and hour of the meeting and stating
the place within the city or other municipality or community at which the list
of stockholders of the corporation may be examined. The notice of an annual
meeting shall state that the meeting is called for the election of directors
and for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the purpose or
purposes for which the meeting is called. The notice of any meeting shall also
include, or be accompanied by, any additional statements, information or
documents prescribed by the General Corporation Law. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than ten (10) days nor more
than sixty (60) days before the date of the meeting, unless the lapse of the
prescribed period of time shall have been waived, and directed to each
stockholder at his record address or at such other address which he may have
furnished by request in writing to the Secretary of the corporation. Notice by
mail shall be deemed to be given when deposited, with postage thereon prepaid,
in the United States Mail. If a meeting is adjourned to another time, not more
than thirty (30) days hence, and/or to another place, and if an announcement of
the adjourned time and/or place is made at the meeting, it shall not be
necessary to give notice of the adjourned meeting unless the directors, after
adjournment, fix a new record date for the adjourned meeting. Notice need not
be given to any stockholder who submits a written waiver of notice signed by
him before or after the time stated therein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the stockholder attends the meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
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<PAGE> 5
STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city or other municipality or
community where the meeting is to be held, which place shall be specified in
the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by
any stockholder who is present. The stock ledger shall be the only evidence as
to who are the stockholders entitled to examine the stock ledger, the list
required by this section or the books of the corporation, or to vote at any
meeting of stockholders.
CONDUCT OF MEETING. Meetings of the stockholders shall be
presided over by one of the following officers in the order of seniority and if
present and acting--the Chairman of the Board, if any, the Vice Chairman of the
Board, if any, the President, a Vice President, or if none of the foregoing is
in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the corporation, or in his absence, an
Assistant Secretary, shall act as secretary of every meeting, but is neither
the Secretary nor an Assistant Secretary is present the Chairman of the meeting
shall appoint a secretary of the meeting.
PROXY REPRESENTATION. Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a stockholder
is entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three (3) years from its date unless
such proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and, if, and only as long as,
it is coupled with an interest sufficient in law to support an irrevocable
power. A proxy may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
corporation generally.
INSPECTORS. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors of election to act at the meeting
or any adjournment thereof. If an inspector or inspectors are not appointed,
the person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspectors at such
meeting with strict impartiality and according to the best of his ability.
The inspectors, if any, shall determine the number of shares of stock
outstanding and the
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<PAGE> 6
voting power of each, the shares of stock represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by
him or them and execute a certificate of any fact found by him or them. Except
as otherwise required by subsection (e) of Section 231 of the General
Corporation Law, the provisions of that Section shall not apply to the
corporation.
QUORUM. The holders of a majority of the outstanding shares
of stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum.
VOTING. Each share of stock shall entitle the holders thereof
to one vote. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Any other action shall be authorized by a
majority of the votes cast except where the General Corporation Law prescribes
a different percentage of votes and/or a different exercise of voting power,
and except as may be otherwise prescribed by the provisions of the certificate
of incorporation and these By-Laws. In the election of directors, and for any
other action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action
required by the General Corporation Law to be taken at any annual or special
meeting of stockholders, or any action which may be taken at any annual or
special meeting of stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Action taken pursuant to this
paragraph shall be subject to the provisions of Section 228 of the General
Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs
of the corporation shall be managed by or under the direction of the Board of
Directors of the corporation. The Board of Directors shall have the authority
to fix the compensation of the
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<PAGE> 7
members thereof. The use of the phrase "whole board" herein refers to the
total number of directors which the corporation would have if there were no
vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware. The initial Board of Directors shall consist of three (3) persons.
Thereafter the number of directors constituting the whole board shall be at
least one (1). Subject to the foregoing limitation and except for the first
Board of Directors, such number may be fixed from time to time by action of the
stockholders or of the directors, or, if the number is not fixed, the number
shall be at least one (1). The number of directors may be increased or
decreased by action of the stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors,
unless the members thereof shall have been named in the certificate of
incorporation, shall be elected by the incorporator or incorporators and shall
hold office until the first annual meeting of stockholders and until their
successors are elected and qualified or until their earlier resignation or
removal. Any director may resign at any time upon written notice to the
corporation. Thereafter, directors who are elected at an annual meeting of
stockholders, and directors who are elected in the interim to fill vacancies
and newly created directorships, shall hold office until the next annual
meeting of stockholders and until their successors are elected and qualified or
until their earlier resignation or removal. Except as the General Corporation
Law may otherwise require, in the interim between annual meetings of
stockholders or of special meetings of stockholders called for the election of
directors and/or for the removal of one or more directors and for the filling
of any vacancy in that connection, newly created directorships and any
vacancies in the Board of Directors, including unfilled vacancies resulting
from the removal of directors for cause or without cause, may be filled by the
vote of a majority of the remaining directors then in office, although less
than a quorum, or by the sole remaining director.
4. MEETINGS.
TIME. Meetings shall be held at such time as the Board shall
fix, except that the first meeting of a newly elected Board shall be held as
soon after its election as the directors may conveniently assemble.
PLACE. Meetings shall be held at such place within or without
the State of Delaware as shall be fixed by the Board.
CALL. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called by or
at the direction of the Chairman of the Board, if any, of the Vice Chairman of
the Board, if any, of the President, or of a majority of the directors in
office.
-7-
<PAGE> 8
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any director or to any member
of a committee of directors who submits a written waiver of notice signed by
him before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is
present, may adjourn a meeting to another time and place. Except as herein
otherwise provided, and except as otherwise provided by the General Corporation
Law, the vote of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board. The quorum and voting
provisions herein stated shall not be construed as conflicting with any
provisions of the General Corporation Law and these By-Laws which govern a
meeting of directors held to fill vacancies and newly created directorships in
the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board,
or any such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
CHAIRMAN OF THE MEETING. The Chairman of the Board, if any
and if present and acting, shall preside at all meetings. Otherwise, the Vice
Chairman of the Board, if any and if present and acting, or the President, if
present and acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be
provided by the General Corporation Law, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any
-8-
<PAGE> 9
meeting of the committee. In the absence or disqualification of any member of
any such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or disqualified member. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require it.
7. WRITTEN ACTION. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of such officers
as may be appointed by the Board of Directors from time to time, including but
not limited to a President, a Secretary, and, if deemed necessary, expedient,
or desirable by the Board of Directors, a Chairman of the Board, a Vice
Chairman of the Board, an Executive Vice President, one or more other Vice
Presidents, a Treasurer, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers with such titles as the
resolution of the Board of Directors choosing them shall designate. Except as
may otherwise be provided in the resolution of the Board of Directors choosing
him, no officer, other than the Chairman or Vice Chairman of the Board, if any,
need be a director. Any number of offices may be held by the same person, as
the directors may determine.
Unless otherwise provided in the resolution choosing him, each
officer shall be chosen for a term which shall continue until the meeting of
the Board of Directors following the next annual meeting of stockholders and
until his successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and
perform such duties in the management and operation of the corporation as shall
be prescribed in the resolutions of the Board of Directors designating and
choosing such officers and prescribing their authority and duties, and shall
have such additional authority and duties as are incident to their office
except to the extent that such resolutions may be inconsistent therewith. The
Secretary or an Assistant Secretary of the corporation shall record all of the
proceedings of all meetings and actions in writing of stockholders, directors,
and committees of directors, and shall exercise such additional authority and
perform such additional duties as the Board shall assign to him. Any officer
may
-9-
<PAGE> 10
be removed, with or without cause, by the Board of Directors. Any vacancy in
any office may be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall
be subject to change, by the Board of Directors.
ARTICLE VI
CONTROL OVER BY-LAWS
Subject to the provisions of the certificate of incorporation
and the provisions of the General Corporation Law, the power to amend, alter,
or repeal these By-laws and to adopt new By-Laws may be exercised by the Board
of Directors or by the stockholders.
I HEREBY CERTIFY that the foregoing is a full, true, and
correct copy of the By-Laws of MAXXAM Group Holdings Inc., a Delaware
corporation, as in effect on the date hereof.
DATED: As of November 4, 1996
/s/ BYRON L. WADE
________________________________________
Byron L. Wade, Secretary of
(Seal) MAXXAM Group Holdings Inc.
-10-
<PAGE> 1
EXHIBIT 4.1
DRAFT
12/19/96
MAXXAM GROUP HOLDINGS INC.,
as Issuer,
MAXXAM INC.,
as Guarantor,
AND
First Bank National Association,
as Trustee,
__________________________________
INDENTURE
Dated as of December 23, 1996
__________________________________
$130,000,000 12% Senior Secured Notes due 2003
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . 1
SECTION 1.02. Other Definitions . . . . . . . . . . . . . 26
SECTION 1.03. Incorporation by Reference of
Trust Indenture Act . . . . . . . . . . . . 28
SECTION 1.04. Rules of Construction . . . . . . . . . . . 29
ARTICLE 2
The Securities
--------------
SECTION 2.01. Form and Dating . . . . . . . . . . . . . . 30
SECTION 2.02. Execution and Authentication . . . . . . . 31
SECTION 2.03. Registrar and Paying Agent . . . . . . . . 31
SECTION 2.04. Paying Agent to Hold Money in Trust . . . . 32
SECTION 2.05. Holder Lists . . . . . . . . . . . . . . . 32
SECTION 2.06. Transfer and Exchange . . . . . . . . . . . 32
SECTION 2.07. Replacement Securities . . . . . . . . . . 41
SECTION 2.08. Outstanding Securities . . . . . . . . . . 41
SECTION 2.09. Treasury Securities . . . . . . . . . . . . 41
SECTION 2.10. Temporary Securities . . . . . . . . . . . 42
SECTION 2.11. Cancellation . . . . . . . . . . . . . . . 42
SECTION 2.12. Defaulted Interest . . . . . . . . . . . . 42
SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . 43
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee . . . . . . . . . . . . 43
SECTION 3.02. Selection of Securities to be
Redeemed . . . . . . . . . . . . . . . . . 43
SECTION 3.03. Notice of Redemption . . . . . . . . . . . 44
SECTION 3.04. Effect of Notice of Redemption . . . . . . 45
SECTION 3.05. Deposit of Redemption Price . . . . . . . . 45
SECTION 3.06. Securities Redeemed in Part . . . . . . . . 45
SECTION 3.07. Cancellation of Redeemed Securities . . . . 45
SECTION 3.08. No Repurchase Restrictions . . . . . . . . 45
</TABLE>
i
<PAGE> 3
ARTICLE 4
Covenants
<TABLE>
<S> <C> <C>
SECTION 4.01. Payment of Securities . . . . . . . . . . . 46
SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . 46
SECTION 4.03. Limitation on Indebtedness . . . . . . . . 46
SECTION 4.04. Limitation on Restricted Payments . . . . . 49
SECTION 4.05. Ownership of Capital Stock of
Subsidiaries and Kaiser Shares . . . . . . 53
SECTION 4.06. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries . . . . 54
SECTION 4.07. Limitation on Asset Sales . . . . . . . . . 56
SECTION 4.08. Limitation on Transactions with
Affiliates . . . . . . . . . . . . . . . . 62
SECTION 4.09. Change of Control . . . . . . . . . . . . . 64
SECTION 4.10. Limitation on Liens . . . . . . . . . . . . 67
SECTION 4.11. Amendment of Scotia Pacific
Agreements or Intercompany Note . . . . . . 69
SECTION 4.12. Compliance Certificate . . . . . . . . . . 70
SECTION 4.13. Use of Proceeds . . . . . . . . . . . . . . 70
SECTION 4.14. Corporate Existence . . . . . . . . . . . . 70
SECTION 4.15. Limitation on Status as Investment
Company . . . . . . . . . . . . . . . . . . 70
SECTION 4.16. Limitation on Liens on Pledged
Shares and Intercompany Note . . . . . . . 70
SECTION 4.17. Declaration and Payment of Dividends
by MGI . . . . . . . . . . . . . . . . . . . . 71
SECTION 4.18. Releases from Lien of MGI Indenture . . . . 71
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer
Assets . . . . . . . . . . . . . . . . . . 71
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default . . . . . . . . . . . . . 73
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . 75
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . 75
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . 75
SECTION 6.05. Control by Majority . . . . . . . . . . . . 76
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . 76
SECTION 6.07. Rights of Holders to Receive Payment . . . 77
SECTION 6.08. Collection Suit by Trustee . . . . . . . . 77
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 6.09. Trustee May File Proofs of Claim . . . . . 77
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . 77
SECTION 6.11. Undertaking for Costs . . . . . . . . . . . 78
SECTION 6.12. Waiver of Stay or Extension Laws . . . . . 78
SECTION 6.13. Restoration of Rights and Remedies . . . . 78
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . 79
SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . 80
SECTION 7.03. Individual Rights of Trustee . . . . . . . 81
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . 82
SECTION 7.05. Notice of Defaults . . . . . . . . . . . . 82
SECTION 7.06. Reports by Trustee to Holders . . . . . . . 82
SECTION 7.07. Compensation and Indemnity . . . . . . . . 82
SECTION 7.08. Replacement of Trustee . . . . . . . . . . 83
SECTION 7.09. Successor Trustee by Merger . . . . . . . . 84
SECTION 7.10. Eligibility; Disqualification . . . . . . . 85
SECTION 7.11. Preferential Collection of Claims Against
Company . . . . . . . . . . . . . . . . . . 85
ARTICLE 8
Discharge of Indenture
----------------------
SECTION 8.01. Discharge of Liability on Securities;
Defeasance . . . . . . . . . . . . . . . . 85
SECTION 8.02. Conditions to Defeasance . . . . . . . . . 86
SECTION 8.03. Application of Trust Money . . . . . . . . 87
SECTION 8.04. Repayment to Company . . . . . . . . . . . 87
SECTION 8.05. Indemnity for Government Obligations . . . 87
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . 88
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders . . . . . . . . 88
SECTION 9.02. With Consent of Holders . . . . . . . . . . 89
SECTION 9.03. Compliance with Trust Indenture Act . . . . 90
SECTION 9.04. Revocation and Effect of Consents and
Waivers . . . . . . . . . . . . . . . . . . 90
SECTION 9.05. Notation on or Exchange of
Securities . . . . . . . . . . . . . . . . 91
SECTION 9.06. Trustee to Sign Amendments . . . . . . . . 91
</TABLE>
iii
<PAGE> 5
ARTICLE 10
Security
--------
<TABLE>
<S> <C> <C>
SECTION 10.01. Grants of Security Interests . . . . . . . 91
SECTION 10.02. Pledged Shares and Intercompany Notes . . . 94
SECTION 10.03. Collateral Accounts . . . . . . . . . . . . 97
SECTION 10.04. Further Assurances; Revisions of
Exhibit D . . . . . . . . . . . . . . . . . 103
SECTION 10.05. Release and Substitution of
Collateral . . . . . . . . . . . . . . . . 103
SECTION 10.06. Trustee Appointed Attorney-in-Fact . . . . 114
SECTION 10.07. Trustee May Perform . . . . . . . . . . . . 114
SECTION 10.08. Remedies Upon Event of Default . . . . . . 115
SECTION 10.09. Application of Proceeds . . . . . . . . . . 116
SECTION 10.10. Continuing Liens . . . . . . . . . . . . . 116
SECTION 10.11. Certificates and Opinions . . . . . . . . . 116
SECTION 10.12. Representations and Warranties . . . . . . 116
SECTION 10.13. Certain Mergers, Consolidations, etc.
Among the Company, MGI and
Restricted Subsidiaries . . . . . . . . . . 117
ARTICLE 11
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls . . . . . . . 118
SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . 118
SECTION 11.03. Communication by Holders with Other
Holders . . . . . . . . . . . . . . . . . . 119
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent . . . . . . . . . . . . . . . . . 119
SECTION 11.05. Statements Required in Certificate or
Opinion . . . . . . . . . . . . . . . . . . 120
SECTION 11.06. When Treasury Securities
Disregarded . . . . . . . . . . . . . . . . 120
SECTION 11.07. Rules by Trustee, Paying Agent and
Registrar . . . . . . . . . . . . . . . . . 121
SECTION 11.08. Legal Holidays . . . . . . . . . . . . . . 121
SECTION 11.09. Governing Law . . . . . . . . . . . . . . . 121
SECTION 11.10. No Recourse Against Others . . . . . . . . 121
SECTION 11.11. Successors . . . . . . . . . . . . . . . . 122
SECTION 11.12. Severability . . . . . . . . . . . . . . . 122
SECTION 11.13. Multiple Originals . . . . . . . . . . . . 122
SECTION 11.14. Table of Contents; Headings . . . . . . . . 122
SECTION 11.15. Benefits of Indenture . . . . . . . . . . . 122
SECTION 11.16. No Challenge . . . . . . . . . . . . . . . 122
</TABLE>
iv
<PAGE> 6
ARTICLE 12
MAXXAM Guarantee
----------------
<TABLE>
<S> <C> <C>
SECTION 12.01 Senior Guarantee . . . . . . . . . . . . . . . 123
SECTION 12.02 When Guarantor May Merge, Etc. . . . . . . . . 125
Exhibit A - Form of Security . . . . . . . . . . . . . A-1
Exhibit B - Certificate of Transferor . . . . . . . . . B-1
Exhibit C - Salmon Creek Property Legal
Description . . . . . . . . . . . . . . . . C-1
Exhibit D - Description of Pledged Shares . . . . . . . D-1
</TABLE>
v
<PAGE> 7
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- ------- ---------
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . N A
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . 7 10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; .10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 1.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . 4.02; 4.12; 11.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . 10.11
(e) . . . . . . . . . . . . . . . . . . . . . . . . . 11.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.05;
. . . . . . 11.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
(e) . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a) (last sentence) . . . . . . . . . . . . . . . . . 11.06
(a)(l)(A) . . . . . . . . . . . . . . . . . . . . . . 6.05
(a)(l)(B) . . . . . . . . . . . . . . . . . . . . . . 6.04
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 9.04
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 2.04
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
</TABLE>
N.A. means Not Applicable.
Note: This Cross-Reference Table shall not, for any purpose, be deemed part of
the Indenture.
vi
<PAGE> 8
INDENTURE dated as of December 23, 1996, among MAXXAM Group Holdings
Inc., a Delaware corporation (the "Company"), MAXXAM Inc., a Delaware
corporation (the "Guarantor"), and First Bank National Association, a national
banking association, as trustee (the "Trustee").
Each party agrees as follows for the benefit of each other party and
for the equal and ratable benefit of the Holders of the Company's 12% Series A
Senior Secured Notes due 2003 (the "Series A Securities") and the 12% Series B
Senior Secured Notes due 2003 (the "Series B Securities" and, together with the
Series A Securities, the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"AFFILIATE" of any person means (i) any person who, directly or
indirectly, is in control of, is controlled by or is under common control with
such person and (ii) any person who is a director or officer (A) of such
person, (B) of any subsidiary of such person or (C) of any person described in
clause (i) above, and shall be deemed to include any joint venture, partnership
or other person (other than a Subsidiary of the Company) in which the Company
and/or its Subsidiaries have an equity ownership interest equal to or greater
than 5% and in which one or more Affiliates of the Company has a direct or an
indirect equity ownership interest in excess of 5% therein other than by virtue
of the direct or indirect equity ownership in such joint venture, partnership
or other person held (in the aggregate) by the Company and/or one or more of
its Subsidiaries; provided, however, that the term "Affiliate" shall not
include (i) the Company or (ii) any Subsidiary of the Company so long as no
Affiliate of the Company has a direct or indirect equity ownership interest
equal to or greater than 5% in such Subsidiary other than by virtue of the
direct or indirect equity ownership in such Subsidiary held (in the aggregate)
by the Company and/or one or more of its Subsidiaries. For purposes of this
definition, control of a person means the power, direct or indirect, to direct
or cause the direction of the management and policies of such person whether by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. The fact that an Affiliate of a person
is a partner of a law firm that renders services to such person or its
Affiliates does not mean that the law firm is an Affiliate of such person.
"AGENT" means any Registrar, Paying Agent or transfer agent.
<PAGE> 9
"ASSET SALE" means any sale, transfer or other disposition (including,
without limitation, dispositions pursuant to any Taking, merger, consolidation
or sale and lease back transactions), after the Issue Date, by the Company or
any of its Restricted Subsidiaries (other than Scotia Pacific so long as there
are any Timber Notes outstanding) to any person other than to the Company or
any of its Restricted Subsidiaries of (i) any Capital Stock or other ownership
interest of any of the Company's Restricted Subsidiaries (including sales,
transfers or other dispositions by such Restricted Subsidiary of its Capital
Stock or other ownership interest) or (ii) any other assets (other than any
Capital Stock or ownership interests in any Unrestricted Subsidiary) of the
Company or any of its Restricted Subsidiaries, other than sales, transfers or
other dispositions of assets in the ordinary course of business of the Company
and its Restricted Subsidiaries, taken as a whole; provided, however, that the
term Asset Sale shall not include (A) the sale, transfer or other disposition
of any assets or Capital Stock or other ownership interest by the Company or
its Restricted Subsidiaries if such transaction would have been an Asset Sale
in the absence of this clause (A) to the extent the gross proceeds thereof
(exclusive of indemnities) do not exceed, in aggregate amount with all other
such sales, transfers or other dispositions after the Issue Date, $25,000,000
from and after the Issue Date (such proceeds, to the extent non-cash, to be
determined in good faith by the Board of Directors), (B) the creation,
incurrence, assumption or existence of any Lien to the extent not prohibited by
Section 4.10, (C) any of the transactions governed by Section 5.01, (D) an
exchange of assets, provided, the assets received are to be used in the lines
of business of the Company or any of its Restricted Subsidiaries on the Issue
Date or reasonably related extensions of such lines and only to the extent such
exchange qualifies for non-recognition treatment under the Code, (E) any
transaction to the extent governed by Section 4.04 or Section 4.05, (F) the
sale, transfer or other disposition of Collateral under this Indenture,
collateral under the MGI Indenture or any assets referred to in clause (vi) of
Section 4.04(c) or the proceeds of such assets or (G) any Primary Share Sale by
MGI to the extent the Net Proceeds of such Primary Share Sale are distributed
on the Pledged MGI Shares.
"AVERAGE LIFE" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal
payments.
"BANK DEBT" means any and all amounts payable under or in respect of
the Credit Agreement, including principal, premium (if any), interest, fees,
charges, expenses, reimbursement obligations,
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<PAGE> 10
guaranties, indemnities and all other amounts payable thereunder or in respect
thereof.
"BERING AGREEMENT" means the investment management agreement,
effective as of December 1, 1991, between Bering Holdings Inc. and each of
MAXXAM, the Company, MGI, MPI and Pacific Lumber, as the same has been or may
be amended, supplemented or otherwise modified from time to time in a manner
that is not materially adverse to the Holders.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or
any committee thereof duly authorized to act on behalf of such Board.
"BRITT" means Britt Lumber Co., Inc., a California corporation, and
any successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"BUSINESS DAY" means each day that is not a Legal Holiday.
"CALL PRICE" means, expressed as a percentage of principal amount,
110%.
"CAPITAL LEASE OBLIGATIONS" of any person means, as of any date of
determination, any obligation that is required to be classified and accounted
for as a capital lease on the face of a balance sheet of such person prepared
in accordance with GAAP as of such determination date (it being understood that
the Capital Lease Obligations of the Company shall not include any such
obligations attributable to any Unrestricted Subsidiary as of any determination
date); the amount of such obligation shall be the capitalized amount thereof,
determined in accordance with GAAP; and the stated maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"CAPITAL STOCK" of any person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of
or interests in (however designated) corporate stock of such person, including
any Preferred Stock of such person but excluding any Redeemable Stock of such
person.
"CASH EQUIVALENTS" means (1) when used in respect of any Trust Moneys
(i) any evidence of any obligation issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) demand or time deposits with, and
certificates of deposit or acceptances issued by, any bank or trust company
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<PAGE> 11
organized under the laws of the United States of America or any State thereof
(including the Trustee) whose unsecured, unguaranteed, long-term debt
obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by
Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured,
unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by
Moody's or higher; (iii) repurchase agreements entered into with entities whose
unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and
"A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to
a written agreement with respect to any obligation described in subclauses (i),
(ii) or (iv) of this clause (1); (iv) commercial paper (including both
noninterest-bearing discount obligations and interest-bearing obligations
payable on demand or on a specified date not later than 180 days from the date
of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by
Moody's or higher; (v) direct obligations of any money market fund or other
similar investment company all of whose investments consist primarily of
obligations described in the foregoing clauses of this definition and that is
rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable rate
preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii) taxable
or non-taxable auction rate securities which have interest rates reset on
periodic short term intervals (typically each 7, 14, 21, 28 or 49 days via a
Dutch auction process) and which at the time of purchase have been rated and
the ratings for which (A) for direct issues, must not be less than "P2" if
rated by Moody's and not less than "A2" if rated by S&P and (B) for
collateralized issues which follow the asset coverage tests set forth in the
Investment Company Act of 1940, as amended, must have long-term ratings of at
least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (viii) any
investments hereafter developed which are substantially comparable to those
described above in this clause (1); and (2) otherwise (i) any evidence of any
obligation issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof); (ii) demand or time deposits with, and certificates of deposit or
acceptances issued by, any bank or trust company organized under the laws of
the United States of America or any state thereof (including the Trustee) whose
unsecured, unguaranteed long-term debt obligations are rated "A" by Standard &
Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc.
("Moody's") or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii)
repurchase agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher,
or whose unsecured, unguaranteed commercial paper obligations are rated "A-2"
by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with
respect to
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<PAGE> 12
any obligation described in subclauses (i), (ii) or (iv) of this clause (2);
(iv) commercial paper (including both noninterest-bearing discount obligations
and interest-bearing obligations payable on demand or on a specified date not
later than 180 days from the date of acquisition thereof) and having a rating
of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any
money market fund or other similar investment company all of whose investments
consist primarily of obligations described in the foregoing clauses of this
definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi)
taxable auction rate securities commonly known as "money market notes" that at
the time of purchase have been rated and the ratings for which (A) for direct
issues, must not be less than "P2" if rated by Moody's and not less than "A2"
if rated by S&P and (B) for collateralized issues which follow the asset
coverage tests set forth in the Investment Company Act of 1940, as amended,
must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if
rated by Moody's; or (vii) any investments hereafter developed which are
substantially comparable to those described above in this clause (2).
"CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) MAXXAM, directly or indirectly, not having (other than by reason
of the existence of a Lien, but including by reason of the foreclosure of or
other realization upon a Lien) direct or indirect sole beneficial ownership (as
defined under Regulation 13d-3 of the Exchange Act as in effect on the date of
this Indenture) of at least 40% of the total common equity, on a fully diluted
basis, of the Company; provided, however, that such ownership by MAXXAM,
directly or indirectly, of 30% or greater, but less than 40% of the total
common equity, on a fully diluted basis, of the Company shall not be a Change
of Control if MAXXAM, through direct representation or through persons
nominated by it, controls a majority of the Board of Directors necessary to
effectuate any actions by the Board of Directors; and provided, further, that
the foregoing minimum percentages shall be deemed not satisfied if any person
or group shall, directly or indirectly, own more of the total voting power
entitled to vote generally in the election of directors of the Company than
MAXXAM; (ii) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is used
in Section 13(d)(3) of the Exchange Act) other than to a person that is a
Subsidiary of MAXXAM both immediately before and immediately after giving
effect to such transaction or to any of the Principals (as defined below) or to
a group of which one or more of the Principals is a member (provided that one
or more of the Principals beneficially owns Voting Stock representing at least
80% of the voting power in the election of a majority of the directors of
MAXXAM of the Voting Stock
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<PAGE> 13
beneficially owned by such group); (iii) the approval by the stockholders of
the Company of a plan for the liquidation or dissolution of the Company other
than into MAXXAM or a Subsidiary of MAXXAM; (iv) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than any of the
Principals or a group of which one or more of the Principals is a member
(provided that one or more of the Principals beneficially owns Voting Stock
representing at least 80% of the voting power in the election of a majority of
the directors of MAXXAM of the Voting Stock beneficially owned by such group),
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of Voting Stock
representing more than 35% of the voting power in the election of a majority of
the directors of MAXXAM represented by all outstanding Voting Stock of MAXXAM;
(v) the consummation of the first transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above) other than a group of which one or more of the Principals is a
member (provided that one or more of the Principals beneficially owns Voting
Stock representing at least 80% of the voting power in the election of a
majority of the directors of MAXXAM of the Voting Stock beneficially owned by
such group) becomes the "beneficial owner" (as defined above), directly or
indirectly, of Voting Stock representing more of the voting power in the
election of a majority of the directors of MAXXAM represented by all
outstanding Voting Stock of MAXXAM than is at the time represented by Voting
Stock "beneficially owned" (as defined above) by the Principals; or (vi) the
first day on which a majority of the members of the Board of Directors of
MAXXAM are not Continuing Directors. For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of MAXXAM will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of
such entity that has been so transferred. "Continuing Directors" means, as of
any date of determination, any member of the Board of Directors of MAXXAM who
(i) was a member of such Board of Directors on the date of this Indenture or
(ii) was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election. "Principals" means Charles
Hurwitz, his wife and lineal descendants, any trust for the benefit thereof,
and/or any entity in which any one or more of such persons hold an 80% or more
controlling interest.
"CODE" means the Internal Revenue Code of 1986, as amended (or any
successor statute thereto), and the regulations promulgated thereunder, all as
in effect from time to time.
"COLLATERAL" means, at any time of determination, all property upon
which a Lien exists at such time in favor of the Trustee for
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<PAGE> 14
the benefit of Holders pursuant to Articles 5 and 10, including pursuant to
instruments executed and delivered in compliance with Sections 5.01(i),
10.01(b) or 10.13.
"COLLATERAL DEFAULT" means a Default consisting of the Company's
failure to comply with any provision contained in Article 10 of this Indenture
which (i) either (A) results in an impairment of the validity, perfection, or
priority of the Lien of this Indenture with respect to any portion of the
Collateral having a fair market value in excess of $1 million in the aggregate
or (B) would be materially adverse in any way to the Holders (any Default
consisting of the failure to make any offer required to be made pursuant to
Article 10 being deemed, without limitation, material for this purpose) and
(ii) would constitute an Event of Default unless cured within the applicable
cure or grace period set forth in Section 6.01(3).
"COMPANY" means MAXXAM Group Holdings Inc., a Delaware corporation,
and, subject to the provisions of Article 5 hereof, shall mean its successors
and assigns; provided, however, that, for purposes of any provision contained
herein which is required by the TIA, "Company" shall also mean each other
obligor (if any) on the indenture securities.
"CONSOLIDATED CASH FLOW COVERAGE RATIO" of the Company means, as of
the date of the transaction giving rise to the need to calculate the
Consolidated Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of
(i) the aggregate amount of EBITDA for the immediately preceding four fiscal
quarters for which financial information in respect thereof is available
immediately prior to the Transaction Date to (ii) the aggregate Consolidated
Interest Expense for the fiscal quarter in which the Transaction Date occurs
and to be accrued during the three fiscal quarters immediately subsequent
thereto (based upon the pro forma amount of Indebtedness of the Company and its
Restricted Subsidiaries reasonably expected by the Company to be outstanding on
the Transaction Date and thereafter other than the Timber Notes), assuming for
the purposes of this measurement the continuation of market interest rates
prevailing on the Transaction Date and base interest rates in respect of
floating interest rate obligations equal to the base interest rates on such
obligations in effect as of the Transaction Date; provided that if the Company
or any of its Restricted Subsidiaries is a party to any Interest Rate
Protection Agreements which would have the effect of changing the interest rate
on any Indebtedness of the Company or any of its Restricted Subsidiaries for
such four quarter period (or a portion thereof), the resulting rate shall be
used for such four quarter period or portion thereof; and provided, further,
that any Consolidated Interest Expense with respect to Indebtedness Incurred or
retired by the Company or any of its Restricted Subsidiaries during the fiscal
quarter in which the Transaction Date occurs shall be
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<PAGE> 15
calculated as if such Indebtedness was so Incurred or retired on the first day
of the fiscal quarter in which the Transaction Date occurs; and provided,
further, that if, during the four fiscal quarters referred to in clause (i) of
this definition, (A) the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to
the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale calculated on a pro forma basis as if such Asset
Sale and any related retirement of Indebtedness had occurred on the first day
of such period or (B) the Company or any of its Restricted Subsidiaries shall
have acquired any material assets out of the ordinary course of business,
EBITDA shall be calculated on a pro forma basis as if such asset acquisition
and any related financing had occurred on the first day of such period.
"CONSOLIDATED INCOME TAX EXPENSE" of the Company means (without
duplication), for any period, the aggregate of the income tax expense (net of
applicable credits) of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP other than income
taxes (including credits) with respect to items of net income excluded from the
definition of Consolidated Net Income.
"CONSOLIDATED INTEREST EXPENSE" of the Company means, for any period
(without duplication), (i) the sum of (A) the interest expense of the Company
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP, (B) all fees, commissions, discounts and other charges of
the Company and its Subsidiaries with respect to letters of credit and bankers'
acceptances and the costs (net of benefits) associated with Interest Rate
Protection Agreements for such period, determined on a consolidated basis in
accordance with GAAP, and (C) dividends declared on Redeemable Stock of the
Company or any Restricted Subsidiary held by persons other than the Company or
a Wholly Owned Restricted Subsidiary (other than dividends payable in Capital
Stock of the Company or pro rata dividends payable to all stockholders of such
class or series of Stock payable in Capital Stock of any such Restricted
Subsidiary), less (ii) the amortization or write-off of deferred financing
costs by the Company and its Subsidiaries during such period, determined on a
consolidated basis in accordance with GAAP (including, without limitation, the
amortization of any unamortized deferred financing costs in connection with any
refinancing of the Credit Agreement); in the case of clauses (i) and (ii) of
this definition, without giving effect to any such items and amounts
attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as
any Timber Notes are outstanding, during such period.
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<PAGE> 16
"CONSOLIDATED NET INCOME" of the Company means, for any period, the
aggregate net income (or net loss, as the case may be) of the Company and its
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP ("GAAP Net Income"); provided that (without duplication) there shall
be excluded from GAAP Net Income (to the extent otherwise included therein) (i)
gains and losses (net of applicable taxes) from (A) Asset Sales or reserves
relating thereto, (B) any sale, transfer or other disposition of any Capital
Stock or ownership interests in (x) Salmon Creek or (y) any Unrestricted
Subsidiary to which non-cash proceeds received by the Company in respect of a
Salmon Creek Distribution have been contributed by the Company as contemplated
by Section 4.04(d), (C) the sale, transfer or other disposition by the Company
of any assets received by the Company in respect of a Salmon Creek Distribution
or (D) any sale, transfer or other disposition of Kaiser Shares; (ii) items
classified as extraordinary and gains and losses from discontinued operations;
(iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any
person that is not a Subsidiary of the Company or that is accounted for on the
equity method of accounting, provided that in each case the amount of dividends
or other distributions actually paid to the Company (other than Salmon Creek
Distributions) during such period shall be added to Consolidated Net Income (to
the extent, in the case of clause (A), that the Company elects to include such
distributions in the computation of Consolidated Net Income at the time of the
computation thereof) and the amount of dividends or other distributions
actually paid to a Restricted Subsidiary of the Company (other than Salmon
Creek Distributions) during such period shall be included in computing the net
income (or net loss, as the case may be) of such Restricted Subsidiary, subject
to clause (v) below (to the extent, in the case of clause (A), that the Company
elects to include such distributions in the computation of Consolidated Net
Income at the time of the computation thereof); (iv) except to the extent
includable pursuant to clause (iii) of this definition, the net income (or
loss) of any other person accrued or attributable to any period prior to the
date it becomes a Subsidiary of the Company or is merged into or consolidated
with the Company or any of its Subsidiaries or such other person's property (or
a portion thereof) is acquired by the Company or any of its Subsidiaries; (v)
the net income (or loss) of any Restricted Subsidiary during such period if and
to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary to the Company or any Restricted
Subsidiary of any such net income is not at the time permitted by operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or government regulation applicable to such Restricted
Subsidiary, provided that the amount of dividends or other distributions
actually paid to the Company by such Restricted Subsidiary (other than Salmon
Creek Distributions) shall be added to Consolidated Net Income during such
period and the amount of dividends or other
9
<PAGE> 17
distributions actually paid to a Restricted Subsidiary of the Company (the
"Recipient Restricted Subsidiary") by such Restricted Subsidiary (other than
Salmon Creek Distributions) shall be included in computing the net income (or
net loss, as the case may be) of such Recipient Restricted Subsidiary during
such period; and (vi) the transfer of the Kaiser Shares to the Company by
MAXXAM; provided that there shall be excluded from Consolidated Net Income, to
the extent otherwise included therein, the amount of dividends and
distributions made with the net proceeds of any Equity Offering by any
Subsidiary of the Company.
"CREDIT AGREEMENT" means the agreement dated November 10, 1995,
between Bank of America, National Trust and Savings Association and Pacific
Lumber, together with all related notes, letters of credit, collateral
documents and guarantees and any other related agreements and instruments
executed and delivered in connection therewith, in each case, as amended,
supplemented, restated, restructured, renewed, extended, refinanced or
otherwise modified, in whole or in part, from time to time.
"DEED OF TRUST" means the Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993,
from Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit
of the Collateral Agent named therein, as the same has been or may be amended,
supplemented or otherwise modified from time to time.
"DEFAULT" means any event which is, or after notice or passage of time
or both would be, an Event of Default as specified in Section 6.01.
"DEFINITIVE SECURITIES" means Securities that are in the form of the
Securities attached hereto as Exhibit A that do not include the paragraph or
schedule called for by footnotes 1 and 5 thereof.
"DEPOSITORY" means, with respect to the Global Securities, the person
specified in Section 2.03 as the Depository with respect to the Global
Securities, until a successor shall have been appointed and become such
pursuant to the applicable provision of this Indenture and, thereafter,
"Depository" shall mean or include such successor.
"EBITDA" of the Company means, for any period, the sum for such period
of Consolidated Net Income (excluding, to the extent included in Consolidated
Net Income for such period, any gains (net of applicable taxes) from any sale,
transfer or other disposition of any Capital Stock or ownership interests in
any Unrestricted Subsidiary to which non-cash proceeds received by a Restricted
Subsidiary in respect of a Salmon Creek Distribution have been contributed by a
Restricted Subsidiary as contemplated by Section 4.04(d)) plus, to the extent
reflected in the income statement for
10
<PAGE> 18
such period from which Consolidated Net Income is determined, without
duplication, (i) Consolidated Interest Expense, (ii) Consolidated Income Tax
Expense, (iii) depreciation and depletion expense, (iv) amortization expense
(including amortization of deferred financing costs), and (v) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity; (A) in the case of clauses
(iii), (iv) and (v) of this definition, of the Company and its Subsidiaries
determined on a consolidated basis in accordance with GAAP for such period, but
without giving effect to any such items and amounts attributable to any
Unrestricted Subsidiary during such period or to Scotia Pacific so long as any
Timber Notes are outstanding, and (B) in the case of clauses (iv) and (v) of
this definition, excluding the amounts thereof excluded from the definition of
"Consolidated Interest Expense" pursuant to clause (ii) of such definition.
"EQUITY OFFERING" means any sale, public or private, of equity
securities of any person.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
(or any successor statute thereto), and the rules and regulations promulgated
thereunder.
"EXCHANGE OFFER" means the offer that may be made by the Company
pursuant to the Registration Rights Agreement to exchange Series A Securities
for Series B Securities.
"EXEMPT DISTRIBUTIONS" means any and all dividends, cash, instruments
and other property and proceeds received, receivable or otherwise distributed
on any of the Pledged Shares other than: (i) any liquidating dividend or other
liquidating distribution or other similar extraordinary dividend or
distribution; (ii) any dividend or other distribution on Pledged MGI Shares (or
on Stock of MGI's permitted successor pursuant to Section 10.13) if the amount
of all dividends and other distributions on the Stock of MGI made on or after
the Issue Date to and including the date of such dividend or other distribution
on such Pledged MGI Shares (other than dividends and distributions to the
extent that such dividends or distributions were previously paid or delivered
to the Trustee for inclusion in the Collateral, whether by deposit into an
Account or otherwise, and other than amounts referred to in clauses (iv), (v)
and (vi) below) exceeds 100% of the consolidated net income of MGI plus 100% of
the consolidated depletion expense of MGI, each determined in accordance with
GAAP, accrued on a cumulative basis subsequent to September 30, 1996; (iii) any
dividend or other distribution on any Pledged Kaiser Shares to the extent of
the amount, if any, by which all dividends and other distributions on such
Pledged Kaiser Shares during the 12-month period ending on and including the
date on which such dividend or distribution is paid (other than dividends and
distributions to the extent that such
11
<PAGE> 19
dividends or distributions were previously paid or delivered to the Trustee for
inclusion in the Collateral, whether by deposit into an Account or otherwise,
and other than amounts referred to in clauses (iv), (v) and (vi) below)
exceeds, on a per share basis, 7.5% of the average of the daily closing prices
(or average bid and asked prices if closing prices are not available) of such
Kaiser Shares over such consecutive 12-month period; (iv) any Salmon Creek
Distribution; (v) any dividend or other distribution consisting of proceeds of
any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale;
and (vi) any dividend or other distribution of proceeds of a transaction
effected pursuant to and in accordance with Sections 10.05(c)(2) or 10.13.
Notwithstanding the foregoing, any dividend or other distribution made on any
Pledged MGI Shares and received by the Company during any fiscal year shall be
an Exempt Distribution if such dividend or distribution, together with all
other dividends and other distributions previously so made during such fiscal
year (exclusive of amounts referred to in clauses (iv), (v) and (vi) above),
does not exceed 120% of the interest that has become payable or is to become
payable on the Securities during such year.
"EXTRAORDINARY DISTRIBUTION" means any and all dividends, cash,
instruments and other property and proceeds received, receivable or otherwise
distributed on any Pledged Shares other than: (i) an Exempt Distribution; (ii)
any Salmon Creek Distribution; (iii) any dividend or other distribution
consisting of proceeds of any Primary Share Sale by MGI or Kaiser or proceeds
of any Pledged Share Sale; and (iv) any dividend or other distribution of
proceeds of a transaction effected pursuant to and in accordance with Section
10.05(c)(2) or 10.13.
"GAAP" means, at any date, generally accepted accounting principles as
in effect on December 31, 1995, and used in the preparation of the Company's
consolidated balance sheet at such date and the Company's statements of
consolidated income and cash flows for the year then ended.
"GLOBAL SECURITY" means a Security that contains the paragraph
referred to in footnote 1 and the additional schedule referred to in footnote 5
to the form of the Security attached hereto as Exhibit A.
"GUARANTEE" means the guarantee of the Guarantor set forth in Article
12 hereof.
"GUARANTOR" See the definition of "MAXXAM".
"GUARANTOR'S OFFICERS' CERTIFICATE" means a certificate signed by two
Officers of the Guarantor.
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<PAGE> 20
"HOLDER" OR "SECURITYHOLDER" means the person in whose name a Security
is registered on the Registrar's books.
"INDEBTEDNESS" of any person means, at any date, any of the following
(without duplication): (i) the principal amount of all obligations
(unconditional or contingent) of such person for borrowed money (whether or not
there is recourse to the whole of the assets of such person or only to a
portion thereof) and the principal amount of all obligations (unconditional or
contingent) of such person evidenced by debentures, notes or other similar
instruments (including, without limitation, reimbursement obligations with
respect to letters of credit (except to the extent collateralized by cash or
Cash Equivalents), performance bonds (except to the extent collateralized by
cash or Cash Equivalents) and bankers' acceptances (except to the extent
collateralized by cash or Cash Equivalents)); (ii) all obligations of such
person to pay the deferred purchase price of property or services, except (A)
accounts payable and other current liabilities arising in the ordinary course
of business and (B) compensation, pension obligations and other obligations
arising from employee benefits and employee arrangements; (iii) Capital Lease
Obligations of such person; (iv) all Indebtedness of others secured by a Lien
on any asset of such person (other than assets referred to in clause (vi) of
Section 4.04(c) and the proceeds of such assets) whether or not such
Indebtedness is assumed or guaranteed by such person; (v) all Indebtedness of
others guaranteed by such person; and (vi) all Redeemable Stock, valued at the
greater of its voluntary or involuntary maximum fixed repurchase price (or its
stated liquidation value in the case of Preferred Stock that is not by its
terms redeemable) exclusive of accrued and unpaid dividends; and the amounts
thereof shall be the outstanding balance of any such unconditional obligations
as described in clauses (i) through (v) (other than clause (iv)), and the
maximum liability of any such contingent obligations at such date as described
in clauses (i) through (v) (other than with respect to clause (iv)) and, in the
case of clause (iv), the lesser of the fair value (as determined by the Board
of Directors) at such date of any asset subject to any Lien securing the
Indebtedness of others and the principal amount of the Indebtedness secured;
provided that the Indebtedness of any person shall not include (x) obligations
of such person arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business, provided that such
obligations are extinguished within two Business Days after their Incurrence
and (y) obligations of such person resulting from the endorsement of negotiable
instruments in the ordinary course of business. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Redeemable Stock as if such Redeemable Stock were
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<PAGE> 21
purchased on any date on which Indebtedness is required to be determined
pursuant to this Indenture, and if such price is based upon, or measured by,
the fair market value of such Redeemable Stock, such fair market value shall be
determined in good faith by the board of directors of the issuer of such
Redeemable Stock.
"INDENTURE" means this Indenture as amended, supplemented or otherwise
modified from time to time in accordance with the terms hereof.
"INTERCOMPANY NOTE" means that certain intercompany note in an initial
principal amount of $125,000,000, dated as of the Issue Date, payable by
MAXXAM to the Company.
"INTEREST PAYMENT DEFAULT" means a default in the payment of interest
when due and payable on any of the Securities which would constitute an Event
of Default if such payment were not made within the applicable cure or grace
period pursuant to Section 6.01(1).
"INTEREST RATE PROTECTION AGREEMENT" means any interest rate swap
agreement, interest rate cap agreement, currency swap agreement or other
financial agreement or arrangement designed to protect the Company or any
Subsidiary of the Company against fluctuations in interest rates or currency
exchange rates, as in effect from time to time.
"INVESTMENT" means with respect to any person (such person being
referred to in this definition as the "Investor") (without duplication), (i)
any amount paid or any property transferred, in each case, directly or
indirectly, by the Investor for Capital Stock or Redeemable Stock, partnership
interests or other securities of, or as a contribution to the capital of any
other person, (ii) any direct or indirect loan or advance by the Investor to
any other person other than accounts receivable of the Investor relating to the
purchase and sale of property or services arising in the ordinary course of
business, and (iii) any direct or indirect guarantee by the Investor of any
Indebtedness of any other person.
"ISSUE DATE" means December 23, 1996.
"KAISER" means Kaiser Aluminum Corporation, a Delaware corporation,
and any successor pursuant to a transaction governed by and in accordance with
Section 10.05(c)(2) of this Indenture or Section 10.05(c)(2) of the MGI
Indenture, as in effect on the date hereof.
"KAISER SHARE CASH EQUIVALENTS" means (i) the amount of any Trust
Moneys constituting proceeds of any Primary Share Sale by Kaiser or a Pledged
Share Sale of Pledged Kaiser Shares or any Extraordinary Distribution on
Pledged Kaiser Shares (or the
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<PAGE> 22
proceeds of any non-cash consideration received in any such transaction) that
are released from the Lien of the MGI Indenture and thereupon pledged under the
Indenture as a result of such Trust Moneys not having been utilized to purchase
MGI Notes pursuant to an offer by MGI to purchase MGI Notes at a price at least
equal to the respective Call Prices of the MGI Notes or as a result of payment
in full of the MGI Notes or defeasance of the MGI Notes pursuant to Article 8
of the MGI Indenture, divided by (ii) the greater of (A) the Net Proceeds per
share received by the Company with respect to Pledged Kaiser Shares released
from the Lien of the MGI Indenture in the transaction that resulted in the
deposit of such Trust Moneys thereunder and (B) $9.00 (as adjusted to reflect
any subdivision, combination or reclassification of Kaiser Shares). To the
extent that any of the Net Proceeds referred to in clause (ii)(A) of the
preceding sentence are other than cash, the amount of such non-cash Net
Proceeds attributable to each Pledged Kaiser Share released from the Lien of
the MGI Indenture for purposes of such clause (ii)(A) shall be determined by a
nationally recognized investment banking firm selected by the Company based on
the fair market value per share of such non-cash Net Proceeds received by the
Company in such transaction. As used in this definition, each of the terms
Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary
Distribution, Trust Moneys, Call Prices and Net Proceeds has the meaning
ascribed to such term in the MGI Indenture (as in effect on the date hereof).
"KAISER SHARES" means, at any time, the 27,938,250 shares of common
stock, par value $.01 per share, of Kaiser owned by the Company, and, as of the
Issue Date, pledged under the MGI Indenture, as such shares are (and any number
thereof as utilized in this Indenture is) adjusted to reflect any subdivision,
combination or reclassification (in a merger or otherwise) of such Kaiser
Shares on or after the Issue Date, and any securities or property substituted
for such Kaiser Shares pursuant to any Kaiser Transaction (as such term is
defined in Section 10.05(c)(2) of the MGI Indenture as in effect on the date
hereof) under the MGI Indenture.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions are not required by applicable law to be open in the States of New
York, California, Minnesota and Texas.
"LIEN" means, with respect to any asset, any lien, mortgage, pledge,
security interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement and any lease in the nature thereof) in
respect of such asset.
"MAKE-WHOLE AMOUNT" with respect to any Security means an amount equal
to the excess, if any, of (i) the present value of the remaining interest,
premium and principal payments due on such Security if such Security were
redeemed on August 1, 2000, computed
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<PAGE> 23
using a discount rate equal to the Treasury Rate plus 75 basis points, over
(ii) the outstanding principal amount of such Security. "Treasury Rate" is
defined as the yield to maturity at the time of the computation of United
States Treasury securities with a constant maturity (as compiled by and
published in the most recent Federal Reserve Statistical Release H.15 (519),
which has become publicly available at least two Business Days prior to the
date of the redemption notice or, if such Statistical Release is no longer
published, any publicly available source of similar market data) most nearly
equal to the then remaining maturity of the Security assuming redemption of the
Security on August 1, 2000; provided, however, that if the Make-Whole Average
Life of such Security is not equal to the constant maturity of the United
States Treasury securities for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the Make-
Whole Average Life of such Security is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
"MAKE-WHOLE AVERAGE LIFE" means the number of years (calculated to the
nearest one-twelfth) between the date of redemption and August 1, 2000.
"MAKE-WHOLE PRICE" with respect to any Security means the greater of
(i) the sum of the outstanding principal amount and the Make-Whole Amount of
such Security, and (ii) 110% of the outstanding principal amount of such
Security.
"MAXXAM" OR THE "GUARANTOR" means MAXXAM Inc., a Delaware corporation,
and, subject to the provisions of Article 12 hereof, any successor corporation
by way of merger, consolidation or purchase of all or substantially all of its
assets.
"MONEY" or "U.S. LEGAL TENDER" means such coin or currency of the
United States of America as at the time of payment is legal tender for the
payment of public and private debts.
"MGI" means MAXXAM Group Inc., a Delaware corporation, and any
successor Restricted Subsidiary pursuant to a transaction governed by and in
accordance with Section 10.13.
"MGI INDENTURE" means the Indenture dated as of August 4, 1993,
between MGI and Fleet National Bank, as successor to Shawmut Bank, N.A., as
trustee, pursuant to which the MGI Notes were issued, as the same has been or
may be amended, supplemented or otherwise modified from time to time. A true
and correct copy of the MGI Indenture, as amended through the date hereof, has
been delivered to the Trustee.
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<PAGE> 24
"MGI NOTES" means the debt securities outstanding pursuant to, and
whose terms are governed by, the MGI Indenture.
"MPI" means MAXXAM Properties Inc., a Delaware corporation, and any
successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"MXM GUARANTY" means the Unconditional Guarantee of Payment and
Performance, dated June 17, 1991, to General Electric Capital Corp. by MAXXAM
and MGI, as amended by agreements dated as of June 17, 1992 and December 30,
1992, as amended, supplemented or otherwise modified from time to time in a
manner that is not materially adverse to Holders.
"NET CASH PROCEEDS" means cash payments received (but if received in a
currency other than United States dollars, such payments shall not be deemed
received until the earliest time at which such currency is converted into
United States dollars) by the Company and/or any of its Restricted Subsidiaries
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, or the cash
realization of any non-cash proceeds of any Asset Sale, but, in each case, only
as and when, and to the extent, received by the Company or any of its
Restricted Subsidiaries) from an Asset Sale, in each case and without
duplication, net of (i) fees, expenses and other expenditures in connection
with such Asset Sale (whether or not such fees, expenses or expenditures are
then due and payable or made, as the case may be), (ii) the amounts paid to
repurchase or repay any Indebtedness, or the amount of any Indebtedness
retained, in each case which Indebtedness is either (A) secured, directly or
indirectly, by Liens on the assets which are the subject of such Asset Sale or
(B) associated with such assets and due in connection with such Asset Sale, and
other fees, expenses and other expenditures, in each case, incurred in
connection with such Asset Sale or the repurchase, repayment or assumption of
such Indebtedness (whether or not such fees, expenses or expenditures are then
due and payable), (iii) all amounts deemed appropriate by the Company (as
evidenced by a signed certificate of the Treasurer or Assistant Treasurer of
the Company delivered to the Trustee) to be provided as a reserve, in
accordance with GAAP, against any liabilities associated with such assets which
are the subject of such Asset Sale, (iv) all foreign, federal, state and local
taxes payable (including taxes reasonably estimated to be payable) in
connection with or as a result of such Asset Sale, (v) with respect to any
Asset Sale by a Restricted Subsidiary of the Company or any Primary Share Sale,
the portion of such cash payments required to be paid to persons holding a
minority interest in such Restricted Subsidiary and (vi) if such Asset Sale is
a Primary Share Sale by MGI, any of the proceeds of such Primary Share Sale
that are distributed by the issuer in such Primary Share Sale to its
stockholders; provided, in each such case, such fees, expenses,
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<PAGE> 25
expenditures and other amounts are not payable to an Affiliate of the Company.
"NET PROCEEDS" means any property, assets or other consideration of
any kind, whether tangible or intangible, received by the Company as a dividend
or distribution on any Pledged Shares of proceeds of any Primary Share Sale by,
or from any Pledged Share Sale of any of the Pledged Shares of, MGI or Kaiser,
in each case and without duplication, net of (i) fees, expenses and other
expenditures in connection with such Pledged Share Sale (whether or not such
fees, expenses or expenditures are then due and payable or made, as the case
may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the
amount of any Indebtedness assumed, in each case which Indebtedness is either
(A) secured, directly or indirectly, by Liens on the assets which are the
subject of such Pledged Share Sale or (B) associated with such assets and due
in connection with such Pledged Share Sale, and other fees, expenses and other
expenditures, in each case, incurred in connection with such Pledged Share Sale
or the repurchase, repayment or assumption of such Indebtedness (whether or not
such fees, expenses or expenditures are then due and payable), (iii) all
amounts deemed appropriate by the Company (as evidenced by a signed certificate
of the Treasurer or an Assistant Treasurer of the Company delivered to the
Trustee) to be provided as a reserve, in accordance with GAAP, against any
liabilities associated with such shares which are the subject of such Pledged
Share Sale and (iv) all foreign, federal, state and local taxes payable
(including taxes reasonably estimated to be payable) in connection with or as a
result of such dividend or distribution or Pledged Share Sale; provided, in
each such case, such fees, expenses, expenditures and other amounts are not
payable to an Affiliate of the Company; and provided, further, that, if other
than cash, Net Proceeds shall have as their value for purposes of this
Indenture their fair value as reasonably- determined by the Board of Directors.
"NOTICE OF ACCELERATION" means a written notice delivered during the
continuance of an Event of Default to the Company by the Trustee or by the
Holders of at least 25% in aggregate principal amount of the Securities then
outstanding, stating that an Event of Default has occurred and is continuing
and that the principal amount of and accrued and unpaid interest, if any, on
all of the Securities are due and payable; provided that a Notice of
Acceleration shall be deemed to have been delivered and to be effective for all
purposes under Article 10 of this Indenture upon the occurrence and during the
continuance of an event with respect to the Company specified in Section
6.01(5) or (6).
"OBLIGATIONS" means, with respect to the Company, any principal,
premium, interest, expenses, fees, indemnifications, reimbursements, damages
and other liabilities payable by the Company under the Securities or this
Indenture.
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<PAGE> 26
"OFFERING MEMORANDUM" means the final offering memorandum, dated
December 17, 1996, relating to the offer and sale of the Securities.
"OFFICER" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer,
the Secretary, an Assistant Secretary, the Controller or an Assistant
Controller of the Company or the Guarantor, as the case may be.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers of
the Company.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company, the Guarantor or the Trustee, as the case may be.
"PACIFIC LUMBER" means The Pacific Lumber Company, a Delaware
corporation, and any successor corporation by way of merger, consolidation or
purchase of all or substantially all of its assets.
"PACIFIC LUMBER INDENTURE" means the indenture, dated March 23, 1993,
between Pacific Lumber and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, as trustee, pursuant to which the Pacific
Lumber Senior Notes were issued, as amended, supplemented or otherwise
modified, or, in accordance with and subject to the provisions of Section
4.03(c), restated, restructured, renewed or refinanced in whole or in part from
time to time.
"PACIFIC LUMBER SENIOR NOTES" means the debt securities outstanding
pursuant to, and whose terms are governed by, the Pacific Lumber Indenture.
"PERSON" means any individual, corporation, partnership, joint
venture, association, limited liability company, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"PLEDGED KAISER SHARES" means, at any time, any Kaiser Shares which
are included in the Collateral at such time, and any securities or other
property substituted for Pledged Kaiser Shares pursuant to Section 10.05(c)
included in the Collateral at such time.
"PLEDGED MGI SHARES" means, at any time, any shares of Stock of MGI
included in the Collateral at such time, and any securities or other property
substituted for Pledged MGI Shares pursuant to Section 10.13 included in the
Collateral at such time.
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<PAGE> 27
"PLEDGED SHARE SALE" means a sale to any person of Pledged Shares
other than (i) a sale in connection with a transaction pursuant to and in
accordance with Section 10.13, (ii) a sale in connection with a transaction
pursuant to and in accordance with Section 10.05(c)(2) or (iii) a sale of
Pledged MGI Shares by the Company or one of its Subsidiaries to any of the
Company's Subsidiaries, in which the purchaser becomes a pledgor with respect
to such Pledged Shares pursuant to Article 10 hereof.
"PLEDGED SHARES" means the Pledged MGI Shares and the Pledged Kaiser
Shares.
"PREFERRED STOCK" as applied to the Capital Stock or Redeemable Stock
of any corporation, means Capital Stock or Redeemable Stock of any class or
classes (however designated) which is preferred as to the payment of dividends,
or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock or
Redeemable Stock, as the case may be, of any other class of such corporation.
"PRIMARY SHARE SALE" means (i) any issuance and sale of Stock by MGI
other than to the Company or any of its Subsidiaries (provided, that no
issuance of Stock in connection with a transaction pursuant to and in
accordance with Section 10.13 shall constitute a Primary Share Sale) and (ii)
any issuance and sale of common stock by Kaiser (provided, that no issuance of
Stock in connection with a transaction pursuant to and in accordance with
Section 10.05(c)(2), or pursuant to or in accordance with Section 10.05(c)(2)
of the MGI Indenture as in effect on the date hereof, shall constitute a
Primary Share Sale).
"PUBLIC EQUITY OFFERING" means an underwritten public offering of
common stock of the Company or MGI (or the successor in a transaction with MGI
pursuant to Section 10.13) pursuant to an effective registration statement
filed pursuant to the Securities Act.
"REDEEMABLE STOCK" of any person means any equity security of such
person that by its terms is required to be redeemed prior to the final Stated
Maturity of all principal of the Securities, or is redeemable at the option of
the holder thereof at any time prior to the final Stated Maturity of all
principal of the Securities and shall also include, in the case of the Company,
all Preferred Stock of the Company's Restricted Subsidiaries.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date hereof, by and among the Company and the other
parties named on the signature pages thereof, as such agreement may be amended,
modified or supplemented from time to time.
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<PAGE> 28
"RELEASED KAISER SHARES" means (i) all or any portion of the Kaiser
Shares transferred to the Company by MAXXAM as of the Issue Date (as such
shares are (and any number thereof as utilized in this indenture is) adjusted
to reflect any subdivision, combination or reclassification (in a merger or
otherwise) of such Kaiser Shares on or after the Issue Date) that are released
after the Issue Date from the Lien of the MGI Indenture as a result of (a)
payment in full of the MGI Notes, (b) defeasance of the MGI Notes pursuant to
Article 8 of the MGI Indenture, or (c) early retirement of a portion of the MGI
Notes resulting in a release of some of the Kaiser Shares from the Lien of the
MGI Indenture pursuant to Section 10.05(c)(1) thereof (as in effect on the date
hereof); and (ii) all or any portion of any securities or other property
substituted for Kaiser Shares under the MGI Indenture pursuant to Section
10.05(c)(2) thereof (as in effect on the date hereof) that are released from
the Lien of the MGI Indenture as the result of an occurrence referred to in
clause (a), (b) or (c) of the preceding clause (i); provided, however, that
Kaiser Shares and other collateral released from the Lien of the MGI Indenture
pledged to secure Indebtedness that refinances the MGI Notes (as permitted by
Section 4.05(b)) shall not be deemed to be Released Kaiser Shares.
"RESTRICTED INVESTMENT" means any Investment in an Affiliate (other
than any Unrestricted Subsidiary referred to in Section 4.04(d)) of the
Company, except for (i) the Intercompany Note and (ii) the Company's ownership
of Kaiser Shares or any other asset that is included in the Collateral under
the Indenture or the collateral under the MGI Indenture.
"RESTRICTED SUBSIDIARY" means, as of any determination date, each of
the Subsidiaries of the Company which is not as of such determination date an
Unrestricted Subsidiary of the Company.
"SALMON CREEK" means Salmon Creek Corporation, a Delaware corporation,
or any successor corporation, by way of merger, consolidation, purchase of all
or substantially all of its assets, or otherwise, which holds the Salmon Creek
Property on the date of this Indenture but which may not acquire any other
assets (other than assets incidental to the operation, disposition, management
and maintenance of the Salmon Creek Property or assets received (i) in respect
of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any
part of the real property constituting the Salmon Creek Property or (iii)
otherwise in connection with Salmon Creek or the Salmon Creek Property, except
in connection with the harvesting of timber located on the Salmon Creek
Property), except in exchange for or out of the proceeds of the sale or
disposition of the Salmon Creek Property.
"SALMON CREEK DISTRIBUTION" means a dividend or other distribution
identified as a "Salmon Creek Distribution" by the
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<PAGE> 29
Company in writing to the Trustee at the time of such dividend or other
distribution.
"SALMON CREEK PROPERTY" means any of the property described on Exhibit
C to this Indenture or any assets or Stock, in each case, held by Salmon Creek.
"SCOTIA PACIFIC" means Scotia Pacific Holding Company, a Delaware
corporation, and any successor corporation, by way of merger, consolidation,
purchase of all or substantially all of its assets, or otherwise.
"SCOTIA PACIFIC AGREEMENTS" means any agreements between Scotia
Pacific and Pacific Lumber or any Subsidiary of Pacific Lumber as the same may
be amended after the date hereof in accordance with the terms thereof,
including, without limitation, the Master Purchase Agreement, dated as of March
23, 1993, between Scotia Pacific and Pacific Lumber, the Services Agreement,
dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the
Additional Services Agreement, dated as of March 23, 1993, between Scotia
Pacific and Pacific Lumber, the Environmental Indemnification Agreement, dated
as of March 23, 1993, between Scotia Pacific and Pacific Lumber, and the
Reciprocal Rights Agreement, dated as of March 18, 1993, among Scotia Pacific,
Pacific Lumber and Salmon Creek.
"SEC" means the Securities and Exchange Commission or any successor
regulatory agency thereto.
"SECURITIES" means the Series A Securities and the Series B
Securities, issued, authenticated and delivered pursuant to this Indenture, as
amended, restated, restructured, renewed, extended, or otherwise modified, in
whole or in part, from time to time.
"SECURITIES ACT" means the Securities Act of 1933, as amended (or any
successor statute thereto), and the rules and regulations promulgated
thereunder.
"SECURITIES CUSTODIAN" means the Trustee, as custodian with respect to
the Global Securities, or any successor entity thereto.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the
Company which at the time of determination had, or any group of Restricted
Subsidiaries which, if merged into each other at the time of determination,
would at the time of determination have had, (i) assets which, as of the date
of the Company's most recent quarterly consolidated balance sheet, constituted
at least 10% of the Company's total assets on a consolidated basis as of such
date, (ii) revenues for the 12-month period ending on the date of the Company's
most recent quarterly consolidated statement of income which constituted at
least 10% of the Company's total revenues on
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<PAGE> 30
a consolidated basis for such period, or (iii) EBITDA for the 12-month period
ending on the date of the Company's most recent quarterly consolidated
statement of income which constituted at least 10% of the Company's total
EBITDA on a consolidated basis for such period (it being understood that for
the purposes of clause (iii) of this definition, EBITDA of any Restricted
Subsidiary or group of Restricted Subsidiaries of the Company for any period
shall be that portion of the Company's total EBITDA attributable to such
Restricted Subsidiary or group of Restricted Subsidiaries during such period).
"STATED MATURITY", when used with respect to the payment of any
principal of, or accrued interest on, any Security, means the date specified in
such Security as the fixed date on which such principal of or accrued interest
on such Security is due and payable, as the case may be.
"STOCK" of any person means, collectively, the Capital Stock and the
Redeemable Stock of such person.
"SUBSIDIARY" means, with respect to any person, (i) any corporation of
which more than 50% of the outstanding Capital Stock and Redeemable Stock
having ordinary voting power to elect a majority of the board of directors of
the corporation (irrespective of whether at the time Capital Stock or
Redeemable Stock of any other class or classes of such corporation shall or
might have voting power upon the occurrence of any contingency) is at the time
owned, directly or indirectly, by such person, or by one or more other
Subsidiaries of such person, or by such person and one or more other
Subsidiaries of such person, or (ii) any other entity of which more than 50% of
the outstanding equity ownership interests are at the time owned, directly or
indirectly, by such person, or by one or more other Subsidiaries of such
person, or by such person and one or more other Subsidiaries of such person.
Notwithstanding the foregoing, neither Kaiser nor any Subsidiary of Kaiser
shall be deemed a Subsidiary of the Company for any purpose under this
Indenture unless ownership by the Company of more than 50% of the outstanding
Capital Stock of Kaiser resulted from the acquisition (other than in connection
with a Kaiser Transaction, a dividend or distribution on Capital Stock of
Kaiser, a reclassification of shares of Capital Stock of Kaiser or any other
transaction in which the Company or any Restricted Subsidiary of the Company
receives Capital Stock or other securities of Kaiser in exchange for or in
respect of other shares of Capital Stock or securities of Kaiser) by the
Company of Kaiser Capital Stock after the Issue Date.
"TAKING" means any sale, transfer or other disposition of all or any
part of the assets of the Company and its Restricted Subsidiaries that occurs
by reason of condemnation or eminent domain or other similar proceedings
exercised by, or by consensual transfer by the Company or its Restricted
Subsidiaries of assets
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<PAGE> 31
to, the United States of America or any State, municipality, agency or other
governmental authority thereof.
"TAX SHARING AGREEMENTS" means (i) the tax allocation agreement, dated
May 21, 1988, by and among MAXXAM, Pacific Lumber and certain other
subsidiaries of MAXXAM and MGI, as amended by the tax allocation agreement,
dated as of March 23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific
and Salmon Creek, and as further amended by the tax allocation agreement, dated
as of August 4, 1993, by and between MAXXAM and MGI, (ii) the tax allocation
agreement, dated as of July 3, 1990, by and between MAXXAM and Britt and (iii)
the tax allocation agreement, dated as of the Issue Date, by and between MAXXAM
and the Company; each as amended, supplemented or otherwise modified from time
to time.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa
through 77bbbb) as in effect on the date of this Indenture, except as otherwise
expressly provided herein.
"TIMBER NOTE INDENTURE" means the indenture, dated as of March 23,
1993, between Scotia Pacific and State Street Bank and Trust Company, as
successor to The First National Bank of Boston, as trustee, pursuant to which
the Timber Notes were issued, as amended, supplemented or otherwise modified
from time to time.
"TIMBER NOTES" means the 7.95% Timber Collateralized Notes due 2015,
issued by Scotia Pacific, as amended, supplemented or otherwise modified, in
whole or in part, from time to time in accordance with the terms of the Timber
Note Indenture.
"TRANSFER RESTRICTED SECURITIES" means securities that bear or are
required to bear the legend set forth in Section 2.06.
"TRUST OFFICER" means any officer of the Trustee assigned by the
Trustee to administer its corporate trust matters.
"TRUSTEE" means the party named as such in this Indenture until a
successor replaces it in accordance with the terms of this Indenture and,
thereafter, means the successor.
"UNIFORM COMMERCIAL CODE" means the New York Uniform Commercial Code
as in effect from time to time, except with respect to matters concerning the
validity and perfection of security interests of the Trustee in favor of the
Holders in the Accounts, in which case such term shall mean the Minnesota
Uniform Commercial Code as in effect from time to time.
"UNRESTRICTED INVESTMENTS OUTSTANDING" means, at any time of
determination, in respect of any Unrestricted Subsidiary, the difference
between (i) the sum of all Unrestricted Investments theretofore made by the
Company or any Restricted Subsidiary in
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<PAGE> 32
such Unrestricted Subsidiary after the date of this Indenture, minus (ii) the
amount of all dividends and distributions paid to the Company or a Restricted
Subsidiary (to the extent that the Company does not elect to include the amount
of such dividends and distributions in the computation of Consolidated Net
Income pursuant to the parenthetical of clause (iii) of the definition thereof
at the time of determination) and all repayments of the principal amount of
loans or advances by such Unrestricted Subsidiary to the Company or any of its
Restricted Subsidiaries during the period that such person was an Unrestricted
Subsidiary and any other reduction of Unrestricted Investments in such
Unrestricted Subsidiary during the period that such person was an Unrestricted
Subsidiary (the amount of any Unrestricted Investment returned or reduced, if
other than in cash or a sum certain guaranteed, to be the fair market value as
determined in good faith by the Board of Directors, whose determination shall
be evidenced by a resolution of the Board of Directors filed with the Trustee);
provided that the amount of Unrestricted Investments Outstanding in respect of
any Unrestricted Subsidiary shall at no time be a negative amount.
"UNRESTRICTED SUBSIDIARY" means (i) each of the Subsidiaries of the
Company so designated by a resolution adopted by the Company's Board of
Directors and whose creditors have no direct or indirect recourse (including,
but not limited to, recourse with respect to the payment of principal or
interest on Indebtedness of such Subsidiary) to the Company or a Restricted
Subsidiary (except to the extent such recourse arises (A) solely by operation
of law and not pursuant to a contractual or other consensual arrangement or (B)
pursuant to an Investment or a Restricted Investment permitted by this
Indenture), (ii) any joint venture, partnership or other person (other than a
Subsidiary of the Company, Kaiser or a Subsidiary of Kaiser) in which the
Company and/or its Subsidiaries have an equity ownership interest equal to or
greater than 5% and (except for any Unrestricted Subsidiary referred to in
Section 4.04(d)) in which no Affiliate of the Company has a direct or an
indirect equity ownership interest in excess of 5% therein other than by virtue
of the direct or indirect equity ownership interest in such joint venture,
partnership or other person held (in the aggregate) by the Company and/or one
or more of its Subsidiaries and (iii) Salmon Creek. The Board of Directors may
designate an Unrestricted Subsidiary to be a Restricted Subsidiary, provided,
that any such redesignation shall be deemed to be an Incurrence by the Company
and its Restricted Subsidiaries of the Indebtedness (if any) of such
redesignated Restricted Subsidiary for purposes of Section 4.03 as of the date
of such redesignation to the extent that such Indebtedness does not already
constitute Indebtedness of the Company or one or more of its Restricted
Subsidiaries. Subject to the foregoing, the Board of Directors of the Company
also may designate any Restricted Subsidiary (other than Scotia Pacific so long
as there are any Timber Notes outstand-
25
<PAGE> 33
ing) to be an Unrestricted Subsidiary, provided, that (x) the amount of any
outstanding Investments by the Company and its Restricted Subsidiaries in such
Restricted Subsidiary shall be deemed to be Unrestricted Investments
Outstanding at the time of such designation and (y) immediately after giving
effect to such designation and to the characterization of the Investments by
the Company and its Restricted Subsidiaries in such newly designated
Unrestricted Subsidiary, the Company and its remaining Restricted Subsidiaries
could make at least $1.00 of additional Restricted Payments or Unrestricted
Investments pursuant to Section 4.04.
"U.S. GOVERNMENTAL OBLIGATIONS" means any evidence of obligations
issued directly or fully guaranteed or insured by the United States of America
or any agency or instrumentality thereof for the payment of which the full
faith and credit of the United States of America is pledged and which are not
callable at the issuer's option.
"U.S. LEGAL TENDER" See the definition of "money."
"VOTING STOCK" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary
(i) which is a corporation of which all of the outstanding shares of Capital
Stock and Redeemable Stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether at the time
Capital Stock or Redeemable Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) are owned at the time, directly or indirectly (through one or more
Wholly Owned Restricted Subsidiaries), by the Company (except for director's
qualifying shares), or (ii) which is any other entity of which all of the
outstanding equity ownership interests are owned at the time, directly or
indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the
Company.
SECTION 1.02. OTHER DEFINITIONS.
<TABLE>
<S> <C>
"Accounts" . . . . . . . . . . . . . . . . . . . . . . . 10.03(a)
"Adjustment Period" . . . . . . . . . . . . . . . . . . . 4.08(b)
"Aggregate Redemption Price" . . . . . . . . . . . . . . 10.05(g)
"Asset Sale Offer" . . . . . . . . . . . . . . . . . . . 4.07(c)
"Asset Sale Offer Amount" . . . . . . . . . . . . . . . . 4.07(b)
"Asset Sale Offer Notice" . . . . . . . . . . . . . . . . 4.07(d)
"Asset Sale Purchase Date" . . . . . . . . . . . . . . . 4.07(d)
"Asset Sale Purchase Notice" . . . . . . . . . . . . . . 4.07(e)
"Asset Sale Purchase Price" . . . . . . . . . . . . . . . 4.07(c)
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . 6.01
</TABLE>
26
<PAGE> 34
<TABLE>
<S> <C>
"Cash Collateral Account" . . . . . . . . . . . . . . . . 10.03(a)
"Cash Collateral Default Account" . . . . . . . . . . . . 10.03(a)
"Cash Collateral Offer Account" . . . . . . . . . . . . . 10.03(a)
"Cash Collateral Public Equity Offering Account" . . . . 10.03(a)
"Change of Control Offer Notice" . . . . . . . . . . . . 4.09(b)
"Change of Control Purchase Date" . . . . . . . . . . . . 4.09(a)
"Change of Control Purchase Notice" . . . . . . . . . . . 4.09(c)
"Change of Control Purchase Price" . . . . . . . . . . . 4.09(a)
"Collateralized Cash Proceeds Offer" . . . . . . . . . . 10.05(f)
"Collateralized Cash Proceeds Offer Amount" . . . . . . . 10.05(f)
"Collateralized Cash Proceeds Offer Notice" . . . . . . . 10.05(f)
"Collateralized Cash Proceeds Purchase Date" . . . . . . 10.05(f)
"Collateralized Cash Proceeds Purchase Notice" . . . . . 10.05(f)
"Collateralized Cash Proceeds Purchase Price" . . . . . . 10.05(f)
"Company Party" . . . . . . . . . . . . . . . . . . . . . 4.08(a)
"Continuing Directors" . . . . . . . . . . . . . . . . . 1.01 (within the
definition of
"Change of
Control")
"covenant defeasance option" . . . . . . . . . . . . . . 8.01(b)
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . 6.01
"Dividend Encumbrances" . . . . . . . . . . . . . . . . . 4.17
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Event of Default" . . . . . . . . . . . . . . . . . . . 6.01
"GAAP Net Income" . . . . . . . . . . . . . . . . . . . . 1.01 (within the
definition of
"Consolidated Net
Income")
"Headwaters Joint Venture . . . . . . . . . . . . . . . . 4.08(b)
"Incur" (and the terms "Incurred" and "Incurrence"
have correlative meanings) . . . . . . . . . . . 4.03(a)
"Initial Salmon Creek Agreement . . . . . . . . . . . . . 4.08(b)
"Investor" . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the
definition of
"Investment")
"Kaiser Transaction" . . . . . . . . . . . . . . . . . . 10.05(c)
"legal defeasance option" . . . . . . . . . . . . . . . . 8.01(b)
"maximum fixed repurchase price" . . . . . . . . . . . . 1.01 (within the
definition of
"Indebtedness")
"MGI Asset Sale" . . . . . . . . . . . . . . . . . . . . 4.07(b)
"MGI Refinancing Indebtedness" . . . . . . . . . . . . . 4.05(b)
"Monetization" . . . . . . . . . . . . . . . . . . . . . 10.05(b)
</TABLE>
27
<PAGE> 35
<TABLE>
<S> <C>
"Moody's" . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within
the definition of
"Cash
Equivalents")
"Non-Cash Amount . . . . . . . . . . . . . . . . . . . . "10.05(f)
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . 2.03
"PL Asset Sale" . . . . . . . . . . . . . . . . . . . . . 4.07(b)
"PPI Index" . . . . . . . . . . . . . . . . . . . . . . . 4.08(b)
"Principals" . . . . . . . . . . . . . . . . . . . . . . 1.01 (within
the definition of
"Change of
Control")
"Recipient Restricted Subsidiary" . . . . . . . . . . . . 1.01 (within
the definition of
"Consolidated Net
Income")
"refinance" (and the terms "refinancing" and
"refinanced" have correlative meanings) . . . . 4.03(c)
"Refinancing Indebtedness" . . . . . . . . . . . . . . . 4.03(c)
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Repurchase" . . . . . . . . . . . . . . . . . . . . . . 4.04(a)
"Restricted Payment" . . . . . . . . . . . . . . . . . . 4.04(a)
"S&P" . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the
definition of
"Cash
Equivalents")
"Series A Securities" . . . . . . . . . . . . . . . . . . Introduction
"Series B Securities" . . . . . . . . . . . . . . . . . . Introduction
"Transaction Date" . . . . . . . . . . . . . . . . . . . 1.01 (within
the definition of
"Consolidated
Cash Flow Coverage
Ratio")
"Treasury Rate" . . . . . . . . . . . . . . . . . . . . . 1.01 (within
the definition of
"Make-Whole
Amount")
"Trust Moneys" . . . . . . . . . . . . . . . . . . . . . 10.03(a)
"Unrestricted Investment" . . . . . . . . . . . . . . . . 4.04(a)
</TABLE>
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this
28
<PAGE> 36
Indenture. The following TIA terms used in this Indenture have the following
meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities.
Except as expressly provided herein, all other terms used in this
Indenture that are defined by the TIA, or that are, by reference in the TIA,
defined in the Securities Act, shall have the meaning assigned to such terms in
the TIA and in the Securities Act, as the case may be, as they were in effect
as of the date of this Indenture.
SECTION 1.04. RULES OF CONSTRUCTION. For purposes of the Securities
and this Indenture (except as otherwise expressly provided herein or unless the
context otherwise requires):
a term has the meaning assigned to it;
(1) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(2) "or" is not exclusive;
(3) "including" means including, without limitation;
(4) words in the singular include the plural and words in the
plural include the singular;
(5) unsecured indebtedness shall not be deemed to rank
subordinate or junior in right or priority of payment to secured
indebtedness merely because it is unsecured indebtedness; and
(6) the principal amount of any noninterest bearing security
at any date shall be the principal amount thereof that would be shown
on a balance sheet of the issuer dated such date prepared in
accordance with GAAP and accretion of principal on such security shall
not be deemed to be the Incurrence of Indebtedness.
29
<PAGE> 37
ARTICLE 2
THE SECURITIES
SECTION 2.01. FORM AND DATING.
The Securities and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Securities shall
be issued in registered form and may have notations, legends or endorsements as
the Company may deem appropriate and as not inconsistent with the provisions of
this Indenture, or as may be required by law, stock exchange rule or usage.
Each Security shall be dated the date of its authentication. The Securities
shall be in denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Securities shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby.
Securities issued in global form shall be substantially in the
form of Exhibit A attached hereto (including the text referred to in footnotes
1 and 3 thereto). Securities issued in definitive form shall be substantially
in the form of Exhibit A attached hereto (but without including the text
referred to in footnotes 1 and 3 thereto). Each Global Security shall
represent such of the outstanding Securities as shall be specified therein and
each shall provide that it shall represent the aggregate amount of outstanding
Securities from time to time endorsed thereon and that the aggregate amount of
outstanding Securities represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges and redemptions. Any
endorsement of a Global Security to reflect the amount of any increase or
decrease in the amount of outstanding Securities represented thereby shall be
made by the Trustee or the Securities Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder thereof as
required by Section 2.06 hereof.
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<PAGE> 38
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Securities for the Company by
manual or facsimile signature. Two Officers of MAXXAM shall sign the
Securities for the Guarantor by manual or facsimile signature.
If an Officer of the Company or MAXXAM whose signature is on a
Security no longer holds that office at the time a Security is authenticated,
the Security shall nevertheless be valid.
A Security shall not be valid until authenticated by the
manual signature of the Trustee. The signature shall be conclusive evidence
that the Security has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers, authenticate Securities for original issue up to the aggregate
principal amount stated in paragraph 4 of the Securities. The aggregate
principal amount of Securities outstanding at any time may not exceed such
amount except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Securities. An authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with
the Company or an Affiliate or Subsidiary of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where
Securities may be presented for registration of transfer or for exchange
("Registrar") and an office or agency where Securities may be presented for
payment ("Paying Agent"). The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term
"Registrar" includes any co-registrar and the term "Paying Agent" includes any
additional paying agent. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company shall notify the Trustee in writing
of the name and address of any Agent not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any of its Subsidiaries
may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company
("DTC") to act as Depository with respect to the Global Securities.
31
<PAGE> 39
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Securities Custodian with respect to
the Global Securities.
The Trustee is authorized to enter into a letter of
representations with DTC in the form provided to the Trustee by the Company and
to act in accordance with such letter.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal, premium or interest on the Securities, and will notify
the Trustee of any default by the Company in making any such payment; provided,
however, that any money earned on funds invested by the Trustee or any Paying
Agent shall be remitted to the Company. While any such default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee.
The Company at any time may require a Paying Agent to pay all money held by it
to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other
than the Company) shall have no further liability for the money. If the
Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the Holders all money held by it as
Paying Agent. Upon any bankruptcy or reorganization proceedings relating to
the Company, the Trustee shall serve as Paying Agent for the Securities.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA Section 312(a).
If the Trustee is not the Registrar, the Company shall furnish to the Trustee,
at least seven Business Days before each interest payment date and at such
other times as the Trustee may request in writing, a list in such form and as
of such date as the Trustee may reasonably require of the names and addresses
of the Holders of Securities and the Company shall otherwise comply with TIA
Section 312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Definitive Securities.
When Definitive Securities are presented by a Holder to the Registrar with a
request:
(x) to register the transfer of the Definitive
Securities; or
32
<PAGE> 40
(y) to exchange such Definitive Securities for
an equal principal amount of Definitive
Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its requirements for such transactions are met; provided, however, that the
Definitive Securities presented or surrendered for register of transfer or
exchange:
(i) shall be duly endorsed or
accompanied by a written instruction
of transfer in form satisfactory to
the Registrar duly executed by such
Holder or by his attorney, duly
authorized in writing; and
(ii) in the case of a Definitive Security
that is a Transfer Restricted
Security, such request shall be
accompanied by the following
additional information and
documents, as applicable:
(A) if such Transfer Restricted
Security is being delivered
to the Registrar by a Holder
for registration in the name
of such Holder, without
transfer, a certification to
that effect from such Holder
(in substantially the form of
Exhibit B hereto); or
(B) if such Transfer Restricted
Security is being transferred
to a "qualified institutional
buyer" (as defined in Rule
144A under the Securities
Act) in accordance with Rule
144A under the Securities Act
or pursuant to an exemption
from registration in
accordance with Rule 144 or
Rule 904 under the Securities
Act or pursuant to an
effective registration
statement under the
Securities Act, a
certification to that effect
from such Holder (in
substantially the form of
Exhibit B hereto); or
(C) if such Transfer Restricted
Security is being transferred
in reliance on another
exemption from the
registration requirements of
the Securities Act, a
certification to that effect
from such Holder (in
33
<PAGE> 41
substantially the form of
Exhibit B hereto) and an
Opinion of Counsel from such
Holder or the transferee
reasonably acceptable to the
Company and to the Registrar
to the effect that such
transfer is in compliance
with the Securities Act.
(b) Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged for
a beneficial interest in a Global Security except upon satisfaction of the
requirements set forth below. Upon receipt by the Registrar of a Definitive
Security, duly endorsed or accompanied by appropriate instruments of transfer,
in form satisfactory to the Trustee, together with:
(i) if such Definitive Security is a Transfer Restricted
Security, a certification from the Holder thereof (in
substantially the form of Exhibit B hereto) to the
effect that such Definitive Security is being
transferred by such Holder to a "qualified
institutional buyer" (as defined in Rule 144A under
the Securities Act) in accordance with Rule 144A
under the Securities Act; and
(ii) whether or not such Definitive Security is a Transfer
Restricted Security, written instructions from the
Holder thereof directing the Registrar to make, or to
direct the Securities Custodian to make, an
endorsement on the Global Security to reflect an
increase in the aggregate principal amount of the
Securities represented by the Global Security,
in which case the Registrar shall cancel such Definitive Security in accordance
with Section 2.11 hereof and cause, or direct the Securities Custodian to
cause, in accordance with the standing instructions and procedures existing
between the Depository and the Securities Custodian, the aggregate principal
amount of Securities represented by the Global Security to be increased
accordingly. If no Global Securities are then outstanding, the Company shall
issue and, upon receipt of an authentication order in accordance with Section
2.02 hereof, the Trustee shall authenticate a new Global Security in the
appropriate principal amount.
(c) Transfer and Exchange of Global Securities. The
transfer and exchange of Global Securities or beneficial interests therein
shall be effected through the Depository, in accordance with this Indenture and
the procedures of the Depository therefor,
34
<PAGE> 42
which shall include restrictions on transfer comparable to those set forth
herein to the extent required by the Securities Act.
(d) Transfer of a Beneficial Interest in a Global
Security for a Definitive Security.
(i) Any Person having a beneficial interest in a
Global Security may upon request exchange
such beneficial interest for a Definitive
Security. Upon receipt by the Registrar of
written instructions or such other form of
instructions as is customary for the
Depository, from the Depository or its
nominee on behalf of any person having a
beneficial interest in a Global Security,
and, in the case of a Transfer Restricted
Security, the following additional
information and documents (all of which may
be submitted by facsimile):
(A) if such beneficial interest is
being transferred to the
Person designated by the
Depository as being the
beneficial owner, a
certification to that effect
from such Person (in
substantially the form of
Exhibit B hereto); or
(B) if such beneficial interest is
being transferred to a
"qualified institutional
buyer" (as defined in Rule
144A under the Securities
Act) in accordance with Rule
144A under the Securities Act
or pursuant to an exemption
from registration in
accordance with Rule 144 or
Rule 904 under the Securities
Act or pursuant to an
effective registration
statement under the
Securities Act, a
certification to that effect
from the transferor (in
substantially the form of
Exhibit B hereto); or
(C) if such beneficial interest is
being transferred in reliance
on another exemption from the
registration requirements of
the Securities Act, a
certification to that effect
from the transferor (in
substantially the form of
Exhibit B hereto) and an
Opinion of Counsel from the
transferee or transferor
reasonably
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<PAGE> 43
acceptable to the Company and
to the Registrar to the effect
that such transfer is in
compliance with the
Securities Act,
in which case the Trustee or the Securities
Custodian, at the direction of the Trustee,
shall, in accordance with the standing
instructions and procedures existing between
the Depository and the Securities Custodian,
cause the aggregate principal amount of
Global Securities to be reduced accordingly
and, following such reduction, the Company
shall execute and, upon receipt of an
authentication order in accordance with
Section 2.02 hereof, the Trustee shall
authenticate and deliver to the transferee a
Definitive Security in the appropriate
principal amount.
(ii) Definitive Securities issued in exchange for
a beneficial interest in a Global Security
pursuant to this Section 2.06(d) shall be
registered in such names and in such
authorized denominations as the Depository,
pursuant to instructions from its direct or
indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall
deliver such Definitive Securities to the
Persons in whose names such Securities are so
registered.
(e) Restrictions on Transfer and Exchange of Global
Securities. Notwithstanding any other provision of this Indenture (other than
the provisions set forth in subsection (f) of this Section 2.06), a Global
Security may not be transferred as a whole except by the Depository to a
nominee of the Depository or by a nominee of the Depository to the Depository
or another nominee of the Depository or by the Depository or any such nominee
to a successor Depository or a nominee of such successor Depository.
(f) Authentication of Definitive Securities in Absence of
Depository. If at any time:
(i) the Depository for the Securities notifies
the Company that the Depository is unwilling
or unable to continue as Depository for the
Global Securities and a successor Depository
for the Global Securities is not appointed by
the Company within 90 days after delivery of
such notice; or
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<PAGE> 44
(ii) the Company, at its sole discretion, notifies
the Trustee in writing that it elects to
cause the issuance of Definitive Securities
under this Indenture,
then the Company shall execute, and the Trustee shall, upon receipt of an
authentication order in accordance with Section 2.02 hereof, authenticate and
deliver, Definitive Securities in an aggregate principal amount equal to the
principal amount of the Global Securities in exchange for such Global
Securities.
(g) Legends.
(i) Except as permitted by the following
paragraphs (ii) and (iii), each Security
certificate evidencing Global Securities or
Definitive Securities (and all Securities
issued in exchange therefor or substitution
thereof) shall bear a legend in substantially
the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED
HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED
THAT THE SELLER MAY BE RELYING ON THE
EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF
THE ISSUER THAT (A) SUCH SECURITY MAY BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY
(i) (a) TO A PERSON WHO THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
(AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE
144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE
UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE
904 UNDER THE SECURITIES ACT OR (d) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT (AND BASED UPON AN OPINION OF COUNSEL IF
THE ISSUER SO REQUESTS),
37
<PAGE> 45
(ii) TO THE COMPANY OR (iii) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER APPLICABLE JURISDICTION
AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE."
(ii) Upon any sale or transfer of a Transfer
Restricted Security (including any Transfer
Restricted Security represented by a Global
Security) pursuant to Rule 144 under the
Securities Act or pursuant to an effective
registration statement under the Securities
Act:
(A) in the case of any Transfer
Restricted Security that is a
Definitive Security, the Registrar
shall permit the Holder thereof to
exchange such Transfer Restricted
Security for a Definitive Security
that does not bear the legend set
forth in (i) above and rescind any
restriction on the transfer of such
Transfer Restricted Security; and
(B) in the case of any Transfer
Restricted Security represented by a
Global Security, such Transfer
Restricted Security shall not be
required to bear the legend set
forth in (i) above, but shall
continue to be subject to the
provisions of Section 2.06(c)
hereof; provided, however, that with
respect to any request for an
exchange of a Transfer Restricted
Security that is represented by a
Global Security for a Definitive
Security that does not bear the
legend set forth in (i) above, which
request is made in reliance upon
Rule 144, the Holder thereof shall
certify in writing to the Registrar
that such request is being made
pursuant to Rule 144 (such
certification to be substantially in
the form of Exhibit B hereto).
(iii) Notwithstanding the foregoing, upon
consummation of the Exchange Offer, the
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<PAGE> 46
Company shall issue and, upon receipt of an
authentication order in accordance with
Section 2.02 hereof, the Trustee shall
authenticate Series B Securities in exchange
for Series A Securities accepted for exchange
in the Exchange Offer, which Series B
Securities shall not bear the legend set
forth in (i) above, and the Registrar shall
rescind any restriction on the transfer of
such Securities, in each case unless the
Holder of such Series A Securities is either
(A) a broker-dealer, (B) a Person
participating in the distribution of the
Series A Securities or (C) a Person who is an
affiliate (as defined in Rule 144A) of the
Company.
(h) Cancellation and/or Adjustment of Global Securities.
At such time as all beneficial interests in Global Securities have been
exchanged for Definitive Securities, redeemed, repurchased or cancelled, all
Global Securities shall be returned to or retained and cancelled by the Trustee
in accordance with Section 2.11 hereof. At any time prior to such
cancellation, if any beneficial interest in a Global Security is exchanged for
Definitive Securities, redeemed, repurchased or cancelled, the principal amount
of Securities represented by such Global Security shall be reduced accordingly
and an endorsement shall be made on such Global Security, by the Trustee or the
Securities Custodian, at the direction of the Trustee, to reflect such
reduction.
(i) General Provisions Relating to Transfers and
Exchanges.
(i) To permit registrations of
transfers and exchanges, the
Company shall execute and the
Trustee shall authenticate
Definitive Securities and Global
Securities at the Registrar's
request.
(ii) No service charge shall be made to
a Holder for any registration of
transfer or exchange, but the
Company may require payment of a
sum sufficient to cover any
transfer tax or similar
governmental charge payable in
connection therewith (other than
any such transfer taxes or similar
governmental charge payable upon
exchange or transfer pursuant to
Paragraph 7 of the Securities or
Section 4.07, 4.09, 10.05(f) and
9.05 hereof).
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<PAGE> 47
(iii) All Definitive Securities and
Global Securities issued upon any
registration of transfer or
exchange of Definitive Securities
or Global Securities shall be the
valid obligations of the Company,
evidencing the same debt, and
entitled to the same benefits
under this Indenture, as the
Definitive Securities or Global
Securities surrendered upon such
registration of transfer or
exchange.
(iv) Neither the Company nor the
Registrar shall be required:
(A) to issue, to register the
transfer of or to exchange
Securities for a period of 15
days before the mailing of a
notice of redemption of
Securities selected for
redemption; or
(B) to register the transfer of
or to exchange any Security
selected for redemption in
whole or in part, except the
unredeemed portion of any
Security being redeemed in
part; or
(C) to register the transfer of
or to exchange a Security
between a record date and the
next succeeding interest
payment date.
(v) Prior to due presentment for the
registration of a transfer of any
Security, the Trustee, any Agent,
the Company and MAXXAM may deem
and treat the Person in whose name
any Security is registered as the
absolute owner of such Security
for the purpose of receiving
payment of principal of and
interest on such Securities, and
neither the Trustee, any Agent,
the Company nor MAXXAM shall be
affected by notice to the
contrary.
(vi) The Trustee shall authenticate
Definitive Securities and Global
Securities in accordance with the
provisions of Section 2.02 hereof.
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<PAGE> 48
SECTION 2.07. REPLACEMENT SECURITIES.
If any mutilated Security is surrendered to the Trustee, or
the Company and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Security, the Company shall issue and the
Trustee, upon the written order of the Company signed by two Officers of the
Company, shall authenticate a replacement Security if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Security is
replaced. The Company may charge for its expenses in replacing a Security.
Every replacement Security is an additional obligation of the
Company (guaranteed by MAXXAM) and shall be entitled to all of the benefits of
this Indenture equally and proportionately with all other Securities duly
issued hereunder.
SECTION 2.08. OUTSTANDING SECURITIES.
The Securities outstanding at any time are all the Securities
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Security
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.09 hereof, a Security does not cease to be outstanding because the Company or
an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Security is held by a bona fide purchaser.
If the principal amount of any Security is considered paid
under Section 4.01 hereof, it ceases to be outstanding and interest on it
ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or
an Affiliate of any thereof) holds, on a redemption date or maturity date,
money sufficient to pay Securities payable on that date, then on and after that
date such Securities shall be deemed to be no longer outstanding and shall
cease to accrue interest.
SECTION 2.09. TREASURY SECURITIES.
In determining whether the Holders of the required principal
amount of Securities have concurred in any direction, waiver or consent,
Securities owned by the Company, or by any
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<PAGE> 49
person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company, shall be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities that a Trustee knows are so owned shall be so disregarded.
SECTION 2.10. TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the
Company may prepare and the Trustee shall authenticate temporary Securities
upon a written order of the Company signed by two Officers of the Company.
Temporary Securities shall be substantially in the form of definitive
Securities but may have variations that the Company considers appropriate for
temporary Securities and as shall be reasonably acceptable to the Trustee.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Securities in exchange for temporary Securities.
Holders of temporary Securities shall be entitled to all of the benefits of
this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Securities to the Trustee
for cancellation. The Registrar and Paying Agent shall forward to the Trustee
any Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee and no one else shall cancel all Securities surrendered
for registration of transfer, exchange, payment, replacement or cancellation
and shall destroy cancelled Securities (subject to the record retention
requirement of the Exchange Act). Certification of the destruction of all
cancelled Securities shall be delivered to the Company. The Company may not
issue new Securities to replace Securities that it has paid or that have been
delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the
Securities, it shall pay the defaulted interest in any lawful manner plus, to
the extent lawful, interest payable on the defaulted interest, to the Persons
who are Holders on a subsequent special record date, in each case at the rate
provided in the Securities and in Section 4.01 hereof. The Company shall
notify the Trustee in writing of the amount of defaulted interest proposed to
be paid on each Security and the date of the proposed payment. The Company
shall fix or cause to be fixed each such special record date and payment date,
provided that no such special record date shall be less than 10 days prior to
the related payment date for
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<PAGE> 50
such defaulted interest. At least 15 days before the special record date, the
Company (or, upon the written request of the Company, the Trustee in the name
and at the expense of the Company) shall mail or cause to be mailed to Holders
a notice that states the special record date, the related payment date and the
amount of such interest to be paid.
SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Securities
may use "CUSIP" numbers (if then generally in use), and the Trustee shall use
CUSIP numbers in notices of redemption or exchange as a convenience to Holders
upon written order of the Company signed by two Officers; provided, that any
such notice shall state that neither the Trustee nor the Company makes any
representation as to the correctness of such numbers either as printed on the
Securities or as contained in any notice of redemption or exchange and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption or exchange shall not be affected by any
defect in or omission of such numbers.
ARTICLE 3
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem
Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date and the aggregate principal amount of
Securities to be redeemed. The Company shall give each notice to the Trustee
provided for in this Section 3.01 at least 45 days before the redemption date
(unless a shorter notice period shall be satisfactory to the Trustee). If less
than all the Securities are to be redeemed, the record date relating to such
redemption shall be selected by the Company and given to the Trustee.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If fewer than
all the Securities are to be redeemed, the Trustee shall select the Securities
to be redeemed such that the redemption is effected on a pro rata basis. The
Trustee shall make the selection from outstanding Securities not previously
called for redemption. The Trustee may select for redemption portions of the
principal amount of Securities that have denominations larger than $1,000.
Securities and portions of them the Trustee selects for redemption shall be in
denominations of $1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to Securities called for redemption also apply to portions
of Securities called for redemption. The Trustee in redeeming Securities may
use any method it considers fair and equitable to round up or down so that the
amount of any Securities redeemed shall be in denominations of $1,000 or
integral multiples thereof. If at the time of any such
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<PAGE> 51
selection, the Trustee is not then the Registrar, the Trustee may direct the
Registrar to make the selection in accordance with this Section 3.02. The
Trustee shall notify the Company promptly of the Securities or portions of
Securities to be redeemed.
SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days (or 30 days if
legally required by DTC) but not more than 60 days before a date fixed for
redemption of Securities, the Company shall mail a notice of redemption by
first-class mail to each Holder of Securities to be redeemed at such Holder's
last address as it shall appear upon the register of the Securities maintained
by the Company, but any defect therein or failure of the addressee to receive
such notice shall not affect the validity of the proceedings for the redemption
of any of the Securities. Any failure to give such notice to the Holder of any
Securities shall not affect the validity of the proceedings for the redemption
of any other Security.
The notice shall identify the Securities to be redeemed (including
CUSIP numbers if used) and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be
redeemed, the identification and principal amounts of the particular
Securities to be redeemed;
(6) that, unless the Company defaults in making such redemption
payment, interest on Securities called for redemption ceases to accrue
on and after the redemption date and the only remaining right of the
Holders is to receive payment of the redemption price and accrued and
unpaid interest thereon to (but not including) the redemption date, if
applicable, upon surrender to the Paying Agent of such Securities; and
(7) the paragraph of the Securities and the section of this
Indenture pursuant to which the Securities are to be redeemed.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the
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<PAGE> 52
information required by clauses (1) through (3) at least 60 days prior to any
such redemption date (unless a shorter notice period shall be satisfactory to
the Trustee).
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is mailed, Securities called for redemption become due and payable
on the redemption date and at the redemption price thereof stated in the
notice. Upon surrender to the Paying Agent, each such Security shall be paid
at the applicable redemption price thereof stated in the notice, plus accrued
and unpaid interest thereon, if any, to (but not including) the redemption
date. Unless the Company defaults in making the redemption payment, interest
on the Securities called for redemption ceases to accrue on and after the
redemption date (regardless of whether the Securities have been timely
surrendered), and the only remaining right of the Holders thereof shall be to
receive payment of the redemption price thereof, plus accrued and unpaid
interest thereon to (but not including) such redemption date, if applicable,
upon surrender to the Paying Agent of such Securities. If the date fixed for
redemption is an interest payment date, the redemption payment shall not
include accrued interest which shall be paid in the usual manner otherwise
provided for herein.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 11:00
A.M., New York City time, on the redemption date, the Company shall deposit
with the Paying Agent (or if the Company or a Subsidiary is the Paying Agent,
shall segregate and hold in trust as provided in Section 2.04) money sufficient
to pay the redemption price of, and accrued interest, if any, on, all
Securities to be redeemed on that date other than Securities or portions
thereof called for redemption on that date which have been delivered by the
Company to the Trustee for cancellation. All money earned on funds held in
trust by the Trustee or any Paying Agent shall be remitted to the Company.
SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder thereof (at the Company's expense)
a new Security equal in principal amount at maturity in authorized
denominations to the unredeemed portion of the Security surrendered.
SECTION 3.07. CANCELLATION OF REDEEMED SECURITIES. All Securities
surrendered to the Trustee, upon redemption pursuant to the provisions of this
Article 3, shall be forthwith cancelled by it.
SECTION 3.08. NO REPURCHASE RESTRICTIONS. Except as expressly
provided in Article 10, nothing contained in this Indenture or in the
Securities shall be deemed to prohibit or in any way restrict the Company, any
Subsidiary or any Affiliate from
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<PAGE> 53
purchasing or otherwise acquiring any Security or interest therein at any price
or for any consideration whether higher or lower than the redemption price, in
a transaction not effected pursuant to this Article 3.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly pay
the principal of and accrued interest, if any, on the Securities on the dates
and in the manner provided in the Securities and in this Indenture. The
principal of Securities and accrued interest, if any, shall be considered paid
on the date due to the extent that on such date the Trustee or the Paying Agent
holds in accordance with this Indenture money sufficient to pay the principal
of the Securities and accrued interest, if any, then due and the Trustee or the
Paying Agent, as the case may be, is not prohibited from paying such money to
the Securityholders on that date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal of the Securities
at the rate specified therefor in the Securities, and it shall pay interest on
overdue installments of interest to the extent permitted by applicable law
calculated at the same rate as the rate at which the interest that is in
default was calculated.
SECTION 4.02. SEC REPORTS. Whether or not the Company and MAXXAM are
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, each of the Company and MAXXAM shall file with the SEC (unless the SEC
will not accept the same for filing) and the Trustee within fifteen days after
it is or would have been required to file the same with the SEC, copies of such
annual reports and such information, documents and other reports as it is
required to file pursuant to, or would be required to file if it were subject
to the requirements of, Section 13 or 15(d) of the Exchange Act. In addition,
the Company and MAXXAM shall, for so long as any Securities are outstanding,
furnish to the Holders and to securities analysts and prospective investors,
upon request, the information required to be delivered pursuant to Rule 144
A(d)(4) under the Securities Act. The Company also shall comply with the
provisions of TIA Section 314(a).
SECTION 4.03. LIMITATION ON INDEBTEDNESS.
(a) The Company shall not, and shall not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or become liable with respect to, contingently or otherwise
(collectively, "INCUR"), any Indebtedness (including, without duplication,
guarantees of Indebtedness by the
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<PAGE> 54
Company and/or its Restricted Subsidiaries), except that the Company and/or its
Restricted Subsidiaries (other than Scotia Pacific so long as there are any
Timber Notes outstanding) may Incur Indebtedness (including, without
duplication, guarantees of Indebtedness by the Company and/or its Restricted
Subsidiaries) if, immediately after giving effect thereto and the receipt and
application of the proceeds thereof, the Consolidated Cash Flow Coverage Ratio
of the Company would exceed 2.0 to 1.
(b) Notwithstanding the provisions of Section 4.03(a),
the Company and/or its Restricted Subsidiaries (other than, except in the case
of clauses (xi) and (xii) of Section 4.03(b), Scotia Pacific so long as there
are any Timber Notes outstanding) may Incur (without duplication) the
following:
(i) Indebtedness in respect of the Securities;
(ii) aggregate Indebtedness under the Credit
Agreement in an amount not to exceed at any time outstanding
$40,000,000;
(iii) Indebtedness outstanding on the Issue Date,
including the indebtedness outstanding pursuant to the MGI Indenture
or the Pacific Lumber Indenture (other than the Timber Notes which are
governed by clause (xi) of this Section 4.03(b));
(iv) Indebtedness in connection with one or more
letters of credit issued pursuant to (A) self-insurance obligations
(other than workmen's compensation obligations), the aggregate face or
stated amount of which, together with the aggregate amount of any
related reimbursement obligations (without duplication) does not
exceed $1,000,000 at any time outstanding, and (B) workmen's
compensation obligations;
(v) Indebtedness owed by the Company to a Restricted
Subsidiary or owed by a Restricted Subsidiary to the Company or to any
other Restricted Subsidiary of the Company;
(vi) Capital Lease Obligations (other than Capital
Lease Obligations permitted by clause (xii) of this Section 4.03(b))
not exceeding in the aggregate $10,000,000 at any time outstanding;
(vii) Indebtedness under any Interest Rate
Protection Agreement to the extent that such Interest Rate Protection
Agreement is related to payment obligations on Indebtedness otherwise
permitted under this Section 4.03;
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(viii) Indebtedness Incurred in connection with
Indebtedness the interest on which is exempt from Federal income tax
under the Code in an aggregate amount not exceeding $10,000,000 at any
time outstanding;
(ix) Indebtedness owed to or guaranteed by any
governmental agency, instrumentality or other authority Incurred to
provide relief from natural disasters or other similar assistance;
(x) Indebtedness Incurred after August 4, 1993 (in
addition to (and without duplication of) Indebtedness otherwise
permitted by this Section 4.03), in an aggregate principal amount not
exceeding $25,000,000 at any one time outstanding in the case of
Indebtedness Incurred by Pacific Lumber and its Subsidiaries that are
Restricted Subsidiaries, $15,000,000 at any one time outstanding in
the case of Indebtedness Incurred by MGI and its Restricted
Subsidiaries other than Pacific Lumber and its Subsidiaries that are
Restricted Subsidiaries, and $7,500,000 at any one time outstanding in
the case of Indebtedness Incurred by the Company;
(xi) Indebtedness of Scotia Pacific under the Timber
Notes or the Timber Note Indenture or in respect of the Scotia Pacific
Agreements or any other agreement entered into in connection with the
Timber Notes, as the same may be amended from time to time in
accordance with Section 4.11; and
(xii) Capital Lease Obligations of Scotia Pacific.
(c) Notwithstanding anything to the contrary in Section
4.03(a) or (b), the Company and its Restricted Subsidiaries (other than Scotia
Pacific so long as there are any Timber Notes outstanding) may Incur
Indebtedness all of the net proceeds of which (after premiums, reasonable fees,
expenses and costs related to the Incurrence of such Indebtedness) are applied
to renew, extend, restructure, restate, refund or otherwise refinance, in whole
or in part (collectively, "REFINANCE") the Indebtedness permitted by paragraphs
(a) or (b)(i) and (b)(iii) of this Section 4.03 or any one or more successive
refinancings thereof (collectively, "REFINANCING INDEBTEDNESS"), provided that:
(i) such Refinancing Indebtedness is in an aggregate amount not exceeding the
aggregate amount outstanding of the Indebtedness being so refinanced plus an
amount equal to the premiums, reasonable fees and expenses incurred in
connection with such refinancing; (ii) with respect to Refinancing Indebtedness
which refinances Indebtedness of the Company which ranks (pursuant to its
terms) subordinate in right and priority of payment to the Securities, (A) the
final stated maturity date of such Refinancing Indebtedness shall not be
earlier than the final stated maturity date of the
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Indebtedness being so refinanced, (B) in the case of such Refinancing
Indebtedness Incurred by the Company, such Refinancing Indebtedness is ranked
(pursuant to its terms) subordinate in right and priority of payment to the
Securities to the same extent as the Indebtedness being so refinanced, and (C)
such Refinancing Indebtedness has an Average Life at the time it is Incurred
which is not less than the remaining Average Life of the Indebtedness being so
refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing
Indebtedness to refinance Indebtedness of the Company pursuant to this
paragraph (c) of Section 4.03 except to the extent that such Refinancing
Indebtedness constitutes a guarantee by such Restricted Subsidiary of
Indebtedness of the Company (it being understood that such Restricted
Subsidiary may incur Indebtedness to refinance Indebtedness of the Company to
the extent that the Incurrence of such Indebtedness is otherwise permitted by
paragraph (a) or (b) of this Section 4.03).
(d) Any revocation of the designation of an Unrestricted
Subsidiary shall be deemed for purposes of this Section 4.03 to be an
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of
the Indebtedness of such Unrestricted Subsidiary as of the time of such
revocation to the extent such Indebtedness does not already constitute
Indebtedness of the Company or one of its Restricted Subsidiaries.
(e) Notwithstanding anything to the contrary in Section
4.03(a), (b) or (c), so long as Britt remains a Restricted Subsidiary, Britt
may not Incur after the Issue Date Indebtedness (other than Indebtedness in
respect of the Securities, the MGI Notes and Indebtedness owed to the Company
or MGI and Refinancing Indebtedness in respect of the foregoing) in an
aggregate principal amount exceeding $5,000,000 at any time outstanding.
SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company
shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to:
(i)(x) declare or pay any dividend or make any distribution
on the Company's Capital Stock or the Company's Redeemable Stock
(other than (A) in either case, dividends or distributions payable in
Capital Stock that is not convertible or exchangeable into Redeemable
Stock or Indebtedness of the Company and (B) in the case of the
Company's Redeemable Stock, dividends and distributions in an amount
not exceeding (in addition to any dividends or distributions declared
or paid in accordance with clause (A) above) the amount stated to be
payable on such Redeemable Stock pursuant to the provisions thereof)
or (y) purchase, redeem or otherwise acquire or retire for value any
Capital Stock or Redeemable Stock of the Company (each of the
foregoing in clauses (x) and (y), a "RESTRICTED PAYMENT"),
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(ii) make any Restricted Investment,
(iii) make any Investment in an Unrestricted Subsidiary (an
"UNRESTRICTED INVESTMENT"), or
(iv) redeem, repurchase, defease or otherwise acquire or
retire for value (a "REPURCHASE"), prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, Indebtedness of
the Company which ranks (pursuant to its terms) subordinate in right
and priority of payment to the Securities and which was scheduled to
mature subsequent to the final Stated Maturity of all principal of the
Securities (other than acquisitions of such Indebtedness in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the
date of such acquisition),
if, at the time of such Restricted Payment, Restricted Investment, Unrestricted
Investment, or Repurchase:
(A) a Default shall have occurred and be continuing; or
(B) after giving effect to such Restricted Payment, Unrestricted
Investment, Repurchase or Restricted Investment by the Company or any
Restricted Subsidiary, the aggregate amount (i) expended for all such
Restricted Payments and Repurchases subsequent to the Issue Date, (ii)
of all Restricted Investments then outstanding (the amount expended
for such Restricted Payments, Repurchases and Restricted Investments
subsequent to the Issue Date, the amount of any Restricted Investments
outstanding at any time, and the amount of any Restricted Investments
returned or reduced, in each case, if other than in cash or a sum
certain guaranteed, to be the fair market value as determined in good
faith by the Board of Directors, whose determination shall be
evidenced by a resolution of the Board of Directors filed with the
Trustee), and (iii) of all Unrestricted Investments Outstanding, shall
exceed the sum of:
(1) 50% of the aggregate Consolidated Net Income of the
Company accrued on a cumulative basis subsequent to September
30, 1996 (or, in case such aggregate cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss), and
(2) the aggregate net cash proceeds, received by the
Company as capital contributions to the Company subsequent to
September 30, 1996, or from the issue or sale (other than to a
Subsidiary of the Company) subsequent to September 30, 1996,
of Capital Stock (including Capital Stock issued upon the
conversion of,
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or in exchange for, Indebtedness or Redeemable Stock (other
than that issued pursuant to clause (ii) of Section 4.04(c)
below) and including upon exercise of warrants or options or
other rights to purchase such Capital Stock, issued subsequent
to September 30, 1996), or from the issue or sale, subsequent
to September 30, 1996, of any Indebtedness (other than that
issued pursuant to clause (ii) of Section 4.04(c) below) or,
without duplication, other security of the Company convertible
or exercisable into such Capital Stock that has been so
converted or exercised.
(b) Transactions and payments which are permitted
by Section 4.08(b) hereof shall not be considered Restricted Payments or
Restricted Investments.
(c) The foregoing provisions of Section 4.04(a)
shall not be violated by reason of: (i) the payment of any dividend or
distribution or the redemption of any securities within 60 days after the date
of declaration of such dividend or distribution or the giving of the formal
notice of such redemption, if at said date of declaration of such dividend or
distribution or the giving of the formal notice of such redemption, such
dividend, distribution or redemption would have complied with Section 4.04(a)
and so long as no Event of Default exists as of the payment date; (ii)
redemptions, repurchases, defeasances, acquisitions or retirements for value,
of indebtedness of the Company which ranks (pursuant to its terms) subordinate
in right and priority of payment to the Securities from the proceeds of
Refinancing Indebtedness permitted by Section 4.03(c); (iii) the acquisition,
redemption or retirement of any shares of the Company's Capital Stock or any
Indebtedness of the Company in exchange for, or in connection with a
substantially concurrent issuance of, Capital Stock of the Company (provided
such Capital Stock is not exchangeable for or convertible into Redeemable Stock
or Indebtedness of the Company or any of its Subsidiaries); (iv) the repurchase
of the Company's Capital Stock or Redeemable Stock with the proceeds of a
substantially concurrent issuance of the Company's Capital Stock that is not
convertible or exchangeable into Redeemable Stock or Indebtedness of the
Company; (v) the making by Pacific Lumber or its Restricted Subsidiaries of an
Unrestricted Investment to the extent the amount of Unrestricted Investments
Outstanding made pursuant to this clause (v) does not exceed $25 million,
provided that none of the funds used by Pacific Lumber or its Restricted
Subsidiaries to make any such Unrestricted Investment is obtained from the
Company or any Restricted Subsidiary (other than Pacific Lumber or a Restricted
Subsidiary of Pacific Lumber); (vi) dividends or distributions of (A) any
Kaiser Shares that are either (x) released from the Lien of this Indenture
pursuant to the provisions of Section 10.05(c)(1) or (y) Released Kaiser Shares
that are not required to be subjected to the Lien of
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this Indenture upon release from the Lien of the MGI Indenture or (B) cash,
securities or other property received by the Company upon the sale of any such
Kaiser Shares or (C) any proceeds of Kaiser Shares that are (x) released from
the Lien of this Indenture or (y) released from the Lien of the MGI Indenture
and not required to be subjected to the Lien of this Indenture upon such
release; or (vii) the payment of any dividends or distributions by the Company
with fifty percent (50%) of the fair market value (as determined in good faith
by the Board of Directors, whose determination shall be evidenced by a
resolution of the Board of Directors filed with the Trustee) of Salmon Creek
Distributions received by the Company (less 50% of any income taxes payable by
the Company in respect of the receipt by the Company of such Salmon Creek
Distributions, or in respect of the sale or other disposition by the Company of
any non-cash proceeds of such Salmon Creek Distributions (to the extent that
Salmon Creek Distributions dividended or distributed by the Company are the
proceeds of such sales or other dispositions)) provided that: (x) such
dividends or distributions (to the extent made in cash) shall not exceed 50% of
the amount of cash so received by the Company (including any cash realization
of any non-cash proceeds of any Salmon Creek Distribution, but, in each case,
only as, when, and to the extent, received by the Company) in respect of Salmon
Creek Distributions, and (y) such dividends or distributions (to the extent
made in kind with property received by the Company in a Salmon Creek
Distribution) shall be valued at fair market value (as determined in good faith
by the Board of Directors, whose determination shall be evidenced by a
resolution of the Board of Directors filed with the Trustee, except to the
extent the fair market value exceeds $10 million, in which case such
determination shall be made by an investment banking firm with capital of at
least $250 million or a nationally recognized appraiser or other expert
selected by the Company whose opinion shall be delivered, and shall be
acceptable, to the Trustee). No payment or other transfer made pursuant to
clauses (ii) through (vii) of this Section 4.04(c) shall reduce the amount
available for Restricted Payments, Restricted Investments, Unrestricted
Investments or Repurchases pursuant to Section 4.04(a) and the application of
proceeds from the issuance of Capital Stock applied pursuant to clause (iii) or
(iv) of this Section 4.04(c) shall not reduce the amount available for
Restricted Payments, Restricted Investments, Unrestricted Investments or
Repurchases pursuant to Section 4.04(a); provided, however, that the proceeds
from the issuance of Capital Stock pursuant to clauses (iii) and (iv) of this
Section 4.04(c) shall not increase the amount available for Restricted
Payments, Restricted Investments, Unrestricted Investments and Repurchases
under Section 4.04(a).
(d) Notwithstanding anything to the contrary
contained in this Indenture (but subject to the provisions of Section 4.08),
the Company or any of its Restricted Subsidiaries shall be permitted to
contribute any non-cash proceeds received in
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respect of a Salmon Creek Distribution to one or more Unrestricted Subsidiaries
and such contribution(s) shall not constitute an Unrestricted Investment under
this Indenture.
SECTION 4.05. OWNERSHIP OF CAPITAL STOCK OF SUBSIDIARIES AND KAISER
SHARES. (a) The Company will not, and will not permit any Restricted
Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly
or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia Pacific (it
being understood that no issue, sale, assignment, transfer or other disposition
of any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other
than Scotia Pacific) shall be deemed to violate this clause (i) provided that
Pacific Lumber shall thereafter continue to own directly all outstanding Stock
of Scotia Pacific), (ii) any Capital Stock or Redeemable Stock of MGI, Pacific
Lumber, Britt or MPI if immediately thereafter, or as a consequence thereof,
the Company shall beneficially own, directly or indirectly, less than a
majority of the Voting Stock and outstanding equity interests (on a fully
diluted basis) of any such company (other than in a transaction governed by and
in compliance with Section 10.13 of this Indenture or Section 10.13 of the MGI
Indenture (as in effect on the date hereof)), (iii) any assets of Scotia
Pacific for consideration consisting in whole or in part of Capital Stock or
Redeemable Stock of another person which is not a Wholly Owned Restricted
Subsidiary, (iv) any Capital Stock or Redeemable Stock of any Restricted
Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI)
(except to the Company or to one or more Restricted Subsidiaries) or any assets
of any Restricted Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber,
Britt or MPI) for consideration consisting in whole or in part of Capital Stock
or Redeemable Stock of another person which is not a Wholly Owned Restricted
Subsidiary unless, in the case of this clause (iv), immediately after giving
effect thereto and the receipt and application of the proceeds therefrom, the
Consolidated Cash Flow Coverage Ratio of the Company would be greater than 1.5
to 1; provided, however, that this Section 4.05(a) shall permit, assuming the
Company complies with the provisions of Article 5 and Sections 10.05 and 10.13,
in each case to the extent applicable, the disposition in a single transaction
or in a series of related transactions of all of the Capital Stock of any
Restricted Subsidiary then owned by the Company or its Restricted Subsidiaries
for a consideration consisting of cash or other property (other than Capital
Stock or Redeemable Stock of another person) which is at least equal to the
fair value (as reasonably determined by the Board of Directors of the Company)
of such Capital Stock; and provided, further, that any entity resulting from
any transaction or disposition permitted by clause (iv) of this Section 4.05(a)
shall be or become a Restricted Subsidiary.
(b) Until such time as the maximum number of
Kaiser Shares required to be pledged as Collateral pursuant to this
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Indenture are included in the Collateral, the Company shall not sell, transfer,
assign, pledge or otherwise dispose of any Kaiser Shares (i) to a Subsidiary of
the Company or to MAXXAM or (ii) in violation of any of the provisions of the
MGI Indenture. In addition, the Company shall not sell, transfer, assign,
pledge or otherwise dispose of any Pledged Shares except pursuant to Section
10.05(b)(1), 10.05(c), 10.13 or 5.01 and except for Liens permitted by Section
4.16. Anything in this Indenture to the contrary notwithstanding, the MGI
Notes may, at any time or from time to time, be refinanced pursuant to Section
4.03(c), in whole or in part, with the proceeds of Indebtedness and such
Indebtedness ("MGI Refinancing Indebtedness") may be secured by Liens on (i)
all or any part of the Kaiser Shares or other collateral subject to the Lien
of the MGI Indenture immediately prior to such refinancing and (ii) the
proceeds of such Kaiser Shares or other collateral; provided, however, that, in
the event that any MGI Refinancing Indebtedness is secured by any such Liens,
such Refinancing Indebtedness shall contain provisions for release of
collateral from the Lien thereunder that (except for the maturity date of such
MGI Refinancing Indebtedness) are no less favorable in any material respect
(taken as a whole) to the Holders than the release provisions of the MGI
Indenture.
SECTION 4.06. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. (a) The Company shall not, and shall not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual restriction or
encumbrance on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or Redeemable
Stock or any other interest or participation in, or measured by, its profits,
in each case, owned by the Company, or pay any Indebtedness owed to the Company
or any Restricted Subsidiary of the Company, (ii) make loans or advances to the
Company or any Restricted Subsidiary of the Company, or (iii) make any transfer
of any of its assets to the Company or a Restricted Subsidiary.
(b) The foregoing shall not prohibit encumbrances or
restrictions existing as of the date hereof or hereafter under or by reason of:
(i) this Indenture, the MGI Indenture or the
Pacific Lumber Indenture;
(ii) the Credit Agreement;
(iii) (A) customary provisions restricting
subletting or assignment of any lease of the Company or any Restricted
Subsidiary of the Company, or (B) customary restrictions imposed on
the transfer of copyrighted or
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patented materials or provisions in agreements that restrict the
assignment of such agreement or any rights thereunder;
(iv) any instrument governing Indebtedness or
other obligations of a person acquired (whether pursuant to a purchase
of stock or assets) by the Company or any Restricted Subsidiary or
applicable to any assets so acquired at the time such person became a
Subsidiary of the Company or such assets were acquired by the Company
or a Restricted Subsidiary (excluding instruments entered into by such
person in connection with, or in contemplation of, its becoming a
Subsidiary of the Company or its assets being acquired by the Company
or any Restricted Subsidiary, as the case may be), which encumbrance
or restriction is not applicable to any person, or the properties or
assets of any person, other than the person or the property or assets
of the person so acquired (including the Capital Stock or Redeemable
Stock thereof) or any entity formed to effect such acquisition, and,
in each case, the monetary proceeds thereof;
(v) Indebtedness or other obligations existing on
the Issue Date;
(vi) the subordination (pursuant to its terms) in
right and priority of payment to Indebtedness of the Company or any of
its Restricted Subsidiaries of any Indebtedness owed by the Company or
any Restricted Subsidiary of the Company to the Company or any of its
other Restricted Subsidiaries, provided, (A) the Indebtedness is
permitted under this Indenture and (B) the Board of Directors has
determined in good faith at the time of the creation of such
encumbrance or restriction that such encumbrance or restriction would
not singly or in the aggregate have a material adverse effect on the
Holders of the Securities;
(vii) restrictions imposed by covenants contained in
any refinancing of Indebtedness or other obligations described in
clauses (i), (ii), (iv), (v) and (ix) of this Section 4.06(b),
provided, that such restrictions are, in the good faith determination
of the Board of Directors, on the whole, not materially more
restrictive than such restrictions contained in such refinanced
Indebtedness;
(viii) restrictions imposed by applicable laws or
regulations or pursuant to condemnation or eminent domain proceedings;
(ix) restrictions on Scotia Pacific and/or any of
its Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of
Trust, the Timber Note Indenture or any other agreements entered into
in connection with the Timber Notes,
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as the same may be amended in accordance with Section 4.11 of this
Indenture;
(x) an agreement which has been entered into for
the sale or disposition of all or substantially all of the Stock or
assets of a Restricted Subsidiary of the Company, provided, however,
that such encumbrances or restrictions are limited to the Stock or
assets being sold or disposed of;
(xi) applicable law and agreements with foreign
governments with respect to assets located in their respective
jurisdictions; or
(xii) customary provisions placing limitations on
the payment of dividends on shares of stock contained in the terms of
Preferred Stock instruments issued in compliance with this Indenture.
(c) The provisions of Section 4.06(a) shall not prohibit (i)
Liens not prohibited by Section 4.10 or (ii) restrictions on the sale or other
disposition of any property securing Indebtedness, provided, that such
Indebtedness is otherwise permitted by this Indenture.
SECTION 4.07. LIMITATION ON ASSET SALES. (a) The Company shall not,
and shall not permit any Restricted Subsidiary to, consummate any Asset Sale,
unless (except in the case of an Asset Sale which is a Taking) (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the fair value of the assets subject to such Asset Sale
(as reasonably determined by the Board of Directors), including the value of
all non-cash consideration, and (ii) at least 75% of the aggregate
consideration (excluding indemnities) received therefor by the Company or such
Restricted Subsidiary is in the form of money or Cash Equivalents. The amount
of any liabilities of the Company or any Restricted Subsidiary of the Company
that is actually assumed by the transferee in such Asset Sale shall be deemed
to be money for purposes of determining the percentage of money and Cash
Equivalent consideration received by the Company and its Restricted
Subsidiaries.
(b) For the purposes of this Section 4.07, "ASSET SALE
OFFER AMOUNT" means the sum of the amount of Net Cash Proceeds from each Asset
Sale by the Company and its Restricted Subsidiaries (excluding the amount of
Net Cash Proceeds from such Asset Sales which have been subjected to a prior
Asset Sale Offer) which, on the 360th day following the consummation of such
Asset Sale (or the 540th day following the consummation of an Asset Sale to the
extent that such Asset Sale is by MGI and/or any Subsidiary of MGI that is a
Restricted Subsidiary (other than Pacific Lumber or any Subsidiary of Pacific
Lumber that is a Restricted Subsidiary) and
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is governed by the terms of the MGI Indenture (an "MGI Asset Sale") or the
590th day following the consummation of an Asset Sale to the extent that such
Asset Sale is by Pacific Lumber and/or any Subsidiary of Pacific Lumber that is
a Restricted Subsidiary, other than Scotia Pacific so long as any Timber Notes
are outstanding, and is governed by the terms of the Pacific Lumber Indenture
(a "PL Asset Sale")), the Company and/or its Restricted Subsidiaries have not
either (i) reinvested, or entered into binding obligations (subject to
customary closing and termination provisions) to reinvest, in additional assets
to be used in one or more lines of business (including capital expenditures) in
which the Company and its Restricted Subsidiaries are engaged as of the Issue
Date (or reasonably related extensions of such lines), or (ii) applied to make
repayments or purchases of the Securities, the MGI Notes or the Pacific Lumber
Senior Notes (or Indebtedness ranking pari passu in right and priority of
payment with the Securities, the MGI Notes or the Pacific Senior Lumber Notes),
provided, that (x) Net Cash Proceeds of any MGI Asset Sale, to the extent not
applied pursuant to the provisions described in clauses (i) and (ii) above,
shall be included in the Asset Sale Offer Amount only to the extent permitted
to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI
Indenture as in effect on the date hereof and applicable law on the earlier of
(A) the 450th day following the consummation of such MGI Asset Sale and (B) the
consummation of any offer to purchase MGI Notes which MGI is required to make
with such Net Cash Proceeds pursuant to the MGI Indenture, (y) Net Cash
Proceeds of any PL Asset Sale, to the extent not applied pursuant to the
provisions described in clauses (i) and (ii) above, shall be included in the
Asset Sale Offer Amount only to the extent (A) permitted to be distributed or
paid as a dividend pursuant to Section 4.04(a) of the Pacific Lumber Indenture
and applicable law on the earlier of (1) the 450th day following the
consummation of such PL Asset Sale and (2) the consummation of any offer to
purchase Pacific Lumber Senior Notes which Pacific Lumber is required to make
with such Net Cash Proceeds pursuant to the Pacific Lumber Indenture and (B)
permitted to be distributed or paid as a dividend pursuant to Section 4.04(a)
of the MGI Indenture (as in effect on the date hereof) and applicable law on
the earlier of (1) the 590th day following the consummation of such PL Asset
Sale and (2) the consummation of any offer to purchase MGI Notes which MGI is
required to make with such Net Cash Proceeds pursuant to the MGI Indenture, and
(z) Net Cash Proceeds of any Primary Share Sale by MGI, to the extent not
applied pursuant to the provisions described in clauses (i) and (ii) above,
shall be included in the Asset Sale Offer Amount only to the extent permitted
to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI
Indenture (as in effect on the date hereof) on the 270th day following the
consummation of such Primary Share Sale.
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(c) Each Holder shall have the right, at the Holder's
option, to require the Company to apply the Asset Sale Offer Amount to purchase
Securities tendered pursuant to an offer by the Company to purchase Securities
at a purchase price (the "ASSET SALE PURCHASE PRICE") equal to 100% of the
principal amount of the Securities purchased, plus accrued and unpaid interest,
if any, to (but not including) the date of purchase in accordance with the
procedures (including proration in the event of an oversubscription) set forth
in this Section 4.07 (an "ASSET SALE OFFER"); provided, that the Company shall
not be required to (but may in its discretion) make an Asset Sale Offer, unless
the Asset Sale Offer Amount exceeds $25,000,000. No Asset Sale Offer Amount
shall be required to be applied to purchase Securities pursuant to more than
one Asset Sale Offer. Pending application of any Net Cash Proceeds in
accordance with this Section 4.07, the Company or a Restricted Subsidiary, as
the case may be, may invest such Net Cash Proceeds in Cash Equivalents.
(d) Within 30 days following the date on which the Asset
Sale Offer Amount exceeds $25,000,000, the Company shall mail a written notice
of an Asset Sale Offer to the Trustee, the Paying Agent and each Holder (and to
beneficial owners as required by applicable law including, without limitation,
the Exchange Act and the rules and regulations promulgated pursuant thereto)
(the "ASSET SALE OFFER NOTICE"). The Asset Sale Offer Notice shall include a
form of Asset Sale Purchase Notice (as described below) to be completed by the
Holder and shall contain or state:
(1) the Asset Sale Offer Amount, a brief description of
the Asset Sale(s) which have generated Net Cash Proceeds and the
calculation of the Asset Sale Offer Amount;
(2) the date by which the Asset Sale Purchase Notice
pursuant to this Section 4.07 must be delivered to the Paying Agent;
(3) the scheduled date of purchase (the "Asset Sale
Purchase Date") (which shall be no earlier than 30 days and not later
than 60 days following the date on which such Asset Sale Offer Notice
is mailed, subject to compliance with applicable law);
(4) the Asset Sale Purchase Price;
(5) the name and address of the Trustee and the Paying
Agent;
(6) that the Securities must be surrendered to the Paying
Agent;
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(7) that the Asset Sale Purchase Price for any Security
as to which an Asset Sale Purchase Notice has been duly given and not
withdrawn will be paid promptly (subject to proration as described in
clause (d)(8) of this Section 4.07) following the later of the Asset
Sale Purchase Date and the time of surrender of such Security as
described in clause (d)(6) of this Section 4.07;
(8) that if Asset Sale Purchase Notices are given with
respect to Securities having an aggregate Asset Sale Purchase Price in
excess of the Asset Sale Offer Amount pursuant to the Asset Sale
Offer, the Company shall purchase Securities on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that
only Securities in denominations of $1,000 or integral multiples
thereof shall be acquired);
(9) the procedures that the Holder must follow to
exercise rights under this Section 4.07 and a brief description of
those rights; and
(10) the procedures for withdrawing an Asset Sale Purchase
Notice.
The Trustee and the Paying Agent shall be under no obligation to ascertain the
occurrence of an Asset Sale. The Trustee and the Paying Agent may conclusively
assume, absent contrary notice from the Company, that no Asset Sale has
occurred.
(e) To accept the offer to purchase Securities described
in Section 4.07(c), a Holder must deliver a written notice of purchase (an
"ASSET SALE PURCHASE NOTICE") to the Paying Agent at any time prior to the
close of business on the third Business Day immediately preceding the Asset
Sale Purchase Date, stating:
(1) the name of the Holder, the principal amount and the
certificate number or numbers of the Security or Securities which the
Holder will deliver to be purchased, and a statement that the Asset
Sale Offer is being accepted with respect to such Securities;
(2) the portion of the principal amount of any Security
which the Holder will deliver to be purchased, which portion must be
$1,000 principal amount or an integral multiple thereof; and
(3) that such Security or Securities shall be purchased
on the Asset Sale Purchase Date pursuant to the terms and conditions
specified in the Securities and this Indenture.
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The delivery of a Security, by hand or by registered mail
prior to, on or after the Asset Sale Purchase Date (together with all necessary
endorsements), to the Paying Agent shall be a condition to the receipt by the
Holder of the Asset Sale Purchase Price therefor; provided, however, that such
Asset Sale Purchase Price shall be so paid pursuant to this Section 4.07 only
if the Security or Securities so delivered to the Paying Agent shall conform in
all respects to the description thereof set forth in the related Asset Sale
Purchase Notice; and provided, further, that the Company shall have no
obligation to purchase any Securities with respect to which an Asset Sale
Purchase Notice has not been received by the Paying Agent prior to the close of
business on the third Business Day immediately preceding the Asset Sale
Purchase Date.
In the event that the Asset Sale Offer described in this
Section 4.07 shall be accepted in accordance with the terms hereof with respect
to any portion of a Security, the Company shall purchase from the Holder
thereof (subject to proration pursuant to Section 4.07(f)), pursuant to this
Section 4.07, such portion of such Security if the principal amount of such
portion is $1,000 or an integral multiple of $1,000. In connection with a
Security purchased in part, the Company shall execute and the Trustee shall
authenticate for delivery to the Holder thereof, a new Security equal in
principal amount to that of the unpurchased portion of the Security
surrendered.
(f) Upon receipt by the Paying Agent of the Asset Sale
Purchase Notice as specified in Section 4.07(e), the Holder of the Security (or
portion thereof) in respect of which such Asset Sale Purchase Notice was given
shall (subject to proration pursuant to this Section 4.07(f) and unless such
Asset Sale Purchase Notice is withdrawn as specified in the following
paragraph) thereafter be entitled to receive the Asset Sale Purchase Price with
respect to such Security (or portion thereof). Such Asset Sale Purchase Price
shall be due and payable as of the Asset Sale Purchase Date and shall be paid
to such Holder promptly following the later of (i) the Asset Sale Purchase Date
(provided the conditions in Section 4.07(e), as applicable, have been
satisfied) and (ii) the date of delivery of such Security to the Paying Agent
by the Holder thereof in the manner required by Section 4.07(e).
An Asset Sale Purchase Notice may be withdrawn by means of a
written notice of withdrawal delivered to the Paying Agent at any time on or
prior to the close of business on the second Business Day preceding the Asset
Sale Purchase Date, specifying:
(1) the certificate number or numbers of the Security or
Securities in respect of which such notice of withdrawal is being
submitted;
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(2) the principal amount of the Security or Securities
with respect to which such notice of withdrawal is being submitted;
and
(3) the principal amount, if any, of such Security or
Securities which remains subject to the original Asset Sale Purchase
Notice, and which has been or will be delivered for purchase by the
Company.
If, at the close of business on the second Business Day
preceding the Asset Sale Purchase Date, the Asset Sale Purchase Price of all
Securities for which Asset Sale Purchase Notices have been given and not
withdrawn exceeds the Asset Sale Offer Amount, the Paying Agent shall select
the Securities to be purchased such that each properly tendering Holder shall
receive a portion of the Asset Sale Offer Amount on a pro rata basis (with such
adjustments as may be deemed appropriate by the Paying Agent so that only
Securities in denominations of $1,000 principal amount or integral multiples
thereof shall be purchased). The Paying Agent shall promptly return to the
Holder thereof any Securities surrendered which the Company shall not be
required to purchase pursuant to this Section 4.07.
(g) On or prior to the Asset Sale Purchase Date, the
Company shall deposit with the Paying Agent (which, for purposes of this
Section 4.07, may not be the Company or a Subsidiary or an Affiliate of either)
an amount of money (not exceeding the Asset Sale Offer Amount) in immediately
available funds sufficient to pay the aggregate Asset Sale Purchase Price of
the Securities (or portions thereof) which are to be purchased on the Asset
Sale Purchase Date. If money sufficient to pay the Asset Sale Purchase Price
of all Securities (or portions thereof) to be purchased on the Asset Sale
Purchase Date is deposited with the Paying Agent as of the Asset Sale Purchase
Date, interest shall cease to accrue, whether or not any such Security is
delivered to the Paying Agent, on such Securities (or portions thereof) on and
after the Asset Sale Purchase Date, and the Holders thereof shall have no other
rights as such, other than the right to receive the Asset Sale Purchase Price
(and, in the case of a Security purchased in part, a new Security equal in
principal amount to the unpurchased portion of the Security surrendered) upon
surrender of such Securities.
(h) In connection with any offer to purchase, or any
purchase of, Securities under this Section 4.07, the Company shall (i) comply
with the Exchange Act, if applicable, (ii) file any required Schedules of the
Exchange Act, if applicable, and (iii) otherwise comply with all Federal and
state securities laws regulating the purchase of the Securities.
(i) The Paying Agent shall return to the Company any
money, together with interest or dividends, if any, thereon held by
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it for the payment of the Asset Sale Purchase Price of the Securities that
remain unclaimed as provided in Section 8.04 hereof; provided, however, that to
the extent that the aggregate amount of money deposited by the Company pursuant
to Section 4.07(g) exceeds the aggregate Asset Sale Purchase Price of the
Securities or portions thereof to be purchased on the Asset Sale Purchase Date,
then promptly after the Asset Sale Purchase Date, the Paying Agent shall return
any such excess to the Company together with interest or dividends, if any,
thereon.
(j) Notwithstanding anything to the contrary contained in
this Section 4.07, this Section 4.07 shall not prohibit or otherwise apply to
(i) a consolidation or merger of the Company or a transfer, conveyance, sale or
lease of all or substantially all of the Company's assets, provided that any
such transaction complies with the provisions and the terms set forth in
Section 5.01 or (ii) any transaction permitted by Section 4.04.
SECTION 4.08. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The
Company shall not, and shall not permit any of its Restricted Subsidiaries or
Salmon Creek (or any successor to Salmon Creek or any transferee of
substantially all of the assets of Salmon Creek so long as such successor or
transferee is a Subsidiary of the Company) or any Unrestricted Subsidiary to
which the Company or any of its Restricted Subsidiaries makes a contribution of
non-cash proceeds received in respect of a Salmon Creek Distribution pursuant
to Section 4.04(d) (each, a "Company Party") to, enter into any transaction or
transactions with any Affiliate of the Company, unless: (i) the terms thereof
are not less favorable to the Company Party than those that could reasonably be
obtained in a comparable transaction at such time with a person who is not an
Affiliate of the Company; (ii) such transaction shall have been approved as
meeting such standard, in good faith, by a majority of the members of the Board
of Directors; and (iii) with respect to any transaction or series of related
transactions involving payments and consideration in excess of $10,000,000, the
Company shall have obtained and made available to the Trustee an opinion of a
nationally recognized investment banking firm stating that the terms of such
transaction or series of transactions are fair from a financial point of view
to the Company Party. The Company shall deliver to the Trustee, within 60 days
after the end of each fiscal quarter of the Company, an Officers' Certificate
which shall briefly describe and specify the aggregate dollar amount of
transactions (other than the transactions set forth in Section 4.08(b), except
clause (vii) thereof)) with Affiliates of the Company occurring during such
fiscal quarter.
(b) The provisions contained in Section 4.08(a) shall not
apply to: (i) any transaction permitted by Section 4.04(a) or Section
4.04(c)(i), (v), (vi) and (vii) of this Indenture; (ii) the
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execution and delivery of, the performance of, and the making of any payments
required by, the Tax Sharing Agreements; (iii) the execution and delivery of,
the performance of, and the making of any payments required by, the Bering
Agreement; (iv) the making of payments to MAXXAM for reimbursement for actual
services provided thereby to the Company and its Subsidiaries based on actual
costs and an allocable share of overhead expenses consistent with prior
practices; (v) compensation, indemnification and other benefits paid or made
available to officers, directors and employees of any Company Party for
services rendered in such person's capacity as an officer, director, or
employee (including reimbursement or advancement of reasonable out-of-pocket
expenses and directors' and officers' liability insurance); (vi) the execution
and delivery of, the performance of, and the making of any payments required
by, the MXM Guaranty; (vii) the execution, delivery and performance of, and the
making of any payments or the taking of any action required or contemplated by,
any agreements initially entered into by a Company Party with one or more
Affiliates, in which MAXXAM (and no other Affiliate) has an equity interest of
30% or less (each, a "Headwaters Joint Venture") relating to the ownership,
holding, development or disposition of any non-cash or non-Cash Equivalent
property (whether an individual property or a group of properties) received by
Pacific Lumber or any of its Subsidiaries as a Salmon Creek Distribution in
connection with or relating to the transactions referred to in or contemplated
by the information set forth in the Offering Memorandum under the caption
"Business of the Company--Headwaters Agreement" (each, an "Initial Salmon Creek
Agreement") provided that each Initial Salmon Creek Agreement satisfies the
provisions of Section 4.08(a) and that each subsequent agreement entered into
by a Company Party and any transaction between any Headwaters Joint Venture and
any Affiliate subsequent to the execution of an Initial Salmon Creek Agreement
that relate to the subject matter of such Initial Salmon Creek Agreement
satisfies the provisions of clauses (i) and (ii) of Section 4.08(a); provided,
further, that (a) each such subsequent agreement involving payments and other
consideration paid to or received by any Company Party, or involving payments
and other consideration paid to or received from any Headwaters Joint Venture
by any Affiliate, in excess of $10.0 million shall satisfy the requirements of
Section 4.08(a), and (b) any material amendment of any Initial Salmon Creek
Agreement or any such subsequent agreement shall be on terms (considered as a
whole) no less favorable to any Company Party, relative to MAXXAM, than the
terms of such Initial Salmon Creek Agreement; (viii) the execution, delivery
and performance of any agreements granting any Lien permitted by clause (xv) of
Section 4.10 or any amendment to any such agreement, to the extent that such
agreement or amendment thereto does not create or evidence Indebtedness of the
Company or any Restricted Subsidiary of the Company; and (ix) the making of the
loan evidenced by the Intercompany Note and any amendment to the Intercompany
Note to the extent such amendment does not materially adversely affect the
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Company's ability to pay its obligations on the Securities; in the case of
clauses (iii) and (iv) of this Section 4.08(b), to the extent the aggregate
amount of payments pursuant to such clauses does not exceed $5.0 million in any
calendar year, which amount shall be adjusted for each calendar year,
commencing with the calendar year beginning January 1, 1996 (each, an
"Adjustment Period"), by multiplying such amount by a fraction, the numerator
of which shall be the then most recent Producer Price Index (Lumber and Wood
Products Commodity Groups) (Standard Industrial Classification No. 2400), as
published by the United States Department of Labor, Bureau of Labor Statistics
(the "PPI Index"), in effect on the first day of such Adjustment Period, and
the denominator of which shall be the most recent PPI Index published as of
January 1, 1993.
SECTION 4.09. CHANGE OF CONTROL. (a) Upon the first Change of
Control to occur after the date of this Indenture (but not upon any subsequent
Change of Control), each Holder shall have the right, at the Holder's option,
to require that the Company purchase any or all of such Holder's Securities at
a purchase price (the "CHANGE OF CONTROL PURCHASE PRICE") in cash equal to 101%
of the principal amount of the Securities, plus accrued and unpaid interest, if
any, to (but not including) the scheduled date of purchase (the "CHANGE OF
CONTROL PURCHASE DATE"), in accordance with the procedures set forth in this
Section 4.09.
(b) Within 30 days following the first occurrence of a
Change of Control following the date of this Indenture, the Company shall mail
a written notice of Change of Control to the Trustee, the Paying Agent and each
Holder (and to beneficial owners as required by applicable law, including
without limitation, the rules and regulations promulgated under the Exchange
Act) (the "CHANGE OF CONTROL OFFER NOTICE"). The Change of Control Offer
Notice shall include a form of Change of Control Purchase Notice (as described
below) to be completed by the Holder and shall contain or state:
(1) a brief description of the Change of Control and the
date of such Change of Control;
(2) the date by which the Change of Control Purchase
Notice pursuant to this Section 4.09 must be delivered to the Paying
Agent;
(3) the Change of Control Purchase Date (which shall be
no earlier than 30 days and not later than 60 days following the date
on which such Change of Control Offer Notice is mailed, subject to
compliance with applicable law);
(4) the Change of Control Purchase Price;
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(5) the name and address of the Trustee and the Paying
Agent;
(6) that the Securities must be surrendered to the Paying
Agent;
(7) that the Change of Control Purchase Price for any
Security as to which such Change of Control Purchase Notice has been
duly given and not withdrawn will be paid promptly following the later
of the Change of Control Purchase Date and the time of surrender of
such Security as described in clause (b)(6) of this Section 4.09;
(8) the procedures that the Holder must follow to
exercise rights under this Section 4.09 and a brief description of
those rights; and
(9) the procedures for withdrawing such Change of Control
Purchase Notice.
The Trustee and the Paying Agent shall be under no obligation
to ascertain the occurrence of a Change of Control. The Trustee and the Paying
Agent may conclusively assume, absent contrary notice from the Company, that no
Change of Control has occurred.
(c) To accept the offer to purchase Securities
described in Section 4.09(a), a Holder must deliver a written notice of
purchase (a "CHANGE OF CONTROL PURCHASE NOTICE") to the Paying Agent at any
time prior to the close of business on the third Business Day immediately
preceding the Change of Control Purchase Date, stating:
(1) the name of the Holder, the principal amount and the
certificate number or numbers of the Security or Securities which the
Holder will deliver to be purchased, and a statement that the offer to
purchase is being accepted with respect to such Securities;
(2) the portion of the principal amount of any Security
which the Holder will deliver to be purchased, which portion must be
$1,000 principal amount or an integral multiple thereof; and
(3) that such Security or Securities shall be purchased
on the Change of Control Purchase Date pursuant to the terms and
conditions specified in the Securities and this Indenture.
The delivery of a Security, by hand or by registered mail
prior to, on or after the Change of Control Purchase Date (together with all
necessary endorsements), to the Paying Agent shall be a
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condition to the receipt by the Holder of the Change of Control Purchase Price
therefor; provided, however, that such Change of Control Purchase Price shall
be so paid pursuant to this Section 4.09 only if the Security or Securities so
delivered to the Paying Agent shall conform in all respects to the description
thereof set forth in the related Change of Control Purchase Notice; and
provided, further, that the Company shall have no obligation to purchase any
Securities with respect to which a Change of Control Purchase Notice has not
been received by the Paying Agent prior to the close of business on the third
Business Day immediately preceding the Change of Control Purchase Date.
In the event that the offer to purchase described in Section
4.09(a) shall be accepted in accordance with the terms hereof with respect to
any portion of a Security, the Company shall purchase from the Holder thereof,
pursuant to this Section 4.09, such portion of such Security if the principal
amount of such portion is $1,000 or an integral multiple of $1,000. In
connection with a Security purchased in part, the Company shall execute and the
Trustee shall authenticate for delivery to the Holder thereof, a new Security
equal in principal amount to the unpurchased portion of the Security
surrendered.
(d) Upon receipt by the Paying Agent of the Change
of Control Purchase Notice as specified in Section 4.09(c), the Holder of the
Security (or portion thereof) in respect of which such Change of Control
Purchase Notice was given shall (unless such Change of Control Purchase Notice
is withdrawn as specified in the following paragraph) thereafter be entitled to
receive the Change of Control Purchase Price with respect to such Security (or
portion thereof). Such Change of Control Purchase Price shall be due and
payable as of the Change of Control Purchase Date and shall be paid to such
Holder promptly following the later of (i) the Change of Control Purchase Date
(provided the conditions in Section 4.09(c), as applicable, have been
satisfied) and (ii) the date of delivery of such Security to the Paying Agent
by the Holder thereof in the manner required by Section 4.09(c).
A Change of Control Purchase Notice may be withdrawn by means
of a written notice of withdrawal delivered to the Paying Agent at any time on
or prior to the close of business on the Business Day next preceding the Change
of Control Purchase Date, specifying:
(1) the certificate number or numbers of the Security or
Securities in respect of which such notice of withdrawal is being
submitted;
(2) the principal amount of the Security or Securities
with respect to which such notice of withdrawal is being submitted;
and
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(3) the principal amount, if any, of such Security or
Securities which remains subject to the original Change of Control
Purchase Notice, and which has been or will be delivered for purchase
by the Company.
(e) On or prior to the Change of Control Purchase
Date, the Company shall deposit with the Paying Agent (or, if the Company or a
Subsidiary or an Affiliate of either of them is acting as Paying Agent, shall
segregate and hold in trust) an amount of cash in immediately available funds
sufficient to pay the aggregate Change of Control Purchase Price of all the
Securities (or portions thereof) which are to be purchased on the Change of
Control Purchase Date. If money sufficient to pay the Change of Control
Purchase Price of all Securities (or portions thereof) to be purchased on the
Change of Control Purchase Date is deposited with the Paying Agent as of the
Change of Control Purchase Date, interest shall cease to accrue, whether or not
such Security is delivered to the Paying Agent, on such securities (or portions
thereof) on and after the Change of Control Purchase Date, and the Holders
thereof shall have no other rights as such, other than the right to receive the
Change of Control Purchase Price (and, in the case of a Security purchased in
part, a new Security equal in principal amount to the unpurchased portion of
the Security surrendered) upon surrender of such Securities.
(f) In connection with any offer to purchase, or
any purchase of, Securities pursuant to this Section 4.09, the Company shall
(i) comply with the Exchange Act and the applicable rules and regulations of
the Exchange Act (or any successor provision thereof), if applicable, (ii) file
the Schedules required by the Exchange Act, if applicable, and (iii) otherwise
comply with all Federal and state securities laws regulating the purchase of
the Securities.
(g) The Paying Agent shall return to the Company
any money, together with interest or dividends, if any, thereon held by it for
the payment of the Change of Control Purchase Price of the Securities that
remain unclaimed as provided in Section 8.04 hereof; provided, however, that to
the extent that the aggregate amount of money deposited by the Company pursuant
to Section 4.09(e) exceeds the aggregate Change of Control Purchase Prices of
the Securities (or portions thereof) to be purchased on the Change of Control
Purchase Date, then promptly after the Change of Control Purchase Date, the
Paying Agent shall return any such excess to the Company together with interest
or dividends, if any, thereon.
SECTION 4.10. LIMITATION ON LIENS. The Company shall not, and shall
not permit any of its Restricted Subsidiaries to, incur, assume, suffer to
exist, create or otherwise cause to be effective Liens upon any of their
respective assets to secure Indebtedness, except for:
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(i) Liens in existence on the Issue Date;
(ii) Liens securing all or any Indebtedness outstanding
under the Credit Agreement;
(iii) Liens incurred or pledges and deposits in connection
with workers' compensation, unemployment insurance and other social
security benefits, leases, appeal bonds and other obligations of like
nature incurred by the Company or any Restricted Subsidiary in the
ordinary course of business;
(iv) Liens imposed by law, including, without limitation,
mechanics', carriers', warehousemen's, materialmen's, suppliers' and
vendors' Liens, incurred by the Company or any Restricted Subsidiary
in the ordinary course of business;
(v) zoning restrictions, easements, licenses, covenants,
reservations, restrictions on the use of real property or minor
irregularities of title incident thereto, which do not in the
aggregate have a material adverse effect on the operation of the
business of the Company or its Restricted Subsidiaries taken as a
whole;
(vi) Liens for ad valorem, income or property taxes or
assessments and similar charges either (A) not delinquent or (B)
contested in good faith by appropriate proceedings and as to which the
Company has set aside on its books reserves to the extent required by
GAAP;
(vii) Liens in respect of purchase money Indebtedness
incurred to acquire assets or Stock provided that such Liens are
limited to the assets or Stock acquired with the proceeds of such
Indebtedness (and the proceeds of such assets or Stock);
(viii) Liens securing Indebtedness permitted by Section
4.03(c) which refinances secured Indebtedness, so long as such Liens
are limited to the collateral which secures the Indebtedness being
refinanced and the proceeds of such collateral;
(ix) Liens on any assets or the Stock of any Subsidiary of
the Company which assets or Stock are acquired by the Company or a
Restricted Subsidiary subsequent to the date of this Indenture and
which Liens were in existence on or prior to the acquisition of such
assets or the Stock of such Subsidiary (to the extent that such Liens
were not created in contemplation of such acquisition); provided that
such Liens are limited to the assets so acquired or the Stock of such
acquired Subsidiary (or the entity organized to effect such
acquisition) and the proceeds thereof;
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(x) Liens securing Indebtedness permitted by clauses (vi),
(viii), (ix), or (xii) of Section 4.03(b), provided, in each such
case, that such Liens are limited to the assets financed with the
proceeds of the Indebtedness incurred pursuant to such provisions (and
the proceeds of such assets);
(xi) Liens securing Indebtedness under any Interest Rate
Protection Agreement permitted by Section 4.03(b)(vii), provided, that
such Liens are limited to the collateral which secures the
Indebtedness to which such Interest Rate Protection Agreement relates;
(xii) Liens imposed pursuant to condemnation or eminent
domain or substantially similar proceedings or in connection with
compliance with environmental laws or regulations;
(xiii) Liens granted pursuant to the Timber Notes, the Timber
Note Indenture or the Deed of Trust, in connection with the Timber
Notes or in connection with any of the Scotia Pacific Agreements, or
in connection with any other agreement entered into in connection with
the Timber Notes;
(xiv) other Liens securing Indebtedness not exceeding
$25,000,000 in aggregate principal amount;
(xv) Liens on assets referred to in clause (vi) of Section
4.04(c) and on the proceeds of such assets; and
(xvi) Liens in favor of the Trustee pursuant to this
Indenture, Liens in favor of the trustee under and pursuant to the MGI
Indenture and Liens in favor of the trustee under and pursuant to the
Pacific Lumber Indenture.
SECTION 4.11. AMENDMENT OF SCOTIA PACIFIC AGREEMENTS OR INTERCOMPANY
NOTE. The Company shall not permit Scotia Pacific to agree to amend the Timber
Note Indenture, the Deed of Trust, or any of the Scotia Pacific Agreements,
unless such amendment (i) is to cure any ambiguity, omission, defect or
inconsistency, or to add to the covenants of Scotia Pacific for the benefit of
the Company or the Holders or to surrender any right or power conferred in the
Master Purchase Agreement on Scotia Pacific, or (ii) does not materially
adversely affect the ability of the Company to pay principal or interest on the
Securities when due. The Company shall not agree to any amendment or
modification of the Intercompany Note unless such amendment (i) is to cure an
ambiguity, omission, defect or inconsistency, or to add to the covenants of
MAXXAM for the benefit of the Company or the Holders or (ii) does not
materially adversely affect the ability of the Company to pay principal or
interest on the Securities when due.
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SECTION 4.12. COMPLIANCE CERTIFICATE. The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating whether or not the signers know of any Default
that occurred during such period. If they do, the Officers' Certificate shall
describe the Default and its status. Such Officers' Certificates shall comply
with TIA Section 314(a)(4).
SECTION 4.13. USE OF PROCEEDS. The Company shall use the net
proceeds from the offering and sale of the Securities as set forth in the
Offering Memorandum under the caption "Use of Proceeds." In addition, while
any Series A Securities remain outstanding that have not been transferred in a
transaction registered under the Securities Act, the Company shall not use any
proceeds from the sale of such Series A Securities for the purpose of buying or
carrying (within the meaning of the margin regulations (Regulations G and U)
issued by the Board of Governors of the Federal Reserve System) any margin
stock (within the meaning of such regulations).
SECTION 4.14. CORPORATE EXISTENCE. Subject to Article 5, the Company
shall do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence, rights (charter and statutory) and
franchises; provided, however, that the Company shall not be required to
preserve any such right or franchise if its Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company.
SECTION 4.15. LIMITATION ON STATUS AS INVESTMENT COMPANY. Neither
the Company nor any of its Restricted Subsidiaries shall become an "investment
company" (as that term is defined in the Investment Company Act of 1940, as
amended).
SECTION 4.16. LIMITATION ON LIENS ON PLEDGED SHARES AND INTERCOMPANY
NOTE. The Company covenants that it will not, and will not permit any
Subsidiary of the Company to, directly or indirectly, create, incur, assume or
permit to exist, will defend such Pledged Shares and Intercompany Note against,
and will take such action as is necessary to remove, any Lien or claim on or in
respect of any Pledged Shares or the Intercompany Note, except (i) the Liens
created by this Indenture, (ii) Liens for taxes or assessments or other
governmental charges or levies not yet due or payable under law or being
contested in good faith by appropriate proceedings, (iii) Liens arising by
operation of law in the ordinary course of business and with respect to amounts
not overdue for a period of more than 90 days or being contested in good faith
by appropriate proceedings and (iv) judgment Liens and other similar Liens
arising in connection with court proceedings (provided, that the execution or
other enforcement thereof is effectively stayed within 60 days following entry
of judgment and
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the claims secured thereby are being actively contested in good faith and by
appropriate proceedings).
SECTION 4.17. DECLARATION AND PAYMENT OF DIVIDENDS BY MGI. The
Company shall cause MGI, to the extent that there exists any consensual
restriction or encumbrance on MGI's ability to pay dividends or make any other
distributions on its Capital Stock ("Dividend Encumbrances"), to declare and
pay dividends to its stockholders to the maximum extent permitted by the
instruments or other agreements containing such Dividend Encumbrances, unless
the Board of Directors of MGI determines in good faith (whose determination
shall be evidenced by a resolution of the Board of Directors filed with the
Trustee) that the declaration or payment of such dividend would be detrimental
to the capital and other operating needs of MGI.
SECTION 4.18. RELEASES FROM LIEN OF MGI INDENTURE. To the extent
that collateral released from the Lien of the MGI Indenture is required to be
pledged as Collateral pursuant to this Indenture, the Company shall seek the
release of such collateral from the Lien of the MGI Indenture promptly after it
becomes eligible for such release pursuant to the terms of the MGI Indenture.
Anything in this Indenture to the contrary notwithstanding, it is understood
and agreed that this Indenture does not create any Lien or claim on or in
respect of any collateral subject to the Lien of the MGI Indenture.
ARTICLE 5
SUCCESSOR COMPANY
SECTION 5.01. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS. Except as
permitted by Section 10.13, the Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to, any person or group of related persons in a single transaction or
series of related transactions, or permit any of its Restricted Subsidiaries to
enter into any such transaction or transactions if such transaction or
transactions in the aggregate would result in a transfer of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
on a consolidated basis to any person other than the Company, unless (except as
permitted by Article 10):
(i) the resulting, surviving or transferee person (if not
the Company) shall be organized and existing under the laws of the
United States of America or any State thereof or the District of
Columbia and such entity shall expressly assume, by supplemental
indenture hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee,
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all the obligations of the Company under the Securities and this
Indenture, and such entity and/or each other person that, upon
consummation of such transaction or transactions, obtains ownership of
any portion of the Collateral (to the extent such Collateral is not
released from the Lien of this Indenture in accordance with the terms
of this Indenture) shall grant a security interest (of like tenor to
the security interest granted on the Issue Date with respect to such
Collateral pursuant to Section 10.01(a) or to the security interest
granted subsequent to the Issue Date with respect to such Collateral
pursuant to any other provision of this Indenture, as applicable) in
such Collateral, and shall expressly assume, by supplemental indenture
hereto, executed and delivered to the Trustee, in form satisfactory to
the Trustee, all the obligations of the Company with respect to such
Collateral set forth in Article 10;
(ii) immediately after giving effect to such transaction,
no Default shall have happened and be continuing;
(iii) except in the case of a merger, or transfer of all or
substantially all assets, of a Restricted Subsidiary into or to the
Company or into or to another Restricted Subsidiary, immediately after
giving effect to such transaction, the Consolidated Cash Flow Coverage
Ratio of the Company or the surviving entity shall exceed 2.0 to 1;
(iv) the Company shall have delivered to the Trustee an
Officers' Certificate to the foregoing effect and an Opinion of
Counsel, stating that such consolidation, merger or transfer,
conveyance or lease (other than the calculation of the Consolidated
Cash Flow Coverage Ratio as to which counsel need not opine) and such
supplemental indenture comply with this Indenture; and
(v) the Lien of this Indenture on the Collateral in favor
of the Trustee for the benefit of Holders of the Securities has not
been materially impaired in contravention of the provisions of this
Indenture as a result of such transaction or transactions; provided,
that MGI may merge or consolidate with or transfer substantially all
of its assets to a Restricted Subsidiary of the Company pursuant to a
transaction in compliance with the provisions of Section 10.13.
The resulting, surviving or transferee person (if other than the
Company which executed this Indenture) shall succeed to, and may exercise every
right and power of, the Company under this Indenture with the same effect as if
such successor Company had been named as the Company herein and the Company
(except in the event of a lease of all or substantially all of the Company's
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assets) shall be relieved of its obligations under this Indenture and
the Securities. Each person that becomes a pledgor with respect to
any Collateral upon consummation of such transaction or transactions
shall succeed to, and may exercise every right and power of, the
Company with respect to such Collateral prior to such consummation
with the same effect as if such person had originally been a pledgor
with respect to such Collateral, and each person who ceases to be such
a pledgor upon such consummation shall be relieved of its obligations
as a pledgor in respect of such Collateral.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on
any Security when the same becomes due and payable and such default
continues for a period of 30 days;
(2) the Company defaults in the payment of the principal
of any Security when the same becomes due and payable at its Stated
Maturity, upon optional or special redemption, upon declaration or
otherwise, including any failure by the Company to redeem or
repurchase any of the Securities when required pursuant to Sections
4.07, 4.09 and 10.05(f) of this Indenture or paragraphs 5 or 7 of the
Securities;
(3) the Company defaults in the performance of, or
breaches, any covenant or agreement on the part of the Company
contained in this Indenture (other than a covenant or agreement on the
part of the Company a default in whose performance or breach is
specifically addressed elsewhere in this Section 6.01), and
continuance of such default or breach for a period of 60 days after
written notice thereof, which must specify the default or breach,
demand it be remedied and state that the notice is a "Notice of
Default," has been given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Securities then outstanding;
(4) there is a default under any bond, debenture, note or
other evidence of Indebtedness of the Company or any Restricted
Subsidiary, or under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or any Restricted Subsidiary, whether such
Indebtedness now exists or is hereafter created, which default
involves the
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failure to pay principal on Indebtedness at the final maturity thereof
or which has resulted in such Indebtedness becoming or being declared
due and payable prior to its scheduled maturity in an aggregate amount
in excess of $10,000,000;
(5) the Company or any Significant Subsidiary pursuant to
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief
against it in an involuntary case,
(C) consents to the appointment of a Custodian of
it or for all or substantially all of its property, or
(D) makes a general assignment for the benefit of
its creditors;
(6) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case,
(B) appoints a Custodian of the Company or any
Significant Subsidiary or for all or substantially all of its
property, or
(C) orders the winding up or liquidation of the
Company or any Significant Subsidiary,
and in each case the order or decree remains unstayed and in effect
for a period of 60 consecutive days; or
(7) the entry by a court having jurisdiction in the
premises of one or more judgments or orders against the Company or any
Restricted Subsidiary for the payment of money in an aggregate amount
in excess of $10,000,000 (to the extent not covered by insurance)
which remain undischarged or unsatisfied for a period of 60
consecutive days after the judgments or orders become final and the
right to appeal them has expired.
The term "Bankruptcy Law" means Title 11 of the United States Code, or
any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
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The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice, in the form of an Officers' Certificate, of
any event which with the giving of notice and the lapse of time would become an
Event of Default under clauses (4) or (7). Such notice shall specify the
status of such event and what action the Company is taking or proposes to take
with respect thereto.
SECTION 6.02. ACCELERATION. If an Event of Default (other than an
Event of Default specified in Section 6.01(5) or (6)) occurs and is continuing,
either the Trustee by written notice to the Company, or the Holders of at least
25% in aggregate principal amount of the Securities then outstanding by written
notice to the Company and the Trustee, may declare the principal amount of and
accrued interest, if any, on all the Securities to be due and payable. If an
Event of Default specified in Section 6.01(5) or (6) with respect to the
Company occurs and is continuing, the principal of and interest on all the
Securities then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Securityholder. The Holders of a majority in aggregate principal amount of the
Securities then outstanding by notice to the Trustee may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay
or omission by the Trustee or any Securityholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy
is exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections 6.07 and
9.02, the Holders of a majority in aggregate principal amount of outstanding
Securities by notice to the Trustee may waive an existing Default and its
consequences except (1) a Default or Event of Default in the payment of the
principal of or interest on a Security as specified in clauses (1) and (2) of
Section 6.01 or
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(2) a Default in respect of a provision that under Section 9.02 cannot be
amended without the consent of each Securityholder affected. When a Default or
Event of Default is waived, it is deemed cured and ceases, but no such waiver
shall extend to any subsequent or other Default or Event of Default or impair
any right consequent thereon.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in
aggregate principal amount of outstanding Securities may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture or, subject to Section 7.01, that the Trustee determines is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee
in personal liability; provided, however, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification reasonably satisfactory to it against all losses and
expenses caused by taking or not taking such action.
SECTION 6.06. LIMITATION ON SUITS. A Securityholder may not pursue
any remedy with respect to this Indenture or the Securities, unless:
(1) the Holders of at least 25% of the aggregate
principal amount of Securities then outstanding give to the Trustee
written notice stating that an Event of Default is continuing;
(2) the Holders of at least 25% of the aggregate
principal amount of the Securities then outstanding make a written
request to the Trustee to pursue the remedy;
(3) such Holders offer to the Trustee reasonable security
or indemnity against any loss, liability or expense to be incurred in
complying with such request;
(4) the Trustee does not comply with the request within
60 days after receipt of the notice, request and offer of security or
indemnity and such Event of Default has not been cured or waived; and
(5) the Holders of a majority of the aggregate principal
amount of the Securities then outstanding do not give the Trustee a
direction inconsistent with the request during such 60-day period.
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A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
another Securityholder.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Securities held by such Holder, on
or after the respective due dates expressed in the Securities, or to bring suit
for the enforcement of any such payment on or after such respective dates,
shall not be impaired or affected without the consent of such Holder; provided,
that no Holder shall have the right to institute any such suit, if and to the
extent that the institution or prosecution thereof or the entry of judgment
therein would, under applicable law, result in the surrender, impairment,
waiver or loss of the Lien on the Collateral created by this Indenture.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in
payment of interest or principal specified in Section 6.01(1) or (2) occurs and
is continuing, the Trustee may recover judgment in its own name and as trustee
of an express trust against the Company for the whole amount of principal and
interest remaining unpaid (together with interest on such unpaid interest to
the extent lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
person performing similar functions, and be entitled and empowered to collect
and receive any monies or other property payable or deliverable on any such
claims and to distribute the same, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07. Nothing herein contained shall be deemed to authorize or consent to or
accept or adopt on behalf of any Securityholder any plan of reorganization,
arrangement, adjustment or composition affecting the Securities or the rights
of any Holder thereof, or to authorize the Trustee to vote in respect of the
claim of any Securityholder in any such proceeding.
SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant
to this Article 6 or, if a Notice of Acceleration has been delivered to the
Company and is in effect and Trust Monies are held
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in the Accounts, it shall pay out the money (or Trust Monies, as applicable) in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company its successors and assigns.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section 6.10. At least 15 days
before such record date, the Trustee shall mail to each Securityholder and the
Company a notice that states the record date, the payment date and the amount
to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section 6.11 does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% of the aggregate principal amount of the then outstanding
Securities.
SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Indenture; and the Company
(to the extent that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law, and shall not hinder, delay or impede the
execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been
enacted.
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or
any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to the Trustee or to such Holder, then
and in every such
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case, subject to any determination in such proceeding, the Company, the Trustee
and the Holders shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Company, the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE. (a) The Trustee, prior to the
occurrence of an Event of Default and after the curing or waiving of all Events
of Default which may have occurred, undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture. If an Event of
Default has occurred and is continuing, the Trustee shall exercise the rights
and powers vested in it by this Indenture, and use the same degree of care and
skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs. At all times, the
Trustee's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Uniform Commercial Code or otherwise, shall be to deal with it in the same
manner as the Trustee deals with similar property for its own account.
(b) Except during the continuance of an Event of
Default:
(1) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no covenants or
obligations shall be implied in this Indenture which are adverse to
the Trustee; and
(2) in the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture; provided, however, that the Trustee shall examine
the certificates and opinions to determine whether or not they conform
to the requirements of this Indenture.
(c) The Trustee may not be relieved from
liability for its own negligent action, its own negligent failure to act or its
own wilful misconduct, except that:
(1) this paragraph does not limit the effect of paragraph
(b) of this Section 7.01;
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(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
(3) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any
way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this
Section.
(e) The Trustee shall agree in writing with the
Company to invest moneys deposited hereunder and the Company shall be entitled
to the income thereon.
(f) Funds held in trust by the Trustee need not
be segregated from other funds except to the extent required by this Indenture
and applicable law.
(g) No provision of this Indenture shall require
the Trustee to expend or risk its own funds or otherwise incur financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds to believe
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01:
(a) The Trustee may rely and shall be protected
in acting or refraining from acting upon any written resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, Security or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties;
(b) Whenever in the administration of this
Indenture the Trustee shall deem it desirable that a matter be proved or
established prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may, in the
absence of bad faith on its part, rely upon an Officers' Certificate or an
Opinion of Counsel;
(c) The Trustee shall not be liable for any
action it takes or omits to take in good faith which it believes to be
authorized or within its rights or powers conferred upon it by this Indenture;
provided, however, that the Trustee's conduct does not constitute willful
misconduct, negligence or bad faith.
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(d) The Trustee may consult with counsel, and the
advice or Opinion of Counsel with respect to this Indenture and the Securities
shall be full and complete authorization and protection from liability in
respect to any action taken, omitted or suffered by it hereunder in good faith
and in accordance with the advice or Opinion of Counsel.
(e) The Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Securityholders pursuant to this Indenture,
unless such Securityholder shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such requests or direction;
(f) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, Security or other paper or document but the Trustee, in its discretion,
may make such further inquiry or investigation into such facts or matters as it
may see fit, and, if the Trustee shall determine to make such further inquiry
or investigation, it shall be entitled to examine the relevant books, records
and premises of the Company, personally or by agent or attorney;
(g) The Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by or
through agents or attorneys, and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with
due care by it hereunder;
(h) The Trustee shall have no duty to review
documents delivered to the Trustee pursuant to Section 4.02 for purposes of
determining compliance with any provisions of this Indenture;
(i) Except with respect to Sections 4.01 and 4.12,
the Trustee shall have no duty to inquire as to the performance of the
Company's covenants in Article 4. In addition, the Trustee shall not be deemed
to have knowledge of any Default or Event of Default except (i) any Default or
Event of Default occurring pursuant to Sections 6.01(1), 6.01(2), 4.01 or 4.12,
or (ii) any Default or Event of Default of which the Trustee shall have
received written notification or obtained actual knowledge.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent or Registrar may do the
same with like
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rights. Notwithstanding the foregoing, the Trustee must comply with Sections
7.10 and 7.11.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for
any statement in this Indenture or the Securities other than its certificate of
authentication.
SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder, in the manner and to the extent provided in TIA Section 315(b),
notice of the Default within 90 days after it occurs. Except in the case of a
Default in payment of principal of or interest on any Security, the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interest of
Securityholders.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. As promptly as
practicable after each May 15, beginning with the May 15 following the date of
this Indenture, and in any event prior to July 15 in each year, the Trustee
shall mail to each Securityholder a brief report dated as of May 15 of such
year that complies with TIA Section 313(a). The Trustee also shall comply with
TIA Section 313(b)(1) and (2) and (c).
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange, if any, on which the
Securities are listed. The Company agrees to notify the Trustee whenever the
Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to
the Trustee from time to time reasonable compensation for its services. The
Trustee's compensation shall not be limited by any law on compensation relating
to the trustee of an express trust. The Company shall reimburse the Trustee
upon request for all reasonable out-of-pocket expenses incurred by it,
including reasonable expenses incurred in connection with exercise of any
remedy with respect to the Collateral, except any such expense as may arise
from the Trustee's negligence, bad faith or wilful misconduct. Such expenses
shall include the reasonable compensation and expenses of the Trustee's agents
and counsel. The Company shall indemnify the Trustee against any loss,
liability or expense (including reasonable attorneys' fees) incurred by it
without negligence or bad faith on its part in connection with the
administration of this trust and the performance of its duties hereunder. The
Trustee shall notify the Company promptly of any
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claim for which it may seek indemnity. The Company shall defend the claim and
the Trustee shall cooperate in the defense. The failure of the Trustee to so
notify the Company shall not relieve the Company of its obligations hereunder,
except to the extent the Company is prejudiced thereby. The Company need not
pay for any settlement made without its written consent. The Company need not
reimburse any expense or indemnify against any loss or liability incurred by
the Trustee through wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee in its capacity as Trustee, except that held in
trust to pay principal of or interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of an Event of Default specified in Section 6.01(5) or (6)
with respect to the Company, the expenses are intended to constitute expenses
of administration under the Bankruptcy Law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of
the Trustee and the appointment of a successor Trustee shall become effective
only upon the successor Trustee's acceptance of appointment as provided in this
Section 7.08. The Trustee may resign at any time by so notifying the Company
and the Holders in writing.
The Holders of a majority in aggregate principal amount of the Securities then
outstanding may remove the Trustee by so notifying the Trustee and the Company
in writing and may appoint a successor Trustee with the Company's consent. The
Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian, receiver or other public officer takes
charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee.
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A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, subject to the
lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of a majority in aggregate principal amount of the Securities then
outstanding may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee
consolidates or merges with or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee; provided, that in the case of a
transfer of all or substantially all of its corporate trust business to another
corporation, the transferee corporation expressly assumes all the Trustee's
liabilities under the Indenture and the Securities.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of
the successor to the Trustee; and in all such cases such certificates shall
have the full force which it is anywhere in the Securities or in this Indenture
provided that the certificate of the Trustee shall have; provided, however,
that the right to adopt the certificate of authentication of any predecessor
trustee or authenticate Securities in the name of any predecessor trustee shall
only apply to its successors by merger, conversion or consolidation.
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SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all
times satisfy the requirements of TIA Section 310(a)(1) and (2). In addition,
without limiting the foregoing, the Trustee shall at all times be authorized to
conduct a corporate trust business in good standing, and be either (a) a bank
or trust company having, or (b) a wholly owned subsidiary of a bank or trust
company having, a combined capital and surplus of at least $50,000,000 as set
forth in its most recent published annual report of condition. The Trustee
shall comply with TIA Section 310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE (a)
When (i) the Company delivers to the Trustee all outstanding Securities (other
than Securities replaced pursuant to Section 2.07) for cancellation or (ii) all
outstanding Securities not delivered to the Trustee for cancellation have
become due and payable, will become due and payable at their stated maturity
within one year or may be called for redemption on a redemption date that is
within one year under arrangements satisfactory to the Trustee and the Company
irrevocably (i.e., without condition or right of withdrawal deposits with the
Trustee money or U.S. Governmental Obligations sufficient to pay at maturity
all outstanding Securities, including interest thereon (other than Securities
replaced pursuant to Section 2.07), and if in either case the Company pays all
other sums payable hereunder by the Company, then this Indenture shall, subject
to Sections 8.01(c) and 8.06, cease to be of further effect. Upon satisfaction
of the conditions set forth in this Section 8.01(a) and upon request of the
Company, accompanied by an Officers' Certificate and an Opinion of Counsel, and
at the expense of the Company, the Trustee shall acknowledge in writing the
discharge of the Company's obligations under the Securities and this Indenture
except for those surviving obligations specified herein.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the
Company at any time may terminate (i) all its obligations under the Securities
and this Indenture ("legal defeasance option") or (ii) its obligations under
Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12,
4.16, 4.17, 4.18 and 5.01(ii) (other than with respect to an Event of Default
specified in Sections 6.01(1) or 6.01(2)) and 5.01(iii) and the operation of
Sections
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6.01(3), 6.01(4) and 6.01(7) ("covenant defeasance option"). The Company may
exercise its legal defeasance option notwithstanding its prior exercise of its
covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Securities may
not be accelerated because of an Event of Default specified in Sections
6.01(3), 6.01(4) and 6.01(7).
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the
Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08,
8.04, 8.05 and 8.06 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. CONDITIONS TO DEFEASANCE. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(i) the Company irrevocably deposits in trust with the
Trustee money or U.S. Governmental Obligations sufficient for the
payment of principal and interest on the Securities to maturity or
redemption, as the case may be;
(ii) the Company delivers to the Trustee an Officers'
Certificate to the effect that the payments of principal and interest
when due and without reinvestment on the deposited U.S. Government
Obligations plus any deposited money without investment will provide
cash at such times and in such amounts (but, in the case of the legal
defeasance option only, not more than such amounts) as will be
sufficient to pay principal and interest when due on all the
Securities to maturity or redemption, as the case may be;
(iii) 90 days pass after the deposit is made and during the
90-day period no Default specified in Section 6.01(5) or (6) with
respect to the Company occurs which is continuing at the end of the
period;
(iv) the deposit does not constitute a default under any
other agreement binding on the Company other than a default (a) with
respect to Indebtedness of the Company which is defeased, redeemed or
otherwise satisfied prior to or contemporaneously with such deposit,
or (b) which is consented
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to or waived by the relevant other party or parties to the agreement;
(v) the Company delivers to the Trustee an Opinion of
Counsel or a ruling received from the Internal Revenue Service to the
effect that holders will not recognize income, gain or loss for
Federal income tax purposes as a result of the exercise of such rights
and will be subject to Federal income tax in the same amount and in
the same manner and at the same time as would have been the case
otherwise; provided, that the Company is not required to deliver to
the Trustee such Opinion of Counsel upon the exercise of the Company's
legal defeasance option or covenant defeasance option within one year
of Stated Maturity or a date fixed for redemption pursuant to Article
3; and
(vi) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the Securities
as contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date
in accordance with Article 3.
SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities.
SECTION 8.04. REPAYMENT TO COMPANY. Subject to Section 8.01, the
Trustee and the Paying Agent shall promptly turn over to the Company any excess
money or securities held by them at any time, upon the written request of the
Company and upon the receipt by the Trustee of an Officers' Certificate in form
reasonably satisfactory to the Trustee, addressing the status of such money or
securities.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall promptly pay to the Company any money held by them for the
payment of principal or interest that remains unclaimed for two years, and,
thereafter, Securityholders entitled to the money must look to the Company for
payment as general creditors, unless applicable law designates another person.
SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S.
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Government Obligations or the principal and interest received on such U.S.
Government Obligations.
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
this Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
ARTICLE 9
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the
Trustee may amend, supplement or otherwise modify this Indenture or the
Securities without notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsis-
tency;
(2) to comply with Article 5, Article 12, Section
10.01(b), Section 10.02(a), Section 10.04 or Section 10.13;
(3) to provide for uncertificated Securities in addition
to or in place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes
of Section 163(f) of the Code, or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of the
Code;
(4) to make any change that does not adversely affect the
rights of any Securityholder;
(5) to add to the covenants of the Company for the
benefit of the Securityholders or to surrender any right or power
herein conferred upon the Company; or
(6) to comply with the TIA.
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After an amendment, supplement or other modification under this
Section becomes effective, the Company shall mail to Securityholders a notice
briefly describing such amendment, supplement or other modification. The
failure to give such notice to all Securityholders, or any defect therein,
shall not impair or affect the validity of an amendment, supplement or other
modification under this Section 9.01.
SECTION 9.02. WITH CONSENT OF HOLDERS. (a) Subject to Section 6.07,
the Company and the Trustee may amend, supplement or otherwise modify this
Indenture or the Securities without notice to any Securityholder but with the
written consent of the Holders of at least a majority of the aggregate
principal amount of the Securities then outstanding; provided, that (except for
changes permitted pursuant to Section 9.01) any change to Article 10 (or the
definitions relating thereto) shall require the written consent of the Holders
of at least 66 2/3% of the aggregate principal amount of Securities then
outstanding. Subject to Sections 6.04 and 6.07, the Holders of a majority in
aggregate principal amount of the Securities then outstanding may waive
compliance by the Company with any provision of this Indenture or the
Securities without notice to any Securityholder.
(b) Notwithstanding anything to the contrary
contained in Sections 9.01 or 9.02(a), without the consent of each
Securityholder affected, an amendment, supplement, other modification or waiver
may not:
(1) reduce the amount of Securities whose Holders must
consent to an amendment, supplement, other modification or waiver;
(2) reduce the rate of or extend the Stated Maturity of
any payment of interest on any Security;
(3) reduce the principal amount (at maturity or any other
time) of or extend the Stated Maturity of any payment of principal of
any Security, including upon redemption, or payment of the Asset Sale
Purchase Price or Change of Control Purchase Price;
(4) reduce the premium payable upon the redemption of any
Security, including upon redemption, or payment of the Asset Sale
Purchase Price or Change of Control Purchase Price; or
(5) make any Security payable in money other than that
stated in the Security.
(c) It shall not be necessary for the consent of
the Holders under this Section 9.02 to approve the particular form
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of any proposed amendment, but it shall be sufficient if such consent approves
the substance thereof.
(d) After an amendment, supplement, waiver or
other modification under this Section becomes effective, the Company shall mail
to Securityholders a notice briefly describing such amendment, supplement,
waiver or other modification. The failure to give such notice to all
Securityholders, or any defect therein, shall not impair or affect the validity
of an amendment, supplement, waiver or other modification under this Section.
(e) Notwithstanding the foregoing, the provisions
of Section 11.16 hereof and this subsection (e) may not be amended without the
consent of the parties to the Credit Agreement.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment,
supplement or other modification to this Indenture or the Securities shall
comply with the TIA as then in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A
consent to an amendment, supplement or other modification or a waiver under or
in connection with this Indenture or the Securities by a Holder of a Security
shall bind the Holder and every subsequent Holder of that Security or portion
of the Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent or waiver is not made on the
Security. However, if such consent or waiver may be revoked, any such Holder
or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation before the date the amendment, supplement, waiver or other
modification becomes effective. After an amendment, supplement, waiver or other
modification becomes effective, it shall bind every Securityholder, unless it
makes a change described in any of clauses (1) through (5) of Section 9.02(b).
In that case, the amendment, supplement, waiver or other modification shall
bind each Holder of a Security who has consented to it and every subsequent
Holder of a Security or a portion of a Security that evidences the same debt as
the consenting Holder's Security.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Securityholders entitled to give their consent
or take any other action described above. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those persons who were
Securityholders at such record date (or their duly designated proxies), and
only those persons, shall be entitled to give such consent or to revoke any
consent previously given or to take any such action, whether or not such
persons continue to be Holders after such record date.
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SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. If an
amendment, supplement, waiver or other modification changes the terms of a
Security, the Trustee may require the Holder of the Security to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Security
regarding the changed terms and return it to the Holder. Alternatively, if the
Company or the Trustee so determines, the Company in exchange for the Security
shall issue and the Trustee shall authenticate a new Security that reflects the
changed terms. Failure to make the appropriate notation or to issue a new
Security shall not affect the validity of such amendment, supplement, waiver or
other modification.
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any
amendment, supplement, waiver or other modification authorized pursuant to this
Article 9 if the amendment, supplement, waiver or other modification does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may, but need not sign it. In signing such amendment,
supplement, waiver or other modification the Trustee shall be entitled to
receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment, supplement, waiver or other modification is authorized or permitted
by this Indenture.
ARTICLE 10
SECURITY
SECTION 10.01. GRANTS OF SECURITY INTERESTS.
(a) To secure the full and punctual payment of
principal and premium of and interest on the Securities and all other amounts
payable pursuant to this Indenture, the Company hereby grants to the Trustee,
for the benefit of the Holders and the Trustee, a first priority and (except
for Liens permitted under Section 4.16) exclusive security interest in all its
right, title and interest in and to the following, subject to the exclusion
specified in the last sentence of this Section 10.01(a):
(i) all of the outstanding shares of Stock of MGI, whether
now or hereafter owned or acquired by the Company;
(ii) all certificates whether now owned or hereafter acquired
representing any of the shares referred to in clause (i) of this
Section 10.01(a);
(iii) all dividends, cash, instruments and other property and
proceeds from time to time received, receivable or otherwise
distributed on or in exchange for any of the foregoing after the Issue
Date, including, without limitation,
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any stocks, bonds or other securities, options, warrants, or other
such rights, cash or other property payable or distributable on any of
the shares referred to in clause (i) of this Section 10.01(a) at any
time, including, without limitation, any distribution on any such
shares upon the dissolution or liquidation, in whole or in part, of
the issuer of such shares or the consolidation or merger of such
issuer with any other person or persons, or the reorganization of such
issuer, or any distribution on any such shares of the capital or
paid-in capital surplus or any part thereof of the issuer of such
shares, in any form, or any subdivision, combination, reclassification
or redemption of any such shares;
(iv) the Intercompany Note;
(v) all payments of interest on and principal of the
Intercompany Note; and
(vi) to the extent not included in clauses (i), (ii),
(iii), (iv) and (v) of this Section 10.01(a), all proceeds (as defined
in the Uniform Commercial Code as in effect on the date hereof) of any
and all of the foregoing (arising after the Issue Date).
Notwithstanding any other provision contained in this Indenture or in the
Securities, no security interest has been granted pursuant to this Indenture,
and the Trustee has not taken pursuant to this Indenture a security interest,
in (x) any Salmon Creek Distribution or (y) any proceeds of any Salmon Creek
Distribution. The Company shall not identify any dividend or distribution as a
"Salmon Creek Distribution" except for any dividends and other distributions on
Pledged MGI Shares or on shares of Stock of any other Restricted Subsidiary of
the Company of amounts or other consideration received by the Company or any of
its Subsidiaries from any person or entity (i) in respect of all or any part of
the Stock of Salmon Creek, (ii) in respect of all or any part of the real
property constituting the Salmon Creek Property or (iii) otherwise in
connection with Salmon Creek or the Salmon Creek Property, except in connection
with the harvesting of timber located on the Salmon Creek Property.
(b) Within ten (10) days after the release of any
Released Kaiser Shares from the Lien of the MGI Indenture, to secure the full
and punctual payment of principal and premium of and interest on the Securities
and all other amounts payable pursuant to this Indenture, the Company shall, by
supplemental indenture hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, grant to the Trustee, for the benefit of the
Holders and the Trustee, a first priority and (except for
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Liens permitted under Section 4.16) exclusive security interest in all its
right, title and interest in and to the following:
(i) such Released Kaiser Shares;
(ii) all certificates whether then owned or thereafter
acquired representing any of such Released Kaiser Shares;
(iii) all dividends, cash, instruments and other property
and proceeds from time to time received, receivable or otherwise
distributed on or in exchange for any of the foregoing after the date
of such supplemental indenture hereto, including, without limitation,
any stocks, bonds or other securities, options, warrants, or other
such rights, cash or other property payable or distributable on any of
such Released Kaiser Shares at any time after the date of such
supplemental indenture hereto, including, without limitation, any
distribution on any such shares upon the dissolution or liquidation,
in whole or in part, of the issuer of such shares or the consolidation
or merger of such issuer with any other person or persons, or the
reorganization of such issuer, or any distribution on any such shares
of the capital or paid-in capital surplus or any part thereof of the
issuer of such shares, in any form, or any subdivision, combination,
reclassification or redemption of any such shares; and
(iv) to the extent not included in clauses (i), (ii) and
(iii) of this Section 10.01(b), all proceeds (as defined in the
Uniform Commercial Code as in effect on the date hereof) of any and
all of the foregoing (arising after the date of such supplemental
indenture hereto.
Notwithstanding the foregoing provisions of this Section 10.01(b), the
aggregate number of Released Kaiser Shares required to be pledged pursuant to
this Section 10.01(b) through any date shall not exceed the sum of (1)
8,027,500 and (2) an amount equal to (x) 8,027,500 times (y) a fraction, the
numerator of which is the aggregate principal amount of the Securities
outstanding on such date, and the denominator of which is the aggregate
principal amount of Securities outstanding on the Issue Date. To the extent
that Released Kaiser Shares are comprised of securities or other property
substituted or adjusted for Kaiser Shares (as contemplated by clause (i) or
(ii) of the definition of Released Kaiser Shares), the kind and amount of
Released Kaiser Shares to be pledged shall be appropriately adjusted to take
account of the kind and amount of such securities or other property so
substituted for each Kaiser Share. Moreover, in no event shall the aggregate
of the number of Released Kaiser Shares required to be pledged pursuant to this
Section 10.01(b) through any date and the number of Kaiser Share Cash
Equivalents resulting from the pledge of released funds pursuant to Section
10.03(d)(6) through such date exceed the number
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of Released Kaiser Shares that would be required to be pledged through such
date if no such released funds were pledged through such date.
SECTION 10.02. PLEDGED SHARES AND INTERCOMPANY NOTE.
(a) Delivery of Certificates and Instruments.
Subject to the terms hereof, the Company agrees that the Intercompany Note and
all certificates or instruments representing or evidencing Pledged Shares or
any other Collateral shall be delivered to the Trustee, at such office in New
York City, New York as is designated by the Trustee from time to time in a
notice addressed to the Company, and shall be in suitable form for transfer by
delivery, and shall be accompanied by duly executed and undated instruments of
transfer or assignment or endorsement, as applicable, in blank (with signatures
appropriately guaranteed if requested by the Trustee), all in form and
substance satisfactory to the Trustee. If an issuer of Pledged Shares is
incorporated in a jurisdiction which does not permit the use of certificates to
evidence equity ownership or which permits or requires pledges of Capital Stock
to be perfected other than by delivery, then the Company shall, upon delivery
to the Company of the Trustee's written request, take such action as may be
necessary in such jurisdiction and reasonably requested by the Trustee to
perfect the Trustee's first priority and (except for Liens permitted under
Section 4.16) exclusive security interest in such Stock and other Collateral
and give the Trustee the other rights in the Pledged Shares granted under the
terms hereof; and the Company agrees to provide to the Trustee an Opinion of
Counsel, in form and substance reasonably satisfactory to it, confirming such
pledge. The Trustee shall have the right at any time at which a Notice of
Acceleration has been delivered and is in effect to exchange certificates or
instruments representing or evidencing the Pledged Shares for certificates or
instruments of smaller or larger denominations.
(b) Preservation of Corporate Existence of
Issuers of Pledged Shares. Subject to Article 5 and Sections 10.05 and 10.13,
the Trustee may do whatever in its reasonable judgment may be necessary, and
the Company shall take such action in connection therewith as may reasonably be
requested in writing by the Trustee, for the purpose of preserving or extending
the corporate existence of MGI and (except as permitted by Section 10.05 of the
MGI Indenture, as in effect on the date hereof) Kaiser.
(c) Change of Registration Upon Notice of
Acceleration. Any or all Pledged Shares held by the Trustee for the benefit of
the Holders of Securities may, if a Notice of Acceleration has been delivered
and is at the time in effect, without notice to the Company, be registered in
the name of the Trustee or its nominee.
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(d) Voting Rights; Dividends; etc.
(1) Unless a Notice of Acceleration has been delivered
and is at the time in effect, the Company shall be entitled to
exercise any and all voting and other corporate rights pertaining to
the Pledged Shares or any part thereof for any purpose not
inconsistent with the terms of this Indenture and the Securities;
provided, however, that no vote shall be cast or consent, waiver or
ratification given or action taken that would be inconsistent with or
violate any provision of this Indenture or the Securities. After a
Notice of Acceleration has been delivered and so long as it remains in
effect, upon written notice from the Trustee to the Company that it
has determined that it will exercise such rights, all rights of the
Company to exercise the voting and other consensual corporate rights
which it would otherwise be entitled to exercise pursuant to this
Section 10.02(d)(1) shall cease and all such rights shall become
vested in the Trustee, which shall thereupon have the sole right to
exercise such voting and other consensual corporate rights during the
continued effectiveness of such Notice of Acceleration (such rights to
include the exercise of any and all rights of conversion, exchange,
subscription or any other rights, privileges or options pertaining to
any of the Pledged Shares, including, without limitation, the right to
exchange, at the Trustee's discretion, any and all of the Pledged
Shares upon the merger, consolidation, reorganization,
recapitalization or other readjustment of any issuer of any of such
Pledged Shares or upon the exercise by any such issuer or the Trustee
of any right, privilege or option pertaining to any of the Pledged
Shares and, in connection therewith, to deposit and deliver any and
all of the Pledged Shares with any committee, depositary, transfer
agent, registrar or other designated agency on such terms and
conditions as the Trustee may determine, all without liability except
to account for property actually received by it). The Trustee shall
have no duty to the Company to exercise any of the aforesaid rights,
privileges or options and shall not be responsible for any failure to
do so or delay in so doing. Upon rescission of such Notice of
Acceleration, such voting and consensual corporate rights shall revert
to the Company.
(2) So long as no Event of Default, Collateral Default or
Interest Payment Default shall have occurred and be continuing, the
Company shall be entitled to receive and retain any and all Exempt
Distributions made on any Pledged Shares.
(3) Upon the occurrence and during the continuance of an
Event of Default, Collateral Default or Interest Payment Default, all
rights of the Company to receive and retain
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Exempt Distributions on Pledged Shares pursuant to Section 10.02(d)(2)
shall cease, and the Trustee shall thereupon have the sole right to
receive any Exempt Distributions on any Pledged Shares made during the
continuance of such Event of Default, Collateral Default or Interest
Payment Default; provided, that the Company shall be entitled to
receive and retain any Salmon Creek Distributions. All such Exempt
Distributions shall be deposited in the Cash Collateral Default
Account in accordance with Section 10.03(f). All Exempt Distributions
on Pledged Shares received by the Company contrary to the provisions
of this Section 10.02(d)(3) shall be received in trust for the benefit
of the Trustee and the Holders, shall be segregated from other funds
of the Company, and shall be forthwith paid over to the Trustee in the
same form as received by the Company (duly endorsed to the Trustee, if
required), and the Trustee shall deposit such amounts in the Cash
Collateral Default Account in accordance with Section 10.03(f). If
any such Event of Default, Collateral Default or Interest Payment
Default shall have been cured or waived and no other Event of Default,
Collateral Default or Interest Payment Default shall be continuing,
the right of the Company to receive and retain any and all Exempt
Distributions on Pledged Shares shall be reinstated.
(4) In order to permit the Company and the Trustee to
exercise their respective voting and other corporate rights which they
are entitled to exercise pursuant to Section 10.02(d)(1) and Section
10.02(d)(5) and to receive the dividends, distributions and other
amounts which they are authorized to receive and retain pursuant to
Sections 10.02(d)(2) and 10.02(d)(3), (A) the Trustee shall, upon
written notice from the Company, from time to time execute and deliver
(or cause to be executed and delivered) to the Company, and (B) the
Company shall, upon written notice from the Trustee, from time to time
execute and deliver (or cause to be executed and delivered) to the
Trustee, all such proxies, dividend payment orders and other
instruments as the Company or the Trustee, as the case may be, may
reasonably request for such purposes as shall be specified in such
request.
(5) At any time with the consent of the Company, or
without the consent of the Company upon the delivery to the Company of
a Notice of Acceleration that is at the time in effect, the Trustee
may join in any plan of voluntary or involuntary reorganization or
readjustment or rearrangement in respect of any Pledged Shares and may
accept or authorize the acceptance of new securities issued in
exchange therefor under any such plan. Any new securities so issued
shall be delivered to the Trustee and pledged hereunder. If the
Trustee does not join in such plan of reorganization or
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readjustment or rearrangement, any money or Cash Equivalents accruing
on or apportioned to such Pledged Shares shall be delivered to the
Trustee for deposit into the Cash Collateral Account in accordance
with Section 10.03(g).
(e) Pledged Shares to Constitute Majority of Voting
Stock and Equity Interests; Delivery of After-Acquired Shares. The Company
shall cause the Pledged Shares that are subject to the Lien of this Indenture
at all times to include: (i) at least a majority of the Voting Stock and the
outstanding equity interests (on a fully diluted basis) of MGI until such time
as MGI merges or consolidates into, or transfers all of its assets to, either
(A) a Restricted Subsidiary or (B) the Company, in either case pursuant to and
in accordance with Section 10.13; and (ii) after any transaction described in
clause (i)(A) above, at least a majority of the Voting Stock and the
outstanding equity interests (on a fully diluted basis) of the Restricted
Subsidiary into which MGI merges or consolidates or to which it transfers all
or substantially all of its assets. The Company shall pledge and deposit with
the Trustee all outstanding shares of Stock of MGI that the Company acquires at
any time after the Issue Date, and to cause all such shares of Stock to be
subject to the Lien of this Indenture.
(f) Payments on Intercompany Note. The Company
shall deliver (or cause to be delivered) to the Trustee all payments of
interest received on the Intercompany Note. All such payments of interest
shall be deposited in the Cash Collateral Account in accordance with Section
10.03(g). The Company shall deliver or cause to be delivered to the Trustee
all payments of principal received on the Intercompany Note, except that the
Company shall be entitled to receive and retain all payments of principal of
the Intercompany Note that do not result in the outstanding principal amount of
the Intercompany Note being reduced below the outstanding principal amount of
the Securities. All payments of principal on the Intercompany Note delivered
to the Trustee pursuant to the preceding sentence shall be deposited in the
Cash Collateral Offer Account in accordance with Section 10.03(d).
SECTION 10.03. COLLATERAL ACCOUNTS.
(a) Establishment of Accounts; Deposit of Trust
Moneys.
(1) The Trustee shall establish from time to time as
required by this Section 10.03, and at all times thereafter until the
trust created by this Indenture has terminated shall maintain, at its
corporate offices in Minnesota, four (4) accounts: the Cash
Collateral Offer Account, the Cash Collateral Public Equity Offering
Account, the Cash Collateral
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Default Account and the Cash Collateral Account (collectively, the
"Accounts"). The Accounts shall be entitled the "MAXXAM GROUP
HOLDINGS INC. Cash Collateral Offer Account, [name of Trustee], as
trustee, secured party," "MAXXAM GROUP HOLDINGS INC. Cash Collateral
Public Equity Offering Account, [name of Trustee], as trustee, secured
party," "MAXXAM GROUP HOLDINGS INC. Cash Collateral Default Account,
[name of Trustee], as trustee, secured party" and "MAXXAM GROUP
HOLDINGS INC. Cash Collateral Account, [name of Trustee], as trustee,
secured party," respectively.
(2) All money and Cash Equivalents required to constitute
Collateral and to be delivered to the Trustee or received by the
Trustee or any agent or nominee of the Trustee in respect thereof,
whether pursuant to the terms of this Indenture, the Uniform
Commercial Code, other applicable law or otherwise ("Trust Moneys"),
shall be deposited in the appropriate Account, as specified in this
Section 10.03, and the Trustee shall thereafter invest, apply, deposit
into another Account or release, as the case may be, Trust Moneys in
accordance with the terms of this Indenture. All right, title and
interest in and to the Accounts shall vest in the Trustee, who shall
have sole dominion and control over the Accounts and only the Trustee
shall have any right of withdrawal therefrom.
(b) Accounts as Collateral. All Trust Moneys
deposited in any of the Accounts shall be held segregated in the Cash
Collateral Offer Account, the Cash Collateral Public Equity Offering Account,
the Cash Collateral Default Account or the Cash Collateral Account, as the case
may be, as provided in this Section 10.03, and shall be held by the Trustee, in
trust under this Indenture, as part of the Collateral.
(c) Investment of Trust Moneys. The Company shall have the right
to direct the Trustee in writing to, and the Trustee shall, except as otherwise
required herein, invest any Trust Moneys held in the Accounts in Cash
Equivalents and liquidate Cash Equivalents held in Accounts into money. The
Trustee shall not be liable or responsible for any loss resulting from such
investments and reinvestments or from any dispositions; provided, however, that
the Trustee shall be liable for its own negligent action, its own negligent
failure to act and its own willful misconduct in complying with this Article
10. The Accounts and all credits thereto and investments therein shall be
maintained in such a manner in accordance with applicable law and all items
shall be delivered to the Trustee and credited to the Accounts in accordance
with applicable law so that the Trustee shall at all times have (except for
Liens permitted under Section 4.16) an exclusive and a first priority perfected
security interest therein. The Company shall deliver to the Trustee and any
bank where any Accounts are
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maintained all such notices and other documents, and shall otherwise make such
filings and take such other actions as may be reasonably requested by the
Trustee, to create and maintain (except for Liens permitted under Section 4.16)
an exclusive and first priority perfected security interest in the Accounts and
all credits thereto and investments therein. Interest and other amounts earned
on an Account shall be held as part of the Collateral, shall be credited to the
Account in which the principal on which they are earned is deposited and shall
be transferred between Accounts together with and in the same manner as the
principal on which they are earned.
(d) Deposits into Cash Collateral Offer Account.
(1) Except as otherwise provided in Section 10.03(e)(1),
upon the receipt of any Net Proceeds of a Primary Share Sale by MGI or
by Kaiser, that were dividended or distributed on Pledged MGI Shares,
or on Pledged Kaiser Shares, as the case may be, the Company shall
deliver or cause to be delivered to the Trustee, for deposit into the
Cash Collateral Offer Account for application pursuant to Section
10.05(f), all such Net Proceeds so received that are money or Cash
Equivalents.
(2) Except as otherwise provided in Section 10.03(e)(2),
upon the release of any Pledged Shares pursuant to Section 10.05(b)(1)
and the receipt of any Net Proceeds of a Pledged Share Sale in respect
of such Pledged Shares, the Company shall deliver or cause to be
delivered to the Trustee, for deposit into the Cash Collateral Offer
Account for application pursuant to Section 10.05(f), all such Net
Proceeds so received that are money or Cash Equivalents.
(3) Upon receipt by the Company of an Extraordinary
Distribution on any Pledged Shares, the Company shall deliver or cause
to be delivered to the Trustee, for deposit into the Cash Collateral
Offer Account for application pursuant to Section 10.05(f), all
amounts so received that are money or Cash Equivalents.
(4) Except as otherwise provided in Section 10.03(e)(3),
if, following receipt by the Company of (A) Net Proceeds, other than
money or Cash Equivalents, of either (x) a Primary Share Sale by MGI
or by Kaiser, that were dividended or distributed on Pledged MGI
Shares, or on Pledged Kaiser Shares, as the case may be, or (y) a
Pledged Share Sale in respect of any Pledged Shares or of (B) an
Extraordinary Distribution on any Pledged Shares in a form other than
money or Cash Equivalents, all or any portion of such Net Proceeds or
Extraordinary Distributions at the time subject to the Lien of this
Indenture are disposed of for money or Cash Equivalents pursuant to
Section 10.05(b)(2), the Company shall deliver or
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cause to be delivered to the Trustee, for deposit into the Cash
Collateral Offer Account, all money or Cash Equivalents received in
consideration of such disposition.
(5) Upon the receipt of any payments of principal on the
Intercompany Note (other than any payments of principal that do no
result in the outstanding principal amount of the Intercompany Note
being reduced below the outstanding principal amount of the
Securities), the Company shall deliver or cause to be delivered to the
Trustee, for deposit into the Cash Collateral Offer Account, such
payments.
(6) If any Trust Moneys constituting proceeds of any
Primary Share Sale by Kaiser or a Pledged Share Sale of Pledged Kaiser
Shares or any Extraordinary Distribution on Pledged Kaiser Shares (or
the proceeds of any non-cash consideration received in any such
transaction) are released from the Lien of the MGI Indenture as a
result of such Trust Moneys not having been utilized to purchase MGI
Notes pursuant to an offer to purchase MGI Notes at a price at least
equal to the respective Call Prices of the MGI Notes or as a result of
payment in full of the MGI Notes or defeasance of the MGI Notes
pursuant to Article 8 of the MGI Indenture, the Company shall, upon
receipt of such released funds (but subject to the limitation set
forth in the last sentence of Section 10.01(b)), deliver or cause to
be delivered to the Trustee, for deposit into the Cash Collateral
Offer Account, such released funds. As used in this Section
10.03(d)(6), each of the terms Trust Moneys, Primary Share Sale,
Pledged Share Sale, Pledged Kaiser Shares, Extraordinary Distribution
and Call Prices has the meaning ascribed to such term in the MGI
Indenture (as in effect on the date hereof).
(e) Deposits into and Transfers from Cash
Collateral Public Equity Offering Account.
(1) Upon receipt of any Net Proceeds of a Primary Share
Sale by MGI or by Kaiser, that were dividended or distributed on
Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be,
if such Primary Share Sale is also a Public Equity Offering and such
receipt occurs prior to August 1, 2000, the Company shall deliver or
cause to be delivered to the Trustee, for deposit into the Cash
Collateral Public Equity Offering Account, all such Net Proceeds so
received that are money or Cash Equivalents.
(2) Upon the release of any Pledged Shares pursuant to
Section 10.05(b)(1) and the receipt of any Net Proceeds of a Pledged
Share Sale in respect of such Pledged Shares, if such Pledged Share
Sale is also a Public Equity Offering and such receipt occurs prior to
August 1, 2000, the Company shall
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deliver or cause to be delivered to the Trustee for deposit into the
Cash Collateral Public Equity Offering Account all such Net Proceeds
so received that are money or Cash Equivalents.
(3) If, following receipt by the Company of Net Proceeds,
other than money or Cash Equivalents, of (A) a Primary Share Sale that
is a Public Equity Offering that were distributed on Pledged Shares or
(B) a Pledged Share Sale that is a Public Equity Offering in respect
of any Pledged Shares, all or any portion of such Net Proceeds at the
time subject to the Lien of this Indenture are disposed of for money
or Cash Equivalents pursuant to Section 10.05(b)(2), the Company shall
deliver or cause to be delivered to the Trustee, for deposit into the
Cash Collateral Public Equity Offering Account, all money or Cash
Equivalents received (if such receipt occurs prior to August 1, 2000)
in consideration of such disposition.
(4) In the event the Company elects, pursuant to Section
10.05(g), optionally to redeem Securities with all or any portion of
any Net Proceeds described in Sections 10.03(e)(1), (2) or (3), such
Net Proceeds (or such portion thereof) shall remain in the Cash
Collateral Public Equity Offering Account for application pursuant to
Article 3 and Section 10.05(g) hereof and paragraph 5 of the
Securities. If no such election is made within the time period
specified in Section 10.05(g), all amounts in such Account shall, upon
expiration of the time period for such election (or upon earlier
written notice from the Company that no such election will be made),
be deposited in the Cash Collateral Offer Account.
(f) Deposits into Cash Collateral Default Account.
(1) Upon and during the continuance of an Event of
Default, Collateral Default or an Interest Payment Default, the
Company shall deliver or cause to be delivered to the Trustee for
deposit into the Cash Collateral Default Account all Exempt
Distributions made on any Pledged Shares during such continuance;
provided, that the Company shall be entitled to receive and retain any
Salmon Creek Distributions. Any Trust Moneys held in the Cash
Collateral Default Account shall be released from the Lien of this
Indenture and, as the Company directs in writing, applied by the
Trustee to cure any outstanding Interest Payment Defaults in respect
of the Securities and to pay the principal due on the Securities at
the final maturity thereof.
(2) If at any time following the deposit of Trust Moneys
into the Cash Collateral Default Account, no Event of Default,
Collateral Default or Interest Payment Default is continuing, any
amounts in the Cash Collateral Default Account shall be
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deposited into the Cash Collateral Offer Account for application
pursuant to Section 10.05(f).
(g) Deposits into Cash Collateral Account. The
Trustee shall deposit into the Cash Collateral Account any money or Cash
Equivalents (i) eligible for transfer out of the Cash Collateral Offer Account
pursuant to Section 10.05(f) upon their eligibility for such transfer, (ii)
delivered to the Trustee pursuant to Section 10.02(d)(5) or 10.02(f) or (iii)
constituting Trust Moneys whose disposition by the Trustee upon receipt thereof
is not otherwise provided for in this Section 10.03.
(h) Application of Trust Moneys to Pay Trustee's
Fees or upon a Notice of Acceleration.
(1) Notwithstanding any other provision contained in this
Article 10, but subject to the Company's continuing primary obligation
contained in Section 7.07, the Trustee may at any time apply Trust
Moneys in the Cash Collateral Account or in the Cash Collateral
Default Account to the payment of due and unpaid fees under Section
7.07 of this Indenture; provided, that funds are drawn, first, from
the Cash Collateral Account and, second, and only if there exist no
Trust Moneys in the Cash Collateral Account, from the Cash Collateral
Default Account.
(2) Notwithstanding any other provision contained in this
Article 10, if a Notice of Acceleration has been delivered to the
Company and is at the time in effect, the Trustee shall apply all
Trust Moneys held in the Accounts in accordance with Section 6.10;
provided, that, so long as a Notice of Acceleration is not in effect,
Trust Moneys shall be invested, applied, deposited in other Accounts
or released as otherwise provided in this Article 10.
(i) Grant of Security Interest in Accounts. As
security for the Company's obligations to pay the principal and premium of and
interest on the Securities and all other amounts and obligations under this
Indenture and the Securities when due, the Company hereby grants a security
interest to the Trustee, for the benefit of the Holders and the Trustee, in all
of its right, title and interest, whether now owned or hereafter acquired, in
the Accounts and all sums of money, funds, securities, investments or other
property held in or credited to the Accounts, from any source whatsoever, now
or hereafter transferred or credited to and comprising the Accounts, including,
without limitation, all proceeds derived from the Collateral credited to the
Accounts, and any and all interest and dividends or other distribution from any
such amounts, and all statements, certificates and instruments in or
representing the Accounts.
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(j) Release and Application of Trust Moneys in
Cash Collateral Account. The Company shall be entitled to a release, at any
time and from time to time, of any Trust Moneys held in the Cash Collateral
Account to be applied, as the Company directs the Trustee in writing, to pay
interest on the Securities (but only to the extent that the Trust Moneys so
applied were derived from payments of interest on the Intercompany Note), to
redeem Securities or to purchase Securities, in the open market or otherwise.
SECTION 10.04. FURTHER ASSURANCES; REVISIONS OF EXHIBIT D. The
Company shall, at any reasonable time and reasonably from time to time, at its
expense, execute and deliver all further instruments and documents and take all
reasonable further action that the Trustee may reasonably request in order to
perfect and protect any Lien granted or purported to be granted with respect to
any Collateral or to enable the Trustee to exercise and enforce its rights and
remedies hereunder with respect to any Collateral. Without limiting the
foregoing, the Company shall provide to the Trustee a revised Exhibit D to
reflect any changes in the composition of the Pledged Shares pledged by it
hereunder, and at such time the Company shall be deemed to make the
representations and warranties set forth in clauses (i) through (iv) of Section
10.12 with respect to Exhibit D as so revised.
SECTION 10.05. RELEASE AND SUBSTITUTION OF COLLATERAL.
(a) General. The Company shall be entitled from
time to time to the release by the Trustee of Pledged Shares and other
Collateral from the Lien of this Indenture, and to substitute other property
for Collateral, upon satisfaction of the requirements of this Section 10.05
and, to the extent applicable, Sections 5.01 and 10.13.
(b) Release of Pledged Shares and of Non-Cash Net
Proceeds and Extraordinary Distributions in Connection with a Collateralized
Cash Proceeds Offer or Optional Redemption.
(1) The Company shall be entitled to a release of Pledged
Shares from the Lien of this Indenture in order to effect a Pledged
Share Sale; provided, that (i) no Event of Default, Collateral Default
or Interest Payment Default has occurred and is continuing or would
result from such release, (ii) an Officers' Certificate is delivered
to the Trustee by the Company so stating and stating that such release
is otherwise permitted under this Section 10.05 and (iii) the Company
agrees to subject money in an amount equal to the amount of Net
Proceeds of such Pledged Share Sale received by the Company, including
all Trust Moneys in the Accounts to the extent required in this
Article 10, to an offer to purchase Securities in accordance with the
provisions of Section
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10.05(f) or, if such Pledged Share Sale is a Public Equity Offering
and the Company shall so elect pursuant to Section 10.05(g) with
respect to all or any portion of such Net Proceeds, to effect an
optional redemption of Securities pursuant to Article 3 of this
Indenture and paragraph 5 of the Securities.
(2) The Company shall be entitled to a release of (A) Net
Proceeds, other than money or Cash Equivalents, of either (x) a
Primary Share Sale by MGI or by Kaiser, that were distributed on
Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be,
or (y) a Pledged Share Sale in respect of any Pledged Shares or of (B)
Extraordinary Distributions on any Pledged Shares in a form other than
money or Cash Equivalents:
(i) if all or any portion of such Net Proceeds or
Extraordinary Distributions are disposed of in one or more
transactions (a "Monetization") for consideration consisting of money
or Cash Equivalents (but which may also include customary indemnities)
and the Company delivers or causes to be delivered to the Trustee, for
deposit into the Cash Collateral Offer Account or the Cash Collateral
Public Equity Offering Account, as applicable, all of the money or
Cash Equivalents received in such Monetization, in which case all or
such portion of such Net Proceeds or Extraordinary Distributions
shall, simultaneously with such Monetization, be released from the
Lien of this Indenture;
(ii) if, in connection with a Collateralized Cash Proceeds
Offer, the Company delivers to the Trustee for deposit into the Cash
Collateral Offer Account, pursuant to Section 10.05(f)(ix), money in
the amount specified in such section, in which case (a) all of such
Net Proceeds or Extraordinary Distributions shall be released from the
Lien of this Indenture, simultaneously with such deposit, if the Cash
Collateralized Proceeds Purchase Price for the Securities equals or
exceeds the Call Price therefor plus accrued and unpaid interest, if
any, thereon to (but not including) the Collateralized Cash Proceeds
Purchase Date and (b) if the preceding clause (a) is not applicable, a
portion of such Net Proceeds or Extraordinary Distributions,
designated by the Company, not greater in value (at the time it became
Collateral) than the amount of money so delivered by the Company
shall, simultaneously with such deposit, be released from the Lien of
this Indenture; and
(iii) if, in connection with an optional redemption using Net
Proceeds of a Public Equity Offering that are subject to the Lien of
this Indenture, the Company delivers to the Trustee for deposit into
the Cash Collateral Public Equity
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Offering Account, pursuant to Section 10.05(g), money in the amount
specified in such section, in which case there shall be released from
the Lien of this Indenture, simultaneously with such deposit, a
portion of such Net Proceeds, designated by the Company, not greater
in value (at the time it became Collateral) than the amount of money
so delivered by the Company.
(iv) If, in connection with an optional redemption referred to
in Section 10.05(f)(xiv), the Company delivers to the Trustee for
deposit into the Cash Collateral Offer Account, pursuant to Section
10.05(f)(xiv), money in the amount specified in such section, in which
case a portion of such Net Proceeds or Extraordinary Distributions,
designated by the Company, not greater in value (at the time it became
Collateral) than the amount of money so delivered by the Company
shall, simultaneously with such deposit, be released from the Lien of
this Indenture.
(c) Pledged Kaiser Share Release and Substitution.
(1) The Company shall be entitled to a release of any
Pledged Kaiser Shares from the Lien of this Indenture at any time and
from time to time if (i) no Event of Default, no Collateral Default
and no Interest Payment Default has occurred and is continuing or
would result from such release, (ii) an Officers' Certificate is
delivered to the Trustee by the Company so stating and stating that
such release is permitted under this Section 10.05(c) and (iii) there
shall remain as Collateral, immediately subsequent to any such
release, a number of Pledged Kaiser Shares equal to 16,055,000
multiplied by a fraction, the numerator of which is equal to the sum
of (x) the aggregate principal amount of Securities outstanding on the
date of such release, plus (y) one-half of the difference obtained by
subtracting the aggregate principal amount of Securities outstanding
on the date of such release from the aggregate principal amount of
Securities outstanding on the Issue Date, and the denominator of which
is the aggregate principal amount of Securities outstanding on the
Issue Date. To the extent that Pledged Kaiser Shares are comprised of
securities or other property substituted for Kaiser Shares (as
contemplated by the definition of Pledged Kaiser Shares), the kind and
amount of Pledged Kaiser Shares to be released shall be appropriately
adjusted to take account of the kind and amount of such securities or
other property so substituted for each Kaiser Share.
(2) The Company shall be entitled to a release of Pledged
Kaiser Shares from the Lien of this Indenture at any time and from
time to time in connection with, and MAXXAM and
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the Company may permit Kaiser to effect, a merger or consolidation of
Kaiser (or a successor thereto pursuant to this Section 10.05(c)(2))
into, or a sale or transfer of all or substantially all of the assets
of Kaiser in any transaction or series of related transactions to,
another person, or in connection with any other corporate
reorganization of Kaiser (other than a spin-off or other similar
distribution of Kaiser Shares to stockholders of MAXXAM or the
Company) (a "Kaiser Transaction") if (i) no Event of Default,
Collateral Default or Interest Payment Default has occurred and is
continuing or would result from such release, (ii) the Trustee
receives, as Collateral subject to the Lien of this Indenture, in
substitution for such Pledged Kaiser Shares, upon consummation of the
Kaiser Transaction, the consideration received in respect of such
Pledged Kaiser Shares pursuant to such Kaiser Transaction, (iii) all
holders of the common stock of Kaiser (or such successor) shall
(subject to proration, customary treatment of fractional amounts and
other similar adjustments) be entitled to receive substantially the
same consideration in respect of their shares of Kaiser common stock
pursuant to the terms of such Kaiser Transaction and (iv) any
non-money or non-Cash Equivalent consideration received in respect of
such Pledged Kaiser Shares pursuant to such Kaiser Transaction shall
have been registered under the Securities Act to the extent required
under the Federal securities laws.
(3) The Company shall be entitled to a release of any
Trust Moneys from the Lien of the Indenture at any time or from time
to time if (i) no Event of Default, no Collateral Default and no
Interest Payment Default has occurred and is continuing or would
result from such release, (ii) an Officers' Certificate is delivered
to the Trustee by the Company so stating and stating that such release
is permitted under this Section 10.05(c) and (iii) there remains as
Collateral immediately subsequent to any such release, an amount of
Trust Moneys equal to the greater of (x) the Make-Whole Price with
respect to the then outstanding principal amount of the Securities (if
such release occurs prior to August 1, 2000) and (y) 110% of the then
outstanding principal amount of the Securities. Any Trust Moneys to
be released pursuant to the provisions of this Section 10.05(c)(3) at
any time shall be released from the Accounts in the following order of
priority until an amount of Trust Moneys equal to the total amount to
be released at such time has been released: first, from the Cash
Collateral Account; second, from the Cash Collateral Default Account;
third, from the Cash Collateral Offer Account; and, fourth, from the
Cash Collateral Public Equity Offering Account.
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(d) Release Upon Defeasance. Notwithstanding
anything to the contrary in this Indenture, upon satisfaction by the Company of
the conditions set forth in Article 8 to its legal defeasance option, its
covenant defeasance option or to the discharge of this Indenture, the Lien of
this Indenture on all the Collateral shall terminate and all the Collateral
shall be released without any further action on the part of the Trustee or any
other Person.
(e) Further Assurances by Trustee Upon Release of
Collateral. Upon the release of any Collateral pursuant to this Article 10,
the Trustee shall execute and deliver an instrument or instruments
acknowledging the release of such Collateral from the Lien of this Indenture
and the discharge of the Lien on such Collateral created by this Article 10,
and shall duly assign, transfer and deliver to the Company or such other person
as may be entitled thereto (without recourse and without any representation or
warranty) such Collateral.
(f) Collateralized Cash Proceeds Offer Procedures.
(i) Each holder shall have the right, at such Holder's
option, to require the Company to apply Trust Moneys in the Cash
Collateral Offer Account, together with other money, if required, in
an aggregate amount equal to the Collateralized Cash Proceeds Offer
Amount, to purchase Securities tendered pursuant to an offer by the
Company to purchase, for U.S. Legal Tender pursuant to an
unconditional, irrevocable offer, subject to applicable law,
Securities at a purchase price (the "COLLATERALIZED CASH PROCEEDS
PURCHASE PRICE") equal to not less than the sum of (1) 101% of the
principal amount thereof plus (2) accrued and unpaid interest to but
not including the date of purchase, in accordance with the procedures
(including proration in the event of an oversubscription) set forth in
this Section 10.05(f) (a "COLLATERALIZED CASH PROCEEDS OFFER");
provided, that the Company shall not be required to (but may in its
discretion) make a Collateralized Cash Proceeds Offer if the sum of
(x) the amount of Trust Moneys deposited in the Cash Collateral Offer
Account, together with (y) the value, when it became Collateral, of
non-money and non-Cash Equivalent Net Proceeds, Extraordinary
Distributions and Exempt Distributions then required to constitute
Collateral, in each case that have not previously been (and are not
being) subjected to an offer pursuant to this Section 10.05(f) or (in
the case of Net Proceeds of a Public Equity Offering) applied to an
optional redemption pursuant to Section 10.05(g) (the amounts
specified in clause (y), above, to the extent not subjected or applied
(or being subjected or applied) as aforesaid, being hereafter referred
to collectively as the "NON-CASH AMOUNT"), do not in the aggregate
exceed $10,000,000. No Net Proceeds, Exempt
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Distributions, Extraordinary Distributions or other Trust Moneys shall
be required to be subjected to more than one Collateralized Cash
Proceeds Offer (or be subjected to any such offer to the extent they
have been applied to an optional redemption (or are being so applied)
in accordance with Section 10.05(f)(xiv)), and no Net Proceeds of a
Public Equity Offering that have been applied to an optional
redemption (or that are being so applied or that may be so applied
pursuant to an election by the Company pursuant to Section 10.05(g)
the time for which has not expired) in accordance with Section
10.05(g) shall be required to be subjected to a Collateralized Cash
Proceeds Offer. Pending application of any Trust Moneys in the Cash
Collateral Offer Account in accordance with this Section 10.05(f),
such moneys may be invested in accordance with Section 10.03(c).
(ii) Within 30 days following the date on which the Trust
Moneys in the Cash Collateral Offer Account, together with the
Non-Cash Amount, exceed $10,000,000 (the amount of such Trust Moneys
together with the Non-Cash Amount, as of the close of business on the
second Business Day prior to the mailing of the Collateralized Cash
Proceeds Offer Notice, described below, being hereinafter referred to
as the "COLLATERALIZED CASH PROCEEDS OFFER AMOUNT"), or earlier if it
shall so elect, the Company shall mail a written notice of a
Collateralized Cash Proceeds Offer to the Trustee, the Paying Agent
(which for purposes of this Article 10 shall not be the Company or any
of its Affiliates or Subsidiaries) and each Holder (and to beneficial
owners as required by applicable law including, without limitation,
the Exchange Act and the rules and regulations promulgated pursuant
thereto) (the "COLLATERALIZED CASH PROCEEDS OFFER NOTICE"). The
Collateralized Cash Proceeds Offer Notice shall include a form of
Collateralized Cash Proceeds Purchase Notice (as described below) to
be completed by the Holder, and shall contain or state:
(1) the Collateralized Cash Proceeds Offer Amount, a
brief description of the transactions which have generated such
amount, and the calculation of the Collateralized Cash Proceeds Offer
Amount;
(2) the date by which the Collateralized Cash Proceeds
Purchase Notice pursuant to this Section 10.05(f) must be delivered to
the Paying Agent;
(3) the scheduled date of purchase (the "Collateralized
Cash Proceeds Purchase Date"), which shall be no earlier than 30 days
and not later than 60 days following the date on which such
Collateralized Cash Proceeds Offer Notice is mailed, subject to
compliance with applicable law;
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(4) the applicable Collateralized Cash Proceeds Purchase
Price;
(5) the name and address of the Trustee and the Paying
Agent;
(6) that the Securities must be surrendered to the Paying
Agent;
(7) that the Collateralized Cash Proceeds Price for any
Security as to which a Collateralized Cash Proceeds Purchase Notice
has been duly given and not withdrawn shall be paid promptly (subject
to proration) following the later of the Collateralized Cash Proceeds
Purchase Date and the time of surrender of such Security as described
in this Section 10.05(f);
(8) that if Collateralized Cash Proceeds Purchase Notices
are given with respect to Securities having an aggregate
Collateralized Cash Proceeds Purchase Price in excess of the
Collateralized Cash Proceeds Offer Amount pursuant to the
Collateralized Cash Proceeds Offer, the Company shall purchase
Securities on a pro rata basis (with such adjustments as may be deemed
appropriate by the Paying Agent so that only Securities in
denominations of $1,000 or integral multiples thereof shall be
acquired)
(9) the procedures that the Holder must follow to
exercise rights under this Section 10.05(f) and a brief description of
those rights; and
(10) the procedures for withdrawing a Collateralized Cash
Proceeds Purchase Notice.
(iii) To accept the offer to purchase Securities described in
this Section 10.05(f), a Holder must deliver a written notice of
purchase (a "COLLATERALIZED CASH PROCEEDS PURCHASE NOTICE") to the
Paying Agent at any time prior to the close of business on the third
Business Day immediately preceding the Collateralized Cash Proceeds
Purchase Date, stating:
(1) the name of the Holder, the principal amount and the
certificate number or numbers of the Security or Securities which the
Holder will deliver to be purchased, and a statement that the
Collateralized Cash Proceeds Offer is being accepted with respect to
such Securities;
(2) the portion of the principal amount of any Security
which the Holder will deliver to be purchased, which portion must be
$1,000 or an integral multiple thereof; and
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(3) that such Security or Securities shall be purchased
on the Collateralized Cash Proceeds Purchase Date pursuant to the
terms and conditions specified in the Securities and this Indenture.
(iv) The delivery of a Security, by hand or by registered
mail prior to, on or after the Collateralized Cash Proceeds Purchase
Date (together with all necessary endorsements), to the Paying Agent
shall be a condition to the receipt by the Holder of the
Collateralized Cash Proceeds Purchase Price therefor; provided,
however, that such Collateralized Cash Proceeds Purchase Price shall
be so paid pursuant to this Section 10.05(f) only if the Security or
Securities so delivered to the Paying Agent shall conform in all
respects to the description thereof set forth in the related
Collateralized Cash Proceeds Purchase Notice and provided, further,
that the Company shall have no obligation to purchase any Securities
with respect to which a Collateralized Cash Proceeds Purchase Notice
has not been received by the Paying Agent prior to the close of
business on the third Business Day immediately preceding the
Collateralized Cash Proceeds Purchase Date.
(v) In the event that the Collateralized Cash Proceeds Offer
described in this Section 10.05(f) shall be accepted in accordance
with the terms thereof with respect to any portion of a Security, the
Company shall purchase from the holder thereof (subject to proration
pursuant to clause (viii) of this Section 10.05(f)), pursuant to this
Section 10.05(f), such portion of such Security if the principal
amount of such portion is $1,000 or an integral multiple of $1,000.
In connection with a Security purchased in part, the Company shall
execute and the Trustee shall authenticate for delivery to the Holder
thereof, a new Security equal in principal amount to that of the
unpurchased portion of the Security so surrendered.
(vi) Upon receipt by the Paying Agent of the
Collateralized Cash Proceeds Purchase Notice as specified in this
Section 10.05(f), the Holder of the Security (or portion thereof) in
respect of which such Collateralized Cash Proceeds Purchase Notice was
given shall (subject to proration pursuant to clause (viii) of this
Section 10.05(f)) and unless such Collateralized Cash Proceeds
Purchase Notice is withdrawn as specified in clause (vii) of this
Section 10.05(f)) thereafter be entitled to receive the applicable
Collateralized Cash Proceeds Purchase Price with respect to such
Security (or portion thereof). Such Collateralized Cash Proceeds
Purchase Price shall be due and payable as of the Collateralized Cash
Proceeds Purchase Date and shall be paid to such Holder promptly
following the later of (A) the Collateralized Cash
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Proceeds Purchase Date (provided, the conditions in clauses (iii) and
(iv) of this Section 10.05(f), as applicable, have been satisfied) and
(B) the date of delivery of such Security to the Paying Agent by the
Holder thereof in the manner required by such clauses (iii) and (iv).
(vii) A Collateralized Cash Proceeds Purchase Notice may be
withdrawn by means of a written notice of withdrawal delivered to the
Paying Agent at any time on or prior to the close of business on the
second Business Day preceding the Collateralized Cash Proceeds
Purchase Date specifying:
(1) the certificate number or numbers of the Security or
Securities in respect of which such notice of withdrawal is being
submitted;
(2) the principal amount of the Security or Securities
with respect to which such notice of withdrawal is being submitted;
and
(3) the principal amount, if any, of such Security or
Securities which remains subject to the original Collateralized Cash
Proceeds Purchase Notice, and which has been or will be delivered for
purchase by the Company.
(viii) If at the close of business on the second Business Day
preceding the Collateralized Cash Proceeds Purchase Date, the
Collateralized Cash Proceeds Purchase Price of all Securities for
which Collateralized Cash Proceeds Purchase Notices have been given
and not withdrawn exceeds the Collateralized Cash Proceeds Offer
Amount, the Paying Agent shall select the Securities to be purchased
such that each properly tendering Holder shall receive a portion of
the Collateralized Cash Proceeds Offer Amount on a pro rata basis
(with such adjustments as may be deemed appropriate by the Paying
Agent so that only Securities in denominations of $1,000 or integral
multiples thereof shall be purchased). The Paying Agent shall
promptly return to the Holder thereof any Securities surrendered which
the Company shall not be required to purchase pursuant to this Section
10.05(f).
(ix) Prior to noon, New York time, on the Collateralized
Cash Proceeds Purchase Date, the Company shall deliver to the Trustee,
for deposit into the Cash Collateral Offer Account, an amount of money
equal to the amount, if any, by which (A) the lesser of (x) the
aggregate Collateralized Cash Proceeds Purchase Price of all
Securities for which Collateralized Cash Proceeds Purchase Notices
have been given and not withdrawn and (y) the Collateralized Cash
Proceeds Offer Amount exceeds (B) the amount of money on deposit in
the Cash Collateral Offer Account. Following such delivery, if any,
but in any
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event on or prior to noon, New York time, on the Collateralized Cash
Proceeds Purchase Date, the Trustee shall release from the Lien of
this Indenture and deliver to the Paying Agent an amount of money from
the Cash Collateral Offer Account equal to the amount specified in
clause (A) above.
(x) Any Trust Moneys remaining in the Cash Collateral
Offer Account following release and delivery by the Trustee pursuant
to Section 10.05(f)(ix) shall be (A) deposited in the Cash Collateral
Account if the Collateralized Cash Proceeds Purchase Price for the
Securities does not equal or exceed the Call Price therefor plus
accrued and unpaid interest, if any, thereon to (but not including)
the Collateralized Cash Proceeds Purchase Date, in which case such
Trust Moneys shall remain subject to the Lien of this Indenture, or
(B) delivered to the Company, if the preceding clause (A) is not
applicable, in which case such moneys shall be released from the Lien
of this Indenture without the need for any further action from the
Trustee.
(xi) If money sufficient to pay the Collateralized Cash
Proceeds Purchase Price of all Securities (or portions thereof) to be
purchased on the Collateralized Cash Proceeds Purchase Date is
deposited with the Paying Agent as of the Collateralized Cash Proceeds
Purchase Date, interest shall cease to accrue on all such Securities
(or portions thereof) on and after the Collateralized Cash Proceeds
Purchase Date, whether or not any such Security is delivered to the
Paying Agent, and the holders thereof shall have no other rights as
such, other than the right to receive the Collateralized Cash Proceeds
Purchase Price (and, in the case of a Security purchased in part, a
new Security equal in principal amount to the unpurchased portion of
the Security surrendered) upon surrender of such Securities.
(xii) In connection with any offer to purchase, or any
purchase of, Securities under this Section 10.05(f), the Company shall
(i) comply with the Exchange Act, if applicable, (ii) file any
required Schedules of the Exchange Act, if applicable, and (iii)
otherwise comply with all Federal and state securities laws regulating
the purchase of the Securities.
(xiii) The Paying Agent shall return to the Company any
money, together with interest or dividends, if any, thereon held by it
for the payment of the Collateralized Cash Proceeds Purchase Price of
the Securities that remain unclaimed as provided in Section 8.04
hereof; provided, however, that to the extent that the aggregate
amount of money deposited by the Company pursuant to Section
10.05(f)(ix) (together with Trust Moneys at the time in the Cash
Collateral Offer Account)
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exceeds the aggregate Collateralized Cash Proceeds Purchase Price of
the Securities or portions thereof to be purchased on the
Collateralized Cash Proceeds Purchase Date, then promptly after the
Collateralized Cash Proceeds Purchase Date, the Paying Agent shall
return any such excess to the Company together with interest or
dividends, if any, thereon.
(xiv) Notwithstanding the foregoing provisions of this
Section 10.05(f), the Company shall not be required to make a
Collateralized Cash Proceeds Offer if and to the extent that, prior to
the time when the Company would have been required to make such
Collateralized Cash Proceeds Offer, the Company shall have, by written
notice to the Trustee, (1) elected to apply all or any portion of the
Collateral Cash Proceeds Offer Amount (such Collateralized Cash
Proceeds Offer Amount to be computed as if the date of delivery of
such written notice to the Trustee were the date of mailing of a
Collateralized Cash Proceeds Offer Notice) to a then permitted
optional redemption of the Securities, in whole or in part, at a
redemption price equal to not less than 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to (but not
including) the redemption date and (2) notified the Trustee of the
redemption date and the aggregate principal amount of Securities to be
redeemed. Following the giving of such written notice, the Company
shall, prior to 11:00 A.M., New York time, on the date set by the
Company for such redemption of Securities in accordance with Article
3, deliver to the Trustee, for deposit into the Cash Collateral Offer
Account, an amount of money equal to the amount, if any, by which the
aggregate redemption price of all Securities called for redemption,
including accrued and unpaid interest, if any, thereon to (but not
including) the date of redemption exceeds the amount of money on
deposit in the Cash Collateral Offer Account. Following such
delivery, if any, but in any event on or prior to 11:00 A.M., New York
time, on the date set by the Company for such redemption of Securities
in accordance with Article 3, the Trustee shall release from the Lien
of this Indenture and deliver to the Paying Agent an amount of money
from the Cash Collateral Offer Account equal to the aggregate
redemption price of all Securities called for redemption, including
accrued and unpaid interest, if any, thereon to (but not including)
the date of redemption.
(g) Release Upon Election Optionally to Redeem. If the
Company receives Net Proceeds from a sale of Pledged Shares or from a
Primary Share Sale that becomes subject to the Lien of this Indenture,
and if such sale constitutes a Public Equity Offering and the Company
is entitled at such time to effect an optional redemption in part of
Securities pursuant to Article 3 of this Indenture and paragraph 5 of
the Securities with
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such Net Proceeds, then the Company may elect, by written notice to
the Trustee delivered within 30 days after it receives such Net
Proceeds, to apply all or any portion of such Net Proceeds to such an
optional redemption. Following the giving of such written notice, the
Company shall, prior to 11:00 A.M., New York time, on the date set by
the Company for such redemption of Securities in accordance with
Article 3, deliver to the Trustee, for deposit into the Cash
Collateral Public Equity Offering Account, an amount of money equal to
the amount, if any, by which the aggregate redemption price of all
Securities called for redemption, including accrued and unpaid
interest, if any, to (but not including) the date of redemption (the
"AGGREGATE REDEMPTION PRICE"), exceeds the amount of money on deposit
in the Cash Collateral Public Equity Offering Account. Following such
delivery, if any, but in any event on or prior to 11:00 A.M., New York
time, on the date set by the Company for such redemption of Securities
in accordance with Article 3, the Trustee shall release from the Lien
of this Indenture and deliver to the Paying Agent an amount of money
from the Cash Collateral Public Equity Offering Account equal to the
Aggregate Redemption Price. Pending application of any Trust Moneys
in the Cash Collateral Public Equity Offering Account in accordance
with this Section 10.05(g), such moneys may be invested in accordance
with Section 10.03(c).
SECTION 10.06. TRUSTEE APPOINTED ATTORNEY-IN-FACT. The Company
hereby appoints the Trustee as its attorney-in-fact, with power of substitution
and with full authority in its place and stead and in its name or the Trustee's
own name, from time to time, in the Trustee's discretion subject to the
provisions of this Article 10, to take any action and to execute any instrument
which the Trustee may deem necessary or advisable in order to accomplish the
purposes of this Article 10, including to receive, endorse and collect all
instruments made payable to it representing any dividend, interest payment or
other distribution in respect of the Collateral or any part thereof and to give
full discharge for the same. This power, being coupled with an interest, is
irrevocable.
SECTION 10.07. TRUSTEE MAY PERFORM. If the Company fails in any
material respect to perform any agreement contained in this Article 10, or
fails to take any action required to be taken by it, to perfect or maintain the
perfection and priority of the Trustee's Lien on any applicable Collateral, the
Trustee may itself perform, or cause performance of, such agreement, and the
expenses of the Trustee incurred in connection therewith shall be payable by
the Company under Section 7.07. Without limiting the foregoing, the Trustee is
authorized to file financing statements without the signature of the grantor of
a security interest in any Collateral in order to perfect any Lien on such
Collateral.
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SECTION 10.08. REMEDIES UPON EVENT OF DEFAULT. If any Notice of
Acceleration shall have been delivered and is at the time in effect, the
Trustee may exercise in respect of the Collateral, in addition to other rights
and remedies provided for herein or otherwise available to it, all the rights
and remedies provided a secured party upon the default of a debtor under the
Uniform Commercial Code at that time. Without limiting the foregoing, the
Trustee may, without notice, except as specified below, sell the Collateral or
any part thereof in one or more parcels at public or private sale, at any
exchange, broker's board or at any of the Trustee's offices or elsewhere, for
cash, on credit or for future delivery, upon such terms as the Trustee may
determine to be commercially reasonable, and the Trustee or any securityholder
may be the purchaser of any or all of the Collateral so sold and thereafter
hold the same, absolutely, free from any right or claim of whatsoever kind.
The Company agrees that, to the extent notice of sale shall be required by law,
at least 10 days' notice to the Company of the time and place of any public
sale or the time after which any private sale is to be made shall constitute
reasonable notification. The Trustee shall not be obligated to make any sale
of Collateral regardless of notice of sale having been given. The Trustee may
adjourn any public or private sale from time to time by announcement at the
time and place fixed there for, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. The Trustee shall
incur no liability to the Company as a result of the sale of the Collateral, or
any part thereof, at any private sale conducted in a commercially reasonable
manner. The Company hereby waives any claim against the Trustee arising by
reason of the fact that the price at which any Collateral pledged by it
hereunder may have been sold at such a private sale was less than the price
which might have been obtained at a public sale, even if the Trustee accepts
the first offer received and does not offer such Collateral to more than one
offeree.
The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws, the
Trustee may be compelled, with respect to any sale of all or any part of the
Collateral, to limit purchasers to those who will agree, among other things, to
acquire such securities for their own account, for investment and not with a
view to the distribution or resale thereof. The Company acknowledges and
agrees that any such sale may result in prices and other terms less favorable
to the seller than if such sale were a public sale without such restrictions
and, notwithstanding such circumstances, agrees that any such sale of any
Collateral pledged by it hereunder shall be deemed to have been made in a
commercially reasonable manner. The Trustee shall be under no obligation to
delay the sale of any of the Pledged Shares for the period of time necessary to
permit the Company to register such securities for public sale
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under the Securities Act or under applicable state securities laws, even if the
Company would agree to do so.
If a Notice of Acceleration has been delivered and is at the time in
effect, the Trustee may, upon written notice, require the Company to use its
best efforts to cause to be registered as soon as possible pursuant to the
Securities Act and relevant state securities laws the Pledged Shares and to
keep such registration effective for at least 360 consecutive days, and to
enter into customary arrangements with the Trustee and the holders concerning
indemnification and reimbursement of expenses.
SECTION 10.09. APPLICATION OF PROCEEDS. If a Notice of Acceleration
has been delivered and is at the time in effect, any Trust Moneys held by the
Trustee as Collateral, and all proceeds received by the Trustee in respect of
any sale of, collection from or other realization upon, all or any part of the
Collateral, shall be applied by the Trustee in the manner specified in Section
6.10.
SECTION 10.10. CONTINUING LIENS. Except as provided in Article 5 and
this Article 10, the Company represents that this Indenture shall create a
continuing Lien on the Collateral with respect to which a security interest is
granted pursuant to Section 10.01(a), and on any Released Kaiser Shares in
which a security interest may hereafter be granted by the Company pursuant to
Section 10.01(b), that shall (i) remain in full force and effect until payment
in full of the Securities, (ii) be binding upon the Company and its successors
and assigns and (iii) enure to the benefit of the Trustee and its successors,
transferees and assigns.
SECTION 10.11. CERTIFICATES AND OPINIONS. The Company shall comply
with (a) TIA Section 314(b) relating to Opinions of Counsel regarding the Lien
of this Indenture and (b) TIA Section 314(d) relating to the release and
substitution of Collateral from the Lien of this Indenture and Officers'
Certificates or other documents regarding fair value of the Collateral, to the
extent such provisions are applicable. The release of any collateral, in whole
or in part, from the Lien of this Indenture shall be deemed not to impair in
contravention of this Indenture, any of the Liens relating to the Collateral,
or otherwise contravene the provisions of this Indenture, if and to the extent
such Collateral is released pursuant to and in compliance with the terms of
this Indenture. Any certificate or opinion required by TIA Section 314(d) may
be executed and delivered by an Officer of the Company to the extent permitted
by TIA Section 314(d).
SECTION 10.12. REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants as follows:
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(i) The Company is the record and beneficial owner of the
Pledged Shares described on Exhibit D, free and clear of any Lien,
except for the Lien created by this Indenture.
(ii) The Company has full corporate power, authority and
legal right to pledge all the Pledged Shares described on Exhibit D
and all other Collateral pledged by the Company.
(iii) The Pledged Shares described on Exhibit D have been
duly authorized and are validly issued, fully paid and non-assessable.
(iv) The pledge in accordance with the terms of this
Indenture of the Pledged Shares described on Exhibit D (assuming no
failure by the Trustee to perform acts customarily required of a
secured party in such circumstances) creates an (except for Liens
permitted under Section 4.16) exclusive and a valid and perfected
first priority Lien on such Collateral, securing payment of principal
and premium of and interest on the Securities by the Company.
(v) Exhibit D hereto sets forth a description of all the
Pledged Shares owned by the Company as of the Issue Date.
(vi) There are no existing options, warrants, calls or
similar commitments relating to any authorized and unissued Stock of
MGI.
SECTION 10.13. CERTAIN MERGERS, CONSOLIDATIONS, ETC. AMONG THE
COMPANY, MGI AND RESTRICTED SUBSIDIARIES. Notwithstanding any other provision
of this Indenture, the Company may at any time and from time to time permit MGI
to merge or consolidate into, or sell or transfer all or substantially all its
assets in any transaction or series of transactions to, any Restricted
Subsidiary if:
(i) the Trustee receives, as Collateral subject to the
Lien of this Indenture, the consideration distributed to the Company
on the Pledged MGI Shares in such transaction or transactions;
(ii) after giving effect to such transaction or
transactions, the Collateral includes at least a majority of the
Voting Stock and outstanding equity interests (on a fully diluted
basis) of the person surviving such merger or consolidation or to whom
such transfer is made, in a proportion at least equal to that in which
the Voting Stock and outstanding equity interests of MGI were included
in the Collateral immediately prior to such transaction or
transactions;
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(iii) no Default exists or would exist immediately following
such transaction or transactions after giving effect thereto on a pro
forma basis; and
(iv) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel stating that clause
(iii) above is satisfied and stating that such transaction or
transactions are otherwise permitted by this Section 10.13.
Upon satisfaction of the requirements of this Section 10.13, the Trustee shall,
if requested, release the Pledged MGI Shares from the Lien of this Indenture to
the extent necessary to effect any transaction or transactions permitted under
this Section 10.13; provided, that any person surviving such merger or
consolidation, or to whom such sale or transfer is made, pursuant to the
foregoing provisions of this Section 10.13 shall be deemed to be, for all
purposes of this Indenture, MGI, such person shall be a Restricted Subsidiary
and any owner of shares of Stock of such person that is either the Company or a
Subsidiary of the Company shall grant a security interest (of like tenor to the
security interest granted on the Issue Date pursuant to Section 10.01(a)) in
such shares of Stock and shall expressly assume, by supplemental indenture
hereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations with respect to such shares applicable to the
Company with respect thereto under this Article 10. Notwithstanding any other
provision of this Indenture, MGI may, at any time and from time to time, merge
or consolidate into, or transfer all or substantially all its assets in any
transaction or series of transactions to, the Company.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of
this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 11.02. NOTICES. Any notice or communication shall be in
writing and delivered in person, transmitted by facsimile (confirmed in writing
by mail) or mailed by first-class mail addressed as follows:
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If to the Company:
MAXXAM Group Holdings, Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77057
Attention: General Counsel
Telecopy Number: (713) 267-3702
with copies to:
Howard A. Sobel, Esq.
c/o Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Telecopy Number: (212) 715-8000
and
if to the Trustee:
First Bank National Association
Corporate Trust Department
180 East 5th Street
Second Floor
St. Paul, Minnesota 55101
Attention: Rick Prokosch
Telecopy Number: (612) 244-0711
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
to the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
Notwithstanding anything to the contrary in this Section 11.02, notices to the
Company or the Trustee shall only be deemed given when received by the Company
or the Trustee, as the case may be.
SECTION 11.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Security
holders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities and the Trustee shall comply with TIA
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Section 312(b). The Company, the Trustee, the Registrar and anyone else shall
have the protection of TIA Section 312(c).
SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company shall furnish to the Trustee upon the
Trustee's request:
(i) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with (or
will have been complied with upon the execution and delivery of
designated instruments); and
(ii) an Opinion of Counsel stating that, in the opinion of
such counsel, as to legal matters, all such conditions precedent have
been complied with (or will have been complied with upon the execution
and delivery of designated instruments);
except that in the case of any application or request as to which the
furnishing of such documents is specifically required by any provisions of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the person making such certificate
or rendering such opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he
or she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of
such person, such covenant or condition has been complied with.
SECTION 11.06. WHEN TREASURY SECURITIES DISREGARDED. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company
or by any person directly or
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indirectly controlling or controlled by or under direct or indirect common
control with the Company shall be disregarded and deemed not to be outstanding,
except that, for the purpose of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
which the Trustee knows are so owned shall be so disregarded. Also, subject to
the foregoing, only Securities outstanding at the time shall be considered in
any such determination.
SECTION 11.07. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The
Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 11.08. LEGAL HOLIDAYS. If a payment date is a Legal Holiday,
payment shall be made on the next succeeding day that is not a Legal Holiday,
and no interest shall accrue for the intervening period. If a regular record
date is a Legal Holiday, the record date shall not be affected.
SECTION 11.09. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK
SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY, EXCEPT THAT THE
LAWS OF THE STATE OF MINNESOTA SHALL GOVERN MATTERS CONCERNING THE VALIDITY AND
PERFECTION OF SECURITY INTERESTS OF THE TRUSTEE IN FAVOR OF THE HOLDERS IN THE
ACCOUNTS, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO
THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY. THE COMPANY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF
NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY,
JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM
THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE
TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY
IN ANY OTHER JURISDICTION.
SECTION 11.10. NO RECOURSE AGAINST OTHERS. A director, officer,
employee or stockholder, as such, of the Company, the Guarantor or the Trustee
shall not have any liability for any
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obligations of the Company, the Guarantor or the Trustee under the Securities
or this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such liability. The waiver and release shall be
part of the consideration for the issue of the Securities.
SECTION 11.11. SUCCESSORS. All agreements of the Company in this
Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 11.12. SEVERABILITY. In case any provision in this Indenture
or in the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions thereof shall not in
any way be affected or impaired thereby.
SECTION 11.13. MULTIPLE ORIGINALS. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture. This Indenture may be executed in two or more counterparts,
each of which shall be an original, but all of them together constitute the
same agreement.
SECTION 11.14. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify, restrict or
otherwise affect the meaning or interpretation of any of the terms or
provisions hereof.
SECTION 11.15. BENEFITS OF INDENTURE. Nothing in this Indenture or
the Securities, express or implied shall give to any person, other than the
parties hereto and their successors hereunder, and the Holders, any benefit or
any legal or equitable right, remedy or claim under this Indenture.
SECTION 11.16. NO CHALLENGE. (a) The Trustee agrees, and each
Holder of a Security by its acceptance thereof agrees, that neither the Trustee
nor any such Holder shall take any action to challenge or to contest, in any
bankruptcy or insolvency proceeding or otherwise, or vote in any way so as to
authorize or participate, directly or indirectly, in any such challenge or
contest of, or file any claim in any bankruptcy or insolvency proceeding or
otherwise inconsistent with: (i) the validity, priority or enforceability of
the Liens and security interests granted to secure payment of the Bank Debt,
whether outstanding at the date hereof or hereafter, (ii) the rights of the
holders of the Bank Debt, or any agent for such holders, set forth in any
security
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agreement, mortgage or other collateral document with respect to such Liens and
security interests, or (iii) the validity or enforceability of any provision of
this Section 11.16. For purposes of this Indenture, the Liens and security
interests granted in connection with the Bank Debt shall be deemed to have been
given in exchange for reasonably equivalent or fair value received by the
Company.
(b) Except as expressly stated in this Section 11.16, the
Trustee and the Holders of the Securities retain their rights to vote their
claims and otherwise to act on their own behalf in any proceeding under the
Bankruptcy Law.
(c) The Trustee acknowledges, on behalf of itself and the
Holders of the Securities, that the holders of the Bank Debt have entered or
will enter into the Credit Agreement and have extended or will extend credit
pursuant thereto in reliance upon this Section 11.16. This Section 11.16 shall
inure to the benefit of and be enforceable by the holders of the Bank Debt and
any agent for such holders.
ARTICLE 12
MAXXAM GUARANTEE
SECTION 12.01 SENIOR GUARANTEE.
Subject to the provisions of this Article 12, the Guarantor
hereby unconditionally guarantees to each Securityholder of Securities
authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of this
Indenture, the Securities or the Obligations of the Company to the
Securityholders or the Trustee hereunder or under the Securities, that: (a)
the principal of, and premium, if any, and interest on the Securities will be
duly and punctually paid in full when due, whether at maturity, by acceleration
or otherwise, and interest on overdue principal, and premium, if any, and (to
the extent permitted by law) interest on any interest, if any, on the
Securities and all other amounts and Obligations of the Company to the
Securityholders or the Trustee hereunder or under the Securities will be
promptly paid in full or performed, all in accordance with the terms hereof and
thereof; and (b) in case of any extension of time of payment or renewal of any
Securities or any of such other Obligations, the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise. Failing
payment when due of any amount so guaranteed or failing performance of any
other Obligation of the Company to the Securityholders, for whatever reason,
the Guarantor
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will be obligated to pay, or to perform or to cause the performance of, the
same immediately.
The Guarantor hereby agrees that its obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Securities or this Indenture, the absence of any action
to enforce the same, any waiver or consent by any Securityholder with respect
to any provision hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of the
Guarantor. The Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Company, protest, notice and all demands whatsoever and covenants that
its Guarantee will not be discharged except by payment in full of the principal
of, premium, if any, and interest on the Securities or as provided in Section
12.02 or Section 8.01 (subject, in the case of Section 8.01, to reinstatement
pursuant to Section 8.06). If any Securityholder or the Trustee is required by
any court or otherwise to return to the Company or any Custodian, trustee,
liquidator or other similar official acting in relation to the Company any
amount paid by any such entity to the Trustee or such Securityholder, this
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect.
The Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Securityholders in respect of any
Obligations guaranteed hereby until payment in full of the principal of,
premium, if any, and interest on the Securities or satisfaction of the
conditions set forth in Section 8.01(a) or 8.02; provided, however, that,
anything in this Indenture or in the Intercompany Note to the contrary
notwithstanding, any payment made by the Guarantor pursuant to this Article 12
shall automatically reduce the outstanding principal amount of the Intercompany
Note by an amount equal to the amount of such payment, provided that such
obligation under the Intercompany Note shall be reinstated to the extent that
any Securityholder or the Trustee is required by any court or otherwise to
return to the Guarantor or any Custodian, trustee, liquidator or other similar
official acting in relation to the Guarantor any amount paid by any such entity
to the Trustee or such Securityholder. The Guarantor agrees that, as between
it, on the one hand, and the Securityholders and the Trustee, on the other
hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated
as provided in Article 6 hereof for the purposes of this Guarantee,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the Obligations guaranteed hereby, and (y) in the
event of any acceleration of such Obligations as provided in Article 6 hereof,
such Obligations (whether or not due and payable) shall forthwith
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become due and payable by the Guarantor for the purpose of this Guarantee.
SECTION 12.02 WHEN GUARANTOR MAY MERGE, ETC.
The Guarantor shall not consolidate or merge with or into
(whether or not the Guarantor is the surviving person), or sell or transfer all
or substantially all of its assets to, another corporation, person or entity
whether or not affiliated with the Guarantor unless:
(i) the person formed by or surviving any such consolidation
or merger (if other than the Guarantor) or that acquires such assets assumes
all obligations of the Guarantor under this Indenture and the Securities
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; and
(ii) immediately after giving effect to such transaction, no
Default or Event of Default exist.
The resulting, surviving or transferee person (if other than
the Guarantor which executed this Indenture) shall succeed to, and may exercise
every right and power of, the Guarantor under this Indenture with the same
effect as if such successor Guarantor had been named as the Guarantor herein
and the Guarantor (except in the event of a lease of all or substantially all
of the Guarantor's assets) shall be relieved of its obligations under this
Indenture and the Securities. The Guarantor shall deliver to the Trustee prior
to the consummation of the proposed transaction a Guarantor's Officers'
Certificate and an Opinion of Counsel (to such counsel's knowledge) to the
effect set forth in clause (ii) and stating that the proposed transaction and
such supplemental indenture (if required) comply with this Indenture.
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IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
MAXXAM GROUP HOLDINGS INC.
Attest:
By: /s/ BERNARD L. BIRKEL By: /s/ BYRON L. WADE
------------------------ ----------------------------
Assistant Secretary Name: Byron L. Wade
Title: Vice President
MAXXAM INC. hereby confirms its agreements set
forth in Article 12 of this Indenture.
Attest:
By: /s/ BERNARD L. BIRKEL By: /s/ RONALD L. REMAN
------------------------ ----------------------------
Assistant Secretary Name: Ronald L. Reman
Title: Vice President - Taxes
FIRST BANK NATIONAL ASSOCIATION
Attest:
By: /s/ BERNARD L. BIRKEL By: /s/ RICHARD PROKASCH
------------------------ -----------------------------
Assistant Secretary Name: Richard Prokasch
Title: Trust Officer
126
<PAGE> 134
EXHIBIT A
(FORM OF FACE OF SECURITY)
No.
$
12% [Series A] [Series B] Senior Secured
Notes due 2003
MAXXAM Group Holdings Inc., a Delaware corporation, promises to pay to
_____________________, or registered assigns, the principal sum of
_____________ ______ DOLLARS on August 1, 2003.
Interest Payment Dates: February 1 and August 1, commencing February
1, 1997.
Record Dates: January 15 and July 15.
Additional provisions of this Security are set forth on the other side
of this Security.
Dated: MAXXAM GROUP HOLDINGS INC.
By_________________________
By_________________________
MAXXAM INC., as Guarantor in
accordance with the Indenture
By_________________________
By_________________________
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
FIRST BANK NATIONAL ASSOCIATION
as Trustee [Seal]
certifies that this is one
of the Series [A][B]
Securities referred to in
the Indenture.
By__________________________________
Authorized Signatory
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[Unless and until it is exchanged in whole or in part for Securities
in definitive form, this Security may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the Depository
to the Depository or another nominee of the Depository or by the Depository or
any such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the issuer or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or such other name as may be requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as may be requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an
interest herein.]*
- ---------------
* This paragraph should be included only if the Security is issued in global
form.
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[THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) (a) TO A PERSON WHO
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN
PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE
SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE ISSUER SO REQUESTS), (ii) TO THE ISSUER OR (iii) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.]*
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* This paragraph should be included only if the Security is a Transfer
Restricted Security.
A-3
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[FORM OF REVERSE SIDE OF SECURITY]
12% [Series A] [Series B] Senior Secured Notes due 2003
1. Interest
MAXXAM Group Holdings Inc., a Delaware corporation (such corporation,
and its successors and assigns under the Indenture (as hereinafter defined),
being herein called the "Company"), promises to pay interest on the principal
amount of this Security at the rate per annum shown above from December 23,
1996, until payment of such principal amount has been made or duly provided for
[and shall pay any Additional Interest payable pursuant to Section 2(e) of the
Registration Rights Agreement referred to below]. The Company shall pay
interest [and Additional Interest, if any,] semiannually on February 1 and
August 1 of each year, commencing on February 1, 1997. Interest on this
Security will accrue from the most recent interest payment date next preceding
the date hereof to which interest has been paid, unless the date hereof is an
interest payment date to which such interest has been paid, in which case from
the date hereof, or unless the date hereof is prior to February 1, 1997, in
which case from December 23, 1996; except that if the date hereof is prior to
an interest payment date and after the next preceding interest payment record
date and if there be no default in payment of interest on the Securities on
such interest payment date, then this Security shall bear interest from such
interest payment date, and if there be such a default then this Security shall
bear interest from the next preceding interest payment date to which interest
has been paid or duly provided for or, in the case of a default in the first
payment of interest, from December 23, 1996. Interest will be computed on the
basis of a 360-day year of twelve 30-day months. The Company shall pay
interest on overdue principal at the rate per annum shown above, and it shall
pay interest on overdue installments of interest [and Additional Interest, if
any,] at the same rate at which interest was paid prior to default, to the
extent lawful.*
2. Method of Payment
The Company will pay interest [and Additional Interest, if any,] on
the Securities to the persons who are registered holders of Securities at the
close of business on the January 15 or July 15 next preceding an interest
payment date even if Securities are canceled after the record date and on or
before
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* Bracketed language should be included in this paragraph only if the Security
is a Transfer Restricted Security.
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such interest payment date (except defaulted interest, which will be paid to
the persons who are registered holders of Securities at the close of business
on a special record date established for payment of such defaulted interest,
which date shall be at least ten days prior to the interest payment date).
Holders must surrender Securities to a Paying Agent to collect principal
payments. The Company will pay principal and interest [and Additional
Interest, if any,] in money of the United States that at the time of payment is
legal tender for payment of public and private debts. However, the Company may
pay principal and interest by check payable in such money. It may mail an
interest check to a Holder's registered address.*
3. Paying Agent and Registrar
Initially, First Bank National Association (the "Trustee") will act as
Paying Agent and Registrar. The Company may appoint and change any Paying
Agent or Registrar without notice, except as provided in the Indenture. The
Company or any of its Subsidiaries may act as Paying Agent or Registrar except
as provided in the Indenture.
4. Indenture
This Security is one of a duly authorized issue of Securities of the
Company, designated as its 12% Senior Secured Notes due 2003 (herein called the
" Securities"), all issued under an Indenture, dated as of December 23, 1996
(the "Indenture"), among the Company, MAXXAM Inc., a Delaware corporation (such
corporation and its successors and assigns under the Indenture being herein
called "MAXXAM"), and the Trustee. The terms of the Securities include those
of the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the
date of the Indenture (the "Act"). The Securities are subject to all such
terms, and Securityholders are referred to the Indenture and the Act for a
statement of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the holders of the
Securities issued pursuant to the Indenture. Capitalized terms used and not
otherwise defined herein have the meanings given to such terms in the
Indenture.
The Securities are general secured obligations of the Company limited
to $130,000,000 aggregate principal amount, subject to Section 2.07 of the
Indenture. The Indenture imposes certain limitations on the Company and its
Restricted
- ---------------
* Bracketed language should be included in this paragraph only if the Security
is a Transfer Restricted Security.
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Subsidiaries with respect to the issuance of Indebtedness, the payment of
dividends and certain other distributions by the Company, the sale or transfer
of assets, transactions with Affiliates and the creation of certain Liens. in
addition, the Indenture limits the ability of the Company and its Subsidiaries
to restrict dividends from Restricted Subsidiaries and certain other payments
to the Company.
5. Optional Redemption
At any time prior to August 1, 2000, the Company may, at its option,
on not less than 15 days (or 30 days if legally required by The Depository
Trust Company) nor more than 60 days notice to each Holder of the Securities to
be redeemed, redeem all or any portion of the Securities at the Make-Whole
Price (as defined in the Indenture) plus accrued and unpaid interest to (but
not including) the date of redemption. In addition, at any time prior to
August 1, 2000, the Securities may be redeemed at the option of the Company, in
part, on not less than 15 days (or 30 days if legally required by The
Depository Trust Company) nor more than 60 days notice to each Holder of the
Securities to be redeemed, with the net proceeds of a Public Equity Offering
(as defined in the Indenture), at 110% of the principal amount thereof, plus
accrued and unpaid interest, if any, to (but not including) the date of
redemption; provided, however, that at least 65% of the aggregate principal
amount of the Securities outstanding on the Issue Date (as defined in the
Indenture) shall remain outstanding after any such redemption pursuant to this
sentence.
On and after August 1, 2000, the Securities may be redeemed at the
option of the Company, in whole or in part, on not less than 15 days (or 30
days if legally required by The Depository Trust Company) nor more than 60 days
notice to each Holder of the Securities to be redeemed, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
and unpaid interest, if any, to (but not including) the date of redemption:
If redeemed during the 12-month period commencing August 1 of the
following years:
<TABLE>
<CAPTION>
Year Price
- ---------------------------------------------------------------------
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.00%
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.00%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00%
</TABLE>
A-6
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6. Notice of Redemption
Notice of redemption will be mailed at least 15 days (or 30 days if
legally required by The Depository Trust Company) but not more than 60 days
before the redemption date to each Holder of Securities to be redeemed at his
or her registered address. Securities in denominations larger than $1,000 may
be redeemed in part, but only in multiples of $1,000. If money sufficient to
pay the redemption price, including accrued and unpaid interest on all
Securities (or portions thereof) to be redeemed on the redemption date is
deposited with the Paying Agent on or before the redemption date and certain
other conditions are satisfied, on and after the redemption date interest shall
cease to accrue on Securities or portions of them called for redemption
(whether or not the Securities have been timely surrendered) and the only
remaining right of the Holders thereof shall be to receive payment of the
redemption price thereof, including accrued and unpaid interest, if any, to
(but not including) the redemption date, if applicable, upon surrender to the
Paying Agent of such Securities.
7. Change of Control, Certain Collateral Dispositions and Asset Sales
Upon the first Change of Control (as defined in the Indenture) after
the date of the Indenture, a Holder of Securities will have the right to cause
the Company to purchase all or any part of the Securities of such Holder at a
purchase price equal to 101% of the principal amount of the Securities to be
purchased, plus accrued and unpaid interest, if any, to (but not including) the
date of purchase, subject to the terms of the Indenture.
Upon certain Asset Sales (as defined in the Indenture), a Holder of
Securities will have the right to cause the Company to purchase Securities of
such Holder at a purchase price equal to 100% of the principal amount of the
Securities to be purchased, plus accrued and unpaid interest, if any, to (but
not including) the date of purchase, subject to the terms of the Indenture. If
less than all Securities are so purchased, such purchase shall be made on a pro
rata basis.
Upon receipt by the Company of certain proceeds of the Collateral (as
defined in the Indenture), a Holder of Securities will have the right to cause
the Company to purchase Securities of such Holder at a purchase price equal to
not less than 101% of the principal amount of the Securities to be purchased,
plus accrued and unpaid interest, if any, to (but not including) the purchase
date, subject to the terms of the Indenture. If less than all Securities are
so purchased, such purchase shall be made on a pro rata basis.
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8. Security
To secure the full and punctual payment of the principal amount and
premium of and interest on the Securities and all other amounts payable under
the Indenture and the Securities when and as the same shall be due and payable,
the Company has granted a security interest in all of the outstanding shares of
Stock of MAXXAM Group Inc. ("MGI"), a wholly owned Subsidiary of the Company.
Subject to the terms of the Indenture, if and only if any Released Kaiser
Shares are released from the Lien of the MGI Indenture by reason of early
retirement of the MGI Notes (other than by reason of a refinancing of the MGI
Notes), the Company will pledge up to 16,055,000 of such shares as security for
the Securities. The Collateral (as defined in the Indenture) is subject to
substitution and release from the Lien of the Indenture to the extent provided
therein.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not transfer or exchange any Securities selected
for redemption (except, in the case of a Security to be redeemed in part, the
portion of the Security not to be redeemed), any Securities for a period of 15
days before the mailing of a notice of redemption of Securities selected for
redemption or any Securities after an interest payment record date and before
the next succeeding interest payment date.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner of
it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its request unless an abandoned property law designates another
person. After any such payment, Holders entitled to any portion of such money
must look only to the Company, and not to the Trustee or Paying Agent, for
payment as general creditors, or, as applicable law designates, another person.
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12. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate principal amount outstanding of the
Securities and (ii) any nonpayment default or noncompliance with any provision
may be waived with the written consent of the Holders of a majority in
aggregate principal amount outstanding of the Securities. Subject to certain
exceptions set forth in the Indenture, without the consent of any Holder of any
Security, the Company and the Trustee may amend the Indenture or the Securities
to cure any ambiguity, omission, defect or inconsistency, to comply with
Articles 5 or 12 and Sections 10.01(b), 10.02(a), 10.04 or 10.13 of the
Indenture (relating to successor corporations and subsequent pledges of
Collateral), to provide for uncertificated Securities in addition to or in
place of certificated Securities, to add to the covenants of the Company for
the benefit of the Holders, to surrender any right or power conferred upon the
Company, to comply with the Trust Indenture Act of 1939 or to make any change
that does not adversely affect the rights of any Holder of any Security.
Without the consent of each Holder of an outstanding Security affected
thereby, no amendment may (i) reduce the aggregate amount of Securities whose
holders must consent to an amendment to the Indenture, (ii) reduce the rate of
or extend the stated maturity of any payment of interest on the Securities,
(iii) reduce the principal (at maturity or any other time) of or extend the
Stated Maturity of any payment of principal of any Security, including upon
redemption or payment of the Asset Sale Purchase Price or Change of Control
Purchase Price, (iv) reduce the premium payable upon the redemption of any
Security or (v) make any Security payable in money other than that stated in
the Security. Notwithstanding any other provision of the Indenture, the right
of any Holder of Securities to receive payment of principal of and interest on
the Securities held by such Holder, on or after the respective due dates
expressed therein, or to bring suit for the enforcement of any such payment on
or after such respective dates, shall not be impaired or affected without the
consent of such Holder; provided, that no Holder shall have the right to
institute any such suit, if and to the extent that the institution or
prosecution thereof or the entry of judgment therein would, under applicable
law, result in the surrender, impairment, waiver or loss of the Lien on the
Collateral created by the Indenture. Changes to Article 10 of the Indenture or
the definitions relating thereto (except for changes permitted without the
consent of Holders of Securities) may be made only with the consent of Holders
of 66-2/3% of the aggregate principal amount of outstanding Securities.
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13. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30 days
in payment of interest on the Securities; (ii) default in payment of the
principal amount of the Securities at maturity, upon redemption or required
repurchase pursuant to paragraph 5 or 7 of the Securities, upon declaration or
otherwise; (iii) failure by the Company to comply with other agreements in the
Indenture or the Securities, in certain cases subject to notice and lapse of
time; (iv) certain defaults with respect to other Indebtedness of the Company
or its Subsidiaries if the amount of such Indebtedness exceeds $10,000,000; (v)
certain events of bankruptcy or insolvency; and (vi) certain judgments or
decrees for the payment of money in excess of $10,000,000 that are not
discharged, waived or stayed within 60 days after notice. If an Event of
Default occurs and is continuing, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Securities may declare the principal amount
of all the Securities to be due and payable in the manner and with the effect
provided in the Indenture. Certain events of bankruptcy or insolvency with
respect to the Company are Events of Default that will result in the principal
amount of the Securities being due and payable immediately upon the occurrence
and during the continuance of such Events of Default.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture
or the Securities unless it receives reasonable indemnity or security. Subject
to certain limitations, Holders of a majority in aggregate principal amount of
the Securities may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Securityholders notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in their interest.
14. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities, and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
15. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the
Company, MAXXAM or the Trustee shall not have any
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<PAGE> 144
liability for any obligations of the Company, MAXXAM or the Trustee under the
Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Securityholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Securities.
16. Authentication
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
17. Discharge
Subject to certain conditions, the Company may terminate some or all
of its obligations under the Securities and the Indenture if the Company
deposits with the Trustee money or U.S. Governmental obligations for the
payment of principal and interest, if any, on the Securities, to redemption or
maturity, as the case may be.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder
or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by
the entireties), JT TEN (= joint tenants with rights of survivorship and not as
tenants in common), CUST (= custodian), and U/G/m/A (= Uniform Gift to Minors
Act).
19. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture which has in it the text of this
Security in large type. Requests may be made to:
MAXXAM Group Holdings Inc.
5847 San Felipe, Suite 2600
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<PAGE> 145
Houston, Texas 77057
Attention: Investor Relations Coordinator
20. Guarantee
This Security is initially entitled to the benefits of the Guarantee
of MAXXAM. Upon the terms and subject to the conditions set forth in the
Indenture, MAXXAM has unconditionally guaranteed that the principal of, and
premium, if any, and interest on the Securities will be duly and punctually
paid in full when due, whether at maturity, by acceleration or otherwise, and
interest on overdue principal, and premium, if any, and (to the extent
permitted by law) interest on any interest, if any, on the Securities and all
other amounts and Obligations of the Company to the Securityholders or the
Trustee under the Indenture or the Securities will be promptly paid in full or
performed.
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<PAGE> 146
________________________________________________________________________________
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code) (Insert
assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on
the books of the Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date: Your Signature:
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
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<PAGE> 147
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.07 of the Indenture, check the box:
[ ]
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 4.07 of the Indenture, state the amount and
check the box:
[ ]
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.09 of the Indenture, check the box:
[ ]
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 4.09 of the Indenture, state the amount and
check the box:
$__________
[ ]
If you want to elect to have this Security purchased by the Company
pursuant to Section 10.05(f) of the Indenture, check the box:
[ ]
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<PAGE> 148
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 10.05(f) of the indenture, state the amount and
check the box:
[ ]
Date:________________________ Your
Signature:________________________
(sign exactly as your name appears on
the other side of this Security)
Signature Guarantee:_____________________
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<PAGE> 149
SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(1)
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
<TABLE>
<CAPTION>
Amount of Amount of Principal Signature of
decrease in increase in Amount of this authorized
Principal Principal Global Security officer of
Amount of Amount of following such Trustee or
Date of this Global this Global decrease Securities
Exchange Security Security (or increase) Custodian
-------- -------- -------- ----------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------
(1) This schedule should be included only if the Security is issued in global
form.
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<PAGE> 150
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF
SECURITIES
Re: 12% Senior Secured Notes due 2003 of MAXXAM Group Holdings Inc.
This Certificate relates to $_____ principal amount of Securities held in *
________ book-entry or *_______ definitive form by ________________ (the
"Transferor").
The Transferor*:
[ ] has requested the Trustee by written order to deliver in exchange for
its beneficial interest in the Global Security held by the Depository a
Security or Securities in definitive, registered form of authorized
denominations in an aggregate principal amount equal to its beneficial interest
in such Global Security (or the portion thereof indicated above); or
[ ] has requested the Trustee by written order to exchange or register the
transfer of a Security or Securities.
In connection with such request and in respect of each such Security, the
Transferor does hereby certify that Transferor is familiar with the Indenture
relating to the above captioned Securities and as provided in Section 2.06 of
such Indenture, the transfer of this Security does not require registration
under the Securities Act (as defined below) because:*
[ ] Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section
2.06(d)(i)(A) of the Indenture).
[ ] Such Security is being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act")) in reliance on Rule 144A (in accordance with and in
satisfaction of Section 2.06(a)(ii)(B), Section 2.06(b)(i) or Section
2.06(d)(i) (B) of the Indenture) or pursuant to an exemption from registration
in accordance with Rule 904 under the Securities Act (in satisfaction of
Section 2.06(a)(ii)(B) or Section 2.06(d)(i)(B) of the Indenture.)
- ---------------
*Check applicable box.
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<PAGE> 151
[ ] Such Security is being transferred pursuant to an exemption from
registration in accordance with Rule 144 under the Securities Act, or pursuant
to an effective registration statement under the Securities Act (in
satisfaction of Section 2.06(a)(ii)(B) or Section 2.06(d)(i)(B) of the
Indenture).
[ ] Such Security is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Securities Act,
other than Rule 144A, Rule 144 or Rule 904 under the Securities Act. An
Opinion of Counsel to the effect that such transfer does not require
registration under the Securities Act accompanies this Certificate (in
satisfaction of Section 2.06(a)(ii)(C) or Section 2.06(d)(i)(C) of the
Indenture).
---------------------------------------
[INSERT NAME OF TRANSFEROR]
By:------------------------------------
Date:--------------------------------
- ---------------
*Check applicable box.
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<PAGE> 152
EXHIBIT C
SALMON CREEK
DESCRIPTION:
All that certain real property situated in the State of California, County of
Humboldt, and is described as follows:
TOWNSHIP 3 NORTH, RANGE 1 EAST, HUMBOLDT MERIDIAN:
Section 8:
The West Half of the Southwest Quarter, the Southeast Quarter of the
Southwest Quarter, and the Southwest Quarter of the Southeast
Quarter.
Section 15:
The Southwest Quarter.
EXCEPTING THEREFROM all oil, gas and minerals, with appurtenant
rights, as excepted in deed from the Regents of the University of
California recorded March 25, 1950 in Book 125 of Official Records,
page 24.
Section 16:
Entire Section.
EXCEPTING THEREFROM all oil, gas and minerals, with appurtenant
rights, as excepted in deed from the Regents of the University of
California recorded March 25, 1950 in Book 125 of Official Records,
page 24.
Section 17:
The Northeast Quarter.
Section 17:
The West Half and the Southeast Quarter.
EXCEPTING THEREFROM one-half of all oil, gas and minerals with
appurtenant rights, as reserved in the deed recorded February 29,
1944 in Book 265 of Deeds, page 256.
C-1
<PAGE> 153
Section 18:
The Southeast Quarter.
EXCEPTING THEREFROM one-half of all oil, gas and minerals with
appurtenant rights, as reserved in the deed recorded February 29,
1944 in Book 265 of Deeds, page 256.
Section 19:
The Northeast Quarter, and the North Half of the Southeast Quarter.
EXCEPTING THEREFROM one-half of all oil, gas and minerals with
appurtenant rights, as reserved in the deed recorded February 29,
1944 in Book 265 of Deeds, page 256.
Section 20:
The North Half, the North Half of the Southeast Quarter and the North
Half of the Southwest Quarter.
EXCEPTING THEREFROM one-half of all oil, gas and minerals with
appurtenant rights, as reserved in the deed recorded February 29,
1944 in Book 265 of Deeds, page 256.
The South Half of the Southeast Quarter.
Section 21:
Entire Section.
Section 22:
The South Half, and the South Half of the Northwest Quarter.
Section 23:
The East Half of the Southeast Quarter, the Northwest Quarter of the
Southeast Quarter and the Northeast Quarter of the Southwest Quarter.
EXCEPTING FROM the lands in Section 21, 22 and 23 above described
one-half of all oil, gas and minerals, with appurtenant rights, as
reserved in the deed recorded February 29, 1944 in Book 265 of Deeds,
page 256.
C-2
<PAGE> 154
Section 22:
The Northeast Quarter, and the North Half of the Northwest Quarter.
Section 23:
The South Half of the Northwest Quarter, the West Half of the
Southwest Quarter, the Southeast Quarter of the Southwest Quarter,
and the Southwest Quarter of the Southeast Quarter.
EXCEPTING FROM the lands in Section 22 and 23 last above described
all oil, gas and minerals, with appurtenant rights as excepted in the
deed from the Regents of the University of California recorded March
22, 1950 in Book 125 of Official Records, page 24.
Section 26:
The Northwest Quarter, the North Half of the Southwest Quarter, the
Southwest Quarter of the Southwest Quarter and the Southwest Quarter
of the Northeast Quarter.
EXCEPTING THEREFROM one-half of all oil, gas and minerals, with
appurtenant rights, as reserved in the deeds recorded February 29,
1944 in Book 265 of Deeds, page 255 and 256.
Section 27:
The West Half, the Northeast Quarter, the North Half of the Southeast
Quarter and the Southeast Quarter of the Southeast Quarter.
Section 28:
The East Half of the Southeast Quarter, the Northeast Quarter of the
Northwest Quarter, and the Northeast Quarter.
EXCEPTING THEREFROM and from the land in Section 27 last above
described one-half of all oil, gas and minerals, with appurtenant
rights, as reserved in the deed recorded February 29, 1944 in Book
265 of Deeds, page 256.
The West Half of the Northwest Quarter, the Southeast Quarter of the
Northwest Quarter, the West Half of the Southeast Quarter, the North
Half of the Southwest
C-3
<PAGE> 155
Quarter and the Southeast Quarter of the Southwest Quarter.
Section 29:
The North Half of the Northeast Quarter.
Section 33:
The Northeast Quarter.
Section 35:
The Northwest Quarter of the Northwest Quarter.
EXCEPTING THEREFROM, one-half of all oil, gas and minerals, with
appurtenant rights as reserved in the deeds recorded February 29,
1944 in Book 265 of Deeds, page 255 and 256.
C-4
<PAGE> 156
EXHIBIT D TO INDENTURE
<TABLE>
<CAPTION>
Company Type of Stock Certificate No. No. of Shares
- ------------ ----------------- ----------------- ---------------
<S> <C> <C> <C>
MAXXAM Group Common 2 100
Inc.
</TABLE>
D-1
<PAGE> 1
EXHIBIT 4.2
================================================================================
MAXXAM GROUP HOLDINGS INC.
MAXXAM INC.
$130,000,000
12% Senior Secured Notes due 2003
Purchase Agreement
December 17, 1996
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
================================================================================
<PAGE> 2
MAXXAM GROUP HOLDINGS INC.,
A DELAWARE CORPORATION
$130,000,000
12% Senior Secured Notes due 2003
PURCHASE AGREEMENT
December 17, 1996
New York, New York
BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, New York 10167
Ladies & Gentlemen:
MAXXAM Group Holdings Inc., a Delaware corporation (the
"Issuer"), confirms its agreement with Bear, Stearns & Co. Inc. ("Bear
Stearns") and Donaldson, Lufkin & Jenrette Securities Corporation (together
with Bear Stearns, the "Initial Purchasers") with respect to the sale by the
Issuer and the purchase by the Initial Purchasers of $130,000,000 aggregate
principal amount of 12% Series A Senior Secured Notes due 2003 (the "Series A
Notes"), subject to the terms and conditions set forth herein. Payment of
principal and interest on the Series A Notes will be guaranteed (the
"Guarantee") on a senior unsecured basis by MAXXAM Inc., a Delaware corporation
(the "Guarantor"). The Issuer is a newly formed, wholly owned subsidiary of
the Guarantor. The Series A Notes will be issued pursuant to an indenture (the
"Indenture"), to be dated as of the Closing Date (as defined), among the
Issuer, the Guarantor and First Bank National Association, as trustee (the
"Trustee"), and will be secured by, among other things, a first priority pledge
of (i) all outstanding shares (the "Pledged MGI Shares") of MAXXAM Group Inc.
("MGI") and (ii) that certain intercompany note payable by the Guarantor to the
Issuer, maturing August 1, 2003 (the "Intercompany Note"). In addition,
subject to the release of such shares as security for public indebtedness of
MGI, the Series A Notes may be secured by up to 16,055,000 of the 27,938,250
shares (the "Kaiser Shares") of Kaiser Aluminum Corporation, which Kaiser
Shares are to be transferred by the Guarantor to the Issuer as of the Closing
Date. Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Indenture or the Offering Memorandum, as
applicable.
1. Issuance of Securities. The Issuer proposes, upon the terms
and subject to the conditions set forth herein, to issue and sell to the
Initial Purchasers an aggregate of $130,000,000 principal amount of Series A
Notes. The Series A Notes and the Series B Notes (as defined below) issuable
in exchange therefor are collectively referred to herein as the "Notes."
Upon original issuance of the Series A Notes, and until such time as
the same is no longer required under the applicable requirements of the
Securities Act of 1933, as amended (the "Act"), the Series A Notes (and all
securities issued in exchange therefor) shall bear the following legend:
<PAGE> 3
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS
ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER
SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY
(i)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
COUNSEL IF THE ISSUER SO REQUEST), (ii) TO THE ISSUER OR (iii)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED
HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
2. Offering. The Series A Notes are being offered and sold to
the Initial Purchasers pursuant to an exemption from the registration
requirements under the Act. The Issuer has prepared a preliminary offering
memorandum, dated November 27, 1996 (the "Preliminary Offering Memorandum"),
and will prepare a final offering memorandum (the "Offering Memorandum"),
relating to the Issuer, the Guarantor, their respective subsidiaries, the
Series A Notes and the Guarantee.
The Initial Purchasers have advised the Issuer that the Initial
Purchasers will make offers (the "Exempt Resales") of the Series A Notes on the
terms set forth in the Offering Memorandum, as amended or supplemented, solely
to persons whom the Initial Purchasers reasonably believe to be qualified
institutional buyers (as defined in Rule 144A under the Act) ("Qualified
Institutional Buyers") in reliance on the exemption from the registration
requirements of the Securities Act provided by Rule 144A, and to a limited
number of institutional accredited investors (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Act) ("Accredited Investors") that, prior to their
purchase of Series A Notes, deliver to the Initial Purchasers an Accredited
Investor Letter (as defined in the Offering Memorandum). The Qualified
Institutional Buyers and the Accredited Investors are referred to herein as the
"Eligible Purchasers." The Initial Purchasers will offer the Series A Notes to
such Eligible Purchasers initially at a price equal to 100% of the principal
amount thereof. Such price may be changed at any time without notice.
<PAGE> 4
Holders (including subsequent transferees) of the Series A Notes will
have the registration rights set forth in the registration rights agreement
relating thereto (the "Registration Rights Agreement"), to be dated the Closing
Date, for so long as such Series A Notes constitute "Registrable Securities"
(as defined in the Registration Rights Agreement). Pursuant to the
Registration Rights Agreement, the Issuer and the Guarantor will agree to file
with the Securities and Exchange Commission (the "Commission"), under the
circumstances set forth therein, (i) a registration statement under the Act
(the "Exchange Offer Registration Statement") relating to the 12% Senior
Secured Notes due 2003, Series B (the "Series B Notes") to be offered in
exchange for the Series A Notes (the "Exchange Offer") and (ii) under certain
circumstances, a shelf registration statement under the Act (the "Shelf
Registration Statement") relating to the resale by certain holders of the
Series A Notes, and to use their best efforts to cause such registration
statement to be declared effective and to consummate the Exchange Offer. This
Agreement, the Series A Notes, the Series B Notes, the Registration Rights
Agreement, the Indenture and the Intercompany Note are hereinafter sometimes
referred to collectively as the "Operative Documents."
3. Purchase, Sale and Delivery. (a) On the basis of the
representations, warranties and covenants contained in this Agreement, and
subject to the terms and conditions set forth herein, the Issuer agree to issue
and sell to the Initial Purchasers, and the Initial Purchasers agree, severally
and not jointly, to purchase from the Issuer, in the proportions specified in
Schedule A hereto, $130,000,000 aggregate principal amount of Series A Notes,
at an aggregate purchase price equal to 97.25% of the principal amount thereof.
(b) Payment of the purchase price and delivery of the certificate
representing the Series A Notes shall be made at the offices of Kramer, Levin,
Naftalis & Frankel, 919 Third Avenue, New York, New York 10022, or such other
location as may be agreed upon by the Initial Purchasers and the Issuer. Such
delivery and payment shall be made at 9:00 A.M. New York time, on December 23,
1996 or at such other time as shall be agreed upon by the Initial Purchasers
and the Issuer. The time and date of such delivery and payment are herein
called the "Closing Date."
(c) One or more Series A Notes in definitive form, registered in the
name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), having
an aggregate amount corresponding to the aggregate amount of the Series A Notes
sold pursuant to Exempt Resales to Qualified Institutional Buyers (the "Global
Note") shall be delivered by the Issuer to the Initial Purchasers (or as the
Initial Purchasers direct), against payment by the Initial Purchasers of the
purchase price therefor, by wire transfer of same day funds, to an account
designated by the Issuer, provided that the Issuer shall give at least two
business days' prior written notice to the Initial Purchasers of the
information required to effect such wire transfer. The Global Note shall be
made available to the Initial Purchasers for inspection not later than 9:30
A.M. on the business day immediately preceding the Closing Date.
(d) One or more Series A Notes in definitive certificated form,
registered in the name of the respective Accredited Investors, having an
aggregate amount corresponding to the aggregate amount of the Series A Notes
sold pursuant to Exempt Resales to such Accredited Investors (the "Certificated
Notes") shall be delivered by the Issuer to the Initial Purchasers (or as the
Initial Purchasers direct), against payment by the Initial Purchasers of the
purchase price therefor, by wire transfer of same day funds, to an account
designated by the Issuer, provided that the Issuer shall give at least two
business days' prior written notice to the Initial Purchasers of the
information required to effect such wire transfer. The Certificated Notes
shall be made available to the Initial Purchasers for inspection not later than
9:30 A.M. on the business day immediately preceding the Closing Date.
<PAGE> 5
4. Covenants of the Issuer and the Guarantor. The Issuer and the
Guarantor hereby covenant and agree with the Initial Purchasers as follows:
(a) To advise the Initial Purchasers promptly and, if
requested by the Initial Purchasers, confirm such advice in writing,
(i) of the issuance against the Issuer or the Guarantor by any state
securities commission of any stop order suspending the qualification
or exemption from qualification of any Notes for offering or sale in
any jurisdiction, or the initiation of any proceeding for such purpose
by any state securities commission or other regulatory authority and
(ii) of the happening of any event that makes any statement of a
material fact made in the Preliminary Offering Memorandum or the
Offering Memorandum untrue or that requires the making of any
additions to or changes in the Preliminary Offering Memorandum or the
Offering Memorandum in order to make the statements of material fact
therein, in the light of the circumstances under which they are made,
not misleading. The Issuer and the Guarantor shall make every
reasonable effort to prevent the issuance of any stop order or order
suspending the qualification or exemption of any Notes under any state
securities or Blue Sky laws and, if at any time any state securities
commission or other regulatory authority shall issue an order
suspending the qualification or exemption of any Notes under any state
securities or Blue Sky laws, the Issuer and the Guarantor shall make
every reasonable effort to obtain the withdrawal or lifting of such
order at the earliest possible time.
(b) To furnish the Initial Purchasers and those persons
identified by the Initial Purchasers to the Issuer, without charge, as
many copies of the Preliminary Offering Memorandum and the Offering
Memorandum, and any amendments or supplements thereto, as the Initial
Purchasers may reasonably request. The Issuer and the Guarantor
consent to the use of the Preliminary Offering Memorandum and the
Offering Memorandum, and any amendments and supplements thereto
required pursuant hereto, by the Initial Purchasers in connection with
Exempt Resales.
(c) Not to amend or supplement the Preliminary Offering
Memorandum or the Offering Memorandum prior to the Closing Date unless
the Initial Purchasers shall previously have been advised thereof and
shall not have objected thereto within a reasonable time after being
furnished a copy thereof. The Issuer shall promptly prepare, upon the
Initial Purchasers' reasonable request, any amendment or supplement to
the Preliminary Offering Memorandum or the Offering Memorandum that
may be necessary or advisable in connection with Exempt Resales.
(d) If, after the date hereof and prior to consummation of
any Exempt Resale, any event shall occur as a result of which, in the
reasonable judgment of the Issuer or in the reasonable opinion of
counsel for the Issuer or counsel for the Initial Purchasers, it
becomes necessary or advisable to amend or supplement the Preliminary
Offering Memorandum or Offering Memorandum in order to make such
statements therein, in the light of the circumstances when such
Offering Memorandum is delivered to an Eligible Purchaser which is a
prospective purchaser, not misleading, or if it is necessary or
advisable to amend or supplement the Preliminary Offering Memorandum
or Offering Memorandum to comply with applicable law, (i) to notify
the Initial Purchasers and (ii) promptly to prepare an appropriate
amendment or supplement to such Preliminary Offering Memorandum or
Offering Memorandum so that the statements therein as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that such Preliminary Offering
Memorandum or Offering Memorandum will comply with applicable law.
(e) To cooperate with the Initial Purchasers and counsel for
the Initial Purchasers in connection with the qualification or
registration of the Series A Notes under the securities or Blue
<PAGE> 6
Sky laws of such jurisdictions of the United States as the Initial
Purchasers may reasonably request and to continue such qualification
in effect so long as required for the Exempt Resales; provided,
however, that neither the Issuer nor the Guarantor shall be required
in connection therewith to register or qualify as a foreign
corporation where it is not now so qualified or to take any action
that would subject it to service of process in suits or taxation, in
each case, in any jurisdiction where it is not now so subject.
(f) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement becomes effective or is
terminated, to pay all costs, expenses, fees and taxes incident to the
performance of the obligations of the Issuer and the Guarantor
hereunder, including (i) the printing, filing and distribution of the
Preliminary Offering Memorandum and the Offering Memorandum
(including, without limitation, financial statements) and all
amendments and supplements thereto required pursuant hereto (other
than legal fees and expenses of counsel to the Initial Purchasers in
connection with any of the foregoing), (ii) the preparation
(including, without limitation, duplication costs) and delivery of all
preliminary and final Blue Sky Memoranda and all other agreements,
memoranda, correspondence and all other documents prepared and
delivered in connection herewith and with the Exempt Resales
(including Blue Sky filing fees, but excluding legal fees and expenses
of counsel to the Initial Purchasers in connection with any of the
foregoing), (iii) the issuance, transfer and delivery by the Issuer of
the Series A Notes to the Initial Purchasers, (iv) the qualification
or registration of the Series A Notes for offer and sale under the
securities or Blue Sky laws of the several states (including, without
limitation, the cost of duplicating and mailing a preliminary and
final Blue Sky Memorandum and the reasonable fees and disbursements of
counsel for the Initial Purchasers relating thereto), (v) furnishing
such copies of the Preliminary Offering Memorandum and the Offering
Memorandum, and all amendments and supplements thereto, as may be
reasonably requested for use in connection with Exempt Resales, (vi)
the preparation of certificates for the Series A Notes (including,
without limitation, printing and engraving thereof), (vii) the fees,
disbursements and expenses of the Issuer's counsel and accountants,
(viii) all expenses and listing fees in connection with the
application for quotation of the Series A Notes in the National
Association of Securities Dealers, Inc. ("NASD") Private Offering,
Resales and Trading through Automated Linkages ("PORTAL") market, (ix)
all fees and expenses (including fees and expenses of counsel) of the
Issuer in connection with the approval of the Series A Notes by DTC
for "book-entry" transfer, (x) rating the Series A Notes by rating
agencies, (xi) the reasonable fees and expenses of the Trustee and its
counsel in connection with the Indenture and the Series A Notes, (xii)
the performance by the Issuer and the Guarantor of their other
obligations under this Agreement and the other Operative Documents and
(xiii) "roadshow" travel and other expenses incurred by the Issuer and
the Guarantor (including one half of the expense of chartered
aircraft) in connection with the marketing and sale of the Series A
Notes.
(g) To use the net proceeds from the sale of the Series A
Notes in the manner described in the Offering Memorandum under the
caption "Use of Proceeds."
(h) Not to voluntarily claim, and to resist actively any
attempts to claim, the benefit of any usury laws against the holders
of any Notes.
(i) To do and perform in all material respects all things
required to be done and performed under this Agreement by it prior to
or after the Closing Date, and to satisfy all conditions precedent on
its part to the delivery of the Series A Notes.
<PAGE> 7
(j) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the Act)
that would be integrated with the sale of the Series A Notes in a
manner that would require the registration under the Act of the sale
to the Initial Purchasers or the Eligible Purchasers of the Series A
Notes or to take any other action that would result in the Exempt
Resales not being exempt from registration under the Act.
(k) For so long as any of the Series A Notes remain
outstanding and during any period in which the Issuer is not subject
to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to make available to any holder or
beneficial owner of Series A Notes in connection with any sale thereof
and any prospective purchaser of such Notes from such holder or
beneficial owner, the information required by Rule 144A(d)(4) under
the Act.
(l) To cause the Exchange Offer to be made in the appropriate
form to permit registered Series B Notes to be offered in exchange for
the Series A Notes and to comply in all material respects with all
applicable federal and state securities laws in connection with the
Exchange Offer.
(m) To comply in all material respects with all of its
agreements set forth in the Operative Documents to which it is a party
and all agreements set forth in the representation letters of the
Issuer to DTC relating to the approval of the Series A Notes by DTC
for "book-entry" transfer.
(n) To use best reasonable efforts to effect the inclusion of
the Series A Notes in PORTAL and to obtain approval of the Series A
Notes by DTC for "book-entry" transfer.
(o) During a period of five years following the Closing Date,
to deliver without charge to the Initial Purchasers, as they may
reasonably request, promptly upon their becoming available, copies of
all reports or other publicly available information that either the
Issuer or the Guarantor shall mail or otherwise make available to its
stockholders.
(p) Prior to the Closing Date, to furnish to the Initial
Purchasers, as soon as they have been prepared in the ordinary course
by the Issuer, the Guarantor or any of their respective subsidiaries,
copies of any unaudited interim financial statements for any period
subsequent to the periods covered by the financial statements
appearing in the Offering Memorandum.
(q) On or prior to the Closing Date, the Guarantor will
transfer to the Issuer the Kaiser Shares. On the Closing Date, the
Issuer will represent and warrant to the Initial Purchasers that the
Kaiser Shares (a) have been duly authorized, validly issued, and are
fully paid and nonassessable, (b) were not issued in violation of any
preemptive or similar rights and (c) except as disclosed in the
Offering Memorandum, are owned by the Issuer free and clear of any
security interest, claim, mortgage, lien, limitation on voting rights
or encumbrance.
(r) Not to take, directly or indirectly, through any of their
respective subsidiaries or otherwise, any action designed to, or that
might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of either of the Issuer or
the Guarantor to facilitate the sale or resale of the Series A Notes,
and not to distribute, except as permitted by the Act, any (i)
preliminary offering memorandum, including, without limitation, the
Preliminary Offering Memorandum, (ii) offering memorandum, including,
without limitation, the Offering Memorandum or (iii) other offering
material in connection with the offering and sale of the Series A
Notes.
<PAGE> 8
(s) On the Closing Date, to furnish to the Initial Purchasers
Federal Reserve Form G-3 pursuant to Regulation G of the Federal
Reserve Board; on and after the Closing Date, to comply with the
provisions of the Indenture described in the Offering Memorandum under
the caption "Description of Notes--Certain Covenants--Use of
Proceeds."
5. Representations and Warranties. (a) The Issuer and the
Guarantor, jointly and severally, represent and warrant to the Initial
Purchasers that:
(i) The Preliminary Offering Memorandum and the Offering
Memorandum do not, and any supplement or amendment to them will not,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations
and warranties contained in this paragraph shall not apply to
statements in or omissions from the Preliminary Offering Memorandum
and the Offering Memorandum (or any supplement or amendment thereto)
made in reliance upon and in conformity with information relating to
the Initial Purchasers furnished to the Issuer in writing by the
Initial Purchasers expressly for use therein. No stop order
preventing the use of the Preliminary Offering Memorandum or the
Offering Memorandum, or any amendment or supplement thereto, or any
order asserting that any of the transactions contemplated by this
Agreement are subject to the registration requirements of the Act, has
been issued.
(ii) Except as disclosed in the Offering Memorandum, since
the date of the most recent audited financial statements included
therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings or business
affairs of the Issuer and its subsidiaries or the Guarantor and its
subsidiaries, in each case taken as a whole (a "Material Adverse
Change"), whether or not arising in the ordinary course of business,
(B) there have been no transactions entered into by the Issuer, the
Guarantor or any of their respective subsidiaries, other than those in
the ordinary course of business, which are material with respect to
the Issuer, the Guarantor and their respective subsidiaries taken as a
whole and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Issuer or the Guarantor on any class of
its capital stock.
(iii) Each of the Issuer and the Guarantor (A) has been duly
incorporated and is validly existing as a corporation and is in good
standing under the laws of its jurisdiction of incorporation, (B) has
all requisite corporate power and authority to carry on its business
as it is currently being conducted and as described in the Offering
Memorandum and to own, lease and operate its properties, and (C) is
duly qualified and in good standing as a foreign corporation,
authorized to do business in each jurisdiction in which the nature of
its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified could not
reasonably be expected to (x) result, individually or in the
aggregate, in a material adverse effect on the properties, business,
results of operations, condition (financial or otherwise), or affairs
of the Issuer and its subsidiaries or the Guarantor and its
subsidiaries, in each case taken as a whole, (y) materially interfere
with or materially adversely affect the issuance of the Series A Notes
pursuant hereto or (z) in any manner draw into question the validity
of this Agreement or any other Operative Document or the transactions
described in the Offering Memorandum under the caption "Use of
Proceeds" (any of the events set forth in clauses (x), (y) or (z), a
"Material Adverse Effect").
(iv) All of the outstanding capital stock of the Issuer (a)
has been duly authorized, validly issued, and is fully paid and
nonassessable, (b) was not issued in violation of any preemptive or
<PAGE> 9
similar rights and (c) is owned by the Guarantor free and clear of any
security interest, claim, mortgage, lien, limitation on voting rights
or encumbrance. On September 30, 1996, after giving pro forma effect
to the issuance and sale of the Series A Notes pursuant hereto (A) the
Issuer would have had an authorized and outstanding capitalization as
set forth in the Offering Memorandum under the caption "Capitalization
of the Company," subject to the notes and assumptions included therein
and (B) the Guarantor would have had an authorized and outstanding
capitalization as set forth in the Offering Memorandum under the
caption "Capitalization of the MAXXAM," subject to the notes and
assumptions included therein.
(v) Each subsidiary of either of the Issuer or the Guarantor
listed on Exhibit A hereto (each a "Significant Subsidiary"), Sam
Houston Race Park, Ltd. ("SHRP") and Palmas del Mar Properties, Inc.
("Palmas") (A) has been duly formed or incorporated and is validly
existing as a partnership or corporation, as applicable, and is in
good standing under the laws of its jurisdiction of formation or
incorporation, as applicable, (B) has all requisite power (corporate
or otherwise) and authority to carry on its business as it is
currently being conducted and as described in the Offering Memorandum
and to own, lease and operate its properties, and (C) is duly
qualified and in good standing as a foreign corporation or
partnership, as applicable, authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a
Material Adverse Effect.
(vi) All of the outstanding capital stock of each Significant
Subsidiary, SHRP and Palmas (a) has been duly authorized, validly
issued, and are fully paid and nonassessable, (b) was not issued in
violation of any preemptive or similar rights and (c) except as
disclosed in the Offering Memorandum, is owned by the Issuer or the
Guarantor, directly or through subsidiaries, free and clear of any
security interest, claim, mortgage, lien, limitation on voting rights
or encumbrance, except any such security interest, claim, mortgage,
lien, limitation or encumbrance as would not have a material effect on
the value of such capital stock or the ability of the Issuer, any
Significant Subsidiary, SHRP or Palmas to control the transfer or
other disposition thereof.
(vii) There are not currently any outstanding subscriptions,
rights, warrants, calls, commitments of sale or options to acquire, or
instruments convertible into or exchangeable for capital stock or
other equity interest of the Issuer, MGI or Kaiser, except for
Kaiser's PRIDES and the Guarantor's Class A Non-Cumulative
Participating Convertible Preferred Stock, and except as disclosed or
referred to in the Offering Memorandum or pursuant to existing option
or employee or director benefit plans.
(viii) When the Series A Notes are issued and delivered
pursuant to this Agreement, no Series A Note will be of the same class
(within the meaning of Rule 144A under the Act) as securities of
either of the Issuer or the Guarantor that are listed on a national
securities exchange registered under Section 6 of the Exchange Act or
that are quoted in a United States automated inter-dealer quotation
system.
(ix) Each of the Issuer and the Guarantor has all requisite
corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each of the other Operative
Documents to which it is a party and to consummate the transactions
contemplated hereby and thereby, including (in the case of the
Issuer), without limitation, the corporate power and authority to
issue, sell and deliver the Series A Notes as provided herein and
therein.
<PAGE> 10
(x) This Agreement has been duly and validly authorized,
executed and delivered by each of the Issuer and the Guarantor and
(assuming the due authorization, execution and delivery of this
Agreement by the Initial Purchasers) is the legal, valid and binding
agreement of each of the Issuer and the Guarantor, enforceable against
each of them in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject
to general principles of equity.
(xi) The Indenture has been duly and validly authorized by
each of the Issuer and the Guarantor and, when duly executed and
delivered by each of the Issuer and the Guarantor, will be the legal,
valid and binding obligation of each of the Issuer and the Guarantor,
enforceable against each of them in accordance with its terms, subject
to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or other laws affecting the rights of creditors
generally and subject to general principles of equity. The
description of the terms of the Indenture contained in the Offering
Memorandum conforms in all material respects to the terms of the
Indenture.
(xii) The Registration Rights Agreement has been duly and
validly authorized by each of the Issuer and the Guarantor and, when
duly executed and delivered by each of the Issuer and the Guarantor,
will be the legal, valid and binding obligation of each of the Issuer
and the Guarantor, enforceable against each of them in accordance with
its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization or other laws affecting the rights of
creditors generally and subject to general principles of equity. The
description of the terms of the Registration Rights Agreement
contained in the Offering Memorandum conforms in all material respects
to the terms of the Registration Rights Agreement.
(xiii) The Series A Notes have been duly and validly
authorized by the Issuer for issuance and sale to the Initial
Purchasers pursuant to this Agreement and, when issued and
authenticated in accordance with the terms of the Indenture and
delivered against payment therefor in accordance with the terms hereof
and thereof, will be the legal, valid and binding obligations of the
Issuer, enforceable against the Issuer in accordance with their terms
and entitled to the benefits of the Indenture, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or other
laws affecting the rights of creditors generally and subject to
general principles of equity. The description of the terms of the
Series A Notes contained in the Offering Memorandum conforms in all
material respects to the terms of the Series A Notes.
(xiv) The Series B Notes have been duly and validly
authorized for issuance by the Issuer and, when issued and
authenticated in accordance with the terms of the Exchange Offer and
the Indenture, will be the legal, valid and binding obligations of the
Issuer, enforceable against the Issuer in accordance with their terms
and entitled to the benefits of the Indenture, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or other
laws affecting the rights of creditors generally and subject to
general principles of equity. The description of the terms of the
Series B Notes contained in the Offering Memorandum conforms in all
material respects to the terms of the Series B Notes.
(xv) The Intercompany Note has been duly and validly
authorized by the Guarantor and, when issued and delivered against
payment therefor in accordance with the terms thereof, will be the
legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or other laws affecting the rights of creditors
generally and subject to general principles of equity. The
description of the terms of the Intercompany Note contained in the
Offering Memorandum conforms in all material respects to the terms of
the Intercompany Note.
<PAGE> 11
(xvi) Reserved.
(xvii) Upon (1) authentication and execution of the Series A
Notes in accordance with the terms of the Indenture, (2) delivery of
the Series A Notes against payment therefor in accordance with the
terms of the Purchase Agreement and (3) delivery to the Trustee in New
York of the certificates representing the Pledged MGI Shares listed on
Exhibit D to the Indenture, certificates representing the Pledged MGI
Shares listed on Exhibit D to the Indenture, registered in the name of
the Issuer, accompanied by stock powers duly endorsed in blank, the
Indenture will create a valid security interest, free of any adverse
claim (within the meaning of Section 8-302 of the UCC), in all of the
Issuer's right, title and interest in and to such Pledged MGI Shares
in favor of the Trustee under the Uniform Commercial Code as in effect
on the date of the Indenture in the State of New York (the "UCC").
Such security interest will be a perfected security interest in all of
the Issuer's right, title and interest in and to such Pledged MGI
Shares that have been delivered to the Trustee (accompanied by stock
powers duly endorsed in blank) and are in the physical possession of
the Trustee in the State of New York for the benefit of the holders of
the Series A Notes under the Indenture. The representation and
warranty in this paragraph (xvii) is based on the assumption, without
independent investigation, (a) that the Trustee will have received
such Pledged MGI Shares and that the purchasers of Series A Notes on
the date of execution of the Indenture are purchasing the Series A
Notes in good faith and without notice (as such term is used in
subsections (1), (3) and (4) of Section 8-304 of the UCC) of an
adverse claim within the meaning of Section 8- 302 of the UCC with
respect to such Pledged MGI Shares, (b) that such Pledged MGI Shares
will at all relevant times be in the actual physical possession of the
Trustee in the State of New York and (c) that the issuer is the record
and beneficial owner of, and has all rights in and title to, such
Pledged MGI Shares.
(xviii) Upon (1) authentication and execution of the
Series A Notes in accordance with the terms of the Indenture, (2)
delivery of the Series A Notes against payment therefor in accordance
with the terms of the Purchase Agreement and (3) delivery to the
Trustee in New York of the Intercompany Note duly endorsed in blank,
the Indenture will create a valid security interest in all of the
Issuer's right, title and interest in and to the Intercompany Note in
favor of the Trustee under the UCC. Such security interest will be a
perfected security interest in the Intercompany Note that has been
delivered to the Trustee (duly endorsed in blank) and is in the
physical possession of the Trustee in the State of New York for the
benefit of the holders of the Series A Notes under the Indenture. The
representation and warranty in this paragraph (xviii) is based on the
assumption, without independent investigation, (a) that the Trustee
will have received the Intercompany Note and that the purchasers of
Series A Notes on the date of execution of the Indenture are
purchasing the Series A Notes in good faith and without notice (as
such term is used in subsections (1), (3) and (4) of the Section 8-304
of the UCC) of an adverse claim within the meaning of Section 8-302 of
the UCC with respect to such Intercompany Note, (b) that such
Intercompany Note will at all relevant times be in the actual physical
possession of the Trustee in the State of New York and (c) that the
Issuer is the record and beneficial owner of, and has all rights in
and title to, such Intercompany Note.
(xix) The Issuer is not and, after giving effect to the
Offering, will not be, (A) in violation of its charter or bylaws, (B)
in default in the performance of any bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties
is subject that could reasonably be expected to have a Material
Adverse Effect, or (C) in violation of any local, state, federal or
foreign law, statute, ordinance, rule, regulation, requirement,
judgment or court decree (including, without limitation, environmental
laws, statutes, ordinances, rules, regulations, judgments or court
<PAGE> 12
decrees) applicable to it or any of its subsidiaries or any of its or
their assets or properties (whether owned or leased) that could
reasonably be expected to have a Material Adverse Effect.
(xx) The Guarantor is not and, after giving effect to the
Offering, will not be, (A) in violation of its charter or bylaws, (B)
in default in the performance of any bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties
is subject that could reasonably be expected to have a Material
Adverse Effect, or (C) in violation of any local, state, federal or
foreign law, statute, ordinance, rule, regulation, requirement,
judgment or court decree (including, without limitation, environmental
laws, statutes, ordinances, rules, regulations, judgments or court
decrees) applicable to it or any of its subsidiaries or any of its or
their assets or properties (whether owned or leased) that could
reasonably be expected to have a Material Adverse Effect.
(xxi) Neither any Significant Subsidiary, nor SHRP nor Palmas
is and, after giving effect to the Offering, will be, (A) in violation
of its charter, bylaws or partnership agreement, as applicable, (B) in
default in the performance of any bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties
is subject that could reasonably be expected to have a Material
Adverse Effect, or (C) in violation of any local, state, federal or
foreign law, statute, ordinance, rule, regulation, requirement,
judgment or court decree (including, without limitation, environmental
laws, statutes, ordinances, rules, regulations, judgments or court
decrees) applicable to it or any of its subsidiaries or any of its or
their assets or properties (whether owned or leased) that could
reasonably be expected to have a Material Adverse Effect.
(xxii) None of (A) the execution, delivery or performance by
either of the Issuer or the Guarantor of this Agreement or any of the
other Operative Documents to which it is a party, (B) the issuance and
sale of the Series A Notes or (C) except to the extent waived or
consented to on or prior to the Closing Date, neither the issuance of
the Intercompany Note by the Guarantor nor the transfer of the Kaiser
Shares to the Issuer violates, conflicts with or constitutes a breach
of any of the terms or provisions of, requires consent under, or
results in the imposition of a lien or encumbrance on, any properties
of the Issuer, the Guarantor or any of their respective subsidiaries,
or an acceleration of any indebtedness of the Issuer, the Guarantor or
any of their respective subsidiaries pursuant to (1) the respective
charter or bylaws of the Issuer, the Guarantor and their respective
subsidiaries, (2) any bond, debenture, note, indenture, mortgage, deed
of trust or other agreement or instrument to which the Issuer, the
Guarantor or any of their respective subsidiaries is a party or by
which any of them or their property is or may be bound, (3) any
statute, rule or regulation applicable to the Issuer, the Guarantor or
any of their respective subsidiaries or any of their assets or
properties or (4) any judgment, order or decree of any court or
governmental agency or authority having jurisdiction over the Issuer,
the Guarantor or any of their respective subsidiaries or any of their
assets or properties, except, in the case of clauses (2), (3) and (4)
above, as could not reasonably be expected to have a Material Adverse
Effect. No consent, approval, authorization or order of, or filing,
registration, qualification, license or permit of or with, (A) any
court or governmental agency, body or administrative agency or (B) any
other person is required for (1) the execution, delivery and
performance by the Issuer or the Guarantor of this Agreement or any of
the other Operative Documents to which it is a party or (2) the
issuance and sale by the Issuer and Guarantor of the Series A Notes
and the transactions contemplated hereby and thereby, except such as
have been obtained and made (or, in the case of the Registration
Rights Agreement, will be obtained and made) under the Act, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and
state securities or Blue Sky
<PAGE> 13
laws and regulations or such as may be required by the NASD, and
except those the failure of which to obtain would not have a Material
Adverse Effect.
(xxiii) There is (A) no action, suit, investigation or
proceeding before or by any court, arbitrator or governmental agency,
body or official, domestic or foreign, now pending or, to the best
knowledge of the Issuer, threatened or contemplated to which either of
the Issuer, the Guarantor or any of their respective subsidiaries is
or may be a party or to which the business or property of the Issuer,
the Guarantor or any of their respective subsidiaries, (B) no statute,
rule, regulation or order that has been enacted, adopted or issued by
any governmental agency or that has been proposed by any governmental
body and (C) no injunction, restraining order or order of any nature
by a federal or state court or foreign court of competent jurisdiction
to which the Issuer, the Guarantor or any of their respective
subsidiaries is or may be subject or to which the business, assets, or
property of the Issuer, the Guarantor or any of their respective
subsidiaries is or may be subject, that, in the case of clauses (A),
(B) and (C) above, (1) is required to be disclosed in the Preliminary
Offering Memorandum and the Offering Memorandum and that is not so
disclosed, or (2) could reasonably be expected to have a Material
Adverse Effect.
(xxiv) No action has been taken and no statute, rule,
regulation or order has been enacted, adopted or issued by any
governmental agency that prevents the issuance of the Series A Notes
or prevents or suspends the use of the Offering Memorandum; no
injunction, restraining order or order of any nature by a federal or
state court of competent jurisdiction has been issued that prevents
the issuance of the Series A Notes or prevents or suspends the sale of
the Series A Notes in any jurisdiction referred to in Section 4(e)
hereof; and every request of any securities authority or agency of any
jurisdiction for additional information has been complied with in all
material respects.
(xxv) Except to the extent disclosed in the Offering
Memorandum, none of the Issuer, the Guarantor or any of their
respective subsidiaries has violated any foreign, federal, state or
local law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws") which could
reasonably be expected to have a Material Adverse Effect.
(xxvi) There is no alleged liability, or to the best
knowledge of the Issuer, potential liability (including, without
limitation, alleged or potential liability or investigatory costs,
cleanup costs, governmental response costs, natural resource damages,
property damages, personal injuries or penalties) of the Issuer, the
Guarantor or any of their respective subsidiaries arising out of,
based on or resulting from (a) the presence or release into the
environment of any Hazardous Material (as defined below) at any
location, whether or not owned by the Issuer, the Guarantor or such
subsidiary, as the case may be, or (b) any violation or alleged
violation of any Environmental Law, which alleged or potential
liability is required to be disclosed in the Offering Memorandum,
other than as disclosed therein, or that could reasonably be expected
to have a Material Adverse Effect. The term "Hazardous Material"
means (i) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (iii) any petroleum or
petroleum product, (iv) any polychlorinated biphenyl, and (v) any
pollutant or contaminant or hazardous, dangerous or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other law relating to protection of human health or the
environment or imposing liability or standards of conduct concerning
any such chemical material, waste or substance.
<PAGE> 14
(xxvii) Each of the Issuer, the Guarantor and their
respective subsidiaries has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"),
including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease and operate their respective
properties and to conduct their businesses, except as could not
reasonably be expected to have a Material Adverse Effect; each of the
Issuer, the Guarantor and their respective subsidiaries has fulfilled
and performed all of its obligations with respect to such permits and
no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such permit;
and, except as described in the Offering Memorandum, such permits
contain no restrictions that are materially burdensome to the Issuer,
the Guarantor or such subsidiary, as the case may be.
(xxviii) Each of the Issuer, the Guarantor and their
respective subsidiaries has (A) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has
made all declarations and filings with, all federal, state and local
authorities, all self-regulatory authorities and all courts and other
tribunals (each, an "Authorization") necessary to engage in the
business conducted by any of them in the manner described in the
Offering Memorandum, except as could not reasonably be expected to
have a Material Adverse Effect and (B) no reason to believe that any
governmental body or agency is considering limiting, suspending or
revoking any such Authorization. All such Authorizations are valid
and in full force and effect and each of the Issuer, the Guarantor and
their respective subsidiaries is in compliance in all material
respects with the terms and conditions of all such Authorizations and
with the rules and regulations of the regulatory authorities having
jurisdiction with respect thereto, except as could not reasonably be
expected to have a Material Adverse Effect.
(xxix) Each of the Issuer, the Guarantor and their respective
subsidiaries owns, possesses or has the right to employ all patents,
patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, software, systems or procedures),
trademarks, service marks and trade names, inventions, computer
programs, technical data and information (collectively, the
"Intellectual Property") presently employed by it in connection with
the businesses now operated by it or that are proposed to be operated
by it free and clear of and without violating any right, claimed
right, charge, encumbrance, pledge, security interest, restriction or
lien of any kind of any other person and, except as disclosed in the
Offering Memorandum, none of the Issuer, the Guarantor or any of their
respective subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing, except as could not reasonably be expected to have a
Material Adverse Effect. To the best knowledge of the Issuer, the use
of the Intellectual Property in connection with the business and
operations of either of the Issuer, the Guarantor or any of their
respective subsidiaries does not infringe on the rights of any person,
except as could not reasonably be expected to have a Material Adverse
Effect.
(xxx) All material tax returns required to be filed by either
of the Issuer, the Guarantor or any of their respective subsidiaries
in all jurisdictions have been so filed. All taxes, including
withholding taxes, penalties and interest, assessments, fees and other
charges due or claimed to be due from such entities or that are due
and payable have been paid, other than those being contested in good
faith and for which adequate reserves have been provided or those
currently payable without penalty or interest. To the knowledge of
the Issuer, there are no material proposed additional tax assessments
against the Issuer, the Guarantor or any of their respective
subsidiaries, or the assets or property of the Issuer, the Guarantor
or any of their respective subsidiaries.
<PAGE> 15
(xxxi) Neither the Issuer nor the Guarantor is required to be
registered as an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company
Act").
(xxxii) The Indenture is in form eligible for qualification
under the Trust Indenture Act.
(xxxiii) None of the Issuer, the Guarantor or any of their
respective subsidiaries has (A) taken, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security
of the Issuer, the Guarantor or any of their respective subsidiaries
to facilitate the sale or resale of the Series A Notes or (B) since
the date of the Preliminary Offering Memorandum (1) sold, bid for,
purchased or paid any person any compensation for soliciting purchases
of the Series A Notes or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities
of the Issuer, the Guarantor or any of their respective subsidiaries.
(xxxiv) No registration under the Act of the Series A Notes
is required for the sale of the Series A Notes to the Initial
Purchasers as contemplated hereby or for the Exempt Resales assuming
(A) that the purchasers who buy the Series A Notes in the Exempt
Resales are Eligible Purchasers and (B) the accuracy of the Initial
Purchasers' representations regarding the absence of general
solicitation in connection with the sale of Series A Notes to the
Initial Purchasers and the Exempt Resales contained herein. No form
of general solicitation or general advertising was used by the Issuer,
the Guarantor or any of their respective representatives (other than
the Initial Purchasers, as to which the Issuer and the Guarantor make
no representation or warranty) in connection with the offer and sale
of any of the Series A Notes in connection with Exempt Resales,
including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium
or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising. No securities of the same class as the Series A Notes
have been issued and sold by the Issuer, the Guarantor or any of their
respective subsidiaries within the six-month period immediately prior
to the date hereof.
(xxxv) The execution and delivery of this Agreement, the
other Operative Documents and the sale of the Series A Notes to be
purchased by the Qualified Institutional Buyers and the Accredited
Investors will not involve any prohibited transaction within the
meaning of Section 406 of the Employee Retirement Income Security Act
of 1974, as amended, or Section 4975 of the Internal Revenue Code of
1986, as amended. The representation made by the Issuer and the
Guarantor in the preceding sentence is made in reliance upon and
subject to the accuracy of, and compliance with, the representations
and covenants made or deemed made by the Qualified Institutional
Buyers and the Accredited Investors as set forth in the Offering
Memorandum under the caption "Notice to Investors."
(xxxvi) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its date, and each amendment or supplement
thereto, as of its date, contains the information specified in, and
meets the requirements of, Rule 144A(d)(4) under the Act.
(xxxvii) Subsequent to September 30, 1996 and up to the
Closing Date, (A) there has not been, singly or in the aggregate, any
change or development of which the Issuer or Guarantor is aware which
could reasonably be expected to result in a Material Adverse Effect of
the type described in clause (x) of such definition and (B) there has
been no dividend or distribution of any kind declared, paid or made by
the Issuer or the Guarantor on any class of their capital stock.
<PAGE> 16
(xxxviii) The accountants who have certified or will certify
the financial statements included or to be included as part of the
Offering Memorandum are independent accountants. The historical
financial statements of the Issuer, the Guarantor and their respective
subsidiaries comply as to form in all material respects with the
requirements applicable to registration statements on Form S-1 under
the Act and present fairly in all material respects the financial
position and results of operations of the Issuer, the Guarantor and
their respective subsidiaries, as the case may be, at the dates and
for the periods indicated. Such financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods presented. The
pro forma financial statements included in the Offering Memorandum
have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein,
and give effect to assumptions made on a reasonable basis and present
fairly in all material respects the historical and proposed
transactions contemplated by this Agreement and the other Operative
Documents. The other financial and statistical information and data
included in the Offering Memorandum, historical and pro forma, are
accurately presented on a basis consistent with the financial
statements, historical and pro forma, included in the Offering
Memorandum and the books and records of the Issuer, the Guarantor and
their respective subsidiaries, as applicable.
(xxxix) Upon the issuance of the Series A Notes, the present
fair saleable value of the assets of the Issuer, the Guarantor and
their respective subsidiaries, taken as a whole, will exceed the
amount that will be required to be paid on or in respect of the
existing debts and other liabilities (including contingent
liabilities) of the Issuer, the Guarantor and their respective
subsidiaries, taken as a whole, as they become absolute and matured.
Upon the issuance of the Series A Notes, the assets of the Issuer, the
Guarantor and their respective subsidiaries, taken as a whole, will
not constitute unreasonably small capital to carry out their
businesses as now conducted, including the capital needs of the
Issuer, the Guarantor and their respective subsidiaries, taking into
account the projected capital requirements and capital availability.
(xl) There exist no conditions that constitute a Default or
Event of Default by the Issuer or the Guarantor (or an event which
with notice or the lapse of time, or both, would constitute a default)
under the Indenture.
(xli) Each of the Issuer, the Guarantor and their respective
subsidiaries has complied with all of the provisions of Florida H.B.
1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to doing business with the
Government of Cuba or with any person or any affiliate located in
Cuba.
(xlii) Each certificate signed by any officer of the Issuer
or the Guarantor and delivered to the Initial Purchasers or counsel
for the Initial Purchasers shall be deemed to be a representation and
warranty by the Issuer and the Guarantor, as applicable, to the
Initial Purchasers as to the matters covered thereby.
The Issuer and the Guarantor acknowledge that the Initial
Purchasers and, for purposes of the opinions to be delivered to the Initial
Purchasers pursuant to Section 8 hereof, counsel for the Issuer and the
Guarantor and counsel for the Initial Purchasers, will rely upon the accuracy
and truth of the foregoing representations and hereby consent to such reliance.
(b) The Initial Purchasers represent, warrant and covenant to the
Issuer and the Guarantor and agree that:
<PAGE> 17
(i) The Initial Purchasers are Qualified Institutional
Buyers, with such knowledge and experience in financial and business
matters as are necessary in order to evaluate the merits and risks of
an investment in the Series A Notes.
(ii) The Initial Purchasers (A) are not acquiring the Series
A Notes with a view to any distribution thereof that would violate the
Act or the securities laws of any state of the United States or any
other applicable jurisdiction and (B) will be reoffering and reselling
the Series A Notes only to Qualified Institutional Buyers in reliance
on the exemption from the registration requirements of the Act
provided by Rule 144A and to Accredited Investors in a private
placement exempt from the registration requirements of the Act.
(iii) No form of general solicitation or general advertising
has been or will be used by the Initial Purchasers or any of their
representatives in connection with the offer and sale of any of the
Series A Notes, including, but not limited to, articles, notices or
other communications published in any newspaper, magazine, or similar
medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation
or general advertising.
(iv) The Initial Purchasers agree that, in connection with
the Exempt Resales, they will solicit offers to buy the Series A Notes
only from, and will offer to sell the Series A Notes only to, Eligible
Purchasers. The Initial Purchasers further agree (A) that they will
offer to sell the Series A Notes only to, and will solicit offers to
buy the Series A Notes only from (1) Qualified Institutional Buyers
who in purchasing such Series A Notes will be deemed to have
represented and agreed that they are purchasing the Series A Notes for
their own accounts or accounts with respect to which they exercise
sole investment discretion and that they or such accounts are
Qualified Institutional Buyers and (2) Accredited Investors who make
the representations contained in, and execute and return to the
Initial Purchasers, a letter in the form of Annex A attached to the
Offering Memorandum and (B) that, in the case of such Qualified
Institutional Buyers and Accredited Investors, acknowledges and agrees
that such Series A Notes will not have been registered under the Act
and may be resold, pledged or otherwise transferred only (x)(I) to a
person who the seller reasonably believes is a Qualified Institutional
Buyer in a transaction meeting the requirements of Rule 144A, (II) in
a transaction meeting the requirements of Rule 144, (III) outside the
United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Act or (IV) in accordance with
another exemption from the registration requirements of the Act (and
based upon an opinion of counsel if the Issuer so requests), (y) to
the Issuer or (z) pursuant to an effective registration statement
under the Act and, in each case, in accordance with any applicable
securities laws of any state of the United States or any other
applicable jurisdiction and (C) that the holder will, and each
subsequent holder is required to, notify any purchaser of the security
evidenced thereby of the resale restrictions set forth in (B) above.
The Initial Purchasers understand that the Issuer and the
Guarantor and, for purposes of the opinions to be delivered to the Initial
Purchasers pursuant to Section 8 hereof, counsel for the Issuer and the
Guarantor and counsel for the Initial Purchasers will rely upon the accuracy
and truth of the foregoing representations and the Initial Purchasers hereby
consent to such reliance.
6. Indemnification.
(a) The Issuer and the Guarantor, jointly and severally,
agree to indemnify and hold harmless (i) the Initial Purchasers, (ii)
each person, if any, who controls the Initial Purchasers
<PAGE> 18
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and (iii) the respective officers, directors, partners,
employees, representatives and agents of the Initial Purchasers or any
controlling person to the fullest extent lawful, from and against any
and all losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to reasonable attorneys' fees and any and
all reasonable expenses whatsoever incurred in investigating,
preparing or defending against any investigation or litigation,
commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the
Preliminary Offering Memorandum or the Offering Memorandum, or in any
supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Issuer and the Guarantor
will not be liable in any such case to the extent, but only to the
extent, that any such loss, liability, claim, damage or expense (i)
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Issuer and the Guarantor by or on behalf of the Initial Purchasers
expressly for use therein or (ii) is caused by an untrue statement or
omission or alleged untrue statement or omission that was contained or
made in the Preliminary Offering Memorandum and corrected in the
Offering Memorandum and (1) any such loss, liability, claim, damage or
expense suffered or insured by any indemnified party resulted from an
action, claim, or suit by any person who purchased Series A Notes from
the Initial Purchasers in the offering, (2) the Initial Purchasers
failed to deliver or provide a copy of the Offering Memorandum to such
person at or prior to the confirmation of the sale of such Series A
Notes in any case where such delivery is required by the Act and (3)
the Offering Memorandum (as so amended and supplemented) would have
cured the defect giving rise to such loss, liability, claim, damage or
expense. This indemnity agreement will be in addition to any
liability which the Issuer and the Guarantor may otherwise have,
including under this Agreement.
(b) The Initial Purchasers agree to indemnify and hold
harmless (i) the Issuer and the Guarantor, (ii) each person, if any,
who controls the Issuer or the Guarantor within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any
losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against
any investigation or litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the
Preliminary Offering Memorandum or the Offering Memorandum, or in any
amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, in each case to the extent, but only to the extent,
that any such loss, liability, claim, damage or expense arises out of
or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Issuer and the
Guarantor by or on behalf of the Initial Purchasers expressly for use
therein; provided, however, that in no case shall the Initial
Purchasers be liable or responsible for any
<PAGE> 19
amount in excess of the discounts and commissions received by the
Initial Purchasers, as set forth on the cover page of the Offering
Memorandum. This indemnity will be in addition to any liability which
the Initial Purchasers may otherwise have, including under this
Agreement.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, proceeding or investigation, such indemnified party shall, if
a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify, as promptly as practicable, each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying
party shall not relieve it from any liability which it may have under
this Section 6 or otherwise except to the extent that it has been
prejudiced in any material respect by such failure). In case any such
action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein, and to the extent it may
elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to
such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties
unless (i) the employment of such counsel shall have been authorized
in writing by the indemnifying parties in connection with the defense
of such action, (ii) the indemnifying parties shall not have employed
counsel to take charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii)
such indemnified party or parties shall have been advised by counsel
that there may be legal defenses available to it or them which are
different from or additional to those available to the indemnifying
parties (in which case the indemnifying party or parties shall not
have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and
expenses of counsel shall be borne by the indemnifying parties;
provided, however, that the indemnifying party under subsection (a) or
(b) above shall only be liable for the legal expenses of one counsel
(in addition to any local counsel and to their own counsel) for all
indemnified parties in connection with any one action or separate but
similar actions in the same jurisdiction arising out of the same
general allegations or claims. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable
for any settlement of any claim or action effected without its prior
written consent; provided, however, that such consent was not
unreasonably withheld.
7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 6 is for any reason held to be unavailable from the indemnifying party
or parties or is insufficient to hold harmless a party indemnified thereunder,
the Issuer and the Guarantor, on the one hand, and the Initial Purchasers, on
the other hand, shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Issuer and
the Guarantor, any contribution received by the Issuer and the Guarantor from
persons, other than the Initial Purchaser, who may also be liable for
contribution, including persons who control the Issuer and the Guarantor within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act) to
which the Issuer, the Guarantor and the Initial Purchaser) may be subject, in
such proportion as is appropriate to reflect the relative benefits received by
the Issuer and the Guarantor, on one hand, and the Initial Purchasers, on the
other hand, from the offering of the Series A Notes or, if such allocation is
not permitted by applicable law or indemnification is not available as a result
of the
<PAGE> 20
indemnifying party not having received notice as provided in Section 6, in such
proportion as is appropriate to reflect not only the relative benefits referred
to above but also the relative fault of the Issuer and the Guarantor, on one
hand, and the Initial Purchasers, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Issuer and the
Guarantor, on one hand, and the Initial Purchasers, on the other hand, shall be
deemed to be in the same proportion as (i) the total proceeds from the offering
of Series A Notes (net of discounts but before deducting expenses) received by
the Issuer and the Guarantor and (ii) the discounts and commissions received by
the Initial Purchasers, respectively, in each case as set forth in the table on
the cover page of the Offering Memorandum. The relative fault of the Issuer
and the Guarantor, on one hand, and of the Initial Purchasers, on the other
hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Issuer, the Guarantor or the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Issuer, the Guarantor and the Initial
Purchasers agree that it would not be just and equitable if contribution
pursuant to this Section 7 were determined by pro rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 7, (i) in no case shall the Initial Purchasers be required to
contribute any amount in excess of the amount by which the discounts and
commissions applicable to the Series A Notes purchased by the Initial
Purchasers pursuant to this Agreement exceeds the amount of any damages which
the Initial Purchasers has otherwise been required to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 7,
(A) each person, if any, who controls the Initial Purchasers within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and (B) the
respective officers, directors, partners, employees, representatives and agents
of the Initial Purchasers or any controlling person shall have the same rights
to contribution as the Initial Purchasers, and each person, if any, who
controls either of the Issuer or the Guarantor within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as the Issuer and the Guarantor, subject in each case to clauses
(i) and (ii) of this Section 7. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 7, notify such
party or parties from whom contribution may be sought, but the failure to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 7 or otherwise, except to the extent that the party entitled to
contribution has been prejudiced in any material respect by such failure. No
party shall be liable for contribution with respect to any action or claim
settled without its prior written consent; provided, however, that such written
consent was not unreasonably withheld.
8. Conditions of Initial Purchasers' Obligations. The
obligations of the Initial Purchasers to purchase and pay for the Series A
Notes, as provided herein, shall be subject to the satisfaction of the
following conditions:
(a) All of the representations and warranties of the Issuer
and the Guarantor contained in this Agreement shall be true and
correct in all material respects on the date hereof and on the Closing
Date with the same force and effect as if made on and as of the date
hereof and the Closing Date, respectively. Each of the Issuer and the
Guarantor shall have performed or complied in all material respects
with all of the agreements herein contained and required to be
performed or complied with by it at or prior to the Closing Date.
<PAGE> 21
(b) The Offering Memorandum shall have been printed and
copies distributed to the Initial Purchasers on the day following the
date of this Agreement or at such later date and time as to which the
Initial Purchasers may agree, and no stop order suspending the
qualification or exemption from qualification of the Series A Notes in
any jurisdiction referred to in Section 4(e) shall have been issued
and no proceeding for that purpose shall have been commenced or shall
be pending or threatened.
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance of the Series A Notes; no action, suit or proceeding shall
have been commenced and be pending against or affecting or, to the
best knowledge of each of the Issuer and the Guarantor, threatened
against, the Issuer, the Guarantor or any of their respective
subsidiaries before any court or arbitrator or any governmental body,
agency or official that, if adversely determined, could reasonably be
expected to result in a Material Adverse Effect; and no stop order
shall have been issued preventing the use of the Offering Memorandum,
or any amendment or supplement thereto, or which could reasonably be
expected to have a Material Adverse Effect.
(d) Except as disclosed in the Offering Memorandum, from the
date hereof and the dates as of which information is given in the
Offering Memorandum until the Closing Date there shall not have been
any material adverse change, or any development that is reasonably
likely to result in a material adverse change, in the capital stock or
the long-term debt, or material increase in the short-term debt, of
the Issuer, the Guarantor or any of their respective subsidiaries from
that set forth in the Offering Memorandum, (ii) no dividend or
distribution of any kind shall have been declared, paid or made by the
Issuer, the Guarantor or any of their respective subsidiaries on any
class of its capital stock and (iii) other than pursuant to this
Agreement, none of the Issuer, the Guarantor or any of their
respective subsidiaries shall have incurred any liabilities or
obligations, direct or contingent, that are material, individually or
in the aggregate, to the Issuer, the Guarantor and their respective
subsidiaries, taken as a whole, and that are required to be disclosed
on a balance sheet or notes thereto in accordance with generally
accepted accounting principles and are not disclosed on the latest
balance sheet or notes thereto included in the Offering Memorandum.
Since the date hereof and since the dates as of which information is
given in the Offering Memorandum, there shall not have occurred any
material adverse change in the business, prospects, financial
condition or results of operation of the Issuer, the Guarantor and
their subsidiaries, taken as a whole.
(e) The Initial Purchasers shall have received a certificate,
dated the Closing Date, signed on behalf of the Issuer and the
Guarantor, in form and substance satisfactory to the Initial
Purchasers, confirming, as of the Closing Date, the matters set forth
in paragraphs (a), (b), (c) and (d) of this Section 8 and that, as of
the Closing Date, the obligations of the Issuer and the Guarantor to
be performed hereunder on or prior thereto have been duly performed in
all material respects.
(f) The Initial Purchasers shall have received on the Closing
Date an opinion, dated the Closing Date, in form and substance
satisfactory to the Initial Purchasers and counsel for the Initial
Purchasers, of Kramer, Levin, Naftalis & Frankel, counsel for the
Issuer and the Guarantor, to the effect set forth in Exhibit B hereto.
(g) The Initial Purchasers shall have received on the Closing
Date an opinion, dated the Closing Date, in form and substance
satisfactory to the Initial Purchasers and counsel for the
<PAGE> 22
Initial Purchasers, of Anthony R. Pierno, Esq., General Counsel of the
Issuer and the Guarantor, to the effect set forth in Exhibit C hereto.
(h) The Initial Purchasers shall have received on the Closing
Date an opinion with respect to compliance by the Issuer and the
Guarantor with Regulation G of the Federal Reserve Board, dated the
Closing Date, in form and substance satisfactory to the Initial
Purchasers and counsel for the Initial Purchasers, of Shearman &
Sterling, special counsel for the Issuer and the Guarantor, to the
effect set forth in Exhibit D hereto.
(i) At the time this Agreement is executed and at the Closing
Date, the Initial Purchasers shall have received from Arthur Andersen
& Co., LLP, independent public accountants, dated as of the date of
this Agreement and as of the Closing Date, customary comfort letters
addressed to the Initial Purchasers and in form and substance
satisfactory to the Initial Purchasers and counsel for the Initial
Purchasers with respect to the financial statements and certain
financial information of the Issuer, the Guarantor and their
respective subsidiaries contained in the Offering Memorandum. The
comfort letter delivered on the Closing Date shall recite that such
accountants have reviewed the financial statements for the Issuer, the
Guarantor, MGI and Kaiser for November 1996. On or prior to the
Closing Date, Arthur Andersen & Co., LLP shall have delivered to the
Initial Purchasers a signed audit opinion in the form set forth in the
Offering Memorandum pertaining to the Issuer and its consolidated
subsidiaries, without the legend appearing at the top of page F-3 of
the Preliminary Offering Memorandum.
(j) The Initial Purchasers shall have received an opinion,
dated the Closing Date, in form and substance reasonably satisfactory
to the Initial Purchasers, of Latham & Watkins, counsel for the
Initial Purchasers, covering such matters as are customarily covered
in such opinions.
(k) Latham & Watkins shall have been furnished with such
documents, in addition to those set forth above, as they may
reasonably require for the purpose of enabling them to review or pass
upon the matters referred to in this Section 8 and in order to
evidence the accuracy, completeness or satisfaction in all material
respects of any of the representations, warranties or conditions
herein contained.
(l) Prior to the Closing Date, the Issuer and the Guarantor
shall have furnished to the Initial Purchasers such further
information, certificates and documents as the Initial Purchasers may
reasonably request.
(m) The Issuer, the Guarantor and the Trustee shall have
entered into the Indenture and the Initial Purchasers shall have
received counterparts, conformed as executed, thereof.
(n) The Issuer and the Guarantor shall have entered into the
Registration Rights Agreement and the Initial Purchasers shall have
received counterparts, conformed as executed, thereof.
All opinions, certificates, letters and other documents
required by this Section 8 to be delivered by the Issuer and the Guarantor will
be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to the Initial Purchasers. The Issuer and
the Guarantor will furnish the Initial Purchasers with such conformed copies of
such opinions, certificates, letters and other documents as they shall
reasonably request.
<PAGE> 23
9. Initial Purchasers' Information. The Issuer and the Initial
Purchasers acknowledge that the statements with respect to the offering of the
Series A Notes set forth in the last paragraph of the cover page and the third
paragraph of text and the fifth and sixth sentences of the fourth paragraph of
text under the caption "Plan of Distribution" in such Offering Memorandum
constitute the only information furnished in writing by the Initial Purchasers
expressly for use in the Offering Memorandum.
10. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the Initial
Purchasers, the Issuer and the Guarantor contained in this Agreement, including
the agreements contained in Sections 4(f) and 11(d), the indemnity agreements
contained in Section 6 and the contribution agreements contained in Section 7,
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Initial Purchasers any controlling
person thereof or by or on behalf of the Issuer, the Guarantor or any
controlling person thereof, and shall survive delivery of and payment for the
Series A Notes to and by the Initial Purchasers. The representations contained
in Section 5 and the agreements contained in Sections 4(f), 6, 7 and 11(d)
shall survive the termination of this Agreement, including any termination
pursuant to Section 11.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective upon execution and
delivery of a counterpart hereof by each of the parties hereto.
(b) The Initial Purchasers shall have the right to terminate
this Agreement at any time prior to the Closing Date by notice to the
Issuer from the Initial Purchasers, without liability (other than with
respect to Sections 6 and 7) on the Initial Purchasers' part to the
Issuer or the Guarantor if, on or prior to such date (i) the Issuer or
the Guarantor shall have failed, refused or been unable to perform in
any material respect any agreement on their part to be performed
hereunder, (ii) any other condition to the obligations of the Initial
Purchasers hereunder as provided in Section 8 is not fulfilled when
and as required in any material respect, (iii) in the reasonable
judgment of the Initial Purchasers, any material adverse change shall
have occurred since the respective dates as of which information is
given in the Offering Memorandum in the condition (financial or
otherwise), business, properties, assets, liabilities, prospects, net
worth, results of operations or cash flows of the Issuer, the
Guarantor and their respective subsidiaries, taken as a whole, other
than as set forth in the Offering Memorandum, or (iv)(A) any domestic
or international event or act or occurrence has materially disrupted,
or in the reasonable opinion of the Initial Purchasers will in the
immediate future materially disrupt, the market for the Issuer's
securities or for securities in general; or (B) trading in securities
generally on the New York or American Stock Exchanges shall have been
suspended or materially limited, or minimum or maximum prices for
trading shall have been established, or maximum ranges for prices for
securities shall have been required, on such exchange, or by such
exchange or other regulatory body or governmental authority having
jurisdiction; or (C) a banking moratorium shall have been declared by
federal or state authorities, or a moratorium in foreign exchange
trading by major international banks or persons shall have been
declared; or (D) there is an outbreak or escalation of armed
hostilities involving the United States on or after the date hereof,
or if there has been a declaration by the United States of a national
emergency or war, the effect of which shall be, in the Initial
Purchasers' judgment, to make it inadvisable or impracticable to
proceed with the offering or delivery of the Series A Notes on the
terms and in the manner contemplated in the Offering Memorandum; or
(E) there shall have been such a material adverse change in general
economic, political or financial conditions or if the effect of
international conditions on the financial markets in the United States
shall be such as, in the Initial Purchasers' reasonable
<PAGE> 24
judgment, makes it inadvisable or impracticable to proceed with the
delivery of the Series A Notes as contemplated hereby.
(c) Any notice of termination pursuant to this Section 10
shall be by telephone, telex, telephonic facsimile, or telegraph,
confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to clause (iv) of
Section 10(b), in which case each party will be responsible for its
own expenses), or if the sale of the Series A Notes provided for
herein is not consummated because any condition to the obligations of
the Initial Purchasers set forth herein is not satisfied or because of
any refusal, inability or failure on the part of the Issuer and the
Guarantor to perform any agreement herein or comply with any provision
hereof, the Issuer and the Guarantor will reimburse the Initial
Purchasers for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of Initial Purchasers' counsel), incurred
by the Initial Purchasers in connection herewith.
12. Notice. All notices and other communications hereunder,
except as may be otherwise specifically provided herein, shall be in writing
and, if sent to the Initial Purchasers shall be mailed, delivered, or telexed,
telegraphed or telecopied and confirmed in writing to Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167, Attention: Corporate Finance
Department, telecopy number: (212) 272-3092, and to Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Corporate Finance Department, telecopy number (212) 892-7272, with a
copy to Latham & Watkins, 233 S. Wacker Drive, Suite 5800, Chicago, Illinois
60606, Attention: Mark A. Stegemoeller, Esq., telecopy number (312) 993-9767;
and if sent to the Issuer, shall be mailed, delivered or telexed, telegraphed
or telecopied and confirmed in writing to the Issuer at 5847 San Felipe, Suite
2600, Houston, Texas 77057, attention of Anthony R. Pierno, General Counsel,
telecopy number (713) 267-3702, with a copy to Kramer, Levin, Naftalis &
Frankel, 919 Third Avenue, New York, New York 10022, attention of Howard A.
Sobel, Esq., telecopy number (212) 715-8000.
13. Parties. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Initial Purchasers, the Issuer, the Guarantor
and the controlling persons and agents referred to in Sections 6 and 7, and
their respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its
capacity as such, of Notes from the Initial Purchasers.
14. Construction. This Agreement shall be construed in accordance
with the internal laws of the State of New York, without giving effect to
principles of conflict of laws. TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. Captions. The captions included in this Agreement are
included solely for convenience of reference and are not to be considered a
part of this Agreement.
16. Counterparts. This Agreement may be executed in various
counterparts which together shall constitute one and the same instrument.
[Signature page to follow]
<PAGE> 25
If the foregoing correctly sets forth the understanding among
the Initial Purchasers, the Issuer and the Guarantor please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
MAXXAM GROUP HOLDINGS INC.
By: /s/ RONALD L. REMAN
-----------------------------------
Name: Ronald L. Reman
Title: Vice President - Taxes
MAXXAM INC.
By: /s/ RONALD L. REMAN
-----------------------------------
Name: Ronald L. Reman
Title: Vice President - Taxes
Accepted and agreed to as of
the date first above written:
BEAR, STEARNS & CO. INC.
By: [Signature illegible]
------------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: /s/ JAMES T. SINGTON
------------------------------------
Name: James T. Sington
Title: Managing Director
S-1
<PAGE> 26
SCHEDULE A
Initial Purchasers Principal Amount
Bear, Stearns & Co. Inc. $ 78,000,000
Donaldson, Lufkin & Jenrette Securities Corporation $ 52,000,000
------------
Total $130,000,000
<PAGE> 27
EXHIBIT A
LIST OF SIGNIFICANT SUBSIDIARIES
MAXXAM Group Inc.
The Pacific Lumber Company
Scotia Pacific Holding Company
Salmon Creek Corporation
Britt Lumber Co., Inc.
Kaiser Aluminum Corporation
Kaiser Aluminum & Chemical Corporation
MCO Properties, Inc.
<PAGE> 28
EXHIBIT B
FORM OF OPINION OF KRAMER, LEVIN, NAFTALIS & FRANKEL
(i) Each of the Issuer and the Guarantor is a corporation validly
organized and existing and in good standing under the laws of Delaware.
(ii) Each of the Issuer and the Guarantor has the requisite
corporate power and authority to (A) own, lease and operate its properties and
to conduct its business as described in the Offering Memorandum and (B) to
perform its respective obligations under the Indenture, the Purchase Agreement
and the Registration Rights Agreement.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by each of the Issuer and the Guarantor.
(iv) The Indenture, the Registration Rights Agreement and the
Intercompany Note have each been duly authorized, executed and delivered by the
Issuer and the Guarantor, as applicable, and each constitutes a legal, valid
and binding agreement of the Issuer and the Guarantor, as applicable,
enforceable against the Issuer and the Guarantor in accordance with its
respective terms.
(v) The Series A Notes and Series B Notes have been duly
authorized by all necessary corporate action on the part of the Issuer and,
when executed and authenticated in accordance with the terms of the Indenture
and the Registration Rights Agreement and delivered against payment pursuant to
the Purchase Agreement and the Registration Rights Agreement (and the other
documents relating to the Exchange Offer), as applicable, will constitute
legal, valid and binding obligations of the Issuer, enforceable against the
Issuer in accordance with their respective terms and entitled to the benefits
of the Indenture.
(vi) The Intercompany Note has been duly and validly authorized by
the Guarantor and, when issued and delivered against payment therefor in
accordance with the terms thereof, will be the legal, valid and binding
obligation of the Guarantor, enforceable against the Guarantor in accordance
with its terms.
(vii) The Indenture constitutes a valid and legally binding
obligation of the Issuer and the Guarantor, enforceable against the Issuer and
the Guarantor, in accordance with its terms.
(viii) Upon (1) authentication and execution of the Series A Notes in
accordance with the terms of the Indenture, (2) delivery of the Series A Notes
against payment therefor in accordance with the terms of the Purchase Agreement
and (3) delivery to the Trustee in New York of the certificates representing
the Pledged MGI Shares listed on Exhibit D to the Indenture, registered in the
name of the Issuer, accompanied by stock powers duly endorsed in blank, the
Indenture will create a valid security interest in all of the Issuer's right,
title and interest in and to such Pledged MGI Shares in favor of the Trustee
under the Uniform Commercial Code as in effect on the date of the Indenture in
the State of New York (the "UCC"). Such security interest will be a perfected
security interest, free of any adverse claim (within the meaning of Section
8-302 of the UCC), in all of the Issuer's right, title and interest in and to
such Pledged MGI Shares that have been delivered to the Trustee (accompanied by
stock powers duly endorsed in blank) and are in the physical possession of the
Trustee in the State of New York for the benefit of the holders of the Series A
Notes under the Indenture. The opinion expressed in this paragraph (viii) is
based on the assumption, with your permission and without independent
investigation, (a) that
<PAGE> 29
the Trustee will have received such Pledged MGI Shares and that the purchasers
of Series A Notes on the date of execution of the Indenture are purchasing the
Series A Notes in good faith and without notice (as such term is used in
subsections (1), (3) and (4) of Section 8-304 of the UCC) of an adverse claim
within the meaning of Section 8-302 of the UCC with respect to such Pledged MGI
Shares, (b) that such Pledged MGI Shares will at all relevant times be in the
actual physical possession of the Trustee in the State of New York and (c) that
the Issuer is the record and beneficial owner of, and has all rights in and
title to, such Pledged MGI Shares.
(ix) Upon (1) authentication and execution of the Series A Notes in
accordance with the terms of the Indenture, (2) delivery of the Series A Notes
against payment therefor in accordance with the terms of the Purchase Agreement
and (3) delivery to the Trustee in New York of the Intercompany Note duly
endorsed in blank, the Indenture will create a valid security interest in all
of the Issuer's right, title and interest in and to the Intercompany Note in
favor of the Trustee under the UCC. Such security interest will be a perfected
security interest in the Intercompany Note that has been delivered to the
Trustee (duly endorsed in blank) and is in the physical possession of the
Trustee in the State of New York for the benefit of the holders of the Series A
Notes under the Indenture. The opinion expressed in this paragraph (ix) is
based on the assumption, with your permission and without independent
investigation, (a) that the Trustee will have received the Intercompany Note
and that the purchasers of Series A Notes on the date of execution of the
Indenture are purchasing the Series A Notes in good faith and without notice
(as such term is used in subsections (1), (3) and (4) of the Section 8-304 of
the UCC) of an adverse claim within the meaning of Section 8-302 of the UCC
with respect to such Intercompany Note, (b) that such Intercompany Note will at
all relevant times be in the actual physical possession of the Trustee in the
State of New York and (c) that the Issuer is the record and beneficial owner
of, and has all rights in and title to, such Intercompany Note.
(x) The Series A Notes, the Registration Rights Agreement, the
Indenture and the Intercompany Note conform, and the Series B Notes (when
issued in accordance with the terms of the Indenture and the Registration
Rights Agreement) will conform, in all material respects to the statements
relating thereto contained in the Offering Memorandum under the captions
"Description of Notes" and "Exchange Offer; Registration Rights."
(xi) Neither the Issuer nor the Guarantor is required to be
registered as an "investment company" under the Investment Company Act of 1940,
as amended.
(xii) To the best knowledge of such counsel, without any independent
inquiry, there are no legal or governmental proceedings pending or threatened
against the Issuer or the Guarantor or their respective subsidiaries, other
than legal or governmental proceedings referred to in the Offering Memorandum
and other claims, lawsuits and other proceedings which in the opinion of the
Issuer or the Guarantor should not have a material adverse effect on the
Issuer's or the Guarantor's consolidated financial position, results of
operations or liquidity.
(xiii) The terms of the Issuer's indebtedness described in the
Offering Memorandum under the caption "Description of Principal Indebtedness --
The Company -- MGI Notes" (other than financial, numerical, statistical or
accounting data included therein or omitted therefrom, as to which no opinion
is expressed) conform in all material respects to the statements relating
thereto under such caption.
(xiv) No authorization, approval, consent or order of any court or
governmental authority or agency is legally required to be obtained by the
Issuer or the Guarantor in connection with the issuance and sale by the Issuer
of the Series A Notes to you under the Purchase Agreement, except such as may
be required in connection with (A) the registration under the Act of the Series
A Notes or the Series B
<PAGE> 30
Notes pursuant to the Registration Rights Agreement, (B) the qualification of
the Indenture under the Trust Indenture Act in connection with the registration
of the Series A Notes or the Series B Notes pursuant to the Registration Rights
Agreement and (C) qualifications, authorizations, registrations or other
actions under state securities or Blue Sky laws or regulations or foreign laws
or regulations, as to which no opinion is expressed. The execution and
delivery by the Issuer and the Guarantor of the Operative Documents and the
consummation of the transactions contemplated therein by each of the Issuer and
the Guarantor do not violate the provisions of the Certificate of Incorporation
or By-laws of the Issuer or the Guarantor as in effect on the date of this
opinion, or, to the best of our knowledge, any applicable law or administrative
regulation (other than state securities or Blue Sky laws or regulations or
foreign laws or regulations, as to which no opinion is expressed) or
administrative or court decree (other than foreign administrative or court
decrees, as to which no opinion is expressed) entered against the Issuer or the
Guarantor, in each case as in effect on the date of this opinion. It is
understood in rendering the opinion expressed in this Paragraph (xiv) with
respect to any law or administrative regulation, we have assumed that none of
the Purchase Agreement, the Indenture, the Registration Rights Agreement, the
Preliminary Offering Memorandum (and any amendment or supplement thereto), the
Offering Memorandum (and any amendment or supplement thereto) or any other
information provided to the Initial Purchasers or any other person by or on
behalf of the Issuer or the Guarantor pursuant thereto or in connection
therewith contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(xv) Assuming that the only purchasers to whom the Initial
Purchasers initially resell the Series A Notes are (i) Qualified Institutional
Buyers and (ii) a limited number of Accredited Investors, and assuming the
accuracy of the representations and warranties of the Issuer and the Guarantor
contained in Section 5(a)(xxxiii) of the Purchase Agreement and compliance by
the Issuer and the Guarantor with the covenants in Sections 4(k) and 4(j) of
the Purchase Agreement, and assuming the accuracy of the Initial Purchasers'
covenants contained in Section 2 of the Purchase Agreement, and assuming that
the representations and warranties of the Accredited Investors or non-U.S
persons to whom the Initial Purchasers initially resell the Series A Notes as
specified in the Offering Memorandum under "Notice to Investors" and as set
forth in the certificates of such Accredited Investors or non-U.S. persons in
the form set forth in Annex A of the Offering Memorandum are true and correct
in all material respects as of the Closing Time, and assuming compliance in all
material respects by such Accredited Investors or non-U.S. persons, as the case
may be, with the agreements in such certificates, and assuming that the
certificates representing the Series A Notes bear the legends contemplated by
the Indenture and receipt by the purchasers to whom the Initial Purchasers
initially resell the Series A Notes of a copy of the Offering Memorandum at or
prior to the delivery of confirmation of sale, it is not necessary in
connection with the offer, sale and delivery of the Series A Notes to the
Initial Purchasers under, or in connection with the initial resale of such
Series A Notes by the Initial Purchasers as contemplated by, the Purchase
Agreement, to register the Series A Notes under the Act or to qualify the
Indenture under the 1939 Act.
(xvi) When the Series A Notes are issued and delivered pursuant to
the Purchase Agreement, such Series A Notes will not be of the same class
(within the meaning of Rule 144A of the Act) as securities of the Issuer or the
Guarantor which are listed on a national securities exchange registered under
Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer
quotation system.
(xvii) The Issuer is required to deliver the information relating to
the Issuer specified in Rule 144A(d)(4) in connection with any resale of the
Series A Notes.
Although such counsel has not undertaken to determine
independently the accuracy and completeness of the statements contained in the
Offering Memorandum, such counsel have obtained information as a result of
discussions and meetings with officers and other representatives of the Issuer
<PAGE> 31
and the Guarantor, as a result of discussions with representatives of the
independent public accountants for the Issuer and the Guarantor in connection
with the preparation of the Offering Memorandum, responses to various questions
raised by such counsel regarding the business of the Issuer and the Guarantor,
and the examination of other information and documents requested by such
counsel. Such counsel did not, however, undertake to determine independently,
and therefore, no responsibility, explicitly or implicitly, is assumed for the
accuracy and completeness or fairness of the statements contained in the
Offering Memorandum, and no assurance can be given that such counsel's
procedures described in the first sentence of this paragraph would necessarily
reveal matters of significance with respect to the following comments. Nothing
has come to the attention of such counsel during the course of the above
described procedures or otherwise that has caused such counsel to believe that
(A) the Offering Memorandum as of the date thereof and as of the date hereof
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE> 32
EXHIBIT C
FORM OF OPINION OF ANTHONY R. PIERNO, ESQ.,
GENERAL COUNSEL OF THE ISSUER AND THE GUARANTOR
(i) To the knowledge of such counsel, each of the Issuer and the
Guarantor is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, except where the failure to so qualify or be in good standing could
not reasonably be expected to have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Issuer, the Guarantor and their respective subsidiaries considered as
one enterprise.
(ii) The Series A Notes and the Series B Notes have been duly
authorized by all necessary corporate action and, when executed and
authenticated in accordance with the terms of the Indenture and the
Registration Rights Agreement and delivered against payment pursuant to the
Purchase Agreement and the Registration Rights Agreement (and the other
documents relating to the Exchange Offer), as applicable, will constitute
legal, valid and binding obligations of the Issuer, enforceable against the
Issuer in accordance with their terms and entitled to the benefits of the
Indenture, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization, fraudulent conveyance and similar laws
and court decisions relating to or affecting creditors' rights and remedies
generally and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or law).
(iii) To the knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Issuer or the
Guarantor, other than legal or governmental proceedings referred to in the
Offering Memorandum and other claims, lawsuits and other proceedings which, in
the opinion of the Issuer, should not have a material adverse effect on the
Issuer's consolidated financial position, results of operations, or liquidity.
(iv) Each Significant Subsidiary has been duly organized and is
validly existing and is in good standing under the laws of the jurisdiction of
its organization, has the requisite corporate, partnership or other
organizational power and authority to own, lease and operate its respective
properties and to conduct its business as described in the Offering Memorandum
and, to the knowledge of such counsel, is duly qualified as a foreign
corporation, partnership or other entity to transact business and, if
applicable, is in good standing in each jurisdiction in which such
qualification is required, except where the failure to so qualify and be in
good standing could not reasonably be expected to have, singly or in the
aggregate, a material adverse effect on the condition, financial or otherwise,
or the earnings, business affairs or business prospects of the Issuer and its
subsidiaries or the Guarantor and its subsidiaries, in each case taken as a
whole. To the knowledge of such counsel, all of the issued and outstanding
capital stock of each such Significant Subsidiary that is a corporation has
been duly authorized and validly issued, is fully paid and non-assessable and,
to the knowledge of such counsel, the shares of capital stock of each such
Significant Subsidiary owned by the Issuer or the Guarantor, as the case may
be, directly or through subsidiaries, are owned free and clear of any Lien,
except (i) as disclosed in the Offering Memorandum and (ii) for the pledge of
all or a portion of the capital stock of Kaiser Aluminum & Chemical Corporation
to BankAmerica Business Credit, Inc., as Agent under a credit agreement.
(v) To the knowledge of such counsel, all of the Kaiser Shares (a)
have been duly authorized, validly issued, and are fully paid and
nonassessable, (b) were not issued in violation of any preemptive
<PAGE> 33
or similar rights and (c) except as disclosed in the Offering Memorandum, are
owned by the Issuer free and clear of any security interest, claim, mortgage,
lien, limitation on voting rights or encumbrance.
(vi) To the knowledge of such counsel, (A) there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments to
which the Issuer or any Significant Subsidiary is a party or by which any of
them may be bound that would be required to be described in a Registration
Statement on Form S-1 under the Act that is not described in the Offering
Memorandum, and (B) no default exists in the due performance or observance of
any material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other instrument
so described, except for defaults which could not reasonably be expected to
have a material adverse effect on the condition, financial or otherwise, or on
the earnings, business affairs or business prospects of the Issuer and its
subsidiaries considered as one enterprise.
(vii) To the knowledge of such counsel, no authorization, approval,
consent or order of any court or governmental authority or agency is legally
required to be obtained by the Issuer or the Guarantor in connection with the
issuance and sale of the Series A Notes to the Initial Purchasers under the
Purchase Agreement, except such as may be required in connection with (A) the
registration under the Act of the Series A Notes or the Series B Notes pursuant
to the Registration Rights Agreement, (B) the qualification of the Indenture
under the Trust Indenture Act in connection with the registration of the Series
A Notes or the Series B Notes pursuant to the Registration Rights Agreement,
and (C) qualifications, authorizations, registrations or other actions under
state securities or Blue Sky laws or regulations or foreign laws or
regulations, as to which no opinion is expressed. The execution and delivery
by the Issuer and the Guarantor, as applicable, of the Operative Documents and
the consummation by the Issuer and the Guarantor, as applicable, of the
transactions contemplated therein do not, to the knowledge of such counsel,
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any Lien, charge or encumbrance upon any property or
assets of the Issuer, the Guarantor or any of the Significant Subsidiaries
pursuant to any contract, indenture, mortgage, loan agreement, note, lease or
other instrument referred to in the Offering Memorandum to which the Issuer,
the Guarantor or any of the Significant Subsidiaries is a party or by which any
of them may be bound, nor does such action conflict with or constitute a breach
of, or default under, or result in any violation of the provisions of the
charter or by-laws, or partnership agreement, or other organizational
documents, as the case may be, of the Issuer, the Guarantor or any of the
Significant Subsidiaries, as in effect on the date of this opinion, or, to the
knowledge of such counsel, any applicable law or administrative regulation
(other than state securities or Blue Sky laws or regulations or foreign laws or
regulations, as to which no opinion is expressed) or administrative or court
decree entered against or applicable to the Issuer, the Guarantor or any of the
Significant Subsidiaries as of the date of this opinion. It is understood that
in rendering the opinion expressed in this paragraph with respect to any law or
administrative regulation, the assumption has been made that none of the
Purchase Agreement, the Registration Rights Agreement, the Preliminary Offering
Memorandum (and any amendment or supplement thereto), the Offering Memorandum
(and any amendment or supplement thereto) or any other information provided to
the Initial Purchasers or any other person by the Issuer or the Guarantor
pursuant thereto or in connection therewith contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(viii) To the knowledge of such counsel, all of the issued and
outstanding shares of capital stock of the Issuer have been duly authorized and
validly issued and are fully paid and non-assessable.
(ix) To the knowledge of such counsel, the descriptions of
documents and legal proceedings contained in the Offering Memorandum under
"Business - Pacific Lumber Operations - Regulatory and
<PAGE> 34
Environmental Matters," "Legal Proceedings" and "Description of Principal
Indebtedness" (other than financial, numerical, statistical or accounting data
included therein or omitted therefrom, and other than the description under the
caption "Description of Principal Indebtedness -- The Company -- MGI Notes," as
to which no opinion is expressed) conform in all material respects to the terms
of the applicable documents or the relevant legal proceedings, as the case may
be.
(x) Except for Kaiser's PRIDES and the Guarantor's Class A
Non-Cumulative Participating Convertible Preferred Stock, and except as
disclosed or referred to in the Offering Memorandum or pursuant to existing
option or employee or director benefit plans, to the knowledge of such counsel,
there are no outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or entitling
any person to purchase or otherwise to acquire any shares of the capital stock
of, or other ownership interest in the Issuer, the Guarantor or any Significant
Subsidiary.
(xi) The authorized capital stock of Kaiser, a Delaware
corporation, consists of 20,000,000 shares of preferred stock and 100,000,000
shares of common stock (8,673,850 shares of preferred stock (all of which are
PRIDES convertible preferred stock) and 71,646,789 shares of common stock being
issued and outstanding as of December 17, 1996); the authorized capital stock
of the Issuer consists of 3,000 shares of common stock (1,000 shares of which
being currently issued and outstanding); the Guarantor, a Delaware
corporation, owns of record and beneficially 100% of the issued and outstanding
shares of capital stock of the Issuer and beneficially owns 62% of the issued
and outstanding shares of common stock of Kaiser (after giving pro forma effect
to the conversion of each share of Kaiser's outstanding PRIDES convertible
preferred stock into one share of common stock of Kaiser); Kaiser owns of
record and beneficially 100% of the issued and outstanding shares of common
stock of Kaiser Aluminum & Chemical Corporation, a Delaware corporation; the
Guarantor owns of record and beneficially 100% of the issued and outstanding
common stock of MCO Properties Inc., a Delaware corporation; the Issuer owns of
record and beneficially 100% of the issued and outstanding common stock of
MAXXAM Group Inc. and upon transfer thereof from the Guarantor on or before the
Closing Date, will own of record 27,938,250 shares, or approximately 34.7%
(after giving pro forma effect to the conversion of each share of Kaiser's
outstanding PRIDES convertible preferred stock into one share of common stock
of Kaiser) of common stock of Kaiser; MAXXAM Group Inc. owns of record and
beneficially 100% of the issued and outstanding shares of The Pacific Lumber
Company, a Delaware corporation ("Pacific Lumber"), and of Britt Lumber Co.,
Inc., a California corporation; Pacific Lumber owns of record and beneficially
100% of the issued and outstanding shares of each of Salmon Creek Corporation,
a Delaware corporation, and Scotia Pacific Holding Company, a special purpose
Delaware corporation. With respect to the foregoing, such counsel notes that
on November 15, 1996, Kaiser filed a shelf registration statement on Form S-3
relating to preferred stock, depository shares, common stock and warrants.
Although neither such counsel nor the attorneys under such
counsel's supervision (the "Legal Staff") have undertaken to determine
independently the accuracy or completeness of the statements contained in the
Offering Memorandum, such counsel and the Legal Staff have obtained information
as a result of discussions and meetings with officers and other representatives
of the Issuer and the Guarantor, as a result of discussions with
representatives of the independent public accountants for the Issuer and the
Guarantor in connection with the preparation of the Offering Memorandum,
responses to various questions raised by such counsel and the Legal Staff
regarding the business of the Issuer and the Guarantor, and the examination of
other information and documents requested by such counsel and the Legal Staff.
Such counsel did not, however, undertake to determine independently, and
therefore, no responsibility, explicitly or implicitly, is assumed for the
accuracy and completeness or fairness of the statements contained in the
Offering Memorandum, and no assurance can be given that such counsel's
procedures described in the first sentence of this paragraph would necessarily
reveal matters of
<PAGE> 35
significance with respect to the following comments. Nothing has come to the
attention of such counsel or the Legal Staff during the course of the above
described procedures or otherwise that has caused such counsel or any member of
the Legal Staff to believe that the Offering Memorandum as of the date thereof
and as of the date hereof contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
<PAGE> 36
EXHIBIT D
FORM OF OPINION OF SHEARMAN & STERLING
(i) The Series A Notes will not constitute purpose credit under
Regulations G and U.
(ii) Purchasers of the Series A Notes that are not registered
lenders pursuant to Regulation G at the time of purchase of the Series A Notes
will not be required to register as such lenders with the Board of Governors of
the Federal Reserve System.
(iii) Upon the exchange of any Series A Notes for Series B Notes,
the Series B Notes will not constitute an "extension of credit" under
Regulations G, T, U and X (12 C.F.R. Parts 207, 220, 221, 224, respectively
(1996)) (the "Margin Regulations"), and, on and after such exchange, the
proceeds of the Series A Notes so exchanged may be used to buy and carry margin
stock without complying with the maximum loan value requirements of the Margin
Regulations. In addition, upon any transfer of the Series A Notes in a
transaction registered under the Securities Act, such Series A Notes will not
constitute an "extension of credit" and, from and after such transfer, the
proceeds of such Series A Notes may be used to buy and carry margin stock
without complying with the maximum loan value requirements of the Margin
Regulations.
<PAGE> 1
EXHIBIT 4.3
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated December 23, 1996
between
MAXXAM GROUP HOLDINGS INC.
MAXXAM INC.
and
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
================================================================================
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 23, 1996 between MAXXAM Group Holdings Inc., a
Delaware corporation (the "Company"), and MAXXAM Inc., a Delaware corporation
(the "Guarantor"), on the one hand, and Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Purchasers"), on the other.
This Agreement is made pursuant to the Purchase Agreement dated
December 17, 1996 among the Company, the Guarantor and the Purchasers (the
"Purchase Agreement"), which provides for, among other things, the sale by the
Company to the Purchasers of an aggregate of $130,000,000 principal amount of
the Company's 12% Senior Secured Notes due 2003 (the "Securities"). In order
to induce the Purchasers to enter into the Purchase Agreement, the Company and
the Guarantor have agreed to provide to the Purchasers and certain of their
direct and indirect transferees the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is a condition to the
closing of the transactions contemplated by the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following capitalized
defined terms shall have the following meanings:
"Additional Interest" shall have the meaning set forth in Section 2(e)
hereof.
"Advice" shall have the meaning set forth in the last paragraph of
Section 3 hereof.
"Applicable Period" shall have the meaning set forth in Section 2(b)
hereof.
"Business Day" shall mean a day that is not a Saturday, a Sunday, or a
day on which banking institutions in New York, New York are required to be
closed.
"Company" shall have the meaning set forth in the preamble to this
Agreement and also includes the Company's successors and permitted assigns.
"Depository" shall mean The Depository Trust Company, or any other
depository appointed by the Company; provided, however, that such depository
must have an address in the Borough of Manhattan, in The City of New York.
"Effectiveness Period" shall have the meaning set forth in Section
2(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, and the rules and regulations of the SEC promulgated
thereunder.
"Exchange Notes" shall mean the 12% Senior Secured Notes due 2003,
Series B, issued by the Company under the Indenture containing terms
substantially identical to the Securities (except that (i)
1
<PAGE> 3
interest thereon shall accrue from the last date to which interest was paid on
the Securities or, if no such interest has been paid, from the Issue Date, (ii)
the provisions for Additional Interest thereon shall be eliminated (except as
contemplated by Section 2(e)(v) hereof with respect to Exchange Notes held by
Participating Broker-Dealers) and (iii) the transfer restrictions thereon shall
be eliminated) to be offered to Holders in exchange for Securities pursuant to
the Exchange Offer.
"Exchange Offer" shall mean the exchange offer by the Company of
Exchange Notes for Securities pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the
Securities Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean any registration
statement of the Company which covers any of the Exchange Notes or Registrable
Securities pursuant to the provisions of this Agreement, and all amendments and
supplements to any such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference, or deemed to be
incorporated by reference, therein.
"Exchange Period" shall have the meaning set forth in Section 2(a)(B)
hereof.
"Guarantor" shall have the meaning set forth in the Indenture.
"Holder" shall mean the Purchasers, for so long as they own any
Registrable Securities, and each of their successors, assigns and direct and
indirect transferees who become registered owners of Registrable Securities
under the Indenture.
"Indenture" shall mean the Indenture relating to the Securities dated
as of December 23, 1996 among the Company, as issuer, the Guarantor and First
Bank National Association, as trustee, as the same may be amended or
supplemented from time to time in accordance with the terms thereof.
"Inspectors" shall have the meaning set forth in Section 3(n) hereof.
"Issue Date" shall mean December 23, 1996.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Registrable Securities.
"Participating Broker-Dealer" shall have the meaning set forth in
Section 3(s) hereof.
"Person" shall mean an individual, trustee, partnership, corporation,
trust or unincorporated organization, or a government or agency or political
subdivision thereof, or other legal entity.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by a Shelf Registration Statement, and by all
other amendments and
2
<PAGE> 4
supplements to a prospectus, including post-effective amendments, and in each
case including all material incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the preamble
to this Agreement.
"Purchasers" shall have the meaning set forth in the preamble to this
Agreement.
"Records" shall have the meaning set forth in Section 3(n) hereof.
"Registrable Securities" shall mean the Securities; provided, however,
that Securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to such Securities for the resale thereof,
shall have been declared effective under the Securities Act and such Securities
shall have been disposed of pursuant to such Registration Statement, (ii) such
Securities shall have been sold to the public in compliance with Rule 144 (or
any similar provision then in force) under the Securities Act, (iii) such
Securities shall have ceased to be outstanding or (iv) with respect to the
Securities, such Securities have been exchanged for Exchange Notes upon
consummation of the Exchange Offer and are thereafter freely tradeable by the
holder thereof not an affiliate of the Company or the Guarantor.
"Registration Default" shall have the meaning set forth in Section
2(e) hereof.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company and the Guarantor with this
Agreement, including without limitation: (i) all SEC, stock exchange or
National Association of Securities Dealers, Inc. (the "NASD") registration and
filing fees, including, if applicable, the fees and expenses of any "qualified
independent underwriter" (and its counsel) that is required to be retained by
any Holder in accordance with the rules and regulations of the NASD, (ii) all
fees and expenses incurred in connection with compliance with state securities
or blue sky laws (including reasonable fees and disbursements of counsel for
any underwriters or Holders in connection with blue sky qualification of any of
the Exchange Notes or Registrable Securities) and compliance with the rules of
the NASD, (iii) all expenses of any Persons retained with the consent of the
Company in preparing or assisting in preparing, word processing, printing and
distributing any Registration Statement, any Prospectus and any amendments or
supplements thereto, and in preparing or assisting in preparing, printing and
distributing any underwriting agreements, securities sales agreements and other
documents relating to the performance of and compliance with this Agreement,
(iv) all rating agency fees, (v) the fees and disbursements of counsel for the
Company and the Guarantor and of the independent certified public accountants
of the Company and the Guarantor, including the expenses of any "cold comfort"
letters required by or incident to such performance and compliance, (vi) the
fees and expenses of the Trustee, and any exchange agent or custodian, (vii)
all fees and expenses incurred in connection with the listing, if any, of any
of the Registrable Securities or Exchange Notes on any securities exchange or
exchanges, and (viii) any fees and disbursements of any underwriter customarily
required to be paid by issuers or sellers of securities and the reasonable fees
and expenses of any special experts, in each case, retained by the Company or
any Guarantor in connection with any Registration Statement, but excluding fees
of counsel to the underwriters and underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Registrable
Securities by a Holder.
"Registration Statement" shall mean each of the Exchange Offer
Registration Statement and the Shelf Registration Statement, as applicable.
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<PAGE> 5
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall have the meaning set forth in the preamble to this
Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended
from time to time and the rules and regulations of the SEC promulgated
thereunder.
"Shelf Registration" shall mean a registration effected pursuant to
Section 2(b) hereof.
"Shelf Registration Event" shall have the meaning set forth in Section
2(b) hereof.
"Shelf Registration Event Date" shall have the meaning set forth in
Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 2(b) hereof
which covers Registrable Securities in respect of which a Shelf Registration
Statement is required to be filed pursuant to this Agreement on an appropriate
form pursuant to Rule 415 under the Securities Act, or any similar rule that
may be adopted by the SEC, and all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference or deemed to be incorporated by reference
therein.
"TIA" shall mean the Trust Indenture Act of 1939, as amended.
"Trustee" shall mean the trustee with respect to the Securities under
the Indenture.
2. Registration Under the Securities Act.
a. Exchange Offer. To the extent not prohibited by any law
or applicable interpretations of the staff of the SEC, the Company and
the Guarantor shall, for the benefit of the Holders, at the Company's
expense, (i) cause to be filed with the SEC within 60 days after the
Issue Date an Exchange Offer Registration Statement on an appropriate
form under the Securities Act covering the offer by the Company and
the Guarantor to the Holders to exchange any and all of the
Registrable Securities for a like principal amount of Exchange Notes
(the "Exchange Offer"), (ii) use their reasonable best efforts to have
such Exchange Offer Registration Statement declared effective under
the Securities Act by the SEC within 150 days after the Issue Date,
(iii) use their reasonable best efforts to have such Exchange Offer
Registration Statement remain effective until the closing of the
Exchange Offer and (iv) use their reasonable best efforts to cause the
Exchange Offer to be consummated within 180 days after the Issue Date.
The Exchange Notes will be issued under the Indenture. Upon the
effectiveness of the Exchange Offer Registration Statement, the
Company and the Guarantor shall as soon as practicable commence the
Exchange Offer, it being the objective of such Exchange Offer to
enable each Holder eligible and electing to exchange Registrable
Securities for Exchange Notes (assuming that such Holder is not an
affiliate of the Company or any Guarantor within the meaning of Rule
405 under the Securities Act and is not a broker-dealer tendering
Registrable Securities acquired directly from the Company or any
Guarantor or any affiliate of the Company or any Guarantor for its own
account, and has no arrangements or understandings with any Person to
participate in the Exchange Offer for the
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<PAGE> 6
purpose of distributing (within the meaning of the Securities Act) the
Exchange Notes) to transfer such Exchange Notes from and after their
receipt, subject to the prospectus delivery requirements of
Participating Broker-Dealers as contemplated by Section 3(s) hereof,
without any limitations or restrictions under the Securities Act or
under state securities or blue sky laws.
In connection with the Exchange Offer, the Company and the
Guarantor shall:
(A) mail to each Holder a copy of the Prospectus forming
part of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(B) keep the Exchange Offer open for acceptance for a
period of not less than 30 days after the date notice thereof is
mailed to the Holders (or longer if required by applicable law) (such
period referred to herein as the "Exchange Period");
(C) utilize the services of a Depository for the
Exchange Offer;
(D) permit Holders to withdraw tendered Securities at
any time prior to the close of business, New York time, on the last
Business Day of the Exchange Period, by sending to the institution
specified in the notice, a telegram, telex, facsimile transmission or
letter setting forth the name of such Holder, the principal amount of
Securities delivered for exchange, and a statement that such Holder is
withdrawing his election to have such Securities exchanged;
(E) notify each Holder that any Security not tendered
will remain outstanding and continue to accrue interest, but will not
retain any rights under this Agreement (except as otherwise provided
herein); and
(F) otherwise comply in all material respects with all
applicable laws relating to the Exchange Offer.
As soon as practicable after the close of the Exchange Offer
the Company shall (i) accept for exchange all Securities or portions
thereof tendered and not validly withdrawn pursuant to the Exchange
Offer and (ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Securities or portions thereof so accepted for
exchange by the Company, and issue, and cause the Trustee under the
Indenture to promptly authenticate and deliver to each Holder, a new
Exchange Note equal in principal amount to the principal amount of the
Securities surrendered by such Holder.
To the extent not prohibited by any law or applicable
interpretations of the staff of the SEC, the Company and the Guarantor
shall use their reasonable best efforts to complete the Exchange Offer
as provided above, and shall comply with the applicable requirements
of the Securities Act, the Exchange Act and other applicable laws in
connection with the Exchange Offer. The Exchange Offer shall not be
subject to any conditions, other than that the Exchange Offer does not
violate any law or applicable interpretations of the staff of the SEC.
Each Holder who wishes to exchange such Registrable Securities for
Exchange Notes in the Exchange Offer will be required to make certain
customary representations in connection therewith, including
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<PAGE> 7
representations that (i) it is not an affiliate of the Company or the
Guarantor, (ii) it is not a broker-dealer tendering Securities
acquired directly from the Company or the Guarantor or an affiliate of
the Company or the Guarantor, (iii) any Exchange Notes to be received
by it will be acquired in the ordinary course of its business, (iv) it
has no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the
Exchange Notes in violation of the Securities Act and (v) it is not
acting on behalf of any person who could not truthfully make the
foregoing representations.
Upon consummation of the Exchange Offer in accordance with
this Section 2(a), the provisions of this Agreement shall continue to
apply, mutatis mutandis, solely with respect to Registrable Securities
as to which Section 2(b)(iii) or Section 2(b)(iv) hereof is applicable
and to Exchange Notes held by Participating Broker-Dealers, and the
Company shall have no further obligation to register Registrable
Securities (other than Securities as to which Section 2(b)(iii) or
Section 2(b)(iv) hereof is applicable) pursuant to Section 2(b)
hereof.
b. Shelf Registration. In the event that (i) the
Company reasonably determines, after conferring with counsel (which
may be in-house counsel), that the Exchange Offer Registration
provided in Section 2(a) hereof is not available or may not be
consummated as soon as practicable after the last day of the Exchange
Period because it would violate any law or applicable interpretations
of the staff of the SEC, (ii) the Exchange Offer is not for any reason
consummated or capable of being consummated within 210 days after the
Issue Date, (iii) any Holder notifies the Company in writing within 15
days after receipt of the prospectus forming part of the Exchange
Offer Registration Statement required to be mailed to each Holder as
set forth above that (A) in the opinion of nationally-recognized
counsel for such Holder (or counsel acting for or by reference to all
Holders), due to a change in law or SEC staff interpretation which
change occurs subsequent to the date hereof, such Holder is not
entitled to participate in the Exchange Offer or (B) in the opinion of
nationally-recognized counsel for such Holder (or counsel acting for
or by reference to all Holders), due to a change in law or SEC staff
interpretation which change occurs subsequent to the date hereof, such
Holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and (I)
the prospectus contained in the Exchange Offer Registration Statement
is not appropriate or available for such resales by such Holder and
(II) such prospectus is not promptly amended or modified in order to
be suitable for use in connection with resales by such Holder or (iv)
upon the request of either Purchaser with respect to any Registrable
Securities which it acquired directly from the Company or the
Guarantor or an affiliate of the Company or the Guarantor and, with
respect to other Registrable Securities held by it, if such Purchaser
is not permitted, in the opinion of nationally-recognized counsel to
such Purchaser, pursuant to any law or applicable interpretations of
the staff of the SEC, to participate in the Exchange Offer and thereby
receive securities that are freely tradeable without restriction
(other than a prospectus delivery requirement) under the Securities
Act and applicable blue sky or state securities laws (any of the
events specified in (i)- (iv) being a "Shelf Registration Event" and
the date of occurrence thereof, the "Shelf Registration Event Date"),
the Company and the Guarantor shall, at the Company's expense, cause
to be filed as promptly as practicable after such Shelf Registration
Event Date, as the case may be, and, in any event, in the case of (i),
(iii) and (iv) above, within 180 days after the Issue Date, and in the
case of (ii) above, as soon as reasonably practicable after the 210
day period set forth therein (notwithstanding in the case of (ii)
above, the Company shall remain liable for the increases in
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<PAGE> 8
interest set forth in Section 2(e) until the effectiveness of the
Shelf Registration Statement), a Shelf Registration Statement
providing for the sale by the Holders of any and all of the
Registrable Securities, and shall use their reasonable best efforts to
have such Shelf Registration Statement declared effective by the SEC
as soon as reasonably practicable after its filing with the SEC. No
Holder may include any of its Registrable Securities in any Shelf
Registration pursuant to this Agreement unless and until such Holder
furnishes to the Company in writing such information as the Company
may, after conferring with counsel with regard to information relating
to Holders that would be required by the SEC to be included in such
Shelf Registration Statement or Prospectus included therein,
reasonably request for inclusion in any Shelf Registration Statement
or Prospectus included therein. Each Holder as to which any Shelf
Registration is being effected agrees to furnish to the Company all
information with respect to such Holder necessary to make the
information previously furnished to the Company by such Holder not
materially misleading.
The Company and the Guarantor agree to use their reasonable
best efforts to keep the Shelf Registration Statement continuously
effective for a period until the earlier of 36 months following the
Issue Date (or for such longer period if extended pursuant to the last
sentence of Section 3 hereof (the "Applicable Period")) or for such
shorter period which will terminate when all of the Registrable
Securities covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement or otherwise cease to be
Registrable Securities (the "Effectiveness Period"). The Company and
the Guarantor shall not permit any securities other than Registrable
Securities to be included in the Shelf Registration. The Company and
the Guarantor further agree, if necessary, to supplement or amend the
Shelf Registration Statement, if required by the rules, regulations or
instructions applicable to the registration form used by the Company
for such Shelf Registration Statement or by the Securities Act or by
any other rules and regulations thereunder for shelf registrations,
and the Company agrees to furnish to the Holders copies of any such
supplement or amendment promptly after its being used or filed with
the SEC.
c. Expenses. The Company and the Guarantor shall pay
all Registration Expenses in connection with the registration pursuant
to Section 2(a) or 2(b) hereof and will pay the reasonable fees and
disbursements of any one counsel designated in writing by the Majority
Holders to act as counsel for the Holders in connection with a Shelf
Registration Statement. Except as provided herein, each Holder shall
pay all expenses of its counsel, underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or
disposition of such Holder's Registrable Securities pursuant to the
Shelf Registration Statement.
d. Effective Registration Statement. An Exchange Offer
Registration Statement pursuant to Section 2(a) hereof or a Shelf
Registration Statement pursuant to Section 2(b) hereof will not be
deemed to have become effective unless it has been declared effective
by the SEC; provided, however, that if, after it has been declared
effective, the effectiveness of a Registration Statement is interfered
with by any stop order, injunction or other order or requirement of
the SEC or any other governmental agency or court, such Registration
Statement will be deemed not to have been effective during the period
of such interference. The Company and the Guarantor will be deemed
not to have used their reasonable best efforts to cause the Exchange
Offer Registration Statement or the Shelf Registration Statement, as
the case may be, to become, or to remain, effective during the
requisite period if they voluntarily take any action that would result
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<PAGE> 9
in any such Registration Statement not being declared effective or in
the Holders covered thereby not being able to exchange or offer and
sell such Registrable Securities during that period unless (i) such
action is required by applicable law or interpretations of the staff
of the SEC or (ii) such action is taken by them in good faith and for
valid business reasons (not including avoidance of their obligations
hereunder).
e. Additional Interest. In the event that (i) the
Exchange Offer Registration Statement has not been filed with the SEC
on or prior to the 60th calendar day after the Issue Date, (ii) the
Exchange Offer Registration Statement is not declared effective on or
prior to the 150th calendar day after the Issue Date, (iii) the
Exchange Offer is not consummated on or prior to the 180th calendar
day after the Issue Date, (iv) a Shelf Registration Event shall have
occurred and the Shelf Registration Statement is not declared
effective on or prior to the 210th calendar day after the Issue Date
or (v) the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective but thereafter ceases to
be effective or usable during the period specified herein (each such
event referred to in (i) through (v), a "Registration Default"), the
interest rate borne by the Securities or Exchange Notes which are
Registrable Securities shall be increased (the "Additional Interest")
by one-quarter of one percent (0.25%) per annum for the first 90-day
period immediately after the first such Registration Default. The
interest rate borne by such Registrable Securities shall increase by
an additional one-quarter of one percent (0.25%) per annum for each
subsequent 90-day period, in each case, until all Registration
Defaults have been cured (provided that in the event the Company has
abandoned the Exchange Offer because of the circumstances described in
Section 2(b)(i) or Section 2(b)(ii) hereof, then the effectiveness of
the Shelf Registration Statement shall be deemed a cure of such
Registration Defaults); provided, that the aggregate increase in such
interest rate pursuant to this Section 2(e) will in no event exceed
one percent (1.00%) per annum. Notwithstanding any of the above, it
is understood that Additional Interest pursuant to a Registration
Default under clause (v) above, as such clause (v) relates to an
Exchange Offer Registration Statement, shall only be payable to a
Participating Broker-Dealer that holds Registrable Securities subject
to a prospectus delivery requirement; provided, that such a
Registration Default may only be deemed to be occurring during the
period following the 150th day after the Issue Date until, subject to
an extension of the relevant 180-day period pursuant to the last
sentence of Section 3 hereof, 180 days after the consummation of the
Exchange Offer. Following the cure of all Registration Defaults, the
interest rate borne by such Registrable Securities will be reduced to
the original interest rate.
The Company shall notify the Trustee within three Business
Days after each and every date on which a Registration Default occurs.
Additional Interest shall be paid by depositing with the Trustee, in
trust, for the benefit of the Holders on or before the applicable
semiannual interest payment date, immediately available funds in sums
sufficient to pay the Additional Interest then due. The Additional
Interest due shall be payable on each interest payment date to the
record Holder entitled to receive the interest payment to be paid on
such date as set forth in the Indenture. Each obligation to pay
Additional Interest shall be deemed to accrue from and including the
day following the applicable Registration Default.
f. Specific Enforcement. Without limiting the remedies
available to the Purchasers and the Holders, the Company and the
Guarantor acknowledge that any failure by the Company
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<PAGE> 10
and the Guarantor to comply with their obligations under Section 2(a)
and Section 2(b) hereof may result in material irreparable injury to
the Purchasers or the Holders for which there is no adequate remedy at
law, that it would not be possible to measure damages for such
injuries precisely and that, in the event of any such failure, the
Purchasers or any Holder may obtain such relief as may be required to
specifically enforce the Company's and the Guarantor's obligations
under Section 2(a) and Section 2(b) hereof.
3. Registration Procedures. In connection with the
obligations of the Company and the Guarantor with respect to the Registration
Statements pursuant to Sections 2(a) and 2(b) hereof, the Company and the
Guarantor shall:
a. prepare and file with the SEC a Registration
Statement or Registration Statements as prescribed by Sections 2(a)
and 2(b) hereof within the relevant time period specified in Section 2
hereof on the appropriate form under the Securities Act, which form
(i) shall be selected by the Company, (ii) shall, in the case of a
Shelf Registration, be available for the sale of the relevant
Registrable Securities by the Holders thereof and (iii) shall comply
as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the
SEC to be filed therewith; and use their reasonable best efforts to
cause such Registration Statement to become effective and remain
effective in accordance with Section 2 hereof; provided, however, that
if (1) such filing is pursuant to Section 2(b), or (2) a Prospectus
contained in an Exchange Offer Registration Statement filed pursuant
to Section 2(a) is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Notes,
before filing any Registration Statement or Prospectus or any
amendments or supplements thereto, the Company shall furnish to and
afford the Holders of the Registrable Securities covered by the
relevant Shelf Registration Statement and each such Participating
Broker-Dealer covered by such Registration Statement, as the case may
be, their counsel and the managing underwriters, if any, a reasonable
opportunity to review copies of all such documents (including copies
of any documents to be incorporated by reference therein and all
exhibits thereto) proposed to be filed (at least five Business Days
prior to such filing). The Company and the Guarantor shall not file
any Registration Statement or Prospectus or any amendments or
supplements thereto in respect of which the Holders must be afforded,
pursuant to this Section 3(a), an opportunity to review prior to the
filing thereof, if the Majority Holders or such Participating
Broker-Dealer, as the case may be, their counsel or the managing
underwriters, if any, shall reasonably and promptly object in writing;
b. prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
Effectiveness Period or the Applicable Period, as the case may be; and
cause each Prospectus to be supplemented by any required prospectus
supplement and as so supplemented to be filed pursuant to Rule 424 (or
any similar provision then in force) under the Securities Act, and
comply with the provisions of the Securities Act, the Exchange Act and
the rules and regulations promulgated thereunder applicable to it with
respect to the disposition of all securities covered by such
Registration Statement during the Effectiveness Period or the
Applicable Period, as the case may be, in accordance with the intended
method or methods of distribution by the selling Holders thereof
described in this Agreement (including sales by any Participating
Broker-Dealer);
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<PAGE> 11
c. in the case of a Shelf Registration, (i) notify each
Holder covered by such Shelf Registration Statement, at least 10 days
prior to filing, that a Shelf Registration Statement with respect to
the Registrable Securities is being filed and advising such Holder
that the distribution of Registrable Securities will be made in
accordance with the method selected by the Majority Holders; and (ii)
furnish to each Holder covered by such Shelf Registration Statement
and to each underwriter of an underwritten offering of Registrable
Securities, if any, without charge, as many copies of each Prospectus,
including each preliminary Prospectus, and any amendment or supplement
thereto and such other documents as such Holder or underwriter may
reasonably request, in order to facilitate the public sale or other
disposition of the Registrable Securities (it being understood that
the Company and the Guarantor hereby consent to the use of the
Prospectus or any amendment or supplement thereto by each of the
selling Holders in accordance with the terms hereof, in connection
with the offering and sale of the Registrable Securities covered by
the Prospectus or any amendment or supplement thereto);
d. in the case of a Shelf Registration, use their
reasonable best efforts to register or qualify the Registrable
Securities under all applicable state securities or "blue sky" laws of
such jurisdictions by the time the applicable Registration Statement
is declared effective by the SEC as any Holder covered by a
Registration Statement and each underwriter of an underwritten
offering of Registrable Securities shall reasonably request in advance
of such date of effectiveness, and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
Holder and underwriter to consummate the disposition in each such
jurisdiction of such Registrable Securities owned by such Holder;
provided, however, that the Company and the Guarantor shall not be
obligated to qualify as foreign corporations in any jurisdiction in
which they are not so qualified or to take any action that would
subject them to general consent to service of process in any
jurisdiction in which they are not now so subject or to subject them
to general taxation in any such jurisdiction in which they are not now
so subject;
e. in the case of (1) a Shelf Registration or (2)
Participating Broker-Dealers who have notified the Company that they
will be utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(s) hereof, promptly
notify each Holder covered by such Shelf Registration Statement, or
such Participating Broker-Dealers, as the case may be, their counsel
and the managing underwriters, if any, and promptly confirm such
notice in writing (i) when a Registration Statement has become
effective and when any post-effective amendments and supplements
thereto become effective, (ii) of any request by the SEC or any state
securities authority for amendments and supplements to a Registration
Statement or Prospectus or for additional information after the
Registration Statement has become effective, (iii) of the issuance by
the SEC or any state securities authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if the Company or the Guarantor
receives any notification with respect to the suspension of the
qualification of the Registrable Securities or the Exchange Notes to
be sold by any Participating Broker-Dealer for offer or sale in any
jurisdiction or the initiation of any proceeding for such purpose, (v)
of the happening of any event or the failure of any event to occur or
the discovery of any facts, during the period a Registration Statement
is effective which makes any statement made in such Registration
Statement or the related Prospectus untrue in any material respect or
which causes such Registration Statement or Prospectus to omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were
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<PAGE> 12
made, not misleading and (vi) of the Company's reasonable
determination that a post-effective amendment to the Registration
Statement would be appropriate;
f. make every reasonable effort to obtain the withdrawal
of any order suspending the effectiveness of a Registration Statement
at the earliest possible moment;
g. in the case of a Shelf Registration, furnish to each
Holder covered by such Shelf Registration Statement, without charge,
at least one conformed copy of each Registration Statement relating to
such Shelf Registration and any post-effective amendment thereto
(without documents incorporated therein by reference or exhibits
thereto, unless requested);
h. in the case of a Shelf Registration, cooperate with
the selling Holders to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and cause such Registrable Securities
to be in such denominations (consistent with the provisions of the
Indenture) and registered in such names as the Holders or the
underwriters may reasonably request at least two Business Days prior
to the closing of any sale of Registrable Securities;
i. in the case of a Shelf Registration or an Exchange
Offer Registration, upon the occurrence of any circumstance
contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi)
hereof, use their reasonable best efforts to prepare a supplement or
post-effective amendment to a Registration Statement or the related
Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities, such Prospectus will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; and
to notify each Holder to suspend use of the Prospectus as promptly as
practicable after the occurrence of such an event, and each Holder
hereby agrees to suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or
omission;
j. in the case of a Shelf Registration, a reasonable
time prior to the filing of any document which is to be incorporated
by reference into a Registration Statement or a Prospectus after the
initial filing of a Registration Statement, provide a reasonable
number of copies of such document to the Holders covered by such Shelf
Registration Statement; and make such of the representatives of the
Company and the Guarantor as shall be reasonably requested by such
Holders or the Purchasers on behalf of such Holders available for
discussion of such document;
k. obtain a CUSIP number for all Exchange Notes or
Registrable Securities, as the case may be, not later than the
effective date of a Registration Statement, and provide the Trustee
with printed certificates for the Exchange Notes or the Registrable
Securities, as the case may be, in a form eligible for deposit with
the Depository;
l. cause the Indenture to be qualified under the TIA, in
connection with the registration of the Exchange Notes or Registrable
Securities, as the case may be, cooperate with the Trustee and the
Holders to effect such changes to the Indenture as may be required for
the Indenture to be so qualified in accordance with the terms of the
TIA and execute, and use their
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<PAGE> 13
reasonable best efforts to cause the Trustee to execute, all documents
as may be required to effect such changes and all other forms and
documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner;
m. in the case of a Shelf Registration, enter into such
agreements as are customary in shelf registrations and take all such
other appropriate actions as are reasonably requested in order to
expedite or facilitate the registration or the disposition of such
Registrable Securities, and in such connection, whether or not an
underwriting agreement is entered into and whether or not the
registration is an underwritten registration: (i) make such
representations and warranties to Holders of such Registrable
Securities and the underwriters (if any), with respect to the business
of the Company and its subsidiaries as then conducted or proposed to
be conducted and the Registration Statement, Prospectus and documents,
if any, incorporated or deemed to be incorporated by reference
therein, in each case, as are customarily made by issuers in shelf
registrations to underwriters and selling securityholders, and confirm
the same if and when requested; (ii) obtain opinions of counsel to the
Company and the Guarantor and updates thereof in form and substance
reasonably satisfactory to the managing underwriters (if any) and the
Holders of a majority in principal amount of the Registrable
Securities being sold, addressed to each Holder and the underwriters
(if any) covering the matters customarily covered in opinions
requested in shelf registrations and such other matters as may be
reasonably requested by such Holders and underwriters; (iii) obtain
"cold comfort" letters and updates thereof in form and substance
reasonably satisfactory to the recipients from the independent
certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of
the Company or of any business acquired by the Company for which
financial statements and financial data are, or are required to be,
included in the Registration Statement), addressed to the selling
Holders and to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with shelf registrations and such
other matters as reasonably requested by such selling Holders and
underwriters (including, without limitation, negative assurance with
respect to any interim financial period included in the Registration
Statement or the Prospectus and with respect to any period after the
date of the latest balance sheet included therein and up to five days
prior to the closing date in respect of any such sale); and (iv) if an
underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those
set forth in Section 4 hereof (or such other provisions and procedures
acceptable to selling Holders of a majority in aggregate principal
amount of Registrable Securities covered by such Registration
Statement and the managing underwriters or agents) with respect to all
parties to be indemnified pursuant to Section 4 hereof (including,
without limitation, such underwriters and Holders). The above shall
be done at each closing under such underwriting agreement, or as and
to the extent required thereunder;
n. if (1) a Shelf Registration is filed pursuant to
Section 2(b) or (2) a Prospectus contained in an Exchange Offer
Registration Statement filed pursuant to Section 2(a) is required to
be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the applicable
period, make available for inspection by any selling Holder being
sold, or each such Participating Broker-Dealer, as the case may be,
any underwriter participating in any such disposition of Registrable
Securities, if any, and any attorney, accountant or other agent
retained by any such selling Holder or each such Participating
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<PAGE> 14
Broker-Dealer, as the case may be (collectively, the "Inspectors"), at
the offices where normally kept, during reasonable business hours, all
financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries (collectively, the
"Records") as shall be reasonably necessary to enable the Inspectors
to exercise any applicable due diligence responsibilities, and cause
the officers, directors and employees of the Company and its
subsidiaries to supply all relevant information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement. Records which the Company determines, in good
faith, to be confidential and any Records which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors
unless (i) the disclosure of such Records is necessary in the opinion
of nationally-recognized counsel to avoid or correct a misstatement or
omission in such Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court
of competent jurisdiction or (iii) the information in such Records has
been made generally available to the public. Each selling Holder and
each Participating Broker Dealer will be required to agree that
information obtained by it as a result of such inspections shall be
deemed confidential and shall not be used by it as the basis for any
market transactions in any securities other than for the purposes
expressly set forth in this Agreement unless and until such is made
generally available to the public. Each selling Holder and each such
Participating Broker Dealer will be required to further agree that it
will, upon learning that disclosure of such Records is sought in a
court of competent jurisdiction, give prompt notice to the Company and
allow the Company at its expense to undertake appropriate action to
prevent disclosure of the Records deemed confidential (it being
understood that the Holders shall at all times be unrestricted in
complying with any order of any court or tribunal of competent
jurisdiction);
o. comply with all applicable rules and regulations of
the SEC and make generally available to the Company's security holders
earnings statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule
promulgated under the Securities Act) no later than 45 days after the
end of any 12-month period (or 90 days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of
any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm commitment or best efforts underwritten
offering and (ii) if not sold to underwriters in such an offering,
commencing on the first day of the first fiscal quarter of the Company
after the effective date of a Registration Statement, which statements
shall cover said 12-month periods;
p. if an Exchange Offer is to be consummated, upon
delivery of the Registrable Securities by Holders to the Company (or
to such other Person as directed by the Company) in exchange for the
Exchange Notes, the Company shall mark, or cause to be marked, on such
Registrable Securities delivered by such Holders that such Registrable
Securities are being cancelled in exchange for the Exchange Notes; in
no event shall such Registrable Securities be marked as paid or
otherwise satisfied;
q. cooperate with each seller of Registrable Securities
covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be
made with the NASD;
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<PAGE> 15
r. use their reasonable best efforts to take all other
steps necessary to effect the registration of the Registrable
Securities covered by a Registration Statement contemplated hereby;
s. in the case of the Exchange Offer Registration
Statement (i) include in the Exchange Offer Registration Statement a
section entitled "Plan of Distribution," which section shall be
reasonably acceptable to the Purchasers or another representative of
the Participating Broker-Dealers, and which shall contain a summary
statement of the positions taken or policies made by the staff of the
SEC with respect to the potential "underwriter" status of any
broker-dealer (a "Participating Broker-Dealer") that holds Registrable
Securities acquired for its own account as a result of market-making
activities or other trading activities and that will be the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Notes to be received by such broker-dealer in the Exchange Offer,
whether such positions or policies have been publicly disseminated by
the staff of the SEC or such positions or policies, in the reasonable
judgment of the Purchasers or such other representative, represent the
prevailing views of the staff of the SEC, including a statement that
any such broker-dealer who receives Exchange Notes for Registrable
Securities pursuant to the Exchange Offer may be deemed a statutory
underwriter and must deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange
Notes, (ii) furnish to each Participating Broker-Dealer who has
delivered to the Company the notice referred to in Section 3(e),
without charge, as many copies of each Prospectus included in the
Exchange Offer Registration Statement, including any preliminary
prospectus, and any amendment or supplement thereto, as such
Participating Broker-Dealer may reasonably request (it being
understood that the Company hereby consents to the use of the
Prospectus forming part of the Exchange Offer Registration Statement
or any amendment or supplement thereto, by any Person subject to the
prospectus delivery requirements of the SEC, including all
Participating Broker-Dealers, in connection with the sale or transfer
of the Exchange Notes covered by the Prospectus or any amendment or
supplement thereto), (iii) use their reasonable best efforts to keep
the Exchange Offer Registration Statement effective and to amend and
supplement the Prospectus contained therein in order to permit such
Prospectus to be lawfully delivered by all Persons subject to the
prospectus delivery requirements of the Securities Act for such period
of time as such Persons must comply with such requirements in order to
resell the Exchange Notes; provided, however, that such period shall
not be required to exceed 180 days (or such longer period if such
180-day period is extended pursuant to the last sentence of Section 3
hereof) and (iv) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to
participate in the Exchange Offer: (1) the following provision or a
provision substantially similar thereto:
"If the exchange offeree is a broker-dealer holding
Registrable Securities acquired for its own account as a
result of market-making activities or other trading
activities, it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any
resale of Exchange Notes received in respect of such
Registrable Securities pursuant to the Exchange Offer";
and (2) a statement to the effect that by a broker-dealer making the
acknowledgement described in clause (1) and by delivering a Prospectus
in connection with the exchange of Registrable
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<PAGE> 16
Securities, the broker-dealer will not be deemed to admit that it is
an underwriter within the meaning of the Securities Act.
The Company may require each seller of Registrable Securities
as to which any registration is being effected to furnish to the Company such
information regarding such seller and the proposed distribution of such
Registrable Securities, as the Company may from time to time reasonably request
in writing. The Company may exclude from such registration the Registrable
Securities of any seller who fails to furnish such information within a
reasonable time after receiving such request.
In the case of (1) a Shelf Registration Statement or (2)
Participating Broker-Dealers who have notified the Company that they will be
utilizing the Prospectus contained in the Exchange Offer Registration Statement
as provided in Section 3(s) hereof, each Holder agrees that, upon receipt of
any notice from the Company of the happening of any event of the kind described
in Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to a
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof or until
it is advised in writing (the "Advice") by the Company that the use of the
applicable Prospectus may be resumed, and, if so directed by the Company, such
Holder will deliver to the Company (at the Company's expense) all copies in
such Holder's possession, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Registrable Securities or
Exchange Notes, as the case may be, current at the time of receipt of such
notice. If the Company or the Guarantor shall give any such notice to suspend
the disposition of Registrable Securities or Exchange Notes, as the case may
be, pursuant to a Registration Statement or the Prospectus that is then
available pursuant to the Exchange Offer Registration Statement, the Company
and the Guarantor shall file and use their reasonable best efforts to have
declared effective (if an amendment) as soon as practicable an amendment or
supplement to the Registration Statement or such Prospectus, and shall extend
the period during which such Registration Statement shall be maintained
effective (or such Prospectus is required to be made available) pursuant to
this Agreement by the number of days in the period from and including the date
of the giving of such notice to and including the date when the Company shall
have made available to the Holders (x) copies of the supplemented or amended
Prospectus necessary to resume such dispositions or (y) the Advice.
4. Indemnification and Contribution. a. The Company and
the Guarantor shall indemnify and hold harmless each Purchaser, each Holder,
each Participating Broker-Dealer, each underwriter who participates in an
offering of Registrable Securities, their respective affiliates, each Person,
if any, who controls any of such parties (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) and each of their
respective directors, officers, employees and agents, as follows:
(a) from and against any and all loss, liability, claim,
damage and expense whatsoever, joint or several, as incurred, arising
out of any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment
thereto), covering Registrable Securities or Exchange Notes, including
all documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a
15
<PAGE> 17
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(b) from and against any and all loss, liability, claim,
damage and expense whatsoever, joint or several, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation,
or any investigation or proceeding by any court or governmental agency
or body, commenced or threatened, or of any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 4(d) below)
any such settlement is effected with the prior written consent of the
Company; and
(c) from and against any and all expenses whatsoever, as
incurred (including the fees and disbursements of counsel chosen by
the Purchasers, such Holder, such Participating Broker-Dealer or any
underwriter (except to the extent otherwise provided in Section 4(c)
hereof)), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
court or governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, to the extent that any
such expense is not paid under subparagraph (i) or (ii) of this
Section 4(a);
provided, however, that this Section 4(a) shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished in writing to the
Company by either Purchaser, any Holder, any Participating Broker-Dealer or any
underwriter with respect to either Purchaser, Holder, Participating
Broker-Dealer or underwriter, as the case may be, expressly for use in the
Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto).
b. Each Holder agrees, severally and not jointly, to
indemnify and hold harmless the Company and the Guarantor, each Purchaser, each
underwriter who participates in an offering of Registrable Securities and the
other selling Holders and each of their respective directors, officers
(including each officer of the Company who signed the Registration Statement),
employees and agents and each Person, if any, who controls the Company and the
Guarantor, either Purchaser, any underwriter or any other selling Holder
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act), from and against any and all loss, liability, claim, damage and
expense whatsoever described in the indemnity contained in Section 4(a) hereof,
as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement (or
any amendment thereto) or any Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such selling Holder with respect to such Holder expressly for
use in the Registration Statement (or any amendment thereto), or any such
Prospectus (or any amendment or supplement thereto); provided, however, that,
in the case of Shelf Registration Statement, no such Holder shall be liable for
any claims hereunder in excess of the amount of net proceeds received by such
Holder from the sale of Registrable Securities pursuant to such Shelf
Registration Statement.
c. Each indemnified party shall give notice as promptly
as reasonably practicable
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<PAGE> 18
to each indemnifying party of any action commenced against it in respect of
which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder except to the extent it is materially prejudiced as a result thereof
and in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. An indemnifying party
may participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (expect with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution is sought under this Section 4 (whether or not
the indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
d. If at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that, unless such
indemnifying party is contesting the payment of such fees and expenses in good
faith, it shall be liable for any settlement of the nature contemplated by
Section 4(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 90 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received written
notice of all of the terms of such settlement at least 60 days prior to such
settlement being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior to the
date of such settlement.
e. If the indemnification provided for in Section 4(a)
or (b) hereof is for any reason unavailable to or insufficient to hold harmless
an indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Guarantor on the one hand and the Holder, the Participating Broker-Dealer or
Purchaser, as the case may be, on the other hand from the offering of the
Securities pursuant to the Purchase Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the Guarantor
on the one hand and of the Holder, the Participating Broker-Dealer or
Purchaser, as the case may be, on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative fault of the Company and the Guarantor on the one
hand and the Holder, the Participating Broker-Dealer or the Purchasers, as the
case may be, on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
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<PAGE> 19
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Guarantor, or by the Holder, the
Participating Broker-Dealer or the Purchasers, as the case may be, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company, the Guarantor and the Holders and the Purchasers
agree that it would not be just and equitable if contribution pursuant to this
Section 4(e) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 4(e).
No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 4(e), each Person, if any, who
controls a Holder, a Purchaser or a Participating Broker-Dealer (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
shall have the same rights to contribution as such other Person, and each
director of the Company and the Guarantor, each officer of the Company who
signed the Registration Statement, and each Person, if any, who controls the
Company and the Guarantor (within the meaning of Section 15 of the Securities
act or Section 20 of the Exchange Act) shall have the same rights to
contribution as the Company and the Guarantor.
5. Participation in Underwritten Registrations. No
Holder may participate in any underwritten registration hereunder unless such
Holder (a) agrees to sell such Holder's Registrable Securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents reasonably required under the
terms of such underwriting arrangements.
6. Selection of Underwriters. The Holders covered by
the Shelf Registration Statement who desire to do so may sell the securities
covered by such Shelf Registration in an underwritten offering. In any such
underwritten offering, the underwriter or underwriters and manager or managers
that will administer the offering will be selected by the Holders of a majority
in aggregate principal amount of the Registrable Securities included in such
offering; provided, however, that such underwriters and managers must be
reasonably satisfactory to the Company.
7. Miscellaneous.
a. Rule 144 and Rule 144A. For so long as the Company
or any Guarantor is subject to the reporting requirements of Section 13 or 15
of the Exchange Act and any Registrable Securities remain outstanding, the
Company and the Guarantor covenant that they will comply with their reporting
obligations under the Securities Act and Section 13(a) or 15(d) of the Exchange
Act and the rules and regulations adopted by the SEC thereunder, that if they
cease to be required to file periodic reports thereunder, they will upon the
request of any Holder (a) make publicly available such information as is
necessary to permit sales pursuant to Rule 144 under the Securities Act, (b)
deliver such information to a prospective purchaser as is necessary to permit
sales pursuant to Rule 144A under the Securities Act,
18
<PAGE> 20
and (c) take such further action that is reasonable in the circumstances, in
each case, to the extent required from time to time to enable such Holder to
sell its Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by (i) Rule 144 under the
Securities Act, as such rule may be amended from time to time, (ii) Rule 144A
under the Securities Act, as such rule may be amended from time to time, or
(iii) any similar rules or regulations hereafter adopted by the SEC. For so
long as the Company or the Guarantor is subject to the reporting requirements
of Section 13 or 15 of the Exchange Act and any Registrable Securities remain
outstanding, upon the request of any Holder, the Company and the Guarantor will
deliver to such Holder a written statement as to whether they have complied
with such requirements.
b. No Inconsistent Agreements. The Company and the
Guarantor have not entered into nor will the Company and the Guarantor on or
after the date of this Agreement enter into any agreement which may require any
action which would violate the rights granted to the Holders in this Agreement
or otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and do not under any
circumstances require any action which would violate the rights granted to the
holders of the Company's other issued and outstanding securities under any
other agreements in effect on the date hereof.
c. Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, otherwise than with
the prior written consent of (A) the Holders of not less than a majority in
aggregate principal amount of the then outstanding Registrable Securities and
(B) in circumstances that would adversely affect the Participating Broker-
Dealers, the Participating Broker-Dealers holding not less than a majority in
aggregate principal amount of the Exchange Notes held by all Participating
Broker-Dealers; provided, however, that Section 4 and this Section 7(c) may not
be amended, modified or supplemented without the prior written consent of each
Holder and each Participating Broker-Dealer (including any Person who was a
Holder or Participating Broker-Dealer of Registrable Securities or Exchange
Notes, as the case may be, disposed of pursuant to any Registration Statement).
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders may be given by Holders of at least a
majority in aggregate principal amount of the Registrable Securities being sold
by such Holders pursuant to such Registration Statement.
d. Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, telecopier, or any courier guaranteeing
overnight delivery (i) if to a Holder, at the most current address given by
such Holder to the Company by means of a notice given in accordance with the
provisions of this Section 7(d), which address initially is, with respect to
the Purchasers, the address set forth in the Purchase Agreement; and (ii) if to
the Company or the Guarantor, initially at the Company's address set forth in
the Purchase Agreement to the attention of General Counsel and thereafter at
such other address, notice of which is given in accordance with the provisions
of this Section 7(d), with a copy to Kramer, Levin, Naftalis & Frankel, 919
Third Avenue, New York, New York 10022, Attention: Howard A. Sobel, Esq.
All such notices and communications shall be deemed to have
been duly given: at the
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time delivered by hand, if personally delivered; five Business Days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt is acknowledged, if telecopied; and on the next Business
Day, if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications
shall be concurrently delivered by the Person giving the same to the Trustee,
at the address specified in the Indenture.
e. Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors, assigns and transferees
of the Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Registrable Securities in violation of the terms of the Purchase Agreement or
the Indenture. If any transferee of any Holder shall acquire Registrable
Securities, in any manner, whether by operation of law or otherwise, such
Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities, such Person
shall be conclusively deemed to have agreed to be bound by and to perform all
of the terms and provisions of this Agreement and such Person shall be entitled
to receive the benefits hereof.
f. Third Party Beneficiary. Each of the Purchasers
shall be a third party beneficiary of the agreements made hereunder between the
Company and the Guarantor, on the one hand, and the Holders, on the other hand,
and shall have the right to enforce such agreements directly to the extent it
deems such enforcement necessary or advisable to protect its rights or the
rights of Holders hereunder.
g. Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
h. Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
i. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO
HAVE BEEN MADE IN THE STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF
THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. EACH OF
THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT.
j. Severability. In the event that any one or more of
the provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
k. Securities Held by the Company or Its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable
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<PAGE> 22
Securities held by the Company or the Guarantor or their affiliates (as such
term is defined in Rule 405 under the Securities Act) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
l. Entire Agreement. This Agreement, together with the
Purchase Agreement and the Indenture, is intended by the parties as a final and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein and any and all
prior oral or written agreements, representations, or warranties, contracts,
understandings, correspondence, conversation and memoranda between the
Purchasers on the one hand and the Company and the Guarantor on the other, or
between or among any agents, representatives, parents, subsidiaries,
affiliates, predecessors in interest or successors in interest with respect to
the subject matter hereof and thereof are merged herein and replaced hereby.
[Signature Page Follows]
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<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
MAXXAM GROUP HOLDINGS INC.
By: /s/ BYRON L. WADE
-------------------------------------
Name: Byron L. Wade
Title: Vice President
MAXXAM INC.
By: /s/ ANTHONY R. PIERNO
-------------------------------------
Name: Anthony R. Pierno
Title: Senior Vice President
S-1
<PAGE> 24
Confirmed and accepted as of
the date first above
written:
BEAR, STEARNS & CO. INC.
By: [Signature Illegible]
------------------------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: /s/ JAMES T. SINGTON
------------------------------------------------
Name James T. Sington
Title: Managing Director
S-2
<PAGE> 1
EXHIBIT 10.1
MAXXAM INC.
TAX ALLOCATION AGREEMENT WITH
MAXXAM GROUP HOLDINGS INC.
OF DECEMBER 23, 1996
This Agreement is made as of December 23, 1996, between MAXXAM Inc.
("Parent"), a Delaware corporation, and MAXXAM Group Holdings Inc. ("MGHI"), a
Delaware corporation.
WHEREAS, MGHI is currently a member of the affiliated group within the
meaning of Section 1504(a) of The Internal Revenue Code of 1986, as amended
(the "Code") of which Parent is the common parent corporation (the "Group");
and
WHEREAS, pursuant to a tax allocation agreement dated as of May 21,
1988 (the "May 88 Agreement"), Parent and certain of its then existing
subsidiaries, including MAXXAM Group Inc. ("MGI"), a Delaware Corporation, The
Pacific Lumber Company ("Pacific Lumber"), a Delaware corporation, MAXXAM
Properties Inc. ("MPI"), a Delaware corporation, and Yosuba Farms ("Yosuba"), a
California corporation, established a Tax Allocation Method, as hereinafter
defined. As used herein, the term "Tax Allocation Method" shall mean a method
for allocating the consolidated tax liability of a group among its members and
for reimbursing the group's parent for the payment of such liability; and
WHEREAS, pursuant to a tax allocation agreement dated as of July 3,
1990, Parent and Britt Lumber Co., Inc. ("Britt"), a
California corporation, established a Tax Allocation Method (the "Britt
Agreement"); and
WHEREAS, pursuant to a tax allocation agreement dated as of March 23,
1993, Parent and Pacific Lumber amended the May 88 Agreement with respect to
Pacific Lumber and established a Tax
1
<PAGE> 2
Allocation Method with respect to certain Pacific Lumber subsidiaries (the "PL
Agreement"); and
WHEREAS, on December 23, 1996, MGHI issued $130,000,000 of its Senior
Secured Notes due 2003 (the "Notes"); and
WHEREAS, from time to time, MGHI or any of its Restricted Subsidiaries
(as hereinafter defined) may incorporate a Restricted Subsidiary which may
become a member of the Group; and
WHEREAS, pursuant to a tax allocation agreement dated as of August 4,
1993, Parent and MGI further amended the May 88 Agreement solely with respect
to MGI such that MGI and its subsidiaries, excluding Salmon Creek Corporation,
will ultimately pay Parent Federal income taxes as if they filed on a
consolidated basis with respect to taxable periods beginning on or after August
4, 1993 (the "Revised MGI Agreement").
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements and covenants contained herein, Parent and MGHI hereby agree as
follows:
1. MGHI shall cause any Restricted Subsidiary, at the time that
it becomes a member of the Group, to agree to be included in Parent's
consolidated Federal income tax return for all taxable years during which such
Restricted Subsidiary is eligible to be included in Parent's consolidated
Federal income tax return. Restricted Subsidiary shall mean a Restricted
Subsidiary as defined in the indenture dated as of December 23, 1996 by and
between MGHI, as Issuer, Parent, as Guarantor, and First Bank National
Association, as Trustee, for the Notes (the "Indenture").
2. MGHI shall cause any Restricted Subsidiary which becomes a member of
the Group to execute any consents and other documents as are necessary in
connection therewith.
2
<PAGE> 3
3. Except with respect to any payments to Parent that are required under
this Agreement, the May 88 Agreement, the Britt Agreement, the PL Agreement or
the Revised MGI Agreement, Parent shall indemnify MGHI and each MGHI Subgroup
Subsidiary (as hereinafter defined) and hold them harmless against all Federal
income tax liabilities relating to taxable years of MGHI and each MGHI Subgroup
Subsidiary during which MGHI and each MGHI Subgroup Subsidiary is or was a
member of the Group.
4. (a) For purposes of making the computations described herein, MGHI
and all lower (with respect to MGHI) tier entities, including
newly-formed Restricted Subsidiaries but excluding Salmon
Creek Corporation, (individually and collectively referred to
as "MGHI Subgroup Subsidiary" or "MGHI Subgroup Subsidiaries")
in which MGHI has direct or indirect ownership shall be
treated as an affiliated group of corporations (the "MGHI
Subgroup"), the common parent of which is MGHI, provided,
however, that the MGHI Subgroup shall only include any MGHI
Subgroup Subsidiary to the extent that such MGHI Subgroup
Subsidiary meets the test of affiliation under Section 1504 of
the Code as it would apply to the MGHI Subgroup. MGHI and
each MGHI Subgroup Subsidiary shall sometimes be referred to
as "MGHI Subgroup Members".
(b) The tax liability required of MGHI shall be equal to MGHI's
Tentative Tax Liability (as hereinafter defined) minus MGI's
Tentative Tax Liability (as determined under the Revised MGI
Agreement).
(c) The computation of the Federal income tax liability of MGHI
shall take into account the taxable income, loss, credits and
other tax attributes of each MGHI Subgroup Subsidiary as if
MGHI filed a consolidated return with
3
<PAGE> 4
each MGHI Subgroup Subsidiary (taking into account all
applicable limitations under the Code) ("MGHI's Tentative Tax
Liability"). In calculating such liability, all intercompany
transactions between MGHI Subgroup Members shall be treated
consistent with the consolidated return Treasury Regulations.
(d) To the extent that MGHI's Tentative Tax Liability is less than
MGI's Tentative Tax Liability, Parent shall pay the amount of
such difference to MGHI.
(e) For purposes of Section 4(c) of this Agreement, any net
operating loss carryforwards available to the MGI Subgroup on
the date hereof under the Revised MGI Agreement shall be
available to offset income of the MGHI Subgroup in the same
manner as under the Revised MGI Agreement.
(f) If the calculation of MGHI's Tentative Tax Liability in
Section 4(c) results in a net operating loss that can be
carried back to a prior taxable period or periods with respect
to which MGHI made payments to Parent under this Agreement,
then, in that event, Parent shall pay MGHI an amount equal to
the tax refund to which MGHI would have been entitled
consistent with this Section 4.
(g) If the calculation of MGHI's Tentative Tax Liability in
Section 4(c) results in a net operating loss that cannot be
carried back pursuant to the preceding subsection (f), then,
in that event, such net operating loss shall be a net
operating loss carryover to be used by the MGHI Subgroup in
computing its Federal income tax liability pursuant to the
preceding subsection (c) for future taxable periods, under the
law applicable to net operating loss carryovers in general.
4
<PAGE> 5
5. This Agreement shall be effective for the Group's 1996 taxable period
and all subsequent taxable periods until the earliest date on which (i) MGHI
ceases to be a member of the Group, (ii) the Group no longer remains in
existence within the meaning of Treasury Regulation Section 1.1502-75(a), or
(iii) the Group is no longer eligible to file, or is no longer eligible to join
in the filing of, a consolidated return for Federal income tax purposes. Prior
to or upon termination of this Agreement, the parties may enter into a new
agreement, consistent with the provisions of this Agreement, taking into
account, among other things, to the extent applicable, the manner in which MGHI
ceased to be a member of the Group, the reason that the Group is no longer in
existence, or the reason that Parent and/or MGHI can no longer join in the same
consolidated return.
6. This Agreement is entered into by the parties solely in recognition of
the mutual benefits resulting from filing a Federal (or state or other local)
consolidated or combined tax return. The respective amounts of tax liability
allocated to each MGHI Subgroup Member for purposes of computing such
corporation's earnings and profits for Federal (or any other) income tax
purposes may differ from those determined in accordance with this Agreement.
Furthermore, any amount treated for Federal (or state or other local) income
tax purposes, on account of such a difference, as a contribution to capital or
a distribution with respect to stock, or a combination thereof, as the case may
be, shall be treated as a contribution to capital, a distribution with respect
to stock, or a combination thereof, solely for Federal (or state or other
local) income tax purposes.
7. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
5
<PAGE> 6
IN WITNESS WHEREOF, Parent and MGHI have executed this Agreement by
authorized officers thereof as of the date first above written.
MAXXAM Inc.
By: /s/ RONALD L. REMAN
-----------------------------------
Name: Ronald L. Reman
Title: Vice President - Taxes
MAXXAM Group Holdings Inc.
By: /s/ TERRY FREEMAN
-----------------------------------
Name: Terry Freeman
Title: Assistant Controller
<PAGE> 1
EXHIBIT 10.8
NON-NEGOTIABLE INTERCOMPANY NOTE
December 23, 1996
FOR VALUE RECEIVED, the undersigned, MAXXAM Inc., a Delaware
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of
MAXXAM Group Holdings Inc., a Delaware corporation (the "Payee"),
the principal sum of ONE HUNDRED TWENTY-FIVE MILLION DOLLARS
($125,000,000) on August 1, 2003.
1. The Company shall pay interest on the outstanding principal
amount of this Note at the rate of 11% per annum (computed on the basis of a
360-day year of twelve 30-day months), semiannually on February 1 and August 1
of each year, commencing on February 1, 1997; provided, however, that the
Company may, at its option, defer the payment of interest on this Note on any
interest payment date to the extent that the Payee has sufficient available
funds to satisfy its obligations on the Payee Notes (as hereinafter defined) on
such date. Any such deferred interest will be automatically added to the
principal amount of this Note (as of the interest payment date on which such
interest would otherwise have been payable) and be payable at the maturity
hereof. As used in this Note, the term "Payee Notes" means the Payee's 12%
Senior Secured Notes due 2003, as amended, restated, restructured, renewed,
extended, or otherwise modified, in whole or in part, from time to time, issued
pursuant to the Indenture dated as of December 23, 1996, among the Payee (as
Issuer), the Company (as Guarantor) and First Bank National Association, as
Trustee (the "Trustee"), as such Indenture may be amended, supplemented or
otherwise modified from time to time in accordance with the terms thereof (the
"Indenture").
<PAGE> 2
2. The Company may, at any time, at its option, prepay this Note
in whole, or from time to time in part, without premium or penalty, on not
less than five (5) days written notice to the Payee.
3. Anything in this Note or in the Indenture to the contrary
notwithstanding, any payment made by the Company pursuant to Article 12 of the
Indenture shall automatically reduce the outstanding principal amount of this
Note by an amount equal to the amount of such payment, provided that such
reduction shall be reinstated to the extent that any holder of Payee Notes or
the Trustee is required by any court or otherwise to return to the Company or
any Custodian (as such term is defined in the Indenture), trustee, liquidator
or other similar official acting in relation to the Company any amount paid by
any such entity to the Trustee or such holder of Payee Notes.
4. This Note may be amended at any time or from time to time by
written agreement between the Company and the Payee, provided that such
amendment does not result in a violation of the Payee's obligations under
Section 4.11 of the Indenture.
5. The Company shall make each payment hereunder not later than
11:00 A.M. (New York City time) on the day when due in lawful money of the
United States of America to the holder of this Note by delivery of a certified
or bank cashier's check in the amount of such payment or, at such holder's
option, by wire transfer of immediately available funds.
6. Whenever any payment to be made hereunder shall be stated to be
due on a Saturday, Sunday or a public or bank holiday or the equivalent for
banks generally under the laws
-2-
<PAGE> 3
of the State of New York (any other day being a "Business Day"), such payment
may be made on the next succeeding Business Day.
7. All parties hereto, whether as makers, endorsers or otherwise,
generally waive presentment for payment, demand, protest and notice of dishonor.
8. This Note is the Intercompany Note (as such term is defined in the
Indenture).
9. This Note shall be binding upon the Company and its successors and
assigns, and the terms and provisions of this Note shall inure to the benefit of
Payee and its respective successors and assigns, including subsequent holders
hereof.
10. This Note shall be governed by, and construed in accordance with,
the internal laws of the State of New York without regard to principles of
conflict of laws.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered to the Payee on the date and year first above written.
MAXXAM Inc.
By: /s/ BYRON L. WADE
--------------------------------
Name: Byron L. Wade
Title: Vice President
-4-
<PAGE> 1
EXHIBIT 12.1
MAXXAM GROUP HOLDINGS INC.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical:
Earnings are calculated as
follows:
Income (loss) before income
taxes, minority interests,
extraordinary item and
cumulative effect of
changes in accounting
principles................ $ 3.4 $ 2.3 $ 5.9 $16.1 $(17.7) $(10.7) $ 42.1
Add (deduct):
Fixed charges as
calculated below........ 58.8 58.4 78.0 77.5 81.9 91.4 94.2
----- ----- ----- ----- ------ ------ ------
$62.2 $60.7 $83.9 $93.6 $ 64.2 $ 80.7 $136.3
===== ===== ===== ===== ====== ====== ======
Fixed charges are calculated as
follows:
Interest expense............. $56.1 $56.1 $74.9 $74.6 $ 78.5 $ 89.5 $ 94.2
Amortization of deferred
financing costs........... 2.3 2.1 2.9 2.8 3.4 1.9 --
Interest component of rental
expense................... .4 .2 .2 .1 -- -- --
----- ----- ----- ----- ------ ------ ------
$58.8 $58.4 $78.0 $77.5 $ 81.9 $ 91.4 $ 94.2
===== ===== ===== ===== ====== ====== ======
Ratio of earnings to fixed
charges...................... 1.1x 1.0x 1.1x 1.2x 1.4x
===== ===== ===== ===== ======
Fixed charge coverage
deficiency................... $(17.7) $(10.7)
====== ======
Pro Forma:
Earnings are calculated as
follows:
Income (loss) before income
taxes, minority interests,
extraordinary item and
cumulative effect of
changes in accounting
principles................ $ 1.3 $ 3.2
Add (deduct):
Fixed charges as
calculated below........ 71.1 94.4
----- -----
$72.4 $97.6
===== =====
Fixed charges are calculated as
follows:
Interest expense............. $67.8 $90.5
Amortization of deferred
financing costs........... 2.9 3.7
Interest component of rental
expense................... .4 .2
----- -----
$71.1 $94.4
===== =====
Ratio of earnings to fixed
charges...................... 1.0x 1.0x
===== =====
</TABLE>
<PAGE> 1
EXHIBIT 12.2
MAXXAM INC.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- -------- -------- ------- -------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical:
Earnings are calculated as follows:
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles..................... $ 8.4 $ 59.5 $ 94.5 $ (171.8) $ (211.4) $(13.2) $ 67.4
Add (deduct):
Fixed charges as calculated below.................... 143.5 162.5 216.3 229.3 213.8 215.1 233.1
Undistributed (earnings) losses of less than 50%
owned companies.................................... (9.2) (17.2) (19.2) 1.9 3.3 1.9 19.2
Capitalized interest, included in fixed charges...... (3.3) (2.0) (2.8) (3.0) (4.3) (5.2) (5.1)
Preferred stock dividend requirements of
subsidiaries, included in fixed charges............ (1.5) (17.2) (21.7) (35.5) (10.9) (4.6) (2.0)
Equity in losses of less than 50% owned companies
where a majority owned subsidiary of the Company
has guaranteed the debt of such companies.......... -- -- -- (4.7) (2.5) -- (4.4)
------ ------ ------ -------- -------- ------ ------
$137.9 $185.6 $267.1 $ 16.2 $ (12.0) $194.0 $308.2
====== ====== ====== ======== ======== ====== ======
Fixed charges are calculated as follows:
Interest expense....................................... $128.8 $129.7 $172.7 $ 167.3 $ 169.5 $181.8 $198.8
Amortization of deferred financing costs............... 6.7 6.4 8.6 9.6 15.6 13.8 12.1
Capitalized interest................................... 3.3 2.0 2.8 3.0 4.3 5.2 5.1
Interest component of rental expense................... 3.2 7.2 10.5 9.8 10.5 9.7 9.7
Preferred stock dividend requirements of
subsidiaries......................................... 1.5 17.2 21.7 35.5 10.9 4.6 2.0
Interest expense related to guaranteed debt of less
than 50% owned companies (incurring losses) of
the Company's majority owned subsidiary.............. -- -- -- 4.1 3.0 -- 5.4
------ ------ ------ -------- -------- ------ ------
$143.5 $162.5 $216.3 $ 229.3 $ 213.8 $215.1 $233.1
====== ====== ====== ======== ======== ====== ======
Ratio of earnings to fixed charges....................... 1.1x 1.2x 1.3x
====== ====== ======
Fixed charge coverage deficiency......................... $ (5.6) $ (213.1) $(225.8) $(21.1)
====== ======== ======== ======
Pro Forma:
Earnings are calculated as follows:
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles..................... $(13.7) $ 62.2
Add (deduct):
Fixed charges as calculated below.................... 165.6 246.7
Undistributed (earnings) losses of less than 50%
owned companies.................................... (9.2) (19.2)
Capitalized interest, included in fixed charges...... (3.3) (2.8)
Preferred stock dividend requirements of
subsidiaries, included in fixed charges............ (1.5) (21.7)
Equity in losses of less than 50% owned companies
where a majority owned subsidiary of the Company
has guaranteed the debt of such companies.......... -- --
------ ------
$137.9 $265.2
====== ======
Fixed charges are calculated as follows:
Interest expense....................................... $149.7 $201.5
Amortization of deferred financing costs............... 7.9 10.2
Capitalized interest................................... 3.3 2.8
Interest component of rental expense................... 3.2 10.5
Preferred stock dividend requirements of
subsidiaries......................................... 1.5 21.7
Interest expense related to guaranteed debt of less
than 50% owned companies (incurring losses) of
the Company's majority owned subsidiary.............. -- --
------ ------
$165.6 $246.7
====== ======
Ratio of earnings to fixed charges....................... 1.1x
======
Fixed charge coverage deficiency......................... $(27.7)
======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
PRINCIPAL SUBSIDIARIES OF MAXXAM GROUP HOLDINGS INC.
Listed below are the 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.
State or Province
of Incorporation
Name or Organization
---- -----------------
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> 1
EXHIBIT 21.2
PRINCIPAL SUBSIDIARIES OF MAXXAM INC.
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.
State or Province
of Incorporation
Name or Organization
- ---------------------------------------------------- --------------------
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 Aluminum International, Inc. Delaware
Kaiser Aluminum & Chemical Corporation Delaware
Kaiser Aluminum & Chemical of Canada Limited Ontario
Kaiser Bauxite Company Nevada
Kaiser Finance Corporation Delaware
Kaiser Jamaica Bauxite Company (partnership) Jamaica
Kaiser Jamaica Corporation Delaware
Queensland Alumina Limited Queensland
Volta Aluminium Company Limited Ghana
FOREST PRODUCTS OPERATIONS
Britt Lumber Co., Inc. California
MAXXAM Group Holdings Inc. Delaware
MAXXAM Group Inc. Delaware
MAXXAM Properties Inc. Delaware
Salmon Creek Corporation Delaware
Scotia Pacific Holding Company Delaware
The Pacific Lumber Company Delaware
REAL ESTATE OPERATIONS
Horizon Corporation Delaware
MAXXAM Property Company Delaware
MCO Properties Inc. Delaware
MCO Properties L.P. (limited partnership) Delaware
MXM General Partner, Inc. Delaware
MXM Mortgage L.P. (limited partnership) Delaware
Palmas del Mar Properties, Inc. Delaware
RACE PARK OPERATIONS
New SHRP Acquisition, Inc. Delaware
SHRP General Partner, Inc. Delaware
Sam Houston Entertainment Corp. Texas
Sam Houston Race Park, Ltd. (limited partnership) Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
December 23, 1996
<PAGE> 1
EXHIBIT 23.3
[THELEN, MARRIN, JOHNSON & BRIDGES LLP LETTERHEAD]
December 24, 1996
MAXXAM Group Holdings Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77257
Dear Sirs:
With respect to the Registration Statement on Form S-4 relating
to an exchange offer for $100 million of Senior Secured Notes due 2003, to be
filed by MAXXAM Group Holdings Inc., a Delaware corporation (the "Registration
Statement"), we hereby consent to the use of our name, and to references to
advice rendered by our firm, in the prospectus included in the Registration
Statement under the headings (i) Management's Discussion and Analysis of
Financial Condition and Results of Operation of MAXXAM -- MAXXAM (Parent
Company) -- Aluminum Operations; (ii) Note 8 of the Notes to Consolidated
Financial Statements of Kaiser Aluminum Corporation; (iii) Note 4 of the Notes
to Interim Consolidated Financial Statements of Kaiser Aluminum Corporation;
(iv) Note 7 of the Notes to Consolidated Financial Statements of MAXXAM Inc.;
and (v) Note 7 of the Notes to Interim Consolidated Financial Statements of
MAXXAM Inc.
Very truly yours,
/s/ THELEN, MARRIN, JOHNSON & BRIDGES LLP
THELEN, MARRIN, JOHNSON & BRIDGES LLP
<PAGE> 1
EXHIBIT 23.4
We hereby consent to (i) any references to our firm, or (ii) any
references to advice rendered by our firm and contained in that certain
Registration Statement on Form S-4 of MAXXAM Group Holdings Inc. dated
December , 1996, relating to $100,000,000 of Senior Secured Notes due 2003.
December 24, 1996 WHARTON, LEVIN, EHRMANTRAUT, KLEIN & NASH, P.A.
/s/ JOHN D. KLEIN
<PAGE> 1
EXHIBIT 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM T-1
Statement of Eligibility and Qualification Under the Trust
Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST BANK NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0256895
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
MAXXAM GROUP HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0518669
(State of Incorporation) (I.R.S. Employer
Identification No.)
5847 San Felipe, Suite 2600
Houston TX 77057-3010
(Address of Principal Executive Offices) (Zip Code)
% SERIES B SENIOR SECURED NOTES DUE 2003
GUARANTEES OF THE % SERIES B SENIOR SECURED NOTES DUE 2003
(Title of the Indenture Securities)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to which it
is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification. Each of the exhibits listed below is
incorporated by reference from registration number 33-90786.
1. Copy of Articles of Association.
2. Copy of Certificate of Authority to Commence Business.
3. Authorization of the Trustee to exercise corporate trust
powers (included in Exhibits 1 and 2; no separate instrument).
4. Copy of existing By-Laws.
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the
act.
7. Copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its supervising
or examining authority.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Bank National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested,
all in the City of Saint Paul and State of Minnesota on the 16th day of
December, 1996.
FIRST BANK NATIONAL ASSOCIATION
[SEAL]
/s/ RICHARD PROKOSCH
-------------------------------
Richard Prokosch
Trust Officer
/s/ KATHE BARRETT
- --------------------------
Kathe Barrett
Assistant Secretary
<PAGE> 4
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors or affiliates, are based
upon information furnished to the Trustee by the obligors, While the Trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Bank National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested,
all in the City of Saint Paul and State of Minnesota on the 16th day of
December, 1996.
FIRST BANK NATIONAL ASSOCIATION
[SEAL]
/s/ Richard Prokosch
--------------------
Richard Prokosch
Trust Officer
/s/ Kathe Barrett
- -----------------
Kathe Barrett
Assistant Secretary
<PAGE> 5
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: December 16, 1996
FIRST BANK NATIONAL ASSOCIATION
--------------------
Richard Prokosch
Trust Officer
<PAGE> 6
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: December 16, 1996
FIRST BANK NATIONAL ASSOCIATION
/s/ Richard Prokosch
--------------------
Richard Prokosch
Trust Officer
<PAGE> 7
AMENDED AND RESTATED
ARTICLES OF ASSOCIATION
FIRST BANK NATIONAL ASSOCIATION
FIRST. The title of this Association, which shall carry on the business
of banking under the laws of the United States, shall be "First Bank National
Association."
SECOND. The main office of the Association shall be in the City of
Minneapolis, County of Hennepin, State of Minnesota. The general business of
the Association shall be conducted at its main office and branches.
THIRD. The Board of Directors of this Association shall consist of not
less than five nor more than twenty-five members. At any meeting of the
shareholders held for the purpose of electing Directors, or changing the number
thereof, the number of Directors may be determined by a majority of the votes
cast by the shareholders in person or by proxy. Between meetings of the
shareholders held for the purpose of electing Directors, the Board of Directors
by a majority vote of the full Board may increase the size of the Board by not
more than four Directors in any one year, but not to more than a total of
twenty-five Directors, and fill any vacancy so created in the Board. A
majority of the Board of Directors shall be necessary to constitute a quorum
for the transaction of business at any Directors' meeting. Each Director,
during the full term of his directorship, shall own a minimum of $1,000 par
value of stock of this Association, or any equivalent interest in stock of
First Bank System, Inc.
FOURTH. The regular annual meeting of the shareholders of this
Association shall be held at its main banking house, or other convenient place
duly authorized by the Board of Directors, on such day of each year as is
specified therefor in the By-laws, but if no election is held on that day, it
may be held on any subsequent day according to such lawful rules as may be
prescribed by the Board of Directors.
FIFTH. The authorized amount of capital stock of this Association shall
be divided into 3,500,000 shares of common stock at the par value of Fifty
Dollars ($50.00) each; but said capital stock may be increased or decreased
from time to time, in accordance with the provisions of the laws of the United
States.
If the capital stock is increased by the sale of additional shares
thereof, each shareholder shall be entitled to subscribe for such additional
share in proportion to the number of shares of said capital stock owned by him
at the time the increase is authorized by the shareholders, unless another time
subsequent to the date of the shareholders' meeting is specified in a
resolution adopted by the shareholders at the time the increase is authorized.
The Board of Directors shall have the power to prescribe a reasonable period of
time within which the preemptive rights to subscribe to the new shares of
capital stock must be exercised.
Page 1 of 6
<PAGE> 8
If the capital stock is increased by a stock dividend, each shareholder
shall be entitled to his proportionate amount of such increase in accordance
with the number of shares of capital stock owned by him at the time the
increase is authorized by the shareholders, unless another time subsequent to
the date of the shareholders' meeting is specified in a resolution adopted by
the shareholders at the time the increase is authorized.
The Association, and at any time and from time to time, may authorize
and issue debt obligations, whether or not subordinated, without the approval
of the shareholders. In the event said debt obligations are convertible to
capital stock of the Association, each shareholder shall be entitled to
subscribe for such additional shares in proportion to the number of shares of
capital stock owned by him one month prior to the issuance of capital stock in
satisfaction of said convertible debt obligations.
SIXTH. The Board of Directors shall appoint one of its members
President of this Association, who shall be Chairman of the Board, unless the
Board appoints another director to be the Chairman. The Board may also appoint
one or more of its members to serve as Vice Chairman. The Board shall have the
power to appoint such officers and employees as may be required to transact the
business of this Association; to fix the salaries to be paid to such officers
and employees of this Association; and to dismiss any of such officers or
employees and appoint others to take their place.
The Board of Directors shall have the power to define the duties of
officers and employees of this Association and to require adequate bonds from
them for the faithful performance of their duties; to regulate the manner in
which any increase of the capital of the Association shall be made; to make all
By-laws that may be lawful for the general regulation of the business of this
Association and the management of its affairs; and generally to do and perform
all acts that may be lawful for a Board of Directors to do and perform.
SEVENTH. The Board of Directors shall have the power to change the
location of the main office of this Association to any other place within the
limits of the City of Minneapolis, Minnesota, without the approval of the
shareholders of this Association but subject to the approval of the Comptroller
of the Currency; and shall have the power to change the location of any branch
or branches of this Association to any other location, without the approval of
the shareholders of this Association but subject to the approval of the
Comptroller of the Currency.
EIGHTH. This Association shall have succession from the date of its
organization certificate until such time as it be dissolved by the act of its
shareholders in accordance with the provisions of the banking laws of the
United States, or until its franchise becomes forfeited by reason of violation
of law, or until terminated by either a general or a special act of Congress,
or until its affairs be placed in the hands of a receiver and finally wound up
by him.
NINTH. The Board of Directors of this Association, or any three or more
shareholders owning, in the aggregate, not less than ten per centum of the
stock of this
Page 2 of 6
<PAGE> 9
Association, may call a special meeting of shareholders at any time; provided,
however, that unless otherwise provided by law, not less than ten days prior to
the date fixed for any such meeting, a notice of the time, place, and purpose
of the meeting shall be given by first-class mail, postage prepaid, to all
shareholders of record of this Association at their respective addresses as
shown upon the books of the Association.
TENTH. Any action required to be taken at a meeting of the shareholders
or directors of or any action which may be taken at a meeting of shareholders
or directors may be taken without a meeting if consent in writing, setting
forth the action as taken shall be signed by all the shareholders or directors
entitled to vote with respect to the matter thereof. Such action shall be
effective on the date on which the last signature is place on the writing, or
such earlier date as is set forth therein.
ELEVENTH. Meetings of the Board of Directors or shareholders, regular
or special, may be held by means of conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can simultaneously hear each other, and participation in such meeting
by such aforementioned means shall constitute presence in person at such
meeting.
TWELFTH. (a) Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than any action by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, shall be indemnified by the Corporation, unless similar
indemnification is provided by such other corporation, partnership, joint
venture, trust or other enterprise (any funds received by any person as a
result of the provisions of this Article being deemed an advance against his
receipt of any such other indemnification from any such other corporation,
partnership, joint venture, trust or other enterprise), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person seeking indemnification did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact
that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the
Page 3 of 6
<PAGE> 10
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other corporation, partnership, joint
venture, trust or other enterprise shall be indemnified by the Corporation,
unless similar indemnification is provided by such other corporation,
partnership, joint venture, trust or other enterprise (any funds received by
any person as a result of the provisions of this Article being deemed an
advance against his receipt of any such other indemnification from any such
other corporation, partnership, joint venture, trust or other enterprise),
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
of the circumstances of the case, such person is fairly and reasonably entitled
to indemnify for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, such person shall be indemnified by the
Corporation against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Except as set forth in paragraph (c) of this Article, any
indemnification under paragraphs (a) and (b) of this Article (unless ordered by
the court), shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because such person has met
the applicable standard of conduct set forth in paragraphs (a) and (b) of this
Article. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, of if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which those
seeking indemnification or seeking advancement of expenses may be entitled
under any by-law, agreement, vote of
Page 4 of 6
<PAGE> 11
stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(g) By action of the Board of Directors, notwithstanding any interest
of the directors in the action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation shall have the power to indemnify him against
such liability under the provisions of this Article.
(h) For purpose of this Article, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under this Article with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this Article, references to "other enterprises"
shall include employee benefit plans; reference to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
(j) The indemnification and advancement of expenses hereby provided
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
THIRTEENTH. These Articles of Association may be amended at any regular
or special meeting of the shareholders by the affirmative vote of the holders
of a majority of the stock of this Association, unless the vote of the holders
of a greater amount of stock is required by law and in that case by the vote of
the holders of such greater amount. The
Page 5 of 6
<PAGE> 12
\notice of any shareholders' meeting at which an amendment to the Articles of
Association of this Association is to be considered shall be given as
hereinabove set forth.
IN WITNESS WHEREOF, we have hereunto set our hands as of the 23rd day of
February, 1995.
- --------------------------------- ------------------------------------
John F. Grundhofer Philip G. Heasley
- --------------------------------- ------------------------------------
William F. Farley Richard A. Zona
- --------------------------------- ------------------------------------
Daniel C. Rohr Michael J. O'Rourke
- ---------------------------------
J. Robert Hoffmann
Page 6 of 6
<PAGE> 13
BYLAWS
OF
FIRST BANK NATIONAL ASSOCIATION
ARTICLE I.
MEETINGS OF SHAREHOLDERS
The regular annual meeting of the shareholders for the election of
directors and for the transaction of such other business as properly may come
before the meeting shall be held at the main banking house of the Association
in the City of Minneapolis, Minnesota, or other convenient place duly
authorized by the Board of Directors (hereinafter referred to as the "Board"),
on the last Thursday in February of each year at 9:30 o'clock A.M. of said day,
or such other date or time which the Board may designate at any Board meeting
held prior to the required date for sending notice of the annual meeting to the
shareholders. The holders of a majority of the outstanding shares entitled to
vote, and represented at any annual or special meeting of the shareholders, may
choose persons to act as Chairman and as Secretary of the meeting.
ARTICLE II.
BOARD OF DIRECTORS
Section 1. Number. As provided in the Articles of Association, the
Board of this Association shall consist of not less than five nor more than
twenty-five members. At any meeting of the shareholders held for the purpose of
electing directors, or changing the number thereof, the number of directors may
be determined by a majority of the votes cast by the shareholders in person or
by proxy. Any vacancy occurring in the Board shall be filled by the remaining
directors. Between meetings of the shareholders held for the purpose of
electing directors, the Board by a majority vote of the full Board may increase
the size of the Board by not more than four directors in any one year, but not
to more than a total of twenty-five directors, and fill any vacancy so created
in the Board. All directors shall hold office until their successors are
elected and qualified.
Section 2. Powers. The Board shall have and may exercise all of the
powers granted to or conferred upon it by the Articles of Association and
Bylaws of the Association and by law. The Board may appoint from time to time
one or more committees for any purposes and with such powers as the Board may
determine.
Section 3. Organization. The President or the Chairman of the Board
shall notify the directors-elect of their election and of the time at which
they are required to meet for the purpose of organizing the new Board. If, at
the time fixed for such meeting, there is not a quorum in attendance, the
members present may adjourn from time to time until a quorum
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<PAGE> 14
is secured, and no business shall be transacted until a majority of the
directors-elect shall have taken the oath of office prescribed by law and shall
otherwise duly qualified.
The Board shall appoint one of its members President of this
Association, who shall be Chairman of the Board, but the Board may appoint a
Director in lieu of the President, to be Chairman of the Board, in which case
the latter shall preside at all meetings and shall perform such other duties as
may be designated by the Board. If a Chairman of the Board is so appointed in
lieu of the President, in his absence the President shall preside at meetings
of the Board. In the absence of a presiding officer, the Board shall appoint a
Chairman pro tem. The Board shall appoint a recording officer who shall keep a
record of the meetings and proceedings of the Board. The recording officer need
not be a member of the Board.
Section 4. Meetings. The regular meetings of the Board shall consist of
the annual meeting following the annual election of directors by the
shareholders, and quarterly meetings which shall be held at such place and at
such time as the Chairman or President from time to time may designate. When
the date of any regular meeting of the Board falls on a holiday, the meeting
shall be held on the next ensuing business day other than a Saturday, or on
such day and at such time as may have been ordered.
Special meetings of the Board shall be held at any time upon the call of
the Chairman of the Board, a Vice Chairman, the President, or the acting Chief
Executive Officer, or upon written request of any three (3) directors.
Notice of all meetings of the Board, whether regular or special, shall
be given to each director either orally in person or by mail, telegraph or
telephone, on or before the day of the meeting. Meetings of the Board or
shareholders may be held by conference telephone or similar communication
device by means of which all persons participating in the meeting can
simultaneously hear each other. Participating in such a meeting shall
constitute presence in person at such meeting.
Section 5. Quorum. A majority of all the qualified directors shall
constitute a quorum and shall be necessary for the transaction of business,
but, if at any meeting there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time until a quorum is in
attendance.
Section 6. Advisory Board of Directors. The Board may appoint persons,
who need not be shareholders or directors, to serve as advisory directors on an
Advisory Board of Directors established to serve this bank or a group of
affiliated banks of which this bank is one. An advisory director shall have
such power and duties as may be determined by the Board, provided that advisory
directors shall have no power to vote on matters presented to the Board for
final decision and, provided further, that the Board's responsibility for the
affairs of the Association shall in no respect be delegated or diminished.
Section 7. Directors' Fees, etc. The Board shall have the power to fix
and vote fees and compensation to directors and advisory directors of the
Association for their services as directors and advisory directors, and also
for their services as member of any committee or committees of the Association
contemplated by these Bylaws or otherwise created or
2
<PAGE> 15
appointed by the Board, the Executive Committee, or the President of the
Association. Nothing herein contained shall be construed to preclude any
director or advisory director from serving the Association in any other
capacity and being paid compensation therefor by the Association.
ARTICLE III.
OFFICERS
Section 1. Officers. The Board may elect a Chairman of the Board of
Directors and one (1) or more Vice Chairmen. The Board shall also elect a
President. The Board shall elect, as appropriate, such additional officers as
it may determine, including Executive Vice Presidents or Senior Vice
Presidents. The Chief Executive Officer or in the absence of the Chief
Executive Officer, the President, may appoint such other officers necessary to
conduct the affairs of the Association.
Section 2. Chief Executive Officer. The Board of Directors may
designate a Chief Executive Officer of the Association, who shall be either the
President or Chairman of the Board. The Board may also designate an officer or
director to serve as acting Chief Executive Officer in the absence or
incapacity of the Chief Executive Officer. Subject to the law and the control
of the Board and the Executive Committee, the Chief Executive Officer, or, in
the absence of the Chief Executive Officer, the President shall have authority
to manage the affairs and business of the Association and prescribe and define
the duties of its officers, agents and employees.
Section 3. Term of Office. Any officer elected by the Board shall hold
his office for the current year for which the Board by which he is elected was
elected, unless he shall resign, become disqualified or be removed. The
Chairman, Vice Chairman, and President can be removed by action of a majority
of the Board. All other elected officers can be removed by order of the Chief
Executive Officer, or in his absence, the President. Any other officer shall
hold his office at the pleasure of the Chief Executive Officer, or, in his
absence, the President.
Section 4. Bonds. All officers, agents or employees as the business of
the Association may require, shall give bond with surety to be approved and in
a sum to be fixed by the Board or the Chairman or the President, conditioned
upon the faithful and honest discharge of their respective duties.
ARTICLE IV.
STOCK CERTIFICATES
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<PAGE> 16
Section 1. Forms. Certificates of stock, signed by any elected officer
and any other officer, shall be issued to the shareholders, and each
certificate shall state upon its face that such stock is transferable only upon
the books of the Association.
Section 2. Transfers. Certificates of stock of this Association shall
be assignable and transferable only on the books of this Association subject to
the restrictions and provisions of the national banking laws, and a transfer
book shall be provided in which all assignments and transfers of stock shall be
made. When stock is transferred, the certificates representing the same shall
be returned to the bank, canceled and preserved, and new certificates issued.
Section 3. Dividends. Transfers of stock shall not be suspended
preparatory to the declaration of dividends; and, unless an agreement to the
contrary shall be expressed in the assignment or assignments, dividends shall
be paid to the shareholders in whose name the stock shall stand at the date of
declaration of dividends.
ARTICLE V.
MINUTE BOOK
The organization papers of this Association, the Bylaws as revised or
amended from time to time and the proceedings of all regular and special
meetings of the shareholders and the directors shall be recorded in a minute
book or books. All reports of committees required to be made to the Board shall
be recorded in a minute book or shall be filed by the recording officer. The
minutes of each meeting of the shareholders and the Board shall be signed by
the recording officer and approved by the Chairman of the meeting.
ARTICLE VI.
CONVEYANCES, CONTRACTS, ETC.
All transfers and conveyances of real estate, mortgages, and transfers,
endorsements or assignments of stock, bonds, notes, debentures or other
negotiable instruments, securities or personal property shall be signed by any
elected or appointed officer.
All checks, drafts, certificates of deposit, mortgage satisfactions,
releases, all types of loans, all obligations of the Association, and all funds
of the Association held in its own or in a fiduciary capacity may be paid out
by an order, draft or check bearing the manual or facsimile signature of any
elected or appointed officer of the Association or of such other employees or
agents as may be designated by the Chief Executive Officer or the President.
All other instruments not hereinabove specifically provided for, whether
to be executed in a fiduciary capacity or otherwise, may be signed on behalf of
the Association by any officer thereof.
4
<PAGE> 17
The Secretary of the Association or other proper officer may execute and
certify that required action or authority has been given or has taken place by
resolution of the Board under this Bylaw without the necessity of further
action by the Board.
ARTICLE VII.
SEAL
The following is an impression of the seal if this Association.
ARTICLE VIII.
INDEMNIFICATION OF DIRECTORS,
OFFICERS, AND EMPLOYEES
Section 1. The Association shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action, or proceeding, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the pertinent
corporation) by reason of the fact that he is or was a director, advisory
director or officer of the Association, or is or was serving at the request of
the Association as a director or officer of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees), judgments, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit, or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the pertinent corporation. The termination
of any action, suit, or proceeding by judgment, order, settlement, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
pertinent corporation.
Section 2. The Association shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the pertinent corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, advisory director or officer of the Association, or is or was serving
at the request of the Association as a director or officer of another
corporation,
5
<PAGE> 18
partnership, joint venture, trust, or other enterprise, against expenses,
(including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the pertinent corporation and except that no
indemnification shall be made in respect to any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the pertinent corporation unless
and only to the extent that the court in which such action or suit was brought
shall determine upon application that despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses which such court shall deem
proper.
Section 3. To the extent that a director, advisory director, or officer
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in Sections 1 or 2 of this Article, or in defense of
any claim, issue, or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 4. Any indemnification under Sections 1 and 2 of this Article
(unless ordered by a court) shall be made by the Association only upon a
determination that indemnification of the director, advisory director, or
officer is proper in the circumstances because he has met the applicable
standards of conduct set fourth in said Sections 1 and 2. Such determination
shall be made: (a) by the Board of the Association by a majority vote of a
quorum consisting of directors who were not parties to such action, suit, or
proceeding; or (b) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel
(who may be regular counsel for the Association or pertinent corporation) in a
written opinion; or (c) by the stockholders of the Association.
Section 5. Expenses incurred by any person who may have a right of
indemnification under this Article in defending a civil or criminal action,
suit, or proceeding may be paid by the Association in advance of the final
disposition of such action, suit, or proceeding as authorized by its Board upon
receipt of an undertaking by or on behalf of such person, to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the Association pursuant to this Article.
Section 6. The indemnification provided by this Article is in addition
to and independent of and shall not be deemed exclusive of any other rights to
which any person may be entitled under any certificate of incorporation,
articles of incorporation, articles of association, bylaw, agreement, vote of
stockholders, or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another while holding such office,
and shall continue as to a person who has ceased to be a director, advisory
director, or officer and shall inure to the benefit of the heirs, executors,
and administrators of such a person; provided, that any indemnification
realized other than under this Article shall apply as a credit against any
indemnification provided by this Article.
Section 7. The Association may purchase and maintain insurance on
behalf of any person who is or was a director, advisory director, officer,
employee, or agent of the
6
<PAGE> 19
Association, or is or was serving at the request of the Association as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, if the Association would have the power to indemnify him
against such liability under the provisions of the Article or of applicable
law, if and whenever the Board of the Association deems it to be in the best
interest of the Association to do so.
Section 8. For purposes of this Article and indemnification hereunder,
any person who is or was a director or officer of any other corporation of
which the Association owns or controls or at the time owned or controlled
directly or indirectly a majority of the shares of stock entitled to vote for
election of directors of such other corporation shall be conclusively presumed
to be serving or to have served as such director or officer at the request of
the Association.
Section 9. The Association may provide indemnification under this
Article to any employee or agent of the Association or of any other corporation
of which the Association owns or controls or at the time owned or controlled
directly or indirectly a majority of the shares of stock entitled to vote for
election of directors or to any director, officer, employee, or agent of any
other corporation, partnership, joint venture, trust, or other enterprise in
which the Association)'n has or at the time had an interest as an owner,
creditor, or otherwise, if and whenever the Board of the Association deems it
in the best interest of the Association to do so.
Section 10. The Association may, to the fullest extent permitted by
applicable law from time to time in effect, indemnify any and all persons whom
the Association shall have power to indemnify under said law from and against
any and all of the expenses, liabilities, or other matters referred to in or
covered by said law, if and whenever the Board of the Association deems it to
be in the best interest of the Association to do so.
ARTICLE IX.
AMENDMENTS
These Bylaws, or any of them, may be added to, altered, amended or
repealed by the Board at any regular or special meeting of the Board.
(Adopted July 19, 1990)
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<CIK> 0001029500
<NAME> MAXXAM GROUP HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 48,396 53,112
<SECURITIES> 36,568 31,852
<RECEIVABLES> 20,576 11,466
<ALLOWANCES> 0 0
<INVENTORY> 81,181 78,113
<CURRENT-ASSETS> 195,446 182,594
<PP&E> 159,453 166,322
<DEPRECIATION> 58,420 65,108
<TOTAL-ASSETS> 740,867 713,273
<CURRENT-LIABILITIES> 69,250 56,019
<BONDS> 778,505 772,877
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (126,507) (125,884)
<TOTAL-LIABILITY-AND-EQUITY> 740,867 713,273
<SALES> 242,592 199,580
<TOTAL-REVENUES> 242,592 199,580
<CGS> 127,124 114,617
<TOTAL-COSTS> 127,124 114,617
<OTHER-EXPENSES> 41,180 31,519
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 77,824 58,388
<INCOME-PRETAX> 5,827 3,433
<INCOME-TAX> 1,621 (1,090)
<INCOME-CONTINUING> 4,236 4,523
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,236 4,523
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ALL OF ITS
12% SENIOR SECURED NOTES DUE 2003
FOR ITS
12% SERIES B SENIOR SECURED NOTES DUE 2003
PURSUANT TO THE PROSPECTUS DATED , 1997
----------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , , 1997, UNLESS EXTENDED.
----------------------------------------------------------------
To: EXCHANGE AGENT
FIRST BANK NATIONAL ASSOCIATION
By Mail By Hand/Overnight Express:
First Bank National Association First Bank National Association
180 E. 5th Street 180 E. 5th Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Rick Prokosch Attention: Rick Prokosch
Trust Officer Trust Officer
Facsimile Transmission:
To confirm receipt:
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE
ONE LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS
CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS
COMPLETED.
The undersigned acknowledges receipt of the Prospectus, dated
, 199 ("Exchange Offer"), of MAXXAM Group Holdings Inc., a Delaware
corporation (the "Company"), relating to the offer of the Company, upon the
terms and subject to the conditions set forth in the Exchange Offer and in this
Letter of Transmittal and the instructions hereto (which together with the
Exchange Offer and the instructions hereto constitute the "Offer"), to exchange
its 12% Series B Senior Secured Notes due 2003 ("New Notes") for any and all
of its outstanding 12% Senior Secured Notes due 2003 ("Old Notes"), at the
rate of $1,000 principal amount of the New Notes for each $1,000 principal
amount of the Old Notes. Capitalized terms used but not defined herein have the
meanings given to them in the Exchange Offer.
The undersigned has completed the appropriate boxes below and signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Offer.
<PAGE> 2
This Letter of Transmittal is to be used whether the Old Notes are to
be physically delivered herewith, or whether guaranteed delivery procedures or
book-entry delivery procedures are being used, pursuant to the procedures set
forth under "The Exchange Offer" in the Exchange Offer. If delivery of Old
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company ("DTC"), this Letter of
Transmittal need not be manually executed, provided, however, that tenders of
Old Notes must be effected in accordance with the procedures mandated by DTC
and the procedures set forth in the Exchange Offer under the caption "The
Exchange Offer--Procedures for Tendering Old Notes--Book Entry Delivery." If a
person or entity in whose name Old Notes are registered on the books of the
Registrar (a "Registered Holder") desires to tender Old Notes and such Old
Notes are not immediately available or time will not permit all documents
required by the Offer to reach the Exchange Agent (or such Registered Holder is
unable to complete the procedure for book-entry transfer on a timely basis)
prior to the Expiration Date, a tender may be effected in accordance with the
guaranteed delivery procedures set forth in the Exchange Offer under the
caption "The Exchange Offer--Procedures for Exchanging Old Notes--Guaranteed
Delivery Procedures." See Instruction 1.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Offer, the
undersigned hereby tenders to the Company the principal amount of the Old Notes
indicated below. Subject to, and effective upon, the acceptance for exchange of
the Old Notes tendered hereby, the undersigned hereby irrevocably sells,
assigns and transfers to or upon the order of the Company all right, title and
interest in and to such Old Notes and hereby irrevocably constitutes and
appoints the Exchange Agent the true and lawful agent and attorney-in-fact of
the undersigned (with full knowledge that said exchange agent also acts as the
agent of the Company) with respect to such Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to take such further action as may be required in
connection with the delivery, tender and exchange of the Old Notes.
The undersigned acknowledges that this Offer is being made in reliance
on an interpretation by the staff of the Securities and Exchange Commission
(the "SEC") that the New Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) a broker-dealer who purchased
Old Notes directly from the Company for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), or (ii) a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such New
Notes. See "Morgan Stanley & Co. Inc.," SEC No-Action Letter (available June 5,
1991); The Exchange Offer under the caption "The Exchange Offer -- Resales of
the New Notes."
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE
RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY TENDERING HOLDER IF THE COMPANY
DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD
RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
The undersigned, if the undersigned is a beneficial holder,
represents, or, if the undersigned is a broker, dealer, commercial bank, trust
company or other nominee, represents that it has received representations from
the beneficial owners of the Old Notes stating, (as defined in the Exchange
Offer) that (i) the New Notes to be acquired in connection with the Exchange
Offer by the Eligible Holder and each Beneficial Owner of the Old Notes are
being acquired by the Eligible Holder (as defined in the Exchange Offer) and
each
<PAGE> 3
Beneficial Owner in the ordinary course of business of the Eligible Holder and
each Beneficial Owner, (ii) the Eligible Holder and each Beneficial Owner are
not participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in the distribution of the New
Notes, (iii) the Eligible Holder and each Beneficial Owner acknowledge and
agree that any person participating in the Exchange Offer for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in no-action letters that
are discussed in the Exchange Offer under the caption "The Exchange Offer --
Resales of the New Notes," (iv) that if the Eligible Holder is a broker-dealer
that acquired Old Notes as a result of market making or other trading
activities, it will deliver a prospectus in connection with any resale of New
Notes acquired in the Exchange Offer, (v) the Eligible Holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by item 507 of
Regulations S-K of the Securities Act and (vi) neither the Eligible Holder nor
any Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company or of the Guarantor except as otherwise
disclosed to the Company in writing.
In addition, if the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that the Old Notes to be exchanged for New Notes were acquired by it as a result
of market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned understands and acknowledges that the Company reserves
the right in its sole discretion to purchase or make offers for any Old Notes
that remain outstanding subsequent to the Expiration Date or as set forth in
the Exchange Offer under the caption "The Exchange Offer -- Conditions of the
Exchange Offer," to terminate the Exchange Offer and, to the extent permitted
by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The term of any such purchases or offers
could differ from the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned
accepts the terms and conditions of the Offer, has full power and authority to
tender, exchange, assign and transfer the Old Notes tendered hereby, and that
when the same are accepted for exchange by the Company, the Company will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim or
right. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be reasonably
necessary or desirable to complete the sale, assignment and transfer the Old
Notes tendered hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the undersigned
hereunder shall be binding upon the successors, assigns, heirs, executors,
administrations, trustees in bankruptcy and legal representatives of the
undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned.
The undersigned understands that tenders of the Old Notes pursuant to
any one of the procedures described under "The Exchange Offer -- Procedures for
Tendering Old Notes" in the Exchange Offer and in the instructions hereto
<PAGE> 4
will constitute a binding agreement between the undersigned and the Company in
accordance with the terms and subject to the conditions of the Offer.
The undersigned understands that by tendering Old Notes pursuant to
one of the procedures described in the Exchange Offer and the instructions
thereto, the tendering holder will be deemed to have waived the right to
receive any payment in respect of interest on the Old Notes accrued up to the
date of issuance of the New Notes.
The undersigned recognizes that, under certain circumstances set forth
in the Exchange Offer, the Company may not be required to accept for exchange
any of the Old Notes tendered. Old Notes not accepted for exchange or withdrawn
will be returned to the undersigned as the address set forth below unless
otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein under the box entitled "Special
Exchange Instructions" below, please deliver New Notes in the name of the
undersigned. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send New Notes to the undersigned
at the address shown below the signature of the undersigned. The undersigned
recognizes that the Company has no obligation pursuant to the "Special Exchange
Instructions" to transfer any Old Notes from the name of the Registered Holder
thereof if the Company does not accept for exchange any of the principal amount
of such Old Notes so tendered.
<PAGE> 5
THE UNDERSIGNED BY COMPLETING THE BOX "DESCRIPTION OF OLD NOTES" BELOW
AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AND MADE
CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE EXCHANGE OFFER.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH)
(IMPORTANT: ALSO COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
Dated: , 199
-----------------------------------------------------------------
If the holder(s) is/are tendering any Old Notes, this Letter of Transmittal
must be signed by the Registered Holder(s) as the name(s) appear(s) on the Old
Notes or on a security position listing or by person(s) authorized to become
Registered Holder(s) by endorsements and documents transmitted herewith. If
signature is by a trustee, executor, administrator, guardian, officer or other
person acting in a fiduciary or representative capacity, please set forth full
title. See Instruction 3.
Name(s)
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
-----------------------------------------------------------------------
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
Tax Identification or
Social Security No(s).:
---------------------------------------------------------
(SEE INSTRUCTION 12 AND COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized Signature:
-----------------------------------------------------------
Printed Name:
-------------------------------------------------------------------
Title:
--------------------------------------------------------------------------
Name of Firm:
-------------------------------------------------------------------
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
Dated: , 199
-----------------------------------------------------------------
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE OLD NOTES OR A
NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
<PAGE> 6
List below the Old Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate numbers and
principal amounts should be listed on a separate signed schedule affixed
thereto. See Instruction 7. The minimum permitted tender is $1,000 principal
amount of Old Notes; all other tenders must be in integral multiples of $1,000.
DESCRIPTION OF OLD NOTES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(I) (II) (III) (IV)
<S> <C> <C> <C>
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S) AMOUNT REPRESENTED TENDERED
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
TOTAL
---------------------------------------------------------------------------------------------------
</TABLE>
* Unless otherwise indicated in the column labeled "Principal Amount
Tendered" and subject to the terms and conditions of the Offer, the
undersigned will be deemed to have tendered the entire aggregate
principal amount represented by the Old Notes indicated in the column
labeled "Aggregate Principal Amount Represented." See Instruction 8.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING (See Instructions 1 and 3):
Name(s) of Registered Holder(s):
---------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------
Name of Eligible Institution that Guaranteed Delivery:
-----------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO.
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If delivery of Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC, then tenders of Old Notes must
be effected in accordance with the procedures mandated by DTC and the
procedures set forth in the Exchange Offer under the caption "The Exchange
Offer -- Procedures for Tendering Old Notes--Book Entry Delivery."
<PAGE> 7
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Old Notes in a principal amount not exchanged and/or
New Notes are to be registered in the name of or issued to someone other than
the person or persons whose signature(s) appear(s) on this Letter of
Transmittal above.
Issue and mail: (check appropriate box(es)):
[ ] New Notes to: [ ] Old Notes to:
Name(s)
-------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(ZIP CODE)
- --------------------------------------------------------------------------------
EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(COMPLETE THE SUBSTITUTE FORM W-9)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Old Notes in a principal amount not exchanged and/or
New Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter of Transmittal above or to such person or
persons at an address other than that shown in the box entitled "Description of
Old Notes" on this Letter of Transmittal above.
Mail and deliver: (check appropriate box(es)):
[ ] New Notes to: [ ] Old Notes to:
Name(s)
-------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
- --------------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(ZIP CODE)
- --------------------------------------------------------------------------------
EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
<PAGE> 8
TO BE COMPLETED BY ALL EXCHANGING HOLDERS
(SEE INSTRUCTION 5)
PAYER'S NAME: FIRST BANK NATIONAL ASSOCIATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SUBSTITUTE PART I - PLEASE PROVIDE YOUR TIN SOCIAL SECURITY NUMBER
IN THE BOX AT RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW. OR
FORM W-9 EMPLOYER IDENTIFICATION NUMBER
</TABLE>
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
PART 2 -- CERTIFICATION -- Under penalties of perjury, I certify that: (1) The
number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me) and (2) I am not subject to backup
withholding because: (a) I am exempt from backup withholding, or (b) I have not
been notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out Item (2) above if you have
been notified by the IRS that you are currently subject to backup withholding
because of under-reporting interest or dividends on your tax return. However,
if after being notified by the IRS that you were subject to backup withholding
you received another notification from the IRS that you are no longer subject
to backup withholding, do not cross out such Item (2).
- --------------------------------------------------------------------------------
PART 3
SIGNATURE ______________________ DATE ______________, 199 AWAITING TIN [ ]
- --------------------------------------------------------------------------------
<PAGE> 9
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE
BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification
Number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(2) I intend to mail or deliver an application in the near future. I understand
that if I do not provide a Taxpayer Identification Number within sixty days,
31% of all reportable payments made to me thereafter will be withheld until I
provide a Taxpayer Identification Number.
SIGNATURE ________________________________ DATE ___________________ 199
<PAGE> 10
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Delivery of this Letter of Transmittal and Old Notes:
Guaranteed Delivery Procedures. To be effectively tendered pursuant to the
Offer, the Old Notes, together with a properly completed Letter of Transmittal
(or manually signed facsimile hereof) duly executed by the Registered Holder
thereof, and any other documents required by this Letter of Transmittal must be
received by the Exchange Agent at one of its addresses set forth on the front
page of this Letter of Transmittal and tendered Old Notes must be received by
the Exchange Agent at one of such addresses on or prior to the Expiration Date;
provided, however, that book-entry transfers of Old Notes may be effected in
accordance with the procedures set forth in the Exchange Offer under the
caption "The Exchange Offer -- Procedures For Tendering Old Notes -- Book Entry
Delivery." If the Beneficial Owner of any Old Notes is not the Registered
Holder, then such person may validly tender such person's Old Notes only by
obtaining and submitting to the Exchange Agent a properly completed Letter of
Transmittal from the Registered Holder. LETTERS OF TRANSMITTAL OF OLD NOTES
SHOULD BE DELIVERED ONLY BY HAND OR BY COURIER, OR TRANSMITTED BY MAIL, AND
ONLY TO THE EXCHANGE AGENT AND NOT TO THE COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS
TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IF OLD NOTES ARE SENT BY MAIL,
IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Old Notes and such holder's Old Notes
are not immediately available or time will not permit such holder to complete
the procedures for book-entry transfer on a timely basis or time will not
permit such holder's Letter of Transmittal and other required documents to
reach the Exchange Agent on or before the Expiration Date, such holder's tender
may be effected if:
(a) such tender is made by or through an Eligible
Institution (as defined below);
(b) on or prior to the Expiration Date, the Exchange
Agent has received a telegram, facsimile transmission or letter from
such Eligible Institution setting forth the name and address of the
holder of such Old Notes, the certificate number(s) of such Old Notes
(except in the case of book-entry tenders) and the principal amount of
Old Notes tendered and stating that the tender is being made thereby
and guaranteeing that, within three business days after the Expiration
Date, a duly executed Letter of Transmittal, or facsimile thereof,
together with the Old Notes, and any other documents required by this
Letter of Transmittal and Instructions, will be deposited by such
Eligible Institution with the Exchange Agent; and
(c) this Letter of Transmittal, or a manually signed
facsimile hereof, and Old Notes, in proper form for transfer (or a
Book-Entry confirmation with respect to such Old Notes), and all other
required documents are received by the Exchange Agent within three
business days after the Expiration Date.
2. Withdrawal of Tenders. Tendered Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must (i) be timely received by the Exchange Agent at one
of its addresses set forth on the first page of this Letter of Transmittal
before the Exchange Agent receives notice of acceptance from the Company, (ii)
specify
<PAGE> 11
the name of the person who tendered the Old Notes, (iii) contain the
description of the Old Notes to be withdrawn, the certificate number(s) of such
Old Notes (except in the case of book-entry tenders) and the aggregate
principal amount represented by such Old Notes or a Book-Entry Confirmation
with respect to such Old Notes, and (iv) be signed by the holder of such Old
Notes in the same manner as the original signature appears on this Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Company that the person withdrawing the tender has
succeeded to the beneficial ownership of the Old Notes. The signature(s) on the
notice of withdrawal must be guaranteed by an Eligible Institution unless such
Old Notes have been tendered (i) by a Registered Holder (which term for
purposes of this document shall include any participant tendering by book-entry
transfer) of Old Notes who has not completed either the box entitled "Special
Exchange Instruction" or the box entitled "Special Delivery Instructions" on
this Letter of Transmittal or (ii) for the account of an Eligible Institution.
If the Old Notes have been tendered pursuant to the procedure for book-entry
tender set forth in the Exchange Offer under the caption "Exchanging Book Entry
Old Notes," a notice of withdrawal is effective immediately upon receipt by the
Exchange Agent of a written, telegraphic or facsimile transmission notice of
withdrawal even if physical release is not yet effected. In addition, such
notice must specify, in the case of Old Notes tendered by delivery of such Old
Notes, the name of the Registered Holder (if different from that of the
tendering holder) to be credited with the withdrawn Old Notes. Withdrawals may
not be rescinded, and any Old Notes withdrawn will thereafter be deemed not
validly tendered for purposes of the Offer. However, properly withdrawn Old
Notes may be retendered by following one of the procedures described under "The
Exchange Offer -- Procedures for Tendering Old Notes" in the Exchange Offer at
any time on or prior to the applicable Expiration Date.
3. Signatures on this Letter of Transmittal, Bond Powers and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed
by the Registered Holder of the Old Notes tendered hereby, the signature must
correspond exactly with the name as written on the face of the Old Notes
without any change whatsoever.
If any Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Old Notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the Registered Holder or
Holders specified herein and tendered hereby, no endorsements of such Old Notes
or separate bond powers are required. If, however, New Notes are to be issued,
or any untendered principal amount of Old Notes are to be reissued to a person
other than the Registered Holder, then endorsements of any Old Notes
transmitted hereby or separate bond powers are required.
If this Letter of Transmittal is signed by a person other than the
Registered Holder or Holders, such Old Notes must be endorsed or accompanied by
appropriate bond powers, in either case signed exactly as the name or names of
the Registered Holder or Holders appear(s) on the Old Notes.
If this Letter of Transmittal or a Notice of Guaranteed Delivery or
any Old Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority so to act must be submitted.
Except as describe in this paragraph, signatures on this Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed
by an Eligible Institution which is a firm which is a member of a registered
<PAGE> 12
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or otherwise be an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"). Signatures on this Letter of Transmittal or a notice of
withdrawal, as the case may be, need not be guaranteed if the Old Notes
tendered pursuant hereto are tendered (i) by a Registered Holder of Old Notes
who has not completed either the box entitled "Special Exchange Instructions"
or the box entitled "Special Delivery Instructions" on this Letter of
Transmittal or (ii) for the account of an Eligible Institution.
Endorsement on Old Notes or signatures on bond forms required by this
Instruction 3 must be guaranteed by an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering holders
should indicate in the applicable box the name and address to which New Notes
and/or substitute Old Notes for the principal amounts not exchanged are to be
issued or sent, if different from the name and address of the person signing
this Letter of Transmittal. In the case of issuance in a different name, the
employer identification or social security number of the person named must also
be indicated. If no such instructions are given, such Old Notes not exchanged
will be returned to the name and address of the person signing this Letter of
Transmittal.
5. Taxpayer Identification Number and Backup Withholding.
Federal income tax law of the United States requires that a holder of Old Notes
whose Old Notes are accepted for exchange provide the Company with such
holder's correct taxpayer identification number, which, in the case of a holder
who is an individual, is the holder's social security number, or otherwise
establish an exemption from backup withholding. If the Company is not provided
with the holder's correct taxpayer identification number, the exchanging holder
of Old Notes may be subject to a penalty imposed by the Internal Revenue
Service. In addition, interest on the New Notes acquired pursuant to the Offer
may be subject to backup withholding in an amount equal to 31 percent of any
interest payment. If withholding occurs and results in an overpayment of taxes,
a refund may be obtained from the Internal Revenue Service by filing a return.
To prevent backup withholding, each exchanging holder of Old Notes
subject to backup withholding must provide his correct taxpayer identification
number by completing the Substitute Form W-9 provided in this Letter of
Transmittal, certifying that the taxpayer identification number provided is
correct (or that the exchanging holder of Old Notes is awaiting a taxpayer
identification number) and that either (a) the exchanging holder has not been
notified by the Internal Revenue Service that he is subject to backup
withholding as a result of failure to report all interest or dividends or (b)
the Internal Revenue Service has notified the exchanging holder that he is no
longer subject to backup withholding.
Certain exchanging holders of Old Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. A foreign individual and other exempt holders (e.g.,
corporations) should certify, in accordance with the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9, to such
exempt status on the Substitute Form W-9 provided in this Letter of
Transmittal. Nonresident aliens should submit Form W-8, available from the
Exchange Agent upon request.
6. Transfer Taxes. Holders tendering pursuant to the Offer will
not be obligated to pay brokerage commissions or fees or to pay transfer taxes
with respect to their exchange under the Offer unless the box entitled "Special
Issuance Instructions" in this Letter of Transmittal has been completed, or
unless the securities to be received upon exchange are to be issued to any
person other than the holder of the Old Notes tendered for exchange. The
Company will pay all other charges or expenses in connection with the Offer.
If holders tender Old Notes for exchange and the Offer is not
<PAGE> 13
consummated, such Old Notes will be returned to the holders at the Company
expense.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes specified in this Letter of
Transmittal.
7. Inadequate Space. If the space provided herein is inadequate,
the aggregate principal amount of the Old Notes being tendered and the security
numbers (if available) should be listed on a separate schedule attached hereto
and separately signed by all parties required to sign this Letter of
Transmittal.
8. Partial Tenders. Tenders of Old Notes will be accepted only
in integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Old Notes, fill in the principal amount
of Old Notes which are tendered in column (iv) of the "Description of Old
Notes." In the case of partial tenders, the Old Notes in fully registered form
for the remainder of the principal amount of the Old Notes will be sent to the
persons(s) signing this Letter of Transmittal, unless otherwise indicated in
the appropriate place on this Letter of Transmittal, as promptly as practicable
after the expiration or termination of the Offer.
Unless otherwise indicated in column (iv) in the box labeled
"Description of Old Notes," and subject to the terms and conditions of the
Offer, tenders made pursuant to this Letter of Transmittal will be deemed to
have been made with respect to the entire aggregate principal amount
represented by the Old Notes indicated in column (iii) of such box.
9. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated above for further instructions.
10. Validity and Acceptance of Tenders. All questions as to the
validity, form, eligibility (including time of receipt), acceptance and
withdrawal of Old Notes tendered for exchange will be determined by the Company
in its sole discretion, which determination shall be final and binding. The
Company reserves the absolute right to reject any and all Old Notes not
properly tendered and to reject any Old Notes the Company's acceptance of which
might, in the judgment of the Company or its counsel, be unlawful. The Company
also reserves the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to particular Old Notes either before or
after the Expiration Date (including the right to waive the ineligibility of
any holder who seeks to tender Old Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within such
period of time as the Company shall determine. The Company will use reasonable
efforts to give notification of defects or irregularities with respect to
tenders of Old Notes for exchange but shall not incur any liability for failure
to give such notification. Tenders of the Old Notes will not be deemed to have
been made until such irregularities have been cured or waived.
11. Requests for Assistance or Additional Copies. First Bank
National Association is the Exchange Agent. All tendered Old Notes, executed
Letters of Transmittal and other related documents should be directed to the
Exchange Agent at the addresses or facsimile number set forth on the first page
of this Letter of Transmittal. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
<PAGE> 14
First Bank National Association
108 E. 5th Street
St. Paul, Minnesota 55101
Attention: Richard Prokosch
Trust Officer
Facsimile Transmission:
(612) 244-0711
To confirm receipt:
Tel.
(612) 244-0721
<PAGE> 15
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
FOR ITS
12% SERIES B SENIOR SECURED NOTES DUE 2003
------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , , 1997,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration is a Prospectus dated , 199
("Prospectus") and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Exchange
Offer") relating to an offer by MAXXAM Group Holdings Inc., a Delaware
corporation ("Company"), to exchange all its outstanding 12% Senior Secured
Notes due 2003 ("Old Notes") for its 12% Series B Senior Secured Notes due
2003 upon the terms and subject to the conditions set forth in the Exchange
Offer.
WE ARE THE HOLDER OF RECORD OF OLD NOTES HELD BY US FOR YOUR ACCOUNT.
A TENDER FOR EXCHANGE OF SUCH OLD NOTES CAN BE MADE ONLY BY US AS THE HOLDER OF
RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
FOR EXCHANGE OLD NOTES HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to have us tender for
exchange on your behalf any or all of such Old Notes held by us for your
account, pursuant to the terms and subject to the conditions set forth in the
Exchange Offer.
Your attention is directed to the following:
1. The Exchange Offer and withdrawal rights will expire
at 5:00 P.M., New York City time, on , , 1997, unless
the Exchange Offer is extended. Your instructions to us should be
forwarded to us in ample time to permit us to submit a tender on
your behalf.
2. The Exchange Offer is made for all Old Notes
outstanding, constituting $100,000,000 aggregate principal amount as
of the date of the Prospectus.
3. The minimum permitted tender is $1,000 principal
amount of Old Notes, and all tenders must be in integral multiples of
$1,000.
4. The Offer is conditioned upon the satisfaction of
certain conditions set forth in the Prospectus under the caption "The
Exchange Offer--Conditions of the Exchange Offer." The Exchange Offer
is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange.
5. Tendering Eligible Holders (as defined in the
Prospectus) will not be obligated to pay brokerage fees or commissions
or, except as
<PAGE> 16
set forth in Instruction 6 of the Letter of Transmittal, transfer
taxes applicable to the exchange of Old Notes pursuant to the Exchange
Offer.
6. In all cases, exchange of Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer will be made only
after timely receipt by First Bank National Association ("Exchange
Agent") of (i) certificates representing such Old Notes or timely
confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at The Depository Trust Company ("Book-Entry
Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Procedures for
Tendering Old Notes," (ii) the Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, with any required
signature guarantees, or an Agent's Message (as defined in the
Prospectus) in connection with a book-entry transfer, and (iii) any
other documents required by the Letter of Transmittal. Accordingly,
payment may be made to tendering Eligible Holders at different times
if delivery of the Old Notes and other required documents occurs at
different times.
The Exchange Offer is being made solely by the Prospectus and the
related Letter of Transmittal and is being made to all Eligible Holders of Old
Notes. The Company is not aware of any state where the making of the Exchange
Offer is prohibited by administrative or judicial action pursuant to any valid
state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Exchange Offer or the acceptance of Old Notes
tendered for exchange pursuant thereto, the Company will make a good faith
effort to comply with any such state statute or seek to have such statute
declared inapplicable to the Exchange Offer. If, after such good faith effort,
the Company cannot comply with such state statute the Exchange Offer will not
be made to, nor will tenders be accepted from or on behalf of, the holders of
Old Notes in such state. In any jurisdiction where the securities, blue sky or
other laws require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer shall be deemed to be made on behalf of the Company
by one or more registered brokers or dealers that are licensed under the laws
of such jurisdiction.
If you wish to have us tender any or all of the Old Notes held by us
for your account, please instruct us by completing, executing and returning to
us the instruction form contained in this letter. If you authorize a tender for
exchange of your Old Notes, the entire aggregate principal amount of such Old
Notes will be tendered for exchange unless otherwise specified in such
instruction form. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO
PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE
EXCHANGE OFFER.
<PAGE> 17
INSTRUCTIONS WITH RESPECT TO THE
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ALL OF ITS
12% SENIOR SECURED NOTES DUE 2003
FOR ITS
12% SERIES B SENIOR SECURED NOTES DUE 2003
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus dated , 1997, and the related Letter of Transmittal
(which, together with any amendments or supplements thereto, collectively
constitute the "Exchange Offer") pursuant to an offer by MAXXAM Group Holdings
Inc., a Delaware corporation, to exchange all of its outstanding % Senior
Secured Notes due 2003 ("Old Notes") for its 12% Series B Senior Secured
Notes due 2003.
This will instruct you to tender the principal amount of Old Notes
indicated below (or, if no number is indicated below, the entire aggregate
principal amount) which are held by you for the account of the undersigned,
upon the terms and subject to the conditions set forth in the Exchange Offer.
- --------------------------------------------------------------------------------
Aggregate Principal Amount of Old Notes to be Tendered:* $______________________
Dated: ________________________, 199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGN HERE
Signature(s):___________________________________________________________________
Please print name(s):___________________________________________________________
Address:________________________________________________________________________
Area Code and Telephone Number:_________________________________________________
Tax Identification or Social Security Number:___________________________________
- --------------------------------------------------------------------------------
- -----------------
* Unless otherwise indicated, it will be assumed that the entire
principal amount of the Old Notes held by us for your account are to
be tendered for exchange. The minimum permitted tender is $1,000
principal amount of Old Notes; all other tenders must be in integral
multiples of $1,000.
<PAGE> 18
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
FOR ITS
12% SERIES B SENIOR SECURED NOTES DUE 2003
------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , , 1997,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
------------------------------------------------------------------
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
MAXXAM Group Holdings Inc., a Delaware corporation ("Company"), is
offering to exchange all of its outstanding 12% Senior Secured Notes due 2003
("Old Notes") for its 12% Series B Senior Secured Notes due 2003 upon the
terms and subject to the conditions set forth in the Prospectus dated
, 1997 ("Prospectus") and in the related Letter of Transmittal
(which, together with any amendment or supplements thereto, collectively
constitute the "Exchange Offer") enclosed herewith.
The Exchange Offer is conditioned upon satisfaction of certain
conditions set forth in the Prospectus under the caption "The Exchange Offer --
Conditions of the Exchange Offer." The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes being tendered for exchange.
Enclosed herewith for your information and forwarding to your clients
for whose accounts you hold Old Notes registered in your name or in the name of
your nominee are copies of the following documents:
1. The Prospectus dated , 1997.
2. The blue Letter of Transmittal to tender Old Notes
for exchange (for your use and for the information of your clients).
Facsimile copies of the Letter of Transmittal may be used to tender
Old Notes for exchange.
3. The gray Notice of Guaranteed Delivery (to be used to
tender Old Notes for exchange if certificates for Old Notes are not
immediately available or if such certificates for Old Notes and all
other required documents cannot be delivered to First Bank National
Association ("Exchange Agent") on or prior to the Expiration Date or
if the procedures for book-entry transfer cannot be completed on a
timely basis).
4. A yellow printed form of letter which may be sent to
your clients for whose accounts you hold Old Notes registered in your
name or in the name of your nominee, with space provided for obtaining
such clients' instructions with regard to the Exchange Offer.
5. Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
6. A return envelope addressed to the Exchange Agent.
<PAGE> 19
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS
AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL
RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 199 ,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
In order for Old Notes to be validly tendered pursuant to the Exchange
Offer, (i) a duly executed and properly completed Letter of Transmittal (or a
facsimile thereof) together with any required signature guarantees, or an
Agent's Message (as defined in the Prospectus) in connection with a book-entry
delivery of Old Notes, and any other documents required by the Letter of
Transmittal, must be received by the Depository on or prior to the Expiration
Date, and (ii) either certificates representing tendered Old Notes must be
received by the Exchange Agent or such Old Notes must be tendered by book-entry
transfer into the Exchange Agent account maintained at the Book-Entry Transfer
Facility (as described in the Prospectus), and Book-Entry Confirmation must be
received by the Exchange Agent, all in accordance with the instructions set
forth in the Letter of Transmittal and the Prospectus.
If an Eligible Holder (as defined in the Prospectus) desires to tender
Old Notes for exchange pursuant to the Exchange Offer and such Eligible
Holder's Old Note certificates are not immediately available or such Eligible
Holder cannot deliver the Old Note certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or such
Eligible Holder cannot complete the procedure for delivery by book-entry
transfer on a timely basis, such Old Notes may nevertheless be tendered for
exchange by following the guaranteed delivery procedures specified in the
Prospectus under the caption "The Exchange Offer -- Procedures for Tendering
Old Notes -- Guaranteed Delivery Procedures."
The Company will not pay any fees or commissions to any broker or
dealer or any other person for soliciting tenders of Old Notes pursuant to the
Exchange Offer. The Company will, however, upon request, reimburse you for
customary mailing and handling expenses incurred by you in forwarding any of
the enclosed materials to your clients. The Company will pay or cause to be
paid any transfer taxes applicable to the exchange of Old Notes pursuant to the
Exchange Offer, except as otherwise provided in Instruction 6 of the Letter of
Transmittal.
Any inquires you may have with respect to the Exchange Offer should be
addressed to the Exchange Agent, at its address and telephone numbers set forth
on the back cover of the Prospectus. Additional copies of the enclosed material
may be obtained from the Exchange Agent.
Very truly yours,
MAXXAM Group Holdings Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE
YOU OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS THEREIN.
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
FOR ITS
12% SERIES B SENIOR SECURED NOTES DUE 2003
As set forth in Prospectus described below, this Notice of Guaranteed
Delivery or one substantially equivalent hereto must be used to tender for
exchange 12% Senior Secured Notes due 2003 ("Old Notes"), of MAXXAM Group
Holdings Inc., a Delaware corporation ("Company"), pursuant to the Exchange
Offer (as defined below) if certificates for Old Notes are not immediately
available or the certificates for Old Notes and all other required documents
cannot be delivered to the Exchange Agent on or prior to the Expiration Date
(as defined in the Prospectus), or if the procedures for delivery by book-entry
transfer cannot be completed on a timely basis. This instrument may be
delivered by hand or transmitted by facsimile transmission or mailed to the
Exchange Agent.
The Exchange Agent for the Exchange Offer is:
FIRST BANK NATIONAL ASSOCIATION
By Mail By Hand/Overnight Express:
First Bank National Association First Bank National Association
180 E. 5th Street 180 E. 5th Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Richard Prokosch Attention: Richard Prokosch
Trust Officer Trust Officer
By Facsimile Transmission:
Confirm by telephone:
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the Instructions to the Letter of
Transmittal, such signature guarantee must appear in the applicable space
provided in the signature box in the Letter of Transmittal.
------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , , 1997,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
------------------------------------------------------------------
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and
subject to the conditions set forth in the Prospectus dated ,
199 ("Prospectus") and in the related Letter of Transmittal (which, together
with any amendments or supplements thereto, collectively constitute the
"Exchange Offer"), receipt of each of which is hereby acknowledged, the
principal amount of Old Notes indicated below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Procedures for Tendering Old Notes -- Guaranteed Delivery Procedures.
Signature(s) ___________________________________________________________________
Name(s) of Eligible Holders ____________________________________________________
________________________________________________________________________________
________________________________________________________________________________
PLEASE TYPE OR PRINT
Principal Amount of Old Notes Tendered for
Exchange $______________________________________________________________________
Old Note Certificate No(s). (If available) _____________________________________
________________________________________________________________________________
________________________________________________________________________________
Dated ___________________________________________, 199
Address(es) ____________________________________________________________________
________________________________________________________________________________
Zip Code
Area Code and Tel. No.(s) ______________________________________________________
(Check box if shares will be tendered by book-entry transfer)
[ ] The Depository Trust Company
Account Number _________________________________________________________________
<PAGE> 3
- --------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an Eligible Institution (as defined in the
Prospectus), having an office or correspondent in the United States, hereby (a)
represents that the above named person(s) "own(s)" the Old Notes tendered
hereby within the meaning of Rule 14e-4 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 14e-4"), (b) represents that such
tender of Old Notes complies with Rule 14e-4, and (c) guarantees to either
deliver to the Exchange Agent the certificates representing all the Old Notes
tendered hereby, in proper form for transfer, or to deliver such Old Notes
pursuant to the procedure for book-entry transfer into the Exchange Agent's
account at The Depository Trust Company, in either case together with the
Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, with any required signature guarantees or an Agent's Message (as
defined in the Prospectus) in the case of a book-entry transfer, and any other
required documents, all within three New York Stock Exchange trading days after
the date hereof.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- ----------------------------------- ------------------------------------
Name of Firm Authorized Signature
- ----------------------------------- -----------------------------------
Address Please Type or Print
- ----------------------------------- -----------------------------------
Zip Code
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS NOTICE. CERTIFICATES
SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE> 4
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
- -- Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: I.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE
SOCIAL SECURITY
NUMBER OF --
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, any
one of the individuals(1)
3. Husband and wife (joint account) The actual owner of the account or, if joint funds, either
person(1)
4. Custodian account of a minor (Uniform Gift to The minor(2)
Minors Act)
5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the
minor(1)
6. Account in the name of guardian or committee for a The ward, minor, or incompetent person(3)
designated ward, minor, or incompetent person
7. a. The usual revocable savings trust account The grantor-trustee(1)
(grantor is also trustee)
b. So-called trust account that is not a The actual owner(1)
legal or valid trust under State law
8. Sole proprietorship account The owner(4)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER
IDENTIFICATION
NUMBER OF --
- ------------------------------------------------------------------------------------------------------------------------------
9. A valid trust, estate, or pension trust The legal entity (Do not furnish the identifying number of
the personal representative or trustee unless the legal
entity itself is not designated in the account title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or educational organization The organization
account
12. Partnership account held in the name of the The partnership
business
13. Association, club or other tax-exempt organization The organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of Agriculture in the The public entity
name of a public entity (such as a State or local
government, school district, or prison) that
receives agricultural program payments
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security
number.
(3) Circle the ward's, minor's or incompetent person's name and furnish
such person's social security number.
<PAGE> 5
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number
will be considered to be that of the first name listed.
<PAGE> 6
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service (the
"IRS") and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
- A corporation.
- A financial institution.
- An organization exempt from tax under Section 501(a), or an
individual retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United
States, or any political subdivision or
instrumentality thereof.
- A foreign government, a political subdivision of a foreign
government, or any agency or instrumentality thereof.
- An international organization or any agency or instrumentality
thereof.
- A registered dealer in securities or commodities registered in
the U.S. or a possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under Section 584(a).
- An exempt charitable remainder trust, or a non-exempt trust
described in Section 4947(a)(1).
- An entity registered at all times under the Investment Company
Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under
Section 1441.
- Payments to partnerships not engaged in a trade or business in
the U.S. and which have at least one
nonresident partner.
- Payments of patronage dividends where the amount received is
not paid in money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding
include the following:
- Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this
interest is $600 or more and is paid in the course of the
payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest
dividends under Section 852).
- Payments described in Section 6049(b)(5) to non-resident
aliens.
- Payments on tax-free covenant bonds under Section 1451.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
<PAGE> 7
Certain payments other than interest, dividends, and patronage
dividends, that are not subject to information reporting are also not subject
to backup withholding. For details, see the regulations under Sections 6041,
6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most
recipients of dividend, interest, or other payments to give taxpayer
identification numbers to payers who must report the payments to IRS. IRS uses
the numbers for identification purposes. Payers must be given the numbers
whether or not recipients are required to file tax returns. Beginning January
1, 1984, payers must generally withhold 20% of taxable interest, dividend, and
certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--if you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE
<PAGE> 8
RETURN
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Re: MAXXAM Group Holdings Inc.
First Bank National Association
180 E. 5th Street
St. Paul, Minnesota 55101
Attn: Richard Prokosch
Trust Officer
