UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-3924
MAXXAM INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2078752
(State or other (I.R.S. Employer
jurisdiction Identification Number)
of incorporation or
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange
on which registered
[S] [C]
12-1/2% Subordinated Debentures due
December 15, 1999 American
14% Senior Subordinated Reset Notes due May
20, 2000 American
Common Stock, $.50 par value American, Pacific,
Philadelphia
Number of shares of common stock outstanding at March 1, 1996: 8,707,847
Securities registered pursuant to Section 12(g) of the Act: None.
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Based upon the March 1, 1996 American Stock Exchange closing price of
$44.375 per share, the aggregate market value of the Registrant's
outstanding voting stock held by non-affiliates was approximately $267.8
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's annual report to stockholders for the
fiscal year ended December 31, 1995 are incorporated by reference under
Part II. Certain portions of Registrant's definitive proxy statement, to be
filed with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the close of the Registrant's fiscal
year, are incorporated by reference under Part III.
PART I
ITEM 1. BUSINESS
GENERAL
MAXXAM Inc. and its majority and wholly owned subsidiaries are
collectively referred to herein as the "Company" or "MAXXAM" unless
otherwise indicated or the context indicates otherwise. The Company,
through Kaiser Aluminum Corporation ("Kaiser") and Kaiser's principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), is a
fully integrated aluminum company. The Company's voting interest in Kaiser
is approximately 62% on a fully diluted basis. See "--Aluminum
Operations." In addition, the Company is engaged in forest products
operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI")
and MGI's wholly owned subsidiaries, The Pacific Lumber Company and its
wholly owned subsidiaries (collectively referred to herein as "Pacific
Lumber," unless the context indicates otherwise), and Britt Lumber Co.,
Inc. ("Britt"). See "--Forest Products Operations." The Company is also
engaged in (a) real estate investment and development, managed through
MAXXAM Property Company (and its subsidiaries), MCO Properties Inc., Palmas
del Mar Properties, Inc. ("Palmas"), and various other wholly owned
subsidiaries, and (b) other commercial operations through subsidiaries,
including a Class 1 thoroughbred and quarter horse racing facility located
in the greater Houston metropolitan area. See "--Real Estate and Other
Operations." See Note 11 to the Consolidated Financial Statements
(contained in the Company's Annual Report to Stockholders--see Item 8) for
certain financial information by industry segment and geographic area.
ALUMINUM OPERATIONS
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 20%
of aluminum consumption in 1994, 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 Asia and Latin America,
where aluminum cans are a substantially lower percentage of the total
beverage container market than in the United States. 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 1994, 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 requirements. 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(1) 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 250% from 1990 levels
during the period from 1991 through 1994 to approximately 2.2 million tons
per year. These exports contributed to a significant increase in London
Metal Exchange ("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. See "--Recent Industry Trends."
Based upon information currently available, the Company 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 0.9 million tons of curtailed smelting capacity that could be
restarted by aluminum producers. The increases in primary aluminum
capacity during 1996-1998 are expected to come from one new smelter which
began operations in 1995 and is expected to reach its rated capacity of
approximately 466,000 tons per year in 1996, and the remainder principally
from incremental expansions of existing smelters.
Recent Industry Trends
Market fundamentals for aluminum improved significantly in 1994
as aluminum producers worldwide curtailed primary aluminum production.
Western world consumption of aluminum grew strongly, and customers
replenished inventories, particularly in the United States. 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. The Midwest U.S. transaction
price for primary aluminum in 1995 averaged approximately 86 cents per
pound, compared to a 1994 annual average of approximately 72 cents per
pound. The Midwest U.S. transaction price for primary aluminum averaged
approximately 79 cents per pound in December 1995.
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
(the "CIS") and in the People's Republic of China (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. 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. Overall, Kaiser
believes that the market fundamentals for aluminum will be good for the
near future, barring prolonged economic recession, and that demand is
likely to continue growing at levels sufficient to absorb the output from
restarts of industry smelter capacity and from the limited additions of new
supply under construction.
- ---------------
(1)All references to tons in this Report refer to metric tons of 2,204.6
pounds.
THE COMPANY
General
Kaiser is a direct subsidiary of MAXXAM and, through KACC,
operates in all principal aspects of the aluminum industry - the mining of
bauxite, the refining of bauxite into alumina, the production of primary
aluminum from alumina, and the manufacture of fabricated (including semi-
fabricated) aluminum products. In addition to the production utilized by
KACC in its operations, KACC sells significant amounts of alumina and
primary aluminum in domestic and international markets. In 1995, KACC
produced approximately 2,838,000 tons of alumina, of which approximately
72% was sold to third parties, and produced 413,600 tons of primary
aluminum, of which approximately 66% was sold to third parties. KACC is
also a major domestic supplier of fabricated aluminum products. In 1995,
KACC 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 KACC's fabricated products
are sold to distributors or used by customers as components in the
manufacture and assembly of finished end-use products. See Note 11 of the
Notes to the Consolidated Financial Statements.
The following table sets forth total shipments and intracompany
transfers of KACC's alumina, primary aluminum, and fabricated aluminum
operations:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands of tons)
<S> <C> <C> <C>
ALUMINA:
Shipments to Third Parties 2040.1 2086.7 1997.5
Intracompany Transfers 800.6 820.9 807.5
PRIMARY ALUMINUM:
Shipments to Third Parties 271.7 224 242.5
Intracompany Transfers 217.4 225.1 233.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 368.2 399 373.2
</TABLE>
Sensitivity to Prices and Hedging Programs
Kaiser's operating results 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
and on KACC's hedging strategies. Fabricated aluminum prices, which vary
considerably among products, are influenced by changes in the price of
primary aluminum and generally lag behind primary aluminum prices for
periods of up to six months. Changes in the market price of primary
aluminum also affect Kaiser's production costs of fabricated products
because they influence the price of aluminum scrap purchased by Kaiser and
Kaiser's labor costs, to the extent such costs are indexed to primary
aluminum prices. Through its variable cost structures, forward sales, and
hedging programs, KACC has attempted to mitigate its exposure to possible
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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Trends--
Aluminum Operations--Sensitivity to Prices and Hedging Programs" and Note
10 of the Notes to Consolidated Financial Statements.
Production Operations
The Company's operations are conducted through KACC's
decentralized business units which compete throughout the aluminum
industry.
- The alumina business unit, which mines bauxite and obtains
additional bauxite tonnage under long-term contracts, produced
approximately 8% of Western world alumina in 1995. During 1995,
KACC third party shipments of bauxite represented approximately
21% of bauxite mined. In addition, KACC third party shipments of
alumina represented approximately 72% of alumina produced.
KACC'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 KACC and two foreign smelters in which
KACC holds significant ownership interests. During 1995, KACC
third party shipments of primary aluminum represented
approximately 66% of primary aluminum production. KACC'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 KACC'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 KACC's bauxite mining and alumina
refining facilities as of December 31, 1995:
<TABLE>
<CAPTION>
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- ------------------------------------------------ ------------ ------------ ------------- --------------- ------------
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
--------------- ------------
6,775,000 8,000,000
=============== ============
Alumina Refining Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------------- ------------
2,877,000 5,750,000
=============== ============
<FN>
- ---------------
(1) Although KACC owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has the right to receive all of such entity's output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at the Alpart refinery.
</TABLE>
Bauxite mined in Jamaica by KJBC is refined into alumina at
KACC's plant at Gramercy, Louisiana, or is sold to third parties. In 1979,
the Government of Jamaica granted KACC a mining lease for the mining of
bauxite sufficient to supply KACC'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. KACC owns a 65% interest in Alpart and
Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. KACC has
management responsibility for the facility on a fee basis. KACC and Hydro
have agreed to be responsible for their proportionate shares of Alpart's
costs and expenses. 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. Alpart has entered into an agreement for the supply
of substantially all of its fuel oil through 1996. The balance of Alpart's
fuel oil requirements through 1996 will be purchased in the spot market.
KACC 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
under long-term tolling contracts. The stockholders, including KACC,
purchase bauxite from another QAL stockholder under long-term supply
contracts. KACC has contracted with QAL to take approximately 792,000 tons
per year of capacity or pay standby charges. KACC is unconditionally
obligated to pay amounts calculated to service its share ($88.9 million at
December 31, 1995) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs. QAL's annual production
capacity is approximately 3,300,000 tons, of which approximately 934,000
tons are available to KACC.
KACC'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, KACC sold all of
its bauxite to two customers, the largest of which accounted for
approximately 74% of such sales. KACC 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 world's second largest seller of
alumina to third parties. KACC'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.
Primary Aluminum Products
The following table lists KACC'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 the Company 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>
KACC 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 KACC'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, KACC 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 achieved environmental and operating savings, and engaged in
efforts to increase production through the use of improved, higher-
efficiency reduction cells.
Electric power represents an important production cost for KACC
at its aluminum smelters. In 1995, electric power purchase agreements for
KACC's facilities in the Pacific Northwest were successfully restructured,
which Kaiser anticipates will result in significantly lower electric power
costs in 1996 and beyond for the Mead and Tacoma, Washington, smelters and
the Trentwood, Washington, rolling mill compared to 1995 electric power
costs. From 1981 until 1995, electric power for KACC's Mead and Tacoma
smelters was purchased exclusively from the Bonneville Power Administration
(the "BPA") by KACC under a contract which expires in 2001. In April 1995,
the BPA agreed to allow each of its direct service industrial customers
(the "DSIs"), which include KACC, to purchase a portion of its requirement
for electric power from sources other than the BPA beginning October 1,
1995. In June 1995, KACC entered into an agreement with The Washington
Water Power Company (the "WWP") to purchase up to 50 megawatts of electric
power for its Pacific Northwest facilities for a five-year term beginning
October 1, 1995. KACC is receiving power under that contract, which power
displaces a portion of KACC's interruptible power from the BPA. In
addition, in 1995 KACC 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 KACC is obligated to
purchase from the BPA and which the BPA is obligated to sell to KACC, and
the replacement of such power with power to be purchased from other
suppliers. KACC is negotiating power purchase agreements for such power
with suppliers other than the BPA. Contracts for the purchase of all power
required by KACC's Mead and Tacoma smelters and Trentwood rolling mill for
1996, and for approximately one-half of such power for the period 1997 -
2000, have been finalized. Two lawsuits were filed in December 1995
against the BPA by various parties, one of which petitions for a review of
the BPA's "Record of Decision on Direct Service Industrial Customer
Requirements Power Sales Contract" issued on September 28, 1995, and one of
which petitions for review of, and to set aside, suspend, or modify the
action of the BPA to decide to offer five-year "block" power sales to the
DSIs. The effect of such lawsuits, if any, on KACC's new power purchase
contract with the BPA is not known. Certain of the DSIs, including KACC,
have intervened in the two lawsuits.
In 1995, KACC 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 KACC 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 KACC, have intervened
in the four lawsuits.
KACC began operating its Mead and Tacoma smelters in Washington
at 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 KACC, 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, KACC and the BPA entered into a contract for an amount of such
power, and thereafter KACC 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, KACC entered into a one-year power supply contract with the
BPA, for a term ending 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.
KACC manages, and owns a 90% interest in, the Volta Aluminium
Company Limited ("Valco") aluminum smelter in Ghana. The Valco smelter
uses pre-bake technology and processes alumina supplied by KACC and the
other participant into primary aluminum under long-term tolling contracts
which provide for proportionate payments by the participants in amounts
intended to pay not less than all of Valco's operating and financing costs.
KACC's share of the primary aluminum is sold to third parties. Power for
the Valco smelter is supplied under an agreement which expires in 2017.
The agreement indexes two-thirds of the price of the contract quantity of
power to the market 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 assuming normal rainfall during 1996, Valco should
have available sufficient electric power to operate at its current level
through 1996.
KACC 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. KACC supplies 49% of Anglesey's
alumina requirements and purchases 49% of Anglesey's aluminum output. KACC
sells its share of Anglesey's output to third parties. Power for the
Anglesey aluminum smelter is supplied under an agreement which expires in
2001.
KACC has developed and installed proprietary retrofit and control
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--enhances KACC's ability to compete more
effectively with the industry's newer smelters. KACC 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 KACC's technical and
managerial knowledge. See "--Research and Development."
KACC'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, KACC 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 KACC
who participate in the structuring of major sales transactions. A majority
of the business unit's sales are based upon long-term relationships with
metal merchants and end-users.
Fabricated Aluminum Products
KACC 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 KACC's fabricated products and accounted for approximately 12% of
Kaiser's sales revenue.
KACC'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. KACC has focused its fabricated products
operations on selected products in which KACC has production expertise,
high-quality capability, and geographic and other competitive advantages.
Flat-Rolled Products. The flat-rolled products business unit,
the largest of KACC's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington. The Trentwood
facility is KACC's largest fabricating plant and accounted for
approximately 64% of its 1995 fabricated aluminum products shipments. The
business unit supplies the beverage container market (producing body, lid,
and tab stock), the aerospace market, and the tooling plate, heat-treated
alloy and common alloy coil markets, both directly and through
distributors. During 1995, KACC successfully completed the 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.
KACC'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
KACC with a transportation advantage. Quality of products for the beverage
container industry and timeliness of delivery are the primary bases on
which KACC competes. Kaiser believes that capital improvements at
Trentwood have enhanced the quality of KACC's products for the beverage
container industry and the capacity and efficiency of KACC's manufacturing
operations, and that KACC is one of the highest quality producers of
aluminum beverage can stock in the world.
In 1995, the flat-rolled products business unit had 31 domestic
and foreign can stock customers, including the five major domestic beverage
can manufacturers. 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 "--Competition." The engineered components business unit's
headquarters is located in Erie, Pennsylvania, and there is a sales and
engineering office located in Detroit, Michigan, which 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.
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 ("PET") container
capacity is brought on line by plastics manufacturers. Within the aluminum
business, KACC competes with both domestic and foreign producers of
bauxite, alumina and primary aluminum, and with domestic and foreign
fabricators. Many of KACC's competitors have greater financial resources
than KACC. KACC's principal competitors in the sale of alumina include
Alcoa Alumina and Chemicals LLC, Billiton Marketing and Trading BV, and
Alcan Aluminium Limited. KACC competes with most aluminum producers in the
sale of primary aluminum.
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. KACC
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. KACC concentrates its fabricating
operations on selected products in which KACC 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 KACC's customers, including
intermediaries, would not have a material adverse effect on Kaiser's
financial condition or results of operations.
Research and Development
KACC conducts research and development activities principally at
three facilities--the Center for Technology ("CFT") in Pleasanton,
California; the Primary Aluminum Products Division Technology Center
("DTC") adjacent to the Mead smelter in Washington; and the Alumina
Development Laboratory ("ADL") at the Gramercy, Louisiana, refinery, 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. KACC's research staff totaled 157 at
December 31, 1995. KACC 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 KACC'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 stock, 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 strip-casting micromill process for producing can
sheet. The conversion and capital costs of these micromills are expected
to be significantly lower than conventional rolling mills and to result in
improved economics compared with historical manufacturing and
transportation costs for can stock. A pilot facility has been constructed
and operated at CFT. The first micromill is being constructed in Nevada as
a demonstration production facility, and KACC expects operational startup
of the facility at the end of 1996. KACC currently intends to finance the
cost of the construction of the Nevada micromill, estimated to be
approximately $45.0 million, from general corporate funds, including
possible borrowings under the 1994 Credit Agreement (defined below),
although KACC is in discussions with third parties which might provide some
or all of such funding. DTC maintains specialized laboratories and a
miniature carbon plant where experiments with new anode and cathode
technology are performed. DTC supports KACC'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 KACC's facilities and technical support to new
business ventures in cooperation with KACC's international business
development group.
KACC is actively engaged in efforts to license its technology and
sell technical and managerial assistance to other producers worldwide.
KACC'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, United Arab
Emirates, and the United Kingdom. KACC'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.
KACC has entered into agreements with respect to the Krasnoyarsk
smelter in Russia under which KACC 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 KACC entered into agreements with respect to the Nadvoitsy smelter in
Russia and the Korba smelter of the Bharat Aluminum Co. Ltd., in India,
under which KACC has licensed certain of its technology for use in such
facilities. Services under the Nadvoitsy agreement were completed in 1995,
and KACC expects that services under the Korba agreement will be completed
in 1996.
Operations in China
In 1994, KACC commenced efforts to increase its activities in
certain countries that are expected to be important suppliers of aluminum
and large customers for aluminum and alumina. KACC intends to use its
technical skills, together with capital investments, to form joint ventures
or acquire equity in facilities in such countries.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a
subsidiary of the Company, was formed to participate in the privatization,
modernization, expansion, and operation of aluminum smelting facilities in
the PRC. KYRIL has 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
organized under PRC law (the "Joint Venture").
The Joint Venture constitutes the first large-scale privatization
in the Chinese aluminum smelting industry. 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
special economic zone also in Gansu Province. The smelter at Lanzhou is
the fifth largest aluminum smelter in the PRC and produces approximately
55,000 tons of primary aluminum per year. The smelter at Lianhai produces
approximately 30,000 tons of primary aluminum per year. LAS's capital
contribution to the Joint Venture consisted primarily of the Lanzhou and
Lianhai smelters.
The Joint Venture Agreements include provisions for KYRIL to
contribute up to $59.7 million to the Joint Venture in exchange for up to a
49% interest in the Joint Venture (the "Capital Contribution") and
contemplate that such capital may be used to expand the annual production
capacity of LAS from 85,000 to 115,000 tons, construct a dry Soderberg
paste plant, install and upgrade pollution control equipment, and provide
for general corporate purposes, including working capital. KYRIL
contributed $9.0 million as a contribution 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
any arrangements agreed to by the parties, and there can be no assurance
such approvals will be obtained.
KACC, through its extruded products business unit, has entered
into contracts to form two small joint venture companies in the PRC. KACC
will indirectly acquire 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 will be owned by affiliates of Guizhou Guang
Da Construction Company.
Employees
During 1995, KACC employed an average of approximately 9,550
persons, compared with an average of 9,740 employees in 1994, and 10,220
employees in 1993. At December 31, 1995, KACC's work force was
approximately 9,620, including a domestic work force of approximately
5,950, of whom approximately 4,010 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 United
Steelworkers of America ("USWA") expiring September 30, 1998. The Labor
Contract covers KACC'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, KACC 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, KACC will acquire during 1996 up to an
additional $1,000 of such preference stock held in such plan for the
benefit of substantially the same employees. KACC made and will make
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.
Kaiser considers KACC's employee relations to be satisfactory.
Environmental Matters
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 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 and KACC are subject to various federal, state, and
local workplace health and safety laws and regulations ("Health Laws").
From time to time, KACC 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 KACC. See Item 3. "
Legal Proceedings--Kaiser Litigation--Environmental Litigation." 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 and Reauthorization Act of 1986 ("CERCLA").
KACC, along with certain other entities, has been named as a Potentially
Responsible Party ("PRP") for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA and, in certain
instances, may be exposed to joint and several liability for those costs or
damages to natural resources. KACC's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. In addition, in
connection with certain of its asset sales, KACC has agreed to indemnify
the purchasers with respect to certain liabilities (and associated
expenses) resulting from acts or omissions arising prior to such
dispositions, including environmental liabilities. While uncertainties are
inherent in the final outcome of these matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred,
Kaiser believes that the resolution of such uncertainties should not have a
material adverse effect on KACC's liquidity, consolidated financial
position or results of operations.
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 $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. In addition, $4.5 million in cash
expenditures in 1995, $3.6 million in 1994, and $7.2 million in 1993 were
charged to previously established reserves relating to environmental costs.
Approximately $8.4 million is expected to be charged to such reserves in 1996.
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. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Financial Condition and Investing and
Financing Activities--Aluminum Operations" and Note 9 of the Notes to
Consolidated Financial Statements.
Other
See "--Kaiser" above for a description of the locations and
general character of the principal plants, mines, and other materially
important physical properties relating to KACC's operations. KACC 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 KACC's domestic aluminum smelters and
alumina facility were initially designed early in KACC'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. KACC believes that KACC's domestic plants are cost
competitive on an international basis. Due to KACC'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.
KACC's obligations under its 1994 Credit Agreement are secured
by, among other things, mortgages on Kaiser's major domestic plants (other
than the Gramercy alumina plant).
FOREST PRODUCTS OPERATIONS
GENERAL
The Company also engages in forest products operations through
MGI and its wholly owned subsidiaries, Pacific Lumber and Britt. 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 (1,100 mile) 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 Holding Company (the "Scotia Pacific Timberlands"),
a special purpose Delaware corporation and wholly owned subsidiary of
Pacific Lumber ("Scotia Pacific"). 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 Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(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.
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.
HARVESTING PRACTICES
The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs"). THPs are required to be developed by
registered professional foresters and must be filed with, and approved by,
the California Department of Forestry ("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 proposed 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 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, 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 replacement with 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 customarily 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 under specific circumstances where it is advisable due to specific
site conditions (such as 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
that retain substantial numbers of trees on areas that are harvested,
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. The Fortuna sawmill, built
by Pacific Lumber in 1972, produces primarily common grade lumber. During
1995, the Fortuna mill produced approximately 94 million board feet of
lumber. The Carlotta sawmill was acquired in 1986 and produces both common
and upper grade redwood lumber. During 1995, the Carlotta mill produced
approximately 67 million board feet of lumber. 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, Sawmills "A" and "B" produced 79 and 51 million board
feet of lumber, respectively.
Pacific Lumber operates a finishing plant which processes rough
lumber into a variety of finished products such as trim, fascia, siding and
paneling. These finished products include the industry's largest variety
of customized trim and fascia patterns. Pacific Lumber also enhances the
value of some grades of common grade lumber by assembling knot-free pieces
of narrower and shorter lumber into wider or longer pieces in its state-of-
the-art end and edge glue plant. The result is a standard sized upper
grade product which can be sold at a significant premium over common grade
products.
Pacific Lumber dries the majority of its upper grade lumber
before it is sold. Upper grades of redwood lumber are generally air-dried
for six to eighteen months and then kiln-dried for seven to twenty-four
days to produce a dimensionally stable and high quality product which
generally commands higher prices than "green" lumber (which is lumber sold
before it has been dried). Upper grade Douglas-fir lumber is generally
kiln-dried immediately after it is cut. Pacific Lumber owns and operates
34 kilns, having an annual capacity of approximately 95 million board feet,
to dry its upper grades of lumber efficiently in order to produce a
quality, premium product. Pacific Lumber also maintains several large
enclosed storage sheds which hold approximately 25 million board feet of
lumber.
In addition, Pacific Lumber owns and operates a modern 25-
megawatt cogeneration power plant which is fueled almost entirely by the
wood residue from 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>
Year Ended December 31, 1995 Year Ended December 31, 1994
------------------------------------ ------------------------------------
% of Total % of Total
Lumber % of Total Lumber % of Total
Production Lumber % of Total Production Lumber % of Total
Volume Revenues Revenues Volume Revenues Revenues
Product ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood lumber 17% 38% 31% 17% 41% 33%
Common grade redwood lumber 54% 40% 32% 58% 36% 30%
---------- ---------- ---------- ---------- ---------- ----------
Total redwood lumber 71% 78% 63% 75% 77% 63%
---------- ---------- ---------- ---------- ---------- ----------
Upper grade Douglas-fir lumber 3% 5% 4% 3% 7% 5%
Common grade Douglas-fir lumber 23% 14% 11% 20% 13% 10%
---------- ---------- ---------- ---------- ---------- ----------
Total Douglas-fir lumber 26% 19% 15% 23% 20% 15%
---------- ---------- ---------- ---------- ---------- ----------
Other grades of lumber 3% 3% 4% 2% 3% 4%
---------- ---------- ---------- ---------- ---------- ----------
Total lumber 100% 100% 82% 100% 100% 82%
========== ========== ========== ========== ========== ==========
Logs 7% 9%
========== ==========
Hardwood chips 4% 4%
Softwood chips 5% 4%
---------- ----------
Total wood chips 9% 8%
========== ==========
</TABLE>
Lumber
Pacific Lumber primarily produces and markets lumber. In 1995,
Pacific Lumber sold approximately 277 million board feet of lumber, which
accounted for approximately 82% of Pacific Lumber's total revenues. Lumber
products vary greatly by the species and quality of the timber from which
it is produced. Lumber is sold not only by grade (such as "upper" grade
versus "common" grade), but also by board size and the drying process
associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category.
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 Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Forest Products 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 $11.9 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. 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% of these sales in
1995. 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 in 1995. 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. Competition in the common
grade redwood and Douglas-fir lumber market is more intense, and Pacific
Lumber competes with numerous large and small lumber producers.
EMPLOYEES
As of March 1, 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
million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes") and Scotia Pacific consummated its offering of $385 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 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 $115,100 per month in 1995 and is
expected to be approximately $112,100 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 Corporation
("Salmon Creek," a wholly owned subsidiary of Pacific Lumber) 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 third parties and which are then
sold to each other are transferred at the actual cost of such logs. Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.
BRITT LUMBER OPERATIONS
Business
Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters. Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers. Britt was incorporated in 1965 and
operated as an independent manufacturer of fence products until July 1990,
when it was purchased by a subsidiary of the Company. Britt purchases
small diameter (6 to 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. Over one-half of its
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.
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
March 1, 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 in competition with the northern
California mills of Louisiana Pacific, Georgia Pacific and Eel River.
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
Company does not expect that compliance with such existing laws and
regulations will have a material adverse effect on its future liquidity,
consolidated operating results or financial position; however, these laws
and regulations 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 materially
adversely affect the Company (see below).
In 1994, the 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
("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.
In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA. In October 1992, the United States Fish and
Wildlife Service ("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 6,000 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 proposed to be 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 January 1994, the USFWS proposed designation of critical
habitat for the marbled murrelet under the ESA (which proposed designation
did not include any of Pacific Lumber's timberlands). In July 1995, in a
case entitled Marbled Murrelet v. Babbitt (Case No. C-91-522R), a U.S.
District Court in Seattle ordered the USFWS to make its final designation
of critical habitat for the marbled murrelet by January 29, 1996 and to
issue its proposed final designation of critical habitat by August 1, 1995.
On August 10, 1995, 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. In February 1996, the Court extended until May 15, 1996 the
deadline for final designation of critical habitat for the marbled
murrelet. 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 liquidity,
consolidated financial position or results of operations 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 condition
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.
Pacific Lumber's wildlife biologists are conducting research
concerning the marbled murrelet on its timberlands and are currently
developing a habitat conservation plan for the marbled murrelet (the
"Murrelet HCP"). The Murrelet HCP, which is designed to mitigate the
impact of the Proposed Designation, has been submitted to the USFWS.
Pacific Lumber is working with the USFWS and other government agencies on
the Murrelet HCP. It is uncertain when the Murrelet HCP review process
will be completed or what the outcome will be of the review process or its
effect upon the Company's liquidity, consolidated financial position or
results of operations.
There also 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. It is uncertain what effect any such other listings and/or
designations of critical habitat would have on the Company's liquidity,
consolidated financial position or results of operations.
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 Pacific Lumber expects
that such groups and individuals will continue to file objections to
certain of Pacific Lumber's THPs. In addition, lawsuits are pending which
seek to prevent Pacific Lumber from implementing certain of its approved
THPs and other harvesting operations. These challenges have severely
restricted Pacific Lumber's ability to harvest virgin old growth timber on
its property (and to a lesser extent, its residual old growth timber). To
date, challenges with respect to Pacific Lumber's THPs relating to young
growth and residual old growth timber have been limited; however, no
assurance can be given as to the extent of such challenges in the future.
Pacific Lumber 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 Pacific Lumber from conducting a portion of its operations, to
date such challenges have not had a material adverse effect on the
Company's liquidity, consolidated financial position or results of
operations. It is, however, impossible to predict the future nature or
degree of such challenges or their ultimate impact on the liquidity,
consolidated operating results or financial position of the Company. See
also Item 3. "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 comprehensive wildlife management
plan for the northern spotted owl (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 take 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. 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. The plaintiffs in the Marbled Murrelet action have
requested injunctive relief with respect to the Owl Plan. See Item 3.
"Legal Proceedings--Pacific Lumber Litigation."
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. For example, a bill has
been introduced in the California legislature which would, among other
things, initiate negotiations by the California Resources Agency for the
public acquisition of approximately 4,700 acres of Pacific Lumber's
timberlands, 3,000 acres of which is a contiguous block of virgin old
growth redwood forest often referred to as the "Headwaters Forest." In
addition, the U.S. Congressman from the congressional district in which
Pacific Lumber is located has introduced a bill which would, among other
things, authorize public acquisition of the Headwaters Forest and up to
1,700 contiguous acres. The bill would authorize the Secretary of the
Interior to exchange government-owned timberlands and other property for
the appraised fair market value of the Headwaters Forest and any contiguous
acreage to be acquired. Because such bills are subject to amendment, it is
premature to assess the ultimate content of these bills, the likelihood of
any of the bills passing or the impact of any of these bills on the 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,
however, impossible to assess the effect of such matters on the future
liquidity, consolidated financial position or operating results of the
Company.
REAL ESTATE AND OTHER OPERATIONS
REAL ESTATE AND RESORT OPERATIONS
General
The Company, 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 December 31, 1995, the Company had approximately $23.1
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 December 31, 1995, these receivables had
a weighted average interest rate of approximately 9.4%, a weighted average
maturity of less than four years and average borrower equity of
approximately 45%. As of December 31, 1995, the Company also held $8.4
million of other receivables as a portion of the RTC Portfolio (defined
below).
Principal Properties
Texas. In June 1991, a wholly owned subsidiary of the Company
purchased from the RTC at an auction, for approximately $122.3 million, 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 (the "RTC Portfolio"). Substantially all of the real
property was located in Texas, with the largest concentration in the
vicinity of San Antonio, Houston, Austin and Dallas. From 1992 to December
31, 1995, an aggregate of approximately $28.7 million in loans (which
represented nine loans) were sold or paid off and thirty-one properties
were sold for aggregate consideration of approximately $157.5 million.
These transactions resulted in aggregate gains of $77.3 million. As of
December 31, 1995, the Company held six loans (including two resulting from
property sales) and eleven properties (including five acquired via
foreclosures), which had an aggregate net book value of $32.1 million. All
of the remaining assets are being managed (and marketed for sale or
disposition as appropriate) by the Company.
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, was acquired in 1984.
Palmas del Mar consists of approximately 1,919 acres of undeveloped land,
100 condominiums utilized in its time-sharing program (comprising 5,300
time-share intervals of which approximately 1,036 remain to be sold), a
100-room hotel and adjacent executive convention center known as the
Candelero Hotel, a 23-room luxury hotel known as the Palmas Inn, a casino,
a Gary Player-designed 18-hole golf course, 20 tennis courts, golf and
tennis pro shops, restaurants, beach and pool facilities, an equestrian
center and a 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, the Company has
been actively engaged in the development and sale of condominiums, estate
lots and villas. 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 December 31, 1995, the net book value of
Palmas' assets was approximately $16.2 million
Fountain Hills. In 1968, a subsidiary of the Company purchased
and began developing approximately 12,100 acres of real property at
Fountain Hills, Arizona, which is located near Phoenix and adjacent to
Scottsdale, Arizona. As of December 31, 1995, Fountain Hills had
approximately 3,910 acres of undeveloped residential land, 101 developed
commercial and industrial lots, 121 acres of undeveloped commercial and
industrial land and 102 developed residential lots available for sale. The
population of Fountain Hills is approximately 13,000. The Company 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 the Company 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.
Additionally, in 1994 a subsidiary of the Company 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 development is being undertaken
by SunRidge Canyon L.L.C., an Arizona limited liability company organized
by a subsidiary of the Company and SunCor Development Company. A subsidiary
of the Company holds a 50% equity interest in the venture.
The Company 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 the Company purchased
and began developing approximately 16,700 acres of real property at Lake
Havasu City, Arizona, which were offered for sale in the form of subdivided
single and multiple family residential, commercial and industrial sites.
The Company has sold substantially all of its lot inventory in Lake Havasu
City and is currently planning the development of the remaining 145 acres.
Rancho Mirage. In 1991, a subsidiary of the Company 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 the Company 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. The Company is currently marketing the project's 23 fully-
developed lots.
Other. The Company, through its subsidiaries, owns a number of
other properties in Arizona, New Mexico, Texas and Colorado. Efforts are
underway to sell most of these properties. Most notably, in June 1995 the
Company sold approximately 6,000 acres at its Waterwood National Resort and
Country Club project in Texas, for an aggregate of $4.1 million.
Marketing
The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. In recent years, the Company
has constructed residential units and sold time-share intervals at certain
of its real estate developments. The Company intends to continue selling
land to builders and developers and lots to individuals and expects to
continue to construct and sell completed residential units at certain of
its developments. It also expects to sell certain of its commercial real
estate assets. All sales are made directly to purchasers through the
Company's marketing personnel, independent contractors or through
independent real estate brokers who are compensated through the payment of
customary real estate brokerage commissions.
Competition and Regulation and Other Industry Factors
There is intense competition among companies in the real estate
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.
The Company's real estate operations are subject to comprehensive
federal, state and local regulation. Applicable statutes and regulations
may require disclosure of certain information concerning real estate
developments and credit policies of the Company and its subsidiaries.
Periodic approval is required from various agencies in connection with the
layout and design of developments, the nature and extent of improvements,
construction activity, land use, zoning, and numerous other matters.
Failure to obtain such approval, or periodic renewal thereof, could
adversely affect the real estate development and marketing operations of
the Company and its subsidiaries. Various jurisdictions also require
inspection of properties by appropriate authorities, approval of sales
literature, disclosure to purchasers of specific information, bonding for
property improvements, approval of real estate contract forms and delivery
to purchasers of a report describing the property.
Employees
As of March 1, 1996, the Company's real estate operations had
approximately 800 employees, of which approximately 720 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. The
Company and the union are engaged in collective bargaining negotiations.
Until the collective bargaining process is completed, the Company is unable
to estimate the impact, if any, the union representation of its employees
may have on its resort operations at Palmas. The union is encouraging a
24-hour work stoppage. The Company is uncertain if a work stoppage will
occur; however, Palmas is taking steps to ensure an adequate employment
force if a work stoppage does take place.
SAM HOUSTON RACE PARK
General
In July 1993, the Company, through subsidiaries, acquired various
interests in Sam Houston Race Park, Ltd., a Texas limited partnership
("SHRP, Ltd.") 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, SHRP, Ltd. and two affiliated entities
(collectively, the "Debtors") 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 Debtors's plan of
reorganization and on October 6, 1995, the transactions called for by the
plan of reorganization (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.
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 the Company contributed $5.8 million).
Additionally, a wholly owned subsidiary of the Company 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 the Company 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. The Company has guaranteed its subsidiaries' share of the
line of credit, which totaled $1.6 million. On October 20, 1995, a wholly
owned subsidiary of the Company 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 the Company hold, directly or
indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd.
The Race Park has sustained substantial operating losses since it
began operations in April 1994. The cash contribution made by the New SHRP
Investor Group was intended to provide sufficient capital to enable the
Race Park to meet is obligations for a three-year period. During such
period the Race Park must develop a market for horse racing and compete
with other forms of entertainment in the greater Houston metropolitian
area. The only continuing obligation the Company has with respect to the
Race Park is limited to its $1.6 million commitment under the line of
credit agreement, as previously described. Accordingly, the ability of the
Race Park to continue in existence is largely dependent upon its ability to
achieve a level of cash flow from operations sufficient to enable it to
meet its operating and financing obligations as they become due. In this
regard, management has undertaken a number of steps designed to improve the
Race Park's operations. These steps include but are not limited to: (i)
the reorganization of SHRP, Ltd. which provided new equity capital and a
reduction and restructuring of its principal indebtedness, (ii)
renegotiating contracts with vendors, (iii) reducing staffing and other
administrative costs, and (iv) strengthening management with experienced
race track personnel. However, there can be no assurance that the
operating changes and the capital infusion (together with the $1.7 million
line of credit) will be sufficient to enable the Race Park to achieve the
level of cash flow from operations necessary to enable it to meet its long-
term operating and financing obligations as they become due. Should the
Race Park be unable to achieve sufficient levels of cash flows from its
operations, it will be required to seek additional capital, which may or
may not be available.
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 how wagering proceeds are to be allocated 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 has been able to obtain sufficient
number of live race days (102) for 1996. The Race Park believes that it
will be able to attract sufficient horses to conduct its live racing during
1996.
EMPLOYEES
At March 1, 1996, the Company and its subsidiaries employed
approximately 2,500 persons, exclusive of those involved in Aluminum
Operations.
ITEM 2. PROPERTIES
For information concerning the principal properties and
operations of the Company, see Item 1. "Business."
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The following describes certain legal proceedings in which the
Company or its subsidiaries are involved. The Company and certain of its
subsidiaries are also involved in various claims, lawsuits and other
proceedings not discussed herein which relate to a wide variety of matters.
Uncertainties are inherent in the final outcome of those and the below-
described matters and it is presently impossible to determine the actual
costs that ultimately may be incurred. Nevertheless, the Company believes
(unless otherwise indicated below) that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's liquidity, consolidated financial position
or results of operations.
Certain present and former directors and officers of the Company
are defendants in certain of the actions described below. The Company's
bylaws provide for indemnification of its officers and directors to the
fullest extent permitted by Delaware law. The Company is obligated to
advance defense costs to its officers and directors, subject to the
individual's obligation to repay such amount if it is ultimately determined
that the individual was not entitled to indemnification. In addition, the
Company's indemnity obligation can under certain circumstances include
amounts other than defense costs, including judgments and settlements.
USAT MATTERS
In October 1994, the Company learned that the United States
Department of Treasury's Office of Thrift Supervision ("OTS") had commenced
an investigation into United Financial Group, Inc. ("UFG") and the
insolvency of its wholly owned subsidiary, United Savings Association of
Texas ("USAT"). 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, the Company owned approximately 13% of the voting stock of
UFG. The OTS, successor to the FHLBB for some purposes, subsequently
requested certain documents from the Company which the Company has been
working to provide. The OTS also has deposed certain current and former
officers and/or directors of the Company.
On December 26, 1995, the OTS initiated formal administrative
proceedings (the "OTS action") against the Company and others by filing a
Notice of Charges (the "Notice"). The Notice alleges misconduct by the
Company, Federated Development Company ("Federated"), Mr. Charles Hurwitz
and others (the "respondents") with respect to the failure of USAT. Mr.
Hurwitz is the Chairman of the Board, Chief Executive Officer and President
of the Company. 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 60.7% of the aggregate voting power of the
Company. 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
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 the
Company and Federated, civil money penalties and a removal from, and
prohibition against the Company and the other respondents engaging in, the
banking industry. On February 20, 1996, the respondents filed their
responses to the Notice. The administrative law judge has set this matter
for hearing on January 21, 1997. It is impossible to predict the ultimate
outcome of the foregoing matter or its potential impact on the Company's
liquidity, consolidated financial position or results of operations.
In a separate but related matter, on December 7, 1995, the
Company 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 the Company, whose bid was lower than the Company's bid (i.e. more
costly to the government and taxpayers). The action is entitled MAXXAM
Inc. v. Office of Thrift Supervision, Department of the Treasury (No.
95-60753) (the "MAXXAM v. OTS action"). The bidder that was awarded USAT
subsequently filed a motion to intervene in this action and on March 6,
1996, the Court granted the motion.
In another separate but related matter, on February 21, 1996, the
Company filed an action, pursuant to the Freedom of Information Act,
entitled MAXXAM Inc. v. FDIC (No. H-96-6041) (the "MAXXAM v. FDIC action")
in the U.S. District Court for the Southern District of Texas seeking to
compel the Federal Deposit Insurance Corporation ("FDIC") to produce
certain documents concerning the bidding process for and award of USAT.
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-95-3936) (the "FDIC action") in the U.S. District
Court for the Southern District of Texas. This action did not name the
Company 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 the Company 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. The Company and certain other respondents in the OTS
action subsequently filed motions to intervene in this action; the Company
conditioned its motion 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 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. It is impossible to predict the ultimate outcome of
the foregoing matter or its potential impact on the Company's liquidity,
consolidated financial position or results of operations.
In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. was filed in the U.S. District Court for the Northern
District of California (No. C950322) and names as defendants the Company,
Mr. Hurwitz, MGI, Federated, UFG and a former director of the Company.
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. The Company'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.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against the Company, MGI,
MAXXAM Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and
certain of the Company's directors in the Court of Chancery of the State of
Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al.,
Civil Action No. 10785. Plaintiff purports to bring this action as a
stockholder of the Company derivatively on behalf of the Company and MPI.
In May 1989, a second action containing substantially similar allegations
was filed in the Court of Chancery of the State of Delaware, entitled Wolf
v. Hurwitz, et al. (No. 10846) and the two cases were consolidated
(collectively, the "Zero Coupon Note actions"). The Zero Coupon Note
actions relate 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 the Company's
common stock into which they were converted) for $10.3 million. In July
1989, Mr. Hurwitz exercised the Call and acquired 990,400 shares of the
Company's common stock. The Zero Coupon Note actions generally allege that
in entering into the Prior Agreement Mr. Hurwitz usurped a corporate
opportunity belonging to the Company, that the Put and Call Agreement
constituted a waste of corporate assets of the Company and MPI, and that
the defendant directors breached their fiduciary duties in connection with
these matters. Plaintiffs seek to have the Put and Call Agreement declared
null and void, among other remedies.
RANCHO MIRAGE LITIGATION
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 the
Company, Federated, MCO Properties Inc., a wholly owned subsidiary of the
Company ("MCOP"), and the Company's Board of Directors. The action alleges
abuse of control and breaches of fiduciary obligations based on, and unfair
consideration for, the Company's Agreement in Principle with Federated to
(a) forgive payments of principal and interest of approximately $32.2
million due from Federated under two loan agreements entered into between
MCOP and Federated in 1987 (and later assigned by MCOP to the Company), 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 the
Company 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); Kahn, et al. v. Federated Development Company, et al.
(No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377);
Glinert, et al. v. Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM
Inc., et al. (No. 12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No.
12404). The Kahn, Glinert, Friscia and Kassoway actions have been
consolidated with the Progressive United action into In re MAXXAM
Inc./Federated Development Shareholders Litigation (No. 12111); the NL
Industries action has been "coordinated" with the consolidated actions; 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
the Company (as nominal defendant) and Federated. This action contains
allegations and seeks relief similar to that contained in the In re MAXXAM
Inc./Federated Development Shareholders Litigation. 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 has scheduled a hearing for
April 2, 1996 on various trial-related matters, including defendants'
motion to dismiss the claims relating to the 1987 loan transactions.
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 filed a cost recovery complaint (the
"Complaint") in the United States District Court for the Middle District of
North Carolina, Rockingham Division, No. C-89-231-R, which, as amended,
includes KACC and a number of other defendants. The Complaint, as amended,
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 remedy selected for the Sites is approximately
$32 million. Other possible remedies described in the ROD would have
estimated costs 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 - $8.0 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 soil remedial design and remedial action described in
the ROD for three of the Sites. The estimated cost as set forth in the ROD
for the remedial action at the three Sites is approximately $27 million. A
number of other companies are also named as respondents. KACC has entered
into 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 such group of respondents which, as a group,
are intending to comply with the Administrative Orders to the extent
consistent with applicable law. By letters dated December 30, 1993, the
EPA notified KACC of its potential liability for, and requested that KACC,
along with a number 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 is 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 Orders and that should additional evidence be presented
which demonstrates KACC's liability in excess of the amount contributed to
date, KACC would be willing to discuss the matter further at that time.
United States of America v. Kaiser Aluminum & Chemical
Corporation
In February 1989, a civil action was filed by the United States
Department of Justice (the "DOJ") at the request of the EPA against KACC in
the United States District Court for the Eastern District of Washington,
Case No. 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 SIP opacity
limit and the assessment of civil penalties of not more than $25,000 per
day.
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 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. Kaiser 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 they had incurred or expected to incur costs and damages
of approximately $49 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, the Plaintiffs settled their claims against Catellus in exchange
for payment of approximately $3.25 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 the Final Judgment on those claims
concluding that KACC is liable for various costs and interest, aggregating
approximately $2.2 million, fifty percent (50%) of the future costs of
cleaning up certain parts of the Property and certain fees and costs
associated specifically with the claim by Catellus against KACC. 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, which
KACC intends to contest, seeking reimbursement of fees and costs from KACC
in the aggregate amount of $2.76 million.
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 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 $.5 million. A PRP
participation agreement is under negotiation.
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 fifteen years. At December 31, 1995, the number of such claims
pending was approximately 59,700, as compared with 25,200 at December 31,
1994. In 1995, approximately 41,700 of such claims were received and 7,200
settled or dismissed. 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 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. For
additional information, see Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition and
Investing and Financing Activities--Aluminum Operations" for additional
information. See also Note 9 to the Company's Consolidated Financial
Statements under the heading "Asbestos Contingencies."
OTHER KAISER PROCEEDINGS
Recapitalization Litigation
On September 11, 1995, Kaiser announced that it had appointed an
independent committee of its Board of Directors to consider a possible
recapitalization transaction. On February 5, 1996, Kaiser publicly
announced that it had filed a preliminary proxy statement with the
Securities and Exchange Commission relating to a proposed recapitalization.
A special shareholders' meeting to consider the recapitalization was
subsequently scheduled for April 10, 1996 and the definitive proxy
statement was mailed to shareholders commencing on March 20, 1996. See
Note 7 to the Consolidated Financial Statements of the Company under Item 8
for a description of the proposed recapitalization. On March 19, 1996, a
lawsuit was filed against the Company, Kaiser and Kaiser's directors
challenging and seeking to enjoin the recapitalization and the April 10,
1996 special shareholders' meeting. 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, purports to be a class action by persons
who as of March 18, 1996 (the record date for the April 10, 1996 meeting)
owned Kaiser's outstanding common stock and 8.255% PRIDES, Convertible
Preferred Stock ("PRIDES"). Plaintiffs allege, among other things,
breaches of fiduciary duties by certain defendants and that the proposed
recapitalization violates Delaware law and the certificate of designation
for the PRIDES. Plaintiffs seek injunctive relief, rescission, rescissory
damages and other relief. A hearing on the motion for injunctive relief is
presently scheduled for April 8, 1996.
Hammons Action
On March 5, 1996, a class action complaint was filed in
California against the Company, Alcan Aluminum Corp., Aluminum Company of
America, Alumax, Inc. Reynolds Metal Company, the Aluminum Association and
others 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 state antitrust laws, to raise, stabilize and maintain the
price of primary aluminum and aluminum products through cuts in production
allegedly in connection with the ratification of a Memorandum of
Understanding in 1994 by representatives of the authorities of Australia,
Canada, the European Union, Norway, the Russian Federation and the United
States. 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,
before trebling.
DOJ Investigation
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 Kaiser or any of its competitors during that period. Management
believes that Kaiser's actions have at all times been appropriate, and
Kaiser 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 stock from January 1, 1994, through
March 31, 1995; (ii) the percentage of aluminum scrap and primary aluminum
ingot used by KACC to produce can stock and the manner in which KACC's cost
of acquiring aluminum scrap is factored into its can stock prices; and
(iii) any communications with others regarding any actual or contemplated
changes in its method of pricing can stock from January 1, 1994, through
March 31, 1995. Kaiser 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.
PACIFIC LUMBER LITIGATION
In September 1989, seven past and present employees of Pacific
Lumber brought an action against Pacific Lumber, the Company, MGI, and
certain current and former directors and officers of the Company, Pacific
Lumber and MGI, in the United States District Court, Northern District of
California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No.
C89-3500) (the "Kayes action"). Plaintiffs purport to be participants in
or beneficiaries of Pacific Lumber's former Retirement Plan (the
"Retirement Plan") for whom a group annuity contract was purchased from
Executive Life Insurance Company ("Executive Life") in 1986 after
termination of the Retirement Plan. The Kayes action alleges that the
Company, Pacific Lumber and MGI defendants breached their ERISA fiduciary
duties to participants and beneficiaries of the Retirement Plan by
purchasing the group annuity contract from Executive Life and selecting
Executive Life to administer the annuity payments. Plaintiffs seek, among
other things, a new group annuity contract on behalf of the Retirement Plan
participants and beneficiaries. This case was dismissed on April 14, 1993
and was refiled as Jack Miller, et al. v. Pacific Lumber Company, et al.
(No. C-89-3500-SBA) (the "Miller action") on April 26, 1993. The Miller
action was dismissed on May 14, 1993. On October 22, 1994, the President
signed the Pension Annuitants' Protection Act of 1994, which is intended,
in part, to overturn the District Court's dismissal of the Miller action
and to make available certain remedies not previously provided under ERISA.
On April 10, 1995, the U.S. Ninth Circuit Court of Appeals reversed the
dismissal of the Miller action. On August 7, 1995, the defendants
requested the U.S. Supreme Court to review the case by filing a petition
for writ of certiorari. The U.S. Supreme Court denied defendants' petition
for writ of certiorari.
In June 1991, the U.S. Department of Labor filed a civil action
entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The
Pacific Lumber Company, et al. (No. 91-1812-RHS) (the "DOL civil action")
in the United States District Court, Northern District of California,
against the Company, Pacific Lumber, MGI and certain of their current and
former officers and directors. The allegations in the DOL civil action are
substantially similar to that in the Kayes action.
On December 8, 1995, the parties in the Kayes/Miller actions and
DOL civil action reached an agreement in principle to settle these matters
(for an amount which would not result in any additional charge to the
Company's results of operations). The proposed settlement is subject to
execution of a definitive agreement and other contingencies. A status
conference is scheduled for April 12, 1996 in the Kayes/Miller action and
the DOL civil action. A special committee of the Board of Directors of the
Company has been appointed to review the proposed settlement and a related
derivative action. The Company believes the settlement of this litigation
will not have a material adverse effect on the Company's liquidity,
consolidated financial position or results of operations.
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 exemptions for forest health which
Pacific Lumber and its subsidiaries had previously filed covering their
entire timberlands. 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 timber harvesting operations pursuant to the forest
health exemptions 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 dissolved a temporary restraining order
("TRO") and issued a preliminary injunction enjoining Pacific Lumber and
its subsidiaries from conducting timber harvesting operations under
portions of the forest health exemptions until a trial on the merits of the
case. The majority of the timberlands which are subject to the injunction
are timberlands which have been proposed as critical habitat for the
marbled murrelet. In October 1995, Pacific Lumber appealed the issuance of
the preliminary injunction to the U.S. Ninth Circuit Court of Appeals; oral
argument in the appeal was held March 14, 1996. On March 6, 1996, the
plaintiffs asked for leave to amend their pleadings to add additional
claims and seek additional injunctive relief concerning, among other
things, Pacific Lumber's Owl Plan and up to eight other THPs (only two of
which are presently approved). The eight THPs cover approximately 1,360
acres of the Company's timberlands and represent a substantial portion of
the volume Pacific Lumber and its subsidiaries are planning to utilize in
their operations for 1996. On March 15, 1996, the Court granted
plaintiffs' motion to file an amended complaint and issued a TRO enjoining
Pacific Lumber and its subsidiaries from harvesting pursuant to the eight
THPs. On March 20, 1996, the Court held a hearing on plaintiffs' motion for
preliminary injunction and extended the TRO for ten additional days while
it considers the motion. In view of the recent developments in the Marbled
Murrelet action, the Company is uncertain as to whether or not this matter
will have a material adverse effect on the liquidity, results of
operations, or financial position of Pacific Lumber.
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.
OTHER LITIGATION MATTERS
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 liquidity, consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reference is made to this section in the portions of the
Company's 1995 Annual Report to Stockholders (the "Annual Report") which
are included as part of Exhibit 13.1 hereto and incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements and
Notes thereto and the quarterly financial information in the portions of
the Annual Report which are included as part of Exhibit 13.1 hereto and
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Information required under Part III (Items 10, 11, 12 and 13) has
been omitted from this report since the Company intends to file with the
Securities and Exchange Commission, not later than 120 days after the close
of its fiscal year, a definitive proxy statement pursuant to Regulation 14A
which involves the election of directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
The Consolidated Financial Statements and the
Report of Independent Public Accountants are
included on pages 39 to 72 of the Annual Report
which are included as part of Exhibit 13.1 hereto
and incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES: PAGE
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants on Financial Statement Schedule 40
Schedule I - Condensed Financial Information of Registrant at December 31, 1995
and 1994 and for the years ended December 31, 1995, 1994 and 1993 41-44
</TABLE>
All other schedules are inapplicable or the
required information is included in the
Consolidated Financial Statements or the Notes
thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 46), which index is incorporated
herein by reference.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in MAXXAM Inc.'s
1995 Annual Report to Stockholders incorporated by reference in this Form
10-K, 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 schedule listed in the index on page 39 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 schedule 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
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (UNCONSOLIDATED)
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---------- ----------
(In millions of
dollars)
<S> <C> <C>
ASSETS
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>
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>
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>
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).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized,
who has signed this report on behalf of the Registrant and as the chief
financial officer of the Registrant.
MAXXAM INC.
Date: March 28, 1996 By: PAUL N. SCHWARTZ
Paul N. Schwartz
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: March 28, 1996 By: CHARLES E. HURWITZ
Charles E. Hurwitz
Chairman of the Board, President
and
Chief Executive Officer
Date: March 28, 1996 By: ROBERT J. CRUIKSHANK
Robert J. Cruikshank
Director
Date: March 28, 1996 By: EZRA G. LEVIN
Ezra G. Levin
Director
Date: March 28, 1996 By: STANLEY D. ROSENBERG
Stanley D. Rosenberg
Director
Date: March 28, 1996 By: TERRY L. FREEMAN
Terry L. Freeman
Assistant Controller
(Principal Accounting Officer)
MAXXAM INC.
INDEX OF EXHIBITS
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of MAXXAM Inc.
(the "Company" or "MAXXAM") dated April 10, 1989
(incorporated herein by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1989)
3.2 Certificate of Powers, Designations, Preferences and
Relative, Participating, Optional and Other Rights of
the Company's Class B Junior Participating Preferred
Stock (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989)
3.3 Certificate of Designations of Class A $.05 Non-
Cumulative Participating Convertible Preferred Stock
of the Company, dated July 6, 1994 (incorporated
herein by reference to Exhibit 4(c) to the
Registration Statement of the Company on Form S-8,
Registration No. 33-54479)
3.4 By-laws of the Company, as amended on October 6, 1988
(incorporated herein by reference to Exhibit 3.3 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1988)
4.1 Indenture between the Company and The Bank of New
York, Trustee, regarding the Company's 14% Senior
Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-4,
Registration No. 33-20096)
4.2 Indenture dated as of November 15, 1979 between the
Company and Chemical Bank, Trustee, regarding the
Company's 12-1/2% Subordinated Debentures due December
15, 1999 (incorporated herein by reference to Exhibit
4.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1980)
4.3 Loan and Pledge Agreement, dated as of October 10,
1994, between Custodial Trust Company and the Company
(incorporated herein by reference to Exhibit 4.3 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994)
4.4 Indenture, dated as of August 4, 1993, between Shawmut
Bank, N.A. and MAXXAM Group Inc. ("MGI") regarding
MGI's 11-1/4% Senior Secured Notes due 2003 and
12-1/4% Senior Secured Discount Notes due 2003
(incorporated herein by reference to Exhibit 4.1 to
MGI's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-8857; the "MGI 1993 Form
10-K")
4.5 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)
4.6 First Supplemental Indenture, dated as of May 1, 1993,
to the KACC Senior Subordinated Note Indenture
(incorporated herein by reference to Exhibit 4.2 to
KACC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, File No. 1-3605)
4.7 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 here in by
reference to Exhibit 4.3 to Kaiser's Annual Report on
Form 10-K for the year ended December 31, 1995, File
No. 1-9447)
4.8 Indenture, dated as of February 17, 1994, among KACC,
certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9-7/8% Senior
Notes due 2002 (incorporated herein by reference to
Exhibit 4.3 to KACC's Annual Report on Form 10-K for
the year ended December 31, 1993, File No. 1-3605; the
"KACC 1993 Form 10-K")
4.9 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 Kaiser's Annual
Report on Form 10-K for the year ended December 31,
1995, File No. 1-9447)
4.10 Credit Agreement, dated as of February 17, 1994 (the
"Kaiser 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)
4.11 First Amendment, dated July 21, 1994, to the Kaiser
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)
4.12 Second Amendment, dated March 10, 1995, to the Kaiser
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)
4.13 Third Amendment, dated as of July 20, 1995, to the
Kaiser 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)
4.14 Fourth Amendment, dated as of October 17, 1995, to the
Kaiser 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)
4.15 Fifth Amendment, dated December 11, 1995, to the
Kaiser Credit Agreement (incorporated herein by
reference to Exhibit 4.11 to Kaiser's Annual Report on
Form 10-K for the year ended December 31, 1995, File
No. 1-9447)
4.16 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")
4.17 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)
4.18 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)
4.19 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")
4.20 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)
4.21 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")
4.22 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)
4.23 Amended and Restated Credit Agreement of Pacific
Lumber, dated November 10, 1995 (the "Pacific Lumber
Credit Agreement") (incorporated herein by reference
to Exhibit 4.1 to Pacific Lumber's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995,
File No. 1-9204)
4.24 Form of Deed of Trust, Assignment of Rents, Grant of
Easement and Fixture Filing with respect to the
Pacific Lumber Credit Agreement (incorporated herein
by reference to Exhibit 4.2 to Pacific Lumber's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-9204)
*4.25 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.
4.26 Loan Agreement, dated June 17, 1991, by and between
General Electric Capital Corporation ("GECC") and MXM
Mortgage Corp. (the "GECC Loan Agreement")
(incorporated herein by reference to Exhibit 10(dd) to
Amendment No. 4 to MGI's Registration Statement on
Form S-4 on Form S-2, Registration No. 33-42300; the
"MGI 1991 Registration Statement")
4.27 First Renewal, Extension and Modification Agreement,
dated as of June 17, 1992, among GECC, MXM Mortgage
Corp. and the Company (incorporated herein by
reference to Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1992)
4.28 Loan Increase, Extension and Modification Agreement,
dated as of December 30, 1992, among GECC, MXM
Mortgage Corp. and the Company (incorporated herein by
reference to Exhibit 4.23 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1992
4.29 Consent and Assumption Agreement, dated as of December
10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage
L.P., the Company and MGI (incorporated herein by
reference to Exhibit 4.36 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1993; the "Company 1993 Form 10-K")
4.30 Third Modification Agreement, dated as of December 30,
1993, among GECC, MXM Mortgage Corp. and MXM Mortgage
L.P. (incorporated herein by reference to Exhibit 4.37
to the Company 1993 Form 10-K)
4.31 Fourth Amendment to Loan Agreement, dated as of
December 30, 1993, among GECC, MXM Mortgage Corp. and
MXM Mortgage L.P. (incorporated herein by reference to
Exhibit 4.39 to the Company 1993 Form 10-K)
4.32 Fourth Modification Agreement, dated as of March 31,
1994, by and among GECC, MXM Mortgage Corp. and MXM
Mortgage L.P. (incorporated herein by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994; the "Company
1994 Second Quarter Form 10-Q")
4.33 Fifth Modification Agreement, dated as of January 13,
1995, among GECC, MXM Mortgage Corp. and MXM Mortgage
L.P. (incorporated herein by reference to Exhibit 4.31
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
4.34 Sixth Amendment to Loan Agreement, dated as of January
13, 1995, among GECC, MXM Mortgage Corp. and MXM
Mortgage L.P. (incorporated herein by reference to
Exhibit 4.32 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
*4.35 Eighth Amendment to Loan Agreement, dated October 21,
1995, among GECC, MXM Mortgage, L.P. and MXM Mortgage
Corp.
4.36 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"
4.37 Amended and Restated Deed of Trust, Assignment,
Security Agreement and Financing Statement, dated
October 6, 1995, among SHRP, Richard Prokosch, as
Trustee, and First Bank National Association, as
Mortgagee (incorporated herein by reference to Exhibit
4.2 to the SHRP 1995 Second Quarter Form 10-Q)
4.38 Deed of Trust, Assignment, Security Agreement and
Financing Statement, dated October 6, 1995, among
SHRP, Richard Prokosch, as Trustee, and First Bank
National Association, as Mortgagee (incorporated
herein by reference to Exhibit 4.3 to the SHRP 1995
Second Quarter Form 10-Q)
4.39 Amended and Restated License Negative Pledge, dated
October 6, 1995, executed by SHRP in favor of Trustee
(incorporated herein by reference to Exhibit 4.4 to
the SHRP 1995 Second Quarter Form 10-Q)
4.40 Senior Subordinated Intercompany Note between KACC and
the Company, dated as of January 14, 1993
(incorporated herein by reference to Exhibit 4.13 to
Amendment No. 5 to the Form S-1 on Form S-2
Registration Statement of KACC, Registration No. 33-
48260
4.41 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated February 15, 1994 (incorporated herein
by reference to Exhibit 4.22 to the Kaiser 1993 Form
10-K)
4.42 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated March 17, 1994 (incorporated herein by
reference to Exhibit 4.23 to the Kaiser 1993 Form
10-K)
4.43 Senior Subordinated Intercompany Note between Kaiser
and KACC, dated June 30, 1993 (incorporated herein by
reference to Exhibit 4.24 to the Kaiser 1993 Form
10-K)
4.44 Intercompany Note between Kaiser and KACC
(incorporated herein by reference to Exhibit 4.2 to
Amendment No. 5 to the Registration Statement of KACC
on Form S-1, Registration No. 33-30645)
Note: Pursuant to Regulation Section 229.601, Item
601(b)(4)(iii) of Regulation S-K, upon request of the
Securities and Exchange Commission, the Company hereby
agrees to furnish a copy of any unfiled instrument
which defines the rights of holders of long-term debt
of the Company and its consolidated subsidiaries (and
for any of its unconsolidated subsidiaries for which
financial statements are required to be filed) wherein
the total amount of securities authorized thereunder
does not exceed 10 percent of the total consolidated
assets of the Company.
10.1 Tax Allocation Agreement among the Company and KACC
dated as of December 21, 1989 (incorporated herein by
reference to Exhibit 10.21 to Amendment No. 6 to the
Registration Statement of KACC on Form S-1,
Registration No. 33-30645)
10.2 Tax Allocation Agreement between Kaiser and the
Company (incorporated herein by reference to Exhibit
10.23 to Amendment No. 2 to the Registration Statement
of Kaiser on Form S-1, Registration No. 33-37895)
10.3 Tax Allocation Agreement between the Company and MGI,
dated August 4, 1993 (incorporated herein by reference
to Exhibit 10.6 to Amendment No. 2 to the Form S-2
Registration Statement of MGI, Registration No.
33-56332
10.4 Tax Allocation Agreement dated as of May 21, 1988
among the Company, MGI, Pacific Lumber and the
corporations signatory thereto (incorporated herein by
reference to Exhibit 10.8 to Pacific Lumber's Annual
Report on Form 10-K for the year ended December 31,
1988, File No. 1-9204)
10.5 Tax Allocation Agreement among Pacific Lumber, Scotia
Pacific, Salmon Creek Corporation and the Company,
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
10.6 Tax Allocation Agreement between the Company and Britt
Lumber Co., Inc. (incorporated herein by reference to
Exhibit 10.4 to the MGI 1993 Form 10-K)
10.7 Assumption Agreement, dated as of October 28, 1988
(incorporated herein by reference to Exhibit HHH to
the Final Amendment to the Schedule 13D of MGI and
others in respect of the common stock of the Company)
10.8 Agreement, dated as of June 30, 1993, between Kaiser
and the Company (incorporated herein by reference to
Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, File No. 1-3605)
10.9 Undertaking, dated as of August 4, 1993, by the
Company in favor of MGI (incorporated herein by
reference to Exhibit 10.27 to the MGI 1993 Form 10-K)
10.10 Form of Master Purchase Agreement between Pacific
Lumber and Scotia Pacific, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.1 to
the Scotia Pacific 1993 Form 10-K)
10.11 Form of Services Agreement between Pacific Lumber and
Scotia Pacific, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.2 to
the Scotia Pacific 1993 Form 10-K)
10.12 Form of Additional Services Agreement between Pacific
Lumber and Scotia Pacific, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.3 to
the Scotia Pacific 1993 Form 10-K)
10.13 Form of Reciprocal Rights Agreement among Pacific
Lumber, Scotia Pacific and Salmon Creek Corporation,
dated as of March 23, 1993 (incorporated herein by
reference to Exhibit 10.4 to the Scotia Pacific 1993
Form 10-K)
10.14 Form of Environmental Indemnification Agreement
between Pacific Lumber and Scotia Pacific, dated as of
March 23, 1993 (incorporated herein by reference to
Exhibit 10.5 to the Scotia Pacific 1993 Form 10-K)
10.15 Purchase and Services Agreement between Pacific Lumber
and Britt Lumber Co., Inc., dated as of March 23, 1993
(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
10.16 Exchange Agreement dated as of May 20, 1991 by and
among the Company, MCO Properties Inc. ("MCOP") and
Federated Development Company (incorporated by
reference from Exhibit 10(ff) to the MGI 1991
Registration Statement)
10.17 Revolving Credit and Term Loan Agreement, dated as of
August 27, 1987, as amended, between MCOP and
Federated Development Company (incorporated herein by
reference to Exhibit 10.82 to the Company's
Registration Statement on Form S-4, Registration No.
33-20096)
10.18 Term Loan Agreement, dated as of November 17, 1987,
between MCOP and Federated Development Company
(incorporated herein by reference to Exhibit 10.83 to
the Company's Registration Statement on Form S-4,
Registration No. 33-20096)
10.19 Put and Call Agreement, dated November 16, 1987 (the "Put
and Call Agreement") between Charles E. Hurwitz and MAXXAM
Properties Inc. ("MPI") (incorporated herein by reference
to Exhibit C to Schedule 13D dated November 24, 1987,
filed by MGI with respect to the Company's common stock)
10.20 Amendment to Put and Call Agreement, dated May 18,
1988, (incorporated herein by reference to Exhibit D
to the Final Amendment to Schedule 13D dated May 20,
1988, filed by MGI relating to the Company's common
stock)
10.21 Amendment to Put and Call Agreement, dated as of
February 17, 1989 (incorporated herein by reference to
Exhibit 10.35 to the Company's Annual Report on Form
10-K for the year ended December 31, 1988)
10.22 Note Purchase Agreement dated July 26, 1982, as
amended, between the Company and Drexel Burnham
Lambert Incorporated, relating to the Company's Zero
Coupon Senior Subordinated Notes due 2007
(incorporated herein by reference to Exhibit B to
Schedule 13D dated November 24, 1987, filed by MGI
relating to the Company's common stock)
10.23 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
10.24 MAXXAM 1994 Omnibus Employee Incentive Plan
(incorporated herein by reference to Exhibit 99 to the
Company's Proxy Statement dated April 29, 1994; the
"Company 1994 Proxy Statement")
10.25 Form of Stock Option Agreement under the MAXXAM 1994
Omnibus Employee Incentive Plan (incorporated herein
by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
10.26 MAXXAM 1994 Non-Employee Director Plan (incorporated
herein by reference to Exhibit 99 to the Company 1994
Proxy Statement)
10.27 Form of Stock Option Agreement under the MAXXAM 1994
Non-Employee Director Plan (incorporated herein by
reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
10.28 Form of Deferred Fee Agreement under the MAXXAM 1994
Non-Employee Director Plan (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1994)
10.29 MAXXAM 1994 Executive Bonus Plan (incorporated herein
by reference to Exhibit 99 to the Company 1994 Proxy
Statement)
10.30 MAXXAM Revised Capital Accumulation Plan of 1988, as
amended December 12, 1988 (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995)
10.31 The Company's 1984 Phantom Share Plan, as amended (the
"Company Phantom Share Plan") (incorporated herein by
reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1990; the "Company 1990 Form 10-K")
10.32 Amendment, dated as of March 8, 1990, relating to the
Company Phantom Share Plan (incorporated herein by
reference to Exhibit 10.7 to the Company 1990 Form
10-K)
10.33 Form of Phantom Share Agreement relating to the
Company Phantom Share Plan (incorporated herein by
reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1988)
10.34 MAXXAM Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10(jj) to
the 1991 MGI Registration Statement)
*10.35 Form of Company Deferred Compensation Agreement
10.36 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)
10.37 Form of Stock Option Agreement under the Kaiser 1993
Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994)
10.38 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)
10.39 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")
10.40 Kaiser 1995 Executive Incentive Compensation Program
(incorporated herein by reference to Exhibit 99 to
Kaiser's Proxy Statement dated April 26, 1995)
10.41 Promissory Note dated February 1, 1989 by Anthony R.
Pierno and Beverly J. Pierno to the Company (the "1989
Pierno Note") (incorporated herein by reference to
Exhibit 10.30 to the Company 1990 Form 10-K)
10.42 Letter amendment, dated February 28, 1995, to the 1989
Pierno Note (incorporated herein by reference to
Exhibit 10.44 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
10.43 Promissory Note dated July 19, 1990 by Anthony R.
Pierno to the Company (the "1990 Pierno Note")
(incorporated herein by reference to Exhibit 10.31 to
the Company 1990 Form 10-K)
10.44 Letter amendment, dated February 28, 1995, to the 1990
Pierno Note (incorporated herein by reference to
Exhibit 10.46 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
10.45 Real Estate Lien Note dated July 3, 1990 by Paul N.
Schwartz and Barbara M. Schwartz, Trustee, to the
Company (the "Schwartz Note") and related Deed of
Trust and Letter Agreement (incorporated herein by
reference to Exhibit 10.35 to the Company 1990 Form
10-K)
10.46 Amendment to the Schwartz Note, dated January 25, 1995
(incorporated herein by reference to Exhibit 10.48 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994)
10.47 Real Estate Lien Note dated September 27, 1990 by
Diane M. Dudley to the Company and related Deed of
Trust and Letter Agreement (incorporated herein by
reference to Exhibit 10.41 to the Company 1990 Form
10-K)
10.48 Promissory Note, dated July 20, 1993, between the
Company and Byron L. Wade (incorporated herein by
reference to Exhibit 10.59 to the Company 1993 Form
10-K)
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 the Company
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 the Company's Annual
Report on Form 10-K for the year ended December 31,
1993)
10.51 Employment Agreement, dated as of March 8, 1990,
between the Company and Anthony R. Pierno
(incorporated herein by reference to Exhibit 10.28 to
the Company 1990 Form 10-K)
10.52 Commercial Guaranty, dated February 22, 1993, executed
by the Company in favor of Charter National Bank--
Houston with respect to a loan of Anthony R. Pierno
(incorporated herein by reference to Exhibit 10.27 to
Kaiser's Annual Report on Form 10-K for the year ended
December 31, 1992, File No. 1-9447)
10.53 Commercial Guaranty, dated January 24, 1994, between
the Company and Charter National Bank-Houston with
respect to a loan of Anthony R. Pierno, and a related
letter agreement (incorporated herein by reference to
Exhibit 10.50 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993)
10.54 Employment Agreement, dated as of March 8, 1990,
between the Company and Paul N. Schwartz (incorporated
herein by reference to Exhibit 10.32 to the Company
1990 Form 10-K)
10.55 Employment Agreement, dated as of March 8, 1990,
between the Company and Diane M. Dudley (incorporated
herein by reference to Exhibit 10.37 to the Company
1990 Form 10-K)
10.56 Employment Agreement, dated as of March 8, 1990,
between the Company and Byron L. Wade (incorporated
herein by reference to Exhibit 10.50 to the Company
1990 Form 10-K)
*11 Computation of Net Income Per Common and Common
Equivalent Share Information
*13.1 The portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1995
which are incorporated herein by reference
13.2 Footnote 11 to the consolidated financial statements
of KACC, entitled Subsidiary Guarantors, (incorporated
herein by reference to KACC's Annual Report on Form
10-K for the year ended December 31, 1995, File No. 1-
3605)
*21 List of the Company's Subsidiaries
*23 Consent of Independent Public Accountants by Arthur
Andersen LLP
*27 Financial Data Schedule
- ---------------
* Included with this filing.
EXHIBIT 11
MAXXAM INC.
COMPUTATION OF NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Weighted average common and common equivalent shares outstanding
during each year 9,376,703 9,376,703 9,376,703
Common equivalent shares attributable to stock options and
convertible securities 82,590 71,175 80,380
----------- ---------- ----------
Total common and common equivalent shares 9,459,293 9,447,878 9,457,083
=========== ========== ==========
Income (loss) before extraordinary item and cumulative effect of
changes in accounting principles $ 57.5 $ (116.7) $ (131.9)
Extraordinary item - (5.4) (50.6)
Cumulative effect of changes in accounting principles - - (417.7)
----------- ---------- ----------
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>
EXHIBIT 21
MAXXAM INC.
PRINCIPAL SUBSIDIARIES OF THE REGISTRANT
Listed below are MAXXAM Inc.'s principal subsidiaries and the
jurisdiction of their incorporation or organization. Certain subsidiaries
are omitted which, considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary.
<TABLE>
<CAPTION>
State or Province
of Incorporation
Name or Organization
- ------------------------------------------------------------------ --------------------
<S> <C>
ALUMINUM OPERATIONS
Alpart Jamaica Inc. Delaware
Alumina Partners of Jamaica (partnership) Delaware
Anglesey Aluminium Limited United Kingdom
Kaiser Alumina Australia Corporation Delaware
Kaiser Aluminum Corporation Delaware
Kaiser Aluminium 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 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
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 33-22436.
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 1996
<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>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 104,200
<SECURITIES> 45,900
<RECEIVABLES> 251,700
<ALLOWANCES> 5,500
<INVENTORY> 606,800
<CURRENT-ASSETS> 1,231,700
<PP&E> 1,910,000
<DEPRECIATION> 678,100
<TOTAL-ASSETS> 3,832,300
<CURRENT-LIABILITIES> 684,900
<BONDS> 1,610,200
<COMMON> 5,000
0
300
<OTHER-SE> (69,600)
<TOTAL-LIABILITY-AND-EQUITY> 3,832,300
<SALES> 2,565,200
<TOTAL-REVENUES> 2,565,200
<CGS> 1,990,900
<TOTAL-COSTS> 1,990,900
<OTHER-EXPENSES> 316,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,300
<INCOME-PRETAX> 94,500
<INCOME-TAX> 14,800
<INCOME-CONTINUING> 57,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,500
<EPS-PRIMARY> 6.08
<EPS-DILUTED> 6.08
</TABLE>
SECOND AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
By and Among
MCO PROPERTIES INC.
WESTCLIFF DEVELOPMENT CORPORATION,
HORIZON CORPORATION,
HORIZON PROPERTIES CORPORATION,
MCO PROPERTIES, L.P.
and
THE FIRST NATIONAL BANK OF BOSTON
July 15, 1995
<PAGE>
TABLE OF CONTENTS
Section Page
1 DEFINITIONS AND RULES OF INTERPRETATION
1.1. Definitions
1.2. Rules of Interpretation
2.1. REVOLVING CREDIT LOANS
Sub-Part A - Loans to the Borrower
2.1.1. Commitment to Lend
2.1.2. The Borrower Revolving Credit Note
Sub-Part B - Loans to the L.P.
2.1.3. Commitment to Lend
2.1.4. The LP Revolving Credit Note
Sub-Part C - Applicable to All Revolving Credit Loans
2.1.5. Collateral Note(s)
2.1.6. Interest on Revolving Credit Loans
2.1.7. Requests for Revolving Credit Loans
2.1.8. Conversion Options
2.2. REPAYMENT OF THE REVOLVING CREDIT LOANS
2.2.1. Maturity
2.2.2. Mandatory Repayments of Revolving Credit Loans
2.2.3. Optional Repayments of Revolving Credit Loans
2.2.4. Periodic Payments of Revolving Credit Loans
2.3. LETTERS OF CREDIT
2.3.1. Issuance of Letters of Credit
2.3.2. Interest on Letters of Credit
2.3.3. Effects of Drawing
3. FEES
3.1. Facility Fee
3.2. Administration Fee
3.3. L/C Fee
4. CERTAIN GENERAL PROVISIONS
4.1. Funds for Payments
4.2. Computations
4.3. Inability to Determine Eurodollar Rate
4.4. Illegality
4.5. Additional Costs, Etc. .
4.6. Capital Adequacy
4.7. Indemnity
4.8. Certificate
4.9. Interest on Overdue Amounts
4.10. Late Charge
5. COLLATERAL SECURITY
5.1. Grant of Security Interest
5.2. Warranty of Title
5.3. Pro Rata Security
6. REPRESENTATIONS AND WARRANTIES
6.1. Corporate Authority; Etc.
6.2. Governmental Approvals
6.3. Title to Properties; Leases
6.4. No Material Changes, Etc.
6.5. Franchises, Patents, Copyrights, Etc.
6.6. Litigation
6.7. No Material Adverse Contracts, Etc.
6.8. Compliance With Other Instruments, Laws, Etc.
6.9. Tax Status
6.10. No Suspension Event or Event of Default
6.11. Holding Company and Investment Company Acts
6.12. Absence of UCC Financing Statements, Etc.
6.13. Setoff, Etc.
6.14. Certain Transactions
6.15. Employee Benefit Plans; Multiemployer Plans; Guaranteed
Pension Plans
6.16. Regulations U and X
6.17. Environmental Compliance
6.18. Subsidiaries
6.19. Material Lease Summaries
6.20. Loan Documents
6.21. Mortgaged Property
6.22. Existing Notes Receivable Value
6.23. Existing Lots and Undeveloped Acres
6.24. Non-Underwriting Criteria Loans
6.25. Amended and Restated Credit and Security Agreement
6.26 LP Partners
6.27 LP Assets and Liabilities
7. AFFIRMATIVE COVENANTS OF THE BORROWER
7.1. Punctual Payment
7.2. Maintenance of Office
7.3. Records and Accounts
7.4. Financial Statements, Certificates and Information
7.5. Notices
7.6. Existence; Maintenance of Properties
7.7. Insurance
7.8. Taxes
7.9. Inspection of Properties and Books
7.10. Compliance with Laws, Contracts, Licenses, and Permits
7.11. Use of Availability
7.12. Further Assurances
7.13. Appraisals
7.14. Notification Letters
7.15. Hazardous Substance Remedial Action
8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER
8.1. Restrictions on Indebtedness
8.2. Restrictions on Liens, Etc.
8.3. Restrictions on Investments
8.4. Merger, Consolidation
8.5. Sale and Leaseback
8.6. Compliance with Environmental Laws
8.7. Distributions
8.8 Cash Transactions with Affiliated Entities
8.9. Material Leases
8.10. Restrictions on Compromise of Notes Receivable
8.11. Subsidiaries
8.12 Change in Ownership
9. FINANCIAL COVENANTS OF THE BORROWER
10. CLOSING CONDITIONS
10.1. Loan Documents
10.2. Certified Copies of Organization Documents
10.3. By-laws; Resolutions
10.4. Incumbency Certificate
10.5. Validity of Liens
10.6. Survey and Taxes
10.7. Title Insurance; Title Exception Documents
10.8. Leases and Service Contracts
10.9. Certificates of Insurance
10.10. Hazardous Substance Assessments
10.11. Environmental Indemnity
10.12. Opinions of Counsel Concerning Organization and Loan
Documents
10.13. Financial Information
10.14. Payment of Fees
10.15. Zoning, Environmental and Land Use Compliance Opinion of
Counsel
10.16. Borrowing Base Report
10.17. Guaranties
10.18. Lock Box Account
10.19. Subordination
10.20. Commercial Finance Exam
10.21. Evidence of Licenses, Permits, Utilities, Etc.
10.22. Additional Matters
11. CONDITIONS TO ALL BORROWINGS
11.1. Representations True; No Event of Default
11.2. No Legal Impediment
11.3. Governmental Regulation
11.4. Proceedings and Documents
12. EVENTS OF DEFAULT; ACCELERATION; ETC.
12.1. Events of Default and Acceleration
12.2. Termination of Commitment
12.3. Remedies
12.4. Distribution of Collateral Proceeds
13. SETOFF
14. EXPENSES
15. INDEMNIFICATION
16. SURVIVAL OF COVENANTS, ETC.
17. PERMITTED SALES/RELEASE OF LIEN
17.1 Permitted Sales
17.2 Release of Collateral
18. ASSIGNMENT; PARTICIPATION; ETC.
18.1. Assignment by the Bank
18.2. Participations
18.3. Disclosure
18.4. Pledge by Bank
18.5. No Assignment by Borrower
19. AGENTS, ATTORNEYS, TRUSTEES
20. NOTICES, ETC.
21. PUBLICITY
22. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE
23. HEADINGS
24. COUNTERPARTS
25. ENTIRE AGREEMENT, ETC.
26. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS
27. CONSENTS, AMENDMENTS, WAIVERS, ETC.
28. SEVERABILITY
<PAGE>
EXHIBITS
A. Form of Borrower Revolving Credit Note
B. Form of LP Revolving Credit Note
C. Form of Loan Request
D. Form of Material Lease Summaries
E. Form of Reimbursement Agreement
F. Borrowing Base Report
<PAGE>
SCHEDULES
1.1(a) "Letters of Credit"
1.1(b) "Non-Strategic Projects"
1.1(c) "Strategic Projects"
1.1(d) "Title Insurance Company"
1.1(e) "Underwriting Criteria for Notes Receivable"
1.1(f) LP Assets
1.1(g) Acceptable Existing Notes Receivable
5.1 Collateral Exclusions
5.2(iii) Exception to Notes Receivable
5.2(iv) Patents and Trademarks
5.2(vi) Warranty of Title
6.3 Title to Properties; Leases
6.4 Material Changes
6.6 Litigation
6.7 Adverse Contracts, Etc.
6.15 Employee Benefit Plans, Etc.
6.17 Environmental Compliance
6.18 Subsidiaries
6,21 Leases
6.21(c) Notice of Adverse Zoning, etc.
6.21(e) Real Property Taxes; Special Assessments
6.21(h) Agreements Relating to the Mortgaged Property
6.21(i) Service Agreements
6.21(j) Other Material Real Property Agreements
6.23 Existing Lots and Undeveloped Acres
7.14 Notification Letter
8.1 Outstanding Indebtedness
8.2 Outstanding Liens
8.3 Outstanding Investments
8.7 Form of Letter
10.10 Environmentally Deficient Developed Lots
17 Affidavit
18.3 Confidentiality Agreement
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
This SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT is made
as of the 15th day of July, 1995, by and among:
MCO Properties Inc., a Delaware corporation, with its principal
executive office located at 5847 San Felipe, Suite 2600, P.O. Box
572887, Houston, Texas 77057 (the "Borrower"),
Westcliff Development Corporation, a Texas corporation with its
principal executive office located at 5847 San Felipe, Suite 2600,
P.O. Box 572887, Houston, Texas 77057 ("Westcliff" ),
Horizon Corporation, a Delaware corporation with its principal
executive office located at 5847 San Felipe, Suite 2600, P.O. Box
572887, Houston, Texas 77057 ("Horizon"),
Horizon Properties Corporation, a Delaware corporation with its
principal executive office located at 5847 San Felipe, Suite 2600,
P.O. Box 572887, Houston, Texas 77057 ("HPC"),
MCO Properties, L.P., a Delaware limited partnership with its
principal executive office located at 5847 San Felipe, Suite 2600,
P.O. Box 572887, Houston, Texas 77057 ("LP"); and
THE FIRST NATIONAL BANK OF BOSTON, a national banking association with
its principal executive offices located at 100 Federal Street, Boston,
Massachusetts (the "Bank").
This Second Amended and Restated Credit and Security Agreement is
intended to amend, restate and replace certain terms and conditions set
forth in a certain Amended and Restated Credit and Security Agreement dated
as of December 29, 1992 by and among the Borrower, Westcliff, Horizon, HPC
and the Bank, as amended pursuant to instruments dated June 30, 1993 and
December 29, 1993 (the "1992 Agreement"), provided, however, each and all
of the terms and conditions set forth in 5 of the 1992 Agreement and 6 of
the 1988 Agreement (as defined in the 1992 Agreement) shall remain in full
force and effect (except as the Collateral described therein has been
previously released).
1.1 Definitions. The following terms shall have the meanings set
forth in this 1 or elsewhere in the provisions of this Agreement referred
to below:
Acceptable Contracts. A contract or agreement which is in form
substantially the same as the form which has been approved by the Bank,
entered into by and between any Party and a Person with respect to any
Amenity Sales Contracts, Retail Lot Contracts, Bulk Land Sales Contracts
and Home Mortgages which contracts or agreements give rise to Notes
Receivable, which Notes Receivable may, subject to the terms and conditions
set forth herein, create Availability.
Acceptable Existing Notes Receivable. (a) Such of each of the Party's
Existing Notes Receivable for each of the Strategic Projects and the Non-
Strategic Projects (subject, however, to the limitations set forth in
subsection (b), below), which have been earned by performance and are owed
to any of the Parties by the Note Obligors, and in each instance (A) as
have arisen in the ordinary course of such Party's business, and (B) have
been endorsed (in form and substance satisfactory to the Bank and the
Bank's Counsel), delivered and collaterally assigned to the Bank, (C) in
which the Bank has been granted valid and first perfected security inter-
ests and (D) for which the Bank has received a collateral assignment (in
form and substance satisfactory to the Bank and the Bank's counsel) of the
mortgage or deed of trust and other collateral documents securing such
Existing Notes Receivable.
(b) The following is a listing of those types of Notes
Receivable which are not Acceptable Existing Notes Receivables:
(i) Any which is more than sixty (60) days past due as
shown on the Borrowing Base Report;
(ii) Any which is owed by any individual Party to any of the
other Parties, or any which is owed by any affiliated or related
entity of any of the Parties;
(iii) Any as to which the Note Obligor holds or is
entitled to any claim, counterclaim, set off, or chargeback;
(iv) Any Existing Note Receivable arising out of an In-
stallment Sales Contract, except: (A) where Borrower's, Westcliff's,
Horizon's, HPC's or the LP's performance thereunder consists solely of
deeding the subject premises to the Note Obligor upon payment of all
installment payments under any such Installment Sales Contract, or (B)
as to any Installment Sales Contract which the Bank, in its sole and
absolute discretion, deems acceptable;
(v) Any which is owed by any person employed by, or a
salesperson of any of the Parties.
(c) Set forth on Schedule 1.1(g) to this Agreement is a listing
as of the date hereof of Acceptable Existing Notes Receivable.
Acceptable New Notes Receivable. Such of the Parties' New Notes
Receivable arising out of Acceptable Contracts having a term of not more
than ten (10) years from the date of closing of the transaction giving rise
to the Note Receivable, for each of the Strategic Projects and the Non-
Strategic Projects (subject, however, to the limitations set forth in
subsection (b), below), and in each instance (A) as arise in the ordinary
course of the Parties' business, (B) have been endorsed (in form and
substance satisfactory to the Bank and Bank's counsel), delivered and
collaterally assigned to the Bank, (C) in which the Bank has been granted
valid and first perfected security interest (D) for which the Bank has
received a collateral assignment (in form and substance satisfactory to the
Bank and the Bank's counsel) of the mortgage or deed of trust and other
collateral documents securing each of said New Notes Receivable, and (E)
(i) with respect to such New Notes Receivables realized on account of Bulk
Land Sales Contracts and Amenity Contracts, such of the Parties' New Notes
Receivable meeting the Underwriting Criteria for such Notes Receivable, and
(ii) with respect to such New Notes Receivables realized on account of
Retail Lot Contracts, and Home Mortgages, such of the Parties' New Notes
Receivable meeting the Underwriting Criteria for such Notes Receivable.
(b) The following is a listing of those types of New Notes
Receivable which are not Acceptable New Notes Receivables:
(i) Any which is more than sixty (60) days past due as
shown on the Borrowing Base Report;
(ii) Any which is owed by any Note Obligor (as defined
below) arising out of any sale involving a downpayment of less than:
(A) twenty percent (20%) of the purchase price established under
Retail Lot Contracts and Home Mortgages, or (B) ten percent (10%) of
the purchase price established under Bulk Sales Land Contracts and
Amenity Sales Contracts;
(iii) Any which is owed by any individual Party to any
of the other Parties, or any which is owned by any affiliated or
related entity of any of the Parties;
(iv) Any as to which the Note Obligor holds or is entitled
to any claim, counterclaim, set off, or chargeback;
(v) Any New Note Receivable arising out of an Installment
Sales Contract;
(vi) Any which is owed by any person employed by, or a
salesperson of any of the Parties.
Administration Fee. See 3.2.
Agency Agreement. See 2.2.4.
Agreement. This Second Amended and Restated Credit and Security
Agreement, including the Schedules and Exhibits hereto.
Agreements Relating to the Mortgaged Property shall mean service
agreements, whether written or oral, relating to the operation,
maintenance, security, finance or insurance of any of the Mortgaged
Property.
Amenity Sales Contracts. Such contracts and agreements entered into
by and between any of the Parties and any Person relating to the sale of
land at any of the Strategic Projects: (i) sold for the purpose of
development(s) of certain amenities to be constructed on any of the
Strategic Projects, or (ii) already developed as an amenity on any of the
Strategic Projects, which purpose of such amenities include, without
limitation, swimming pools, tennis courts, clubhouse facilities and other
amenities appurtenant to the construction or development of any of the
Strategic Projects.
Appraisals. Appraisals of the value of the Mortgaged Property,
performed by an independent appraiser selected by the Bank who is not
employed by the Parties or the Bank, the form of such appraisal and the
identity and qualifications of the appraiser to be acceptable to the Bank
in its sole and absolute discretion.
Appraised Value. The Fair Market Value of the Mortgaged Property
determined by the most recent Appraisal obtained pursuant to 7.13.
Availability. The aggregate of Borrower Availability and LP
Availability.
Balance Sheet Date. December 31, 1994.
Bank. The First National Bank of Boston, and its successors and
assigns.
Base Rate. The annual rate of interest announced from time to time by
the Bank at its head office in Boston, Massachusetts as its "base rate".
Book Value. The value ascribed to each asset, as set forth on the
balance sheet of the Parties, as determined in accordance with generally
accepted accounting principles consistently applied.
Borrower. As defined in the preamble hereto.
Borrower Availability. Borrower Availability refers at any time to
the lesser of (i) or (ii), below:
(i) up to (A) Fourteen Million Dollars ($14,000,000.00),
inclusive of the Letter of Credit Amount,
minus
(B) the aggregate amounts then undrawn on all outstanding
Letters of Credit, acceptances, or any other accommodations
issued or incurred by the Bank in connection with the Loan,
minus
(C) the aggregate amounts of Letters of Credit,
acceptances, or any other accommodations paid by the Bank in
connection with the Loan and for which the Bank has not received
reimbursement from the Borrower or any other Party;
minus
(D) the aggregate amount of then Outstanding Revolving
Credit Loans to the LP;
or
(ii) up to (A) seventy-five percent (75%) of (I) the then
outstanding principal balance of each of the Acceptable New Notes
Receivables of the Borrower, Westcliff, Horizon and/or HPC derived
from Retail Lot Contracts and Home Mortgages, and (II) the then
outstanding principal balances of each of the Acceptable Existing
Notes Receivable of the Borrower, Westcliff, Horizon and/or HPC
derived from Retail Lot Contracts and Home Mortgages,
plus
(B) up to the lesser of:
(I) Six Million Dollars ($6,000,000.00), or
(II) up to fifty percent (50%) of the aggregate of (a)
the then outstanding principal balance of Acceptable New
Notes Receivable of the Borrower, Westcliff, Horizon and/or
HPC derived from Bulk Land Sales Contracts, and (b) the then
outstanding principal balance of Acceptable Existing Notes
Receivables of the Borrower, Westcliff, Horizon and/or HPC
derived from Bulk Land Sales Contracts,
plus
(C) up to the lesser of:
(I) fifty percent (50%) of the Book Value of Developed
Lots of the Borrower, Westcliff, Horizon and/or HPC, or
(II) Three Million Dollars ($3,000,000.00);
minus
(D) the aggregate amounts then undrawn on all outstanding
Letters of Credit, acceptances, or any other accommodations
issued or incurred by the Bank in connection with the Loan,
minus
(E) the aggregate amounts of Letters of Credit,
acceptances, or any other accommodations paid by the Bank in
connection with the Loan and for which the Bank has not received
reimbursement from the Borrower or any other Party.
Borrower's Revolving Credit Note. See Section 2.1.2
Borrowing Base Report. A report with respect to the Availability in
the form attached hereto as Exhibit F.
Building. The buildings, structures and improvements now or hereafter
located on any of the Mortgaged Property.
Bulk Land Sales Contracts. Such contract or agreement entered into by
and between any Party and any Person for the sale of: (i) any portion of
the Strategic Projects and/or Non-Strategic Projects which exceeds five (5)
acres, unless such portion of the Strategic Projects and/or Non-Strategic
Projects is zoned for the construction of no more than one commercial
establishment, or no more than two residences, and the minimum price is
less than the amount set forth in (ii), below, or (ii) any portion of the
Strategic Projects and/or Non-Strategic Projects, the gross purchase price
of which exceeds $350,000.00, provided, however, until such time as (i) the
Mirada Action is resolved to the satisfaction of the Bank (in its sole and
absolute discretion), or (ii) the Borrower furnishes the Bank with such
evidence or assurances (each satisfactory to the Bank in its sole and
absolute discretion) that the Mirada Action will not, in any way, affect or
impair the Borrower's title to, or the Bank's first perfected security
interest in, or ability to realize upon, the MCO California Collateral
and/or any Notes Receivable arising on account of the MCO California
Collateral (hereinafter (i) and (ii) collectively referred to as the
"Mirada Preconditions"), none of the Notes Receivable derived from Bulk
Land Sales Contracts entered into by and between the Borrower and any
Person relating to the sale of land at the Strategic Project known as
Rancho Mirage/Mirada, California shall constitute Acceptable New Notes
Receivable.
Business Day. Any day on which banking institutions in Boston,
Massachusetts, are open for the transaction of banking business and, in the
case of Eurodollar Rate Loans, also a day which is a Eurodollar Business
Day.
Cash Equivalents: Any of the following:
(1) U.S. Government Obligations;
(2) Any certificate of deposit or banker's acceptance, in each case,
maturing not more than 180 days after the date of acquisition, issued by,
or, in the case of bankers' acceptances, accepted by, or time deposit of,
any bank or trust company organized under the laws of the United States of
America or any state thereof or the District of Columbia or any United
States branch office or agency of any foreign depository institution;
(3) Repurchase agreements entered into with entities whose unsecured,
unguaranteed long-term debt obligations are rated "A" (or higher) by S&P
and "A2" (or higher) by Moody's, or whose unsecured, unguaranteed
commercial paper obligations are rated "A-2" (or higher) by S&P and "P-2"
(or higher) by Moody's, pursuant to written agreement with respect to any
obligation described in clauses (1), (2) or (4) of this definition of Cash
Equivalents;
(4) Commercial paper (including both noninterest-bearing discount
obligations and interest-bearing obligations payable on demand or on a
specified date not more than 180 days after the date of acquisition),
issued by a corporation organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
thereof is made, of "P-2" (or higher) according to Moody's or "A-2" (or
higher) according to S&P;
(5) Adjustable rate preferred stock that is rated "A" (or higher) by
Moody's or S&P;
(6) 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, or (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;
(7) Money Market deposit accounts issued or offered by any bank or
trust company organized under the laws of the United States of America or
any state thereof or the District of Columbia, in each case having capital
and surplus in excess of $500 million;
(8) Non-taxable securities, maturing not later than one year after
the date of acquisition, issued by any state or municipality and having
ratings of at least "A" if rated by S&P and "A-2" if rated by Moody's; and
(9) Any investments which are substantially comparable to those
described above and which are approved by the Bank.
CERCLA. See 6.17(a).
Certificate. See 4.8.
Certificate of Compliance. The Parties' certifications by each of
their respective chief financial officer, treasurer, controller or other
authorized financial officer designated by the Parties and approved by the
Bank setting forth the calculations necessary to indicate the Borrower's
and the LP's compliance with 8.1, 8.7 and 9, and indicating that there is
then existing no Suspension Event or Event of Default.
Closing Date. The first date on which the conditions set forth in 10
and 11 have been satisfied and any Revolving Credit Loans are to be made.
Code. The Internal Revenue Code of 1986, as amended.
Collateral. See 5.
Collateral Note. See 2.1.5.
Commercial Finance Exam. See 7.4(d).
Commitment. Subject to Availability, $14,000,000.00.
Consolidated or consolidated. With reference to any term defined
herein, shall mean that term as applied to the accounts of each of the
Parties and their respective Subsidiaries, consolidated in accordance with
generally accepted accounting principles.
Conversion Request. A notice given by the Borrower or the LP to the
Bank of its election to convert or continue a Loan in accordance with
2.1.8.
Creditor(s). See definition of Subordination Agreement.
Default Rate. The per annum sum of four percent (4.0%) above the
Domestic Rate.
Depository. See 2.2.4.
Developed Lots. A subdivided lot and the improvements thereon at any
of the Strategic Projects and Non-Strategic Projects (and which is not
otherwise subject to an Acceptable Contract), and with respect to which all
infrastructure improvements necessary for the sale of such lot thereon have
been completed, and with respect to which all permits and approvals, and
evidence of access to utilities necessary for the sale of such lot have
been obtained all as evidenced by such approvals, certificates, or permits
executed by the appropriate duly authorized federal, state and/or local
official for the applicable Strategic Project or Non-Strategic Project,
provided, however, (a) until satisfaction of the Mirada Preconditions, none
of the property located at the Strategic Project known as Rancho Mirage
Mirada, California shall qualify as a Developed Lot and shall not be
included as Developed Lots under Subsection (ii)(C) of the defined term
Borrower Availability set forth in 1, herein, and (b) the Developed Lots
listed on Schedule 10.10, annexed hereto shall not be deemed to be
Developed Lots.
Distribution. The declaration or payment of any dividend on or in
respect of any shares of any class of capital stock of the Parties, or any
other distribution on or in respect of any shares of any class of capital
stock of the Parties (other than On-Loans permitted pursuant to Section 7-
11 (b) hereof); or the return of capital, or payment of any amount, to the
holders of, or on account of, any partnership interest in the LP (other
than On-Loans permitted pursuant to Section 7-11 (b) hereof).
Dollars or $. Dollars in lawful currency of the United States of
America.
Domestic Rate. The sum of one half of one percent (0.50%) plus the
Base Rate.
Domestic Rate Loans. Those Revolving Credit Loans bearing interest
calculated by reference to the Domestic Rate.
Drawdown Date. The date on which any Revolving Credit Loan is made or
is to be made, and the date on which any Revolving Credit Loan is converted
or continued in accordance with 2.1.8.
Employee Benefit Plan. Any employee benefit plan within the meaning
of 3(3) of ERISA maintained or contributed to by the Borrower or any ERISA
Affiliate, other than a Multiemployer Plan.
Environmental Indemnity Agreements. The Environmental Indemnity
Agreements executed individually by each of the Parties and MAXXAM in favor
of the Bank, as required pursuant to 10.11.
Environmental Laws. See 6.17(a).
ERISA. The Employee Retirement Income Security Act of 1974, as
amended and in effect from time to time.
ERISA Affiliate. Any Person which is treated as a single employer
with the Borrower under 414 of the Code.
Eurodollar Business Day. Any day on which commercial banks are open
for international business (including dealings in Dollar deposits) in
London or such other eurodollar interbank market as may be selected by the
Bank in its sole discretion acting in good faith.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar
Rate Loan, the aggregate of: (a) two and three-quarters percent (2.75%),
plus (b) the rate per annum equal to the rate at which the Bank is offered
Dollar deposits two Eurodollar Business Days prior to the beginning of such
Interest Period in an interbank eurodollar market where the eurodollar and
foreign currency and exchange operations of the Bank are customarily
conducted for delivery on the first day of such Interest Period for the
number of days comprised therein and in an amount comparable to the amount
of the Eurodollar Rate Loan to which such Interest Period applies.
Eurodollar Rate Loans. Revolving Credit Loans bearing interest
calculated by reference to the Eurodollar Rate.
Event of Default. See 12.1.
Existing Notes Receivable. Such of each of the Parties' Notes
Receivable in existence as of the date hereof, as set forth on the Schedule
annexed to the initial monthly Borrowing Base Report.
Facility Fee. See 3.1.
Fair Market Value. A value that is within the range of prices that
could reasonably be paid for the property sold in an arms-length
transaction conducted in the competitive open market under all conditions
requisite to a fair sale, the buyer and seller, each acting prudently and
knowledgeably and in view of the market conditions prevailing at the time
of such determination. Implied in this definition is the consummation of a
sale as of a specified date and the passing of title from seller to buyer
under conditions whereby: (a) buyer and seller are typically motivated; (b)
both parties are well informed or well advised, and each acting in what
they consider their own best interest; (c) payment is made in cash or its
equivalent; and (d) financing, if any, is on terms generally available in
the community and typical for the property type in its locale.
Generally accepted accounting principles. (a) When used herein,
whether directly or indirectly through reference to a capitalized term used
herein, means (i) principles that are consistent with the principles
promulgated or adopted by the Financial Accounting Standards Board and its
predecessors, in effect for the fiscal year ended on the Balance Sheet Date
and (ii) to the extent consistent with such principles, the accounting
practices of each of the Parties reflected in their respective financial
statements for the year ended on the Balance Sheet Date and (b) when used
in general, other than as provided above, means principles that are
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, or such successor organ-
ization recognized by the American Institute of Certified Public Accoun-
tants as in effect from time to time; provided that in each case referred
to in this definition of "generally accepted accounting principles" a
certified public accountant would, insofar as the use of such accounting
principles is pertinent, be in a position to deliver an unqualified opinion
(other than a qualification regarding changes in generally accepted
accounting principles) as to financial statements in which such principles
have been properly applied.
Guaranteed Pension Plan. Any employee pension benefit plan within the
meaning of 3(2) of ERISA maintained or contributed to by the Borrower, the
LP or any ERISA Affiliate the benefits of which are guaranteed on
termination in full or in part by the PBGC pursuant to Title IV of ERISA,
other than a Multiemployer Plan.
Guaranties. Individually and collectively, the Unconditional
Guaranties of Payment and Performance, dated December 29, 1992 and/or
December 29, 1993, made by each of the Guarantors in favor of the Bank
pursuant to which each of the Guarantors guarantee to the Bank the payment
and performance of the Obligations, such Guaranties to be in form and
substance satisfactory to the Bank.
Guarantor(s) shall mean (jointly and severally) with respect to the
Obligations of both the Borrower and the LP, each of Westcliff, Horizon,
HPC and MAXXAM; with respect to the Obligations of the Borrower only, the
term "Guarantor" shall also mean the LP; and with respect to the
Obligations of the LP only, the term "Guarantor" shall also mean the
Borrower.
HPC. As defined in the preamble hereto.
Hazardous Substances. See 6.17(b).
Home Mortgages. Such contracts and agreements entered into by and
between any of the Parties and any Person relating to the sale of a
Building at either any of the Strategic Projects or any of the Non-
Strategic Projects and in all circumstances not otherwise constituting a
Bulk Land Sales Contract, provided, however, until satisfaction of the
Mirada Preconditions, none of the Notes Receivable derived from Home
Mortgages entered into by and between the Borrower and any Person relating
to the sale of land at the Strategic Project known as Rancho Mirage/Mirada,
California shall constitute Acceptable New Notes Receivable.
Horizon. As defined in the preamble hereto.
Indebtedness. All obligations, contingent and otherwise, that in
accordance with generally accepted accounting principles should be
classified on the Party's respective balance sheets as liabilities, or to
which reference should be made by footnotes thereto, including in any event
and whether or not so classified: (a) all debt and similar monetary
obligations, whether direct or indirect; (b) all liabilities secured by any
mortgage, pledge, security interest, lien, charge, or other encumbrance
existing on property owned or acquired subject thereto, whether or not the
liability secured thereby shall have been assumed; and (c) all guarantees,
endorsements and other contingent obligations whether direct or indirect in
respect of indebtedness of others, including any obligation to supply funds
to or in any manner to invest in, directly or indirectly, the debtor, to
purchase indebtedness, or to assure the owner of indebtedness against loss,
through an agreement to purchase goods, supplies, or services for the
purpose of enabling the debtor to make payment of the indebtedness held by
such owner or otherwise, and the obligations to reimburse the issuer in
respect of any letters of credit.
Installment Sales Contract. Any contract or agreement in which any of
the Parties continue to remain liable for the performance of conditions.
Insured Projects. The Strategic Projects and Non-Strategic Projects
for which Title Policies are required, as specifically set forth in the
within 1.1, under the defined term "Title Policy."
Interest Payment Date. As to any Revolving Credit Loan (exclusive of
any drawing under any Letters of Credit), interest shall be payable monthly
in arrears on the first day of each month during the term of the Loan.
Interest Period. With respect to each Revolving Credit Loan, (a)
initially, the period commencing on the Drawdown Date of such Revolving
Credit Loan and ending on the last day of one of the periods set forth
below, as selected by the Borrower and/or the LP, as applicable, in a Loan
Request (i) for any Domestic Rate Loan, the last day of the calendar month;
(ii) for any Eurodollar Rate Loan, 3, 6, 9, or 12 months; and (b)
thereafter, each period commencing on the last day of the next preceding
Interest Period applicable to such Revolving Credit Loan and ending on the
last day of one of the periods set forth above, as selected by the Borrower
and/or the LP, as applicable, in a Conversion Request, or as provided for
in Subsection (C), below; provided that all of the foregoing provisions
relating to Interest Periods are subject to the following:
(A) if any Interest Period with respect to a Eurodollar Rate
Loan would otherwise end on a day that is not a Eurodollar Business
Day, that Interest Period shall be extended to the next succeeding
Eurodollar Business Day unless the result of such extension would be
to carry such Interest Period into another calendar month, in which
event such Interest Period shall end on the immediately preceding
Eurodollar Business Day;
(B) if any Interest Period with respect to a Domestic Rate Loan
would end on a day that is not a Business Day, that Interest Period
shall end on the next succeeding Business Day;
(C) if the Borrower and/or the LP shall fail to give notice as
provided in 2.1.8, the Borrower and the LP shall be deemed to have re
quested a conversion of the affected Eurodollar Rate Loan to a
Domestic Rate Loan on the last day of the then current Interest Period
with respect thereto;
(D) any Interest Period relating to any Eurodollar Rate Loan
that begins on the last Eurodollar Business Day of a calendar month
(or on a day for which there is no numerically corresponding day in
the calendar month at the end of such Interest Period) shall end on
the last Eurodollar Business Day of a calendar month; and
(E) any Interest Period relating to any Eurodollar Rate Loan
that would otherwise extend beyond the Revolving Credit Loan Maturity
Date shall end on the Revolving Credit Loan Maturity Date.
(F) in no event shall there be more than four (4) Interest
Periods in the aggregate in effect at any one time for the Borrower
and the LP.
(G) after the occurrence of an Event of Default, at the Bank's
option, interest on the Revolving Credit Loans and all other amounts
payable hereunder and under the other Loan Documents shall bear
interest at the Default Rate, compounded daily (to the extent
permitted by law), to accrue from the due date thereof until the
obligation of the Borrower and/or the LP with respect to the payment
thereof shall be discharged, whether before or after judgment.
Interstate Land Sales Act. See 6.8(b).
Investments. All expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness
(excluding the Existing Notes Receivable and the New Notes Receivable
incurred or acquired in the ordinary course of business) of, or for loans,
advances, capital contributions or transfers of property to, or in respect
of any guaranties (or other commitments as described under Indebtedness),
or obligations of, any Person. In determining the aggregate amount of
Investments outstanding at any particular time: (a) the amount of any
Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding; (b)
there shall be included as an Investment all interest accrued with respect
to Indebtedness constituting an Investment unless and until such interest
is paid; (c) there shall be deducted in respect of each such Investment any
amount received as a return of capital (but only by repurchase, redemption,
retirement, repayment, liquidating dividend or liquidating distribution);
(d) there shall not be deducted in respect of any Investment any amounts
received as earnings on such Investment, whether as dividends, interest or
otherwise, except that accrued interest included as provided in the forego-
ing clause (b) may be deducted when paid; and (e) there shall not be
deducted from the aggregate amount of Investments any decrease in the value
thereof.
Leases. Leases, licenses and agreements whether written or oral,
relating to the use or occupation of any of the Mortgaged Property by
persons other than the Parties, including but not limited to the leases and
parking agreements listed on Schedule 6.21.
Letters of Credit. Standby Letters of Credit issued by the Bank for
the account of the Parties subsequent to the Closing Date, and any
extension or renewal of any Standby Letters of Credit issued prior to the
Closing Date by the Bank for the account of the Parties or MAXXAM, as set
forth on the Schedule entitled "Letters of Credit".
Letter of Credit Amount. Eight Million Five Hundred Thousand Dollars
($8,500,000.00).
Letter of Credit Interest Rate. The sum of four percent (4.0%) above
the Domestic Rate.
L/C Fee. See 3.3.
Loan Account. See 2.1.7(c).
Loan Documents. Any and all documents, instruments and/or agreements
(including all amendments, modifications, substitutions, replacements or
extensions) previously (unless such document, instrument and/or agreement
has been replaced in the entirety), now or hereafter executed and/or
delivered by any of the Parties, any of their respective Subsidiaries,
and/or MAXXAM, in connection with the Obligations, including, without
limitation, this Agreement, the Note, the Collateral Note, the Subor-
dination Agreements, the Security Documents and the Guaranties.
Loan Request. See 2.1.7.
Loan(s). Collectively, the Revolving Credit Loans, all undrawn
Letters of Credit, and all drawings made under any of the Letters of
Credit.
Lock Box Account. See 2.2.4.
LP. MCO Properties L.P., a Delaware limited partnership, whose
general partner is the Borrower.
LP Assets. The real estate located in Fountain Hills, Arizona and
Lake Havasu, Arizona and Paradise Hills, New Mexico owned by the LP, the
LP's equity interest in SunRidge Canyon LLC, as well as all Notes
Receivable now or hereafter owned by the LP and the other personal property
specified in Schedule 1.1(f) to this Agreement.
LP Availability. LP Availability refers at any time to the lesser
of (i) or (ii), below:
(i) up to (A) Fourteen Million Dollars ($14,000,000.00),
inclusive of the Letter of Credit Amount,
minus
(B) the aggregate amounts then undrawn on all outstanding
Letters of Credit, acceptances, or any other accommodations
issued or incurred by the Bank in connection with the Loan,
minus
(C) the aggregate amounts of Letters of Credit,
acceptances, or any other accommodations paid by the Bank in
connection with the Loan and for which the Bank has not received
reimbursement from the LP or any other Party;
minus
(D) the aggregate amount of then Outstanding Revolving
Credit Loans to the Borrower;
or
(ii) up to (A) seventy-five percent (75%) of (I) the then
outstanding principal balance of each of the Acceptable New Notes
Receivables of the LP derived from Retail Lot Contracts and Home
Mortgages, and (II) the then outstanding principal balance of each of
the Acceptable Existing Notes Receivable of the LP derived from Retail
Lot Contracts and Home Mortgages,
plus<PAGE>
(B) up to the lesser of:
(I) Six Million Dollars ($6,000,000.00),
or
(II) up to fifty percent (50%) of the aggregate of (a)
the then outstanding principal balance of Acceptable New
Notes Receivable of the LP derived from Bulk Land Sales
Contracts, and (b) the then outstanding principal balance of
Acceptable Existing Notes Receivables of the LP derived from
Bulk Land Sales Contracts,
plus
(C) up to the lesser of:
(I) fifty percent (50%) of the Book Value of Developed
Lots of the LP,
or
(II) Three Million Dollars ($3,000,000.00);
minus
(D) the aggregate amounts then undrawn on all outstanding
Letters of Credit, acceptances, or any other accommodations
issued or incurred by the Bank in connection with the Loan,
minus
(E) the aggregate amounts of Letters of Credit,
acceptances, or any other accommodations paid by the Bank in
connection with the Loan and for which the Bank has not received
reimbursement from the LP or any other Party.
LP Revolving Credit Note. See Section 2.1.4.
Material Leases. Any Lease and other agreements affecting more than
five (5) acres of any of the Strategic Projects, 25,000 square feet of any
of the Strategic Projects, or generating gross income of more than
$50,000.00 per annum with respect to any of the Strategic Projects.
Material Lease Summaries. Summaries of the material terms of the
Material Leases. Such Material Lease Summaries shall contain the
information described on Exhibit D and any other material terms of Material
Leases relating to the Mortgaged Property.
Maturity Date. The Revolving Credit Maturity Date.
MAXXAM. MAXXAM Inc., a Delaware corporation with its principal place
of business located at 5847 San Felipe, Suite 2600, P.O. Box 572887,
Houston, Texas 77057
MAXXAM Guaranty. See 12.1(k).
MAXXAM Pledge Agreement. See 12.1(k).
MCO California Collateral. See 5.1.
Minimum Capital. See 9
Mirada Action. Individually and collectively (i) Con. C.A. No. 12111,
filed with the Court of Chancery of the State of Delaware and entitled In
re: MAXXAM Inc./Federated Development Shareholders' Litigation and (ii) NL
Industries Inc. and Harold C. Simmons in his capacity as Trustee of The
Combined Master Retirement Trust v. MAXXAM Inc., MCO Properties Inc.,
Federated Development Company, Charles F. Hurwitz, Ezra G. Levin, Barry
Munitz, John B. Connally, John M. Seidl, William C. Leone, Stanley D.
Rosenberg and C.V. Wood, Jr., CA 12353, Court of Chancery, State of
Delaware.
Mortgaged Property. Individually and collectively, the Strategic
Projects and the Non-Strategic Projects.
Multiemployer Plan. Any multiemployer plan within the meaning of
3(37) of ERISA maintained or contributed to by the Borrower, the LP or any
ERISA Affiliate.
Notification Letters. See 7.14.
Net Proceeds. The difference between gross sales price, less
reasonable closing costs.
Net Worth. Shareholder's Equity, plus, as long as MCO Limited
Partner, Inc. remains an affiliate of the Borrower, the entire amount of
partners' equity in the LP owned by MCO Limited Partner, Inc., which is
categorized as a minority interest on the consolidated balance sheet of the
Borrower.
New Notes Receivable. Such of a Party's Notes Receivable arising
subsequent to the date of this Agreement.
Non-Strategic Projects. Each of the properties listed on the Schedule
1-1(b) annexed hereto entitled "Non-Strategic Projects," including, without
limitation, those properties located in, or known as, Pueblo West, Colora-
do, Westcliff, Texas, Waterwood, Texas, Rio Communities, New Mexico, Vail
Valley Ranch, Arizona, Paradise Hills, New Mexico, Arizona Sunsites,
Arizona, Tucson Day Ranch, Arizona, Ina/LaCholla, Arizona.
Note. Shall mean individually and collectively the Borrower Revolving
Credit Note and the LP Revolving Credit Note.
Note Obligors. An unaffiliated third party individual(s) or entity
liable to any of the Parties on account of any Notes Receivable.
Notes Receivable. Negotiable instruments: (i) not subject to any de-
fenses, and (ii) representing an unconditional order to pay for credit
extended to any Note Obligor, whether or not yet earned by performance.
On-Loan. See 7.11.
Obligations. All indebtedness, obligations and liabilities of the
Parties, and each of them, jointly and severally, to the Bank, whether
existing on or prior to the date of this Agreement or arising or incurred
hereafter, direct or indirect, joint or several, absolute or contingent,
matured or unmatured, liquidated or unliquidated, secured or unsecured,
arising by contract, operation of law of otherwise, including, without
limitation those arising under this Agreement, the Guaranties, the Security
Documents or any of the other Loan Documents or in respect of any of the
Loans or other instruments at any time evidencing any thereof.
Outstanding. With respect to the Loans, the aggregate unpaid
principal thereof as of any date of determination.
PBGC. The Pension Benefit Guaranty Corporation created by 4002 of
ERISA and any successor entity or entities having similar responsibilities.
Parties. Jointly and severally, the Borrower, the LP, Westcliff,
Horizon and HPC.
Permitted Distributions. Distributions and/or payments permitted
pursuant to 8.7.
Permitted Liens. Liens, security interests and other encumbrances
permitted by 8.2.
Person. Any individual, corporation, partnership, trust,
unincorporated association, business, or other legal entity, and any
government or any governmental agency or political subdivision thereof.
Real Estate. All real property owned or leased (as lessee or
sublessee) by any of the Parties, or any of their respective Subsidiaries,
including any real property owned with other Persons as a partner, joint
venturer, or otherwise (as, for example, SunRidge Canyon, L.L.C.).
Record. The grid attached to the Note, or the continuation of such
grid, or any other similar record, including computer records, maintained
by the Bank with respect to any Revolving Credit Loan.
Reimbursement Agreement. The applications made and agreements entered
into between the Bank and the Parties relating to the Letters of Credit, in
substantially the form annexed hereto as Exhibit E, as the same may be
amended and in effect from time to time.
Release. See 6.17(c)(iii).
Retail Lot Contracts. Such contracts and agreements entered by and
between any of the Parties and any Person for the sale of any subdivided
lot that is part of the Mortgaged Property, and not otherwise constituting
a Bulk Sales Land Contract, provided, however, until satisfaction of the
Mirada Preconditions, none of the Notes Receivable derived from Retail Lot
Contracts entered into by and between the Borrower and any Person relating
to the sale of land at the Strategic Project known as Rancho Mirage/Mirada,
California shall constitute Acceptable New Notes Receivable.
Revolving Credit Loans. Revolving credit loans (inclusive of all
undrawn Letters of Credit) made or to be made by the Bank to the Borrower
and/or the LP pursuant to 2.
Revolving Credit Maturity Date. May 15, 1998, or such earlier date on
which the Revolving Credit Loans shall become due and payable pursuant to
the terms hereof.
Revolving Credit Note. Shall mean individually and collectively the
Borrower Revolving Credit Note and the LP Revolving Credit Note.
Revolving Credit Note Record. A Record with respect to the Revolving
Credit Note.
Security Documents. All documents, instruments and/or agreements
executed and/or delivered by any of the Parties, evidencing all collateral
security granted, pledged, assigned or delivered by any of the Parties as
collateral security for the payment and performance of the Obligations, all
as more particularly described in 5.
Service Agreements shall mean service agreements, whether written or
oral, relating to the maintenance, security, finance or insurance of the
Notes Receivable.
Shareholder's Equity shall mean shareholder's equity (or deficit) of
the Borrower determined in accordance with Generally accepted accounting
principles, consistently applied.
Strategic Projects. Individually and collectively, the properties
located in, or known as, Fountain Hills, Arizona, Lake Havasu City, Arizona
and Rancho Mirage, sometimes referred to as Mirada, California (as more
particularly described on a current real estate inventory and receivable
summary annexed hereto as Schedule 1-1(c) entitled "Strategic Projects").
Subordination Agreement. The Subordination Agreements, dated December
29, 1992, December 29, 1993 and to be dated on or prior to the Closing Date
(if any), among the Bank, the Guarantors, or any of their respective
affiliates or subsidiaries (collectively, the "Creditors"), the Borrower
and the LP in form and substance satisfactory to the Bank, pursuant to
which the rights of the Creditors against the Borrower and/or the LP with
reference to indebtedness of the Borrower and/or the LP to such Creditors
are subordinated to the rights of the Bank against the Borrower with
reference to the Borrower's and the LP's Indebtedness to the Bank.
Subsidiary. Any corporation, association, partnership, trust, or
other business entity of which the designated parent shall at any time own
directly or indirectly through a Subsidiary or Subsidiaries at least a
majority (by number of votes or controlling interests) of the outstanding
Voting Interests.
Survey shall mean an instrument survey (or plans), including any date-
down survey, or engineer's certification, sufficient to continue the
deletion (if presently existing) of the survey exception from any existing
Title Policy for which any update or endorsement shall be issued with
respect to any of the Strategic Projects, or to remove the survey exception
from any new Title Policy to be issued in connection with the Loan with
respect to any of the Strategic Projects, except for (i) any additional
Developed Lots at the Strategic Project known as Fountain Hills, Arizona,
and (ii) until satisfaction of the Mirada Preconditions, any Developed Lots
at the Strategic Project known as Mirada/Rancho Mirage located in
California, which, if necessary to delete, or continue the deletion of the
survey exception, shall show the location of all buildings, structures,
easements and utility lines on the Mortgaged Property, shall show that all
buildings and structures are within the lot lines of the Mortgaged
Property, shall not show any encroachments by others, shall show the zoning
district or districts in which the Mortgaged Property is located and shall
show whether or not the Mortgaged Property is located in a flood hazard
district as established by the Federal Emergency Management Agency or any
successor agency or is located in any flood plain, flood hazard or wetland
protection district established under federal, state or local law.
Surveyor Certificate shall mean a certificate executed by the
surveyor who prepared the Survey, or the engineer who prepared the
certification, dated as of a recent date and containing such information
relating to the Mortgaged Property as the Bank, its counsel or the Title
Insurance Company may require (and as customarily furnished within the
professional capacities of the surveyor or engineer), such certificate to
be satisfactory to the Bank and its counsel, in form and substance.
Suspension Event. The occurrence of any event which, solely with the
passage of time or the giving of notice (or both), would be, an Event of
Default.
Title Insurance Company. See Schedule 1-1(d) annexed hereto entitled
"Title Insurance Company."
Title Policy shall mean ALTA standard form title insurance policies
issued by the Title Insurance Companies acceptable to the Bank, and in each
instance (with such reinsurance or co-insurance as the Bank may require,
any such reinsurance to be with direct access endorsements), equal to the
corresponding amount for the following projects (the "Insured Projects"):
Insured Projects Amount
Fountain Hills, Arizona
Arizona - Simultaneous Issue with
Lake Havasu City Arizona (and including
separate Fountain Hills Developed Lots
Coverage in the amount of $2,000,000.00) $27,000,000.00
Lake Havasu, Arizona - Simultaneous
with Fountain Hills, Arizona $25,000,000.00
Rancho Mirage/Mirada, California $ 2,000,000.00
Ina/LaCholla, Arizona $ 100,000.00
Vail Valley/Tuscon Day Ranch, Arizona $ 900,000.00
Waterwood, Texas $ 1,000,000.00
each insuring the priority of the Security Documents (relevant to the
Insured Projects), and that each of the Parties (where applicable)
hold marketable or insurable (as applicable in each state of issuance)
fee simple title to the Insured Projects, subject only to the
encumbrances permitted by the Security Documents (relevant to the
Insured Projects) and which shall not contain exceptions for mechanics
liens, persons in occupancy or matters which would be shown by a
survey (if applicable), shall not insure over any matter except to the
extent that any such affirmative insurance is acceptable to the Bank
in its sole discretion, and shall contain such endorsements and
affirmative insurance as the Bank in its discretion may require (as is
available in each state of issuance), including but not limited to (a)
comprehensive endorsement, (b) variable rate of interest endorsement,
(c) usury endorsement, (d) revolving credit endorsement, (e) doing
business endorsement and (f) ALTA form 3.1 zoning endorsement.
Title Update Letter shall mean a title certification letter addressed
to the Bank (in form and substance satisfactory to the Bank), pursuant to
which a Title Insurance Company (acceptable to the Bank) shall certify as
to the status of title to the property that is the subject of such Title
Update Letter.
Type. As to any Revolving Credit Loan its nature as a Domestic Rate
Loan or a Eurodollar Rate Loan.
Underwriting Criteria. See Schedule 1-1(e) annexed hereto entitled
Underwriting Criteria for Notes Receivable.
Voting Interests. Stock or similar ownership interests, of any class
or classes (however designated), the holders of which are at the time
entitled, as such holders, (a) to vote for the election of a majority of
the directors (or persons performing similar functions) of the corporation,
association, partnership, trust or other business entity involved, or (b)
to control, manage or conduct the business of the corporation, partnership,
association, trust or other business entity involved.
Westcliff. As defined in the preamble hereto.
1.2. Rules of Interpretation.
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented from time to
time in accordance with its terms and the terms of this Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or
modification to such law.
(d) A reference to any Person includes its permitted successors
and permitted assigns.
(e) Accounting terms not otherwise defined herein have the
meanings assigned to them by Generally accepted accounting principles
applied on a consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not
limiting.
(g) All terms not specifically defined herein or by generally
accepted accounting principles, which terms are defined in the Uniform
Commercial Code as in effect in Massachusetts, have the meanings assigned
to them therein.
(h) Reference to a particular "" refers to that section of this
Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like
import shall refer to this Agreement as a whole and not to any particular
section or subdivision of this Agreement.
2. THE REVOLVING CREDIT FACILITY.
2.1. Revolving Credit Loans.
Sub-Part A - Loans to the Borrower
2.1.1. Commitment to Lend and Borrower's Promise to Pay. (a) Subject
to the terms and conditions set forth in this Agreement, and provided there
is then existing no Suspension Event or Event of Default, the Bank agrees
to lend to the Borrower and the Borrower may borrow, repay, and reborrow
from time to time between the Closing Date and the Revolving Credit
Maturity Date upon notice by the Borrower to the Bank given in accordance
with 2.1.7, such sums as are outstanding as of the Closing Date and as may
thereafter be requested by the Borrower, provided, however, the maximum
principal amount of Revolving Credit Loans made to the Borrower (after
giving effect to all amounts requested) shall not, at any one time, exceed
the Borrower Availability. Each request for a Revolving Credit Loan here-
under shall constitute a representation and warranty by Borrower on behalf
of itself and each of the Parties that the conditions set forth in 10 and
11, in the case of the initial Revolving Credit Loan, and 11, in the case
of all other Revolving Credit Loans, have been satisfied on the date of
such request.
(b) Except as provided for in 2.2.2, and in 2.2.4, herein, and
provided there is no Event of Default pursuant to which the Obligations are
deemed to be accelerated (as provided for herein), or the Bank accelerates
the Obligations, the Revolving Credit Loans shall mature and be due and
payable, in full, on the Revolving Credit Maturity Date.
2.1.2. The Borrower Revolving Credit Note. The Borrower's Revolving
Credit Loans shall be evidenced by an amended and restated promissory note
of the Borrower in substantially the form of Exhibit A hereto (the
"Borrower Revolving Credit Note"), dated as of the Closing Date and
completed with appropriate insertions. The Borrower Revolving Credit Note
shall be payable to the order of the Bank in the principal amount equal to
the Commitment or, if less, the outstanding amount of all Revolving Credit
Loans made by the Bank to the Borrower, plus interest accrued thereon, as
set forth below. The Borrower irrevocably authorizes the Bank to make or
cause to be made, at or about the time of the Drawdown Date of any
Revolving Credit Loan to the Borrower, or at the time of receipt of any
payment of principal on the Borrower's Revolving Credit Note, an appro-
priate notation on the Record reflecting the making of such Revolving
Credit Loan to the Borrower, or (as the case may be) the receipt of such
payment. The outstanding amount of the Revolving Credit Loans made to the
Borrower set forth on the Record shall be prima facie evidence of the
principal amount thereof owing and unpaid to the Bank, but the failure to
record, or any error in so recording, any such amount on the Record shall
not limit or otherwise affect the obligations of the Borrower hereunder or
under the Borrower Revolving Credit Note to make payments of principal of,
or interest on, the Borrower Revolving Credit Note when due.
Sub-Part B - Loans to the LP
2.1.3. Commitment to Lend and the LP's Promise to Pay. (a) Subject
to the terms and conditions set forth in this Agreement, and provided there
is then existing no Suspension Event or Event of Default, the Bank agrees
to lend to the LP and the LP may borrow, repay, and reborrow from time to
time between the Closing Date and the Revolving Credit Maturity Date upon
notice by the LP to the Bank given in accordance with 2.1.7, such sums as
are outstanding on the Closing Date and as thereafter may be requested by
the LP, provided, however, the maximum principal amount of Revolving Credit
Loans made to the LP (after giving effect to all amounts requested) shall
not, at any one time, exceed the LP Availability. Each request for a
Revolving Credit Loan to the LP hereunder shall constitute a representation
and warranty by the LP on behalf of itself and each of the Parties that the
conditions set forth in 10 and 11, in the case of the initial Revolving
Credit Loan made to the LP, and 11, in the case of all other Revolving
Credit Loans made to the LP, have been satisfied on the date of such
request.
(b) Except as provided for in 2.2.2, and in 2.2.4, herein, and
provided there is no Event of Default pursuant to which the Obligations are
deemed to be accelerated (as provided for herein), or the Bank accelerates
the Obligations, the Revolving Credit Loans made to the LP shall mature and
be due and payable, in full, on the Revolving Credit Maturity Date.
2.1.4. The LP's Revolving Credit Note. The LP's Revolving Credit
Loans shall be evidenced by an amended and restated promissory note of the
LP in substantially the form of Exhibit B hereto (the "LP Revolving Credit
Note"), dated as of December 29, 1993 and completed with appropriate
insertions. The LP's Revolving Credit Note shall be payable to the order
of the Bank in the principal amount equal to the Commitment or, if less,
the outstanding amount of all Revolving Credit Loans made to the LP made by
the Bank, plus interest accrued thereon, as set forth below. The LP
irrevocably authorizes the Bank to make or cause to be made, at or about
the time of the Drawdown Date of any Revolving Credit Loan made to the LP
or at the time of receipt of any payment of principal on the LP Revolving
Credit Note, an appropriate notation on the Record reflecting the making of
such Revolving Credit Loan to the LP or (as the case may be) the receipt of
such payment. The outstanding amount of the Revolving Credit Loans made to
the LP set forth on the Record shall be prima facie evidence of the
principal amount thereof owing and unpaid to the Bank, but the failure to
record, or any error in so recording, any such amount on the Record shall
not limit or otherwise affect the obligations of the LP hereunder or under
the LP Revolving Credit Note to make payments of principal of, or interest
on, the LP Revolving Credit Note when due.
Sub-Part C - Applicable to All Revolving Credit Loans
2.1.5. Collateral Note. In addition to the Revolving Credit Note, to
the extent the Bank or its counsel deem it necessary or advisable to
perfect and/or enforce its rights and remedies against the Parties in each
or any of the jurisdiction where any of the Strategic Projects or Non-
Strategic Projects are located, the Parties shall execute and deliver to
the Bank, a note and/or an amendment and restatement to any existing
note(s) (hereinafter, individually and collectively, the "Collateral Note")
evidencing all or any portion of the Obligations to the Bank, or to any
beneficiary under any Deed(s) of Trust. The Collateral Note shall not
constitute an obligation in addition to the Revolving Credit Notes, but
rather, the outstanding principal balance of any such Collateral Note shall
constitute a portion of the Revolving Credit Notes. Additionally, interest
shall accrue and be payable, together with the outstanding principal
balance of the Collateral Note, in accordance with the terms and conditions
of the Revolving Credit Notes.
2.1.6. Interest on Revolving Credit Loans.
(a) Each Domestic Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the Domestic Rate.
(b) (i) Each Eurodollar Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at the Eurodollar Rate determined for
such Interest Period.
(ii) In accordance with 2.1.8, herein, until the occurrence of an
Event of Default or Suspension Event, the Borrower and/or the LP may select
interest periods of three, six, nine or twelve months with respect to the
Eurodollar Rate Loans, provided that no interest period shall end after the
Revolving Credit Maturity Date and in no event shall there be more than
four (4) Interest Periods in the aggregate in effect at any one time.
(c) The Borrower and the LP shall each pay interest on each Revolving
Credit Loan made to the Borrower or the LP, respectively, in arrears on
each Interest Payment Date with respect thereto.
2.1.7. Requests for Revolving Credit Loans. (a) The Borrower and the
LP may request in the aggregate up to four (4) advances each month. The
first request for an advance during each month must be made concurrent with
the Borrower's and the LP's submittance of the Borrowing Base Report for
the subject month. Each subsequent request for an advance must be in the
form of Exhibit C hereto. The Borrower and the LP shall give to the Bank
written notice in the form of Exhibit C hereto of each Revolving Credit
Loan requested hereunder (a "Loan Request") (a) no less than three (3)
Business Days prior to the Drawdown Date for the first Domestic Rate Loan
requested by the Borrower or the LP in any month, (b)(i) on the same
Business Day as the proposed Drawdown Date for any Domestic Rate Loan
requested by the Borrower or the LP after the first advance during any
month if such request for a subsequent advance is received by the Bank by
11:00 a.m. Boston time; in the event that any such requests for subsequent
advances are not received by 11:00 a.m. Boston time, one (1) Business Day
prior to the Drawdown Date, and (c) no less than three (3) Eurodollar
Business Days prior to the proposed Drawdown Date of any Eurodollar Rate
Loan. Each such notice shall be irrevocable and binding on the Borrower
and the LP and shall obligate the Borrower and/or the LP to accept the
Revolving Credit Loan requested from the Bank on the proposed Drawdown
Date.
(b) Provided there is then existing no Suspension Event or Event
of Default, the Borrower and/or the LP may, from time to time, request that
the Bank make loans and advances against Notes Receivable arising out of
Amenity Sales Contracts, provided, however, (i) nothing contained herein
shall in any way constitute a commitment by the Bank to make any loans or
advances against Notes Receivable arising out of Amenity Sales Contracts,
(ii) all loans or advances against Notes Receivable arising out of Amenity
Sales Contracts shall be subject to Borrower Availability and LP
Availability, as applicable, (iii) the making of any such loan or advance
on any one occasion shall not, in any way, constitute a commitment by the
Bank to make any additional loans or advances on any other occasion, and
(iv) any loans and advances so made by the Bank against Notes Receivable
arising out of any Amenity Sales contracts shall be upon such terms and
conditions as the Bank may determine in its sole and absolute discretion.
In the event that any such loans or advances are so made by the Bank, each
such loan or advance shall constitute a Loan.
(c) The Borrower and the LP shall each open and maintain at the
Bank an account (hereinafter, each, a "Loan Account"), into which Loan
Account the Bank may (at the Bank's discretion and without notice in each
instance) deposit the proceeds of any loans or advances under the Revolving
Credit Loan. The payment of principal, interest, Facility Fees,
Administrative Fees, L/C Fees, closing fees and any other amounts due
hereunder or under any of the other Loan Documents may (at the Bank's
discretion, and without notice, in each instance), be automatically debited
by the Bank from the Loan Account. The Bank shall endeavor to furnish the
Borrower and the LP with notice of any deposit into, or withdrawal of funds
from, the Loan Account, provided, however, the Bank shall not, in any way,
be liable to the Borrower, the LP or any of the other Parties as a result
of its failure to furnish such notice.
2.1.8. Conversion Options.
(a) The Borrower and/or the LP may elect from time to time to
convert any outstanding Revolving Credit Loan to a Revolving Credit Loan
of another Type, provided that (i) with respect to any such conversion of a
Eurodollar Rate Loan into a Domestic Rate Loan, such conversion shall only
be made on the last day of the Interest Period with respect thereto; (ii)
with respect to any such conversion of a Domestic Rate Loan to a Eurodollar
Rate Loan, the Borrower and/or the LP, as applicable, shall give the Bank
at least three (3) Eurodollar Business Days' prior written notice of such
election and (iv) no Loan may be converted into a Eurodollar Rate Loan when
any Suspension Event or Event of Default has occurred. All or any part of
outstanding Revolving Credit Loans of any Type may be converted as provided
herein, provided that partial conversions shall be in an aggregate
principal amount of $50,000 or an integral multiple of $50,000 in excess
thereof. Each Conversion Request relating to the conversion of a Domestic
Rate Loan to a Eurodollar Rate Loan shall be irrevocable by the Borrower
and/or the LP.
(b) Any Revolving Credit Loans of any Type may be continued as
such upon the expiration of an Interest Period with respect thereto by
compliance by the Borrower and/or the LP, as applicable, with the notice
provisions contained in 2.1.8(a); provided that when any Suspension Event
or Event of Default has occurred, any or all Eurodollar Rate Loans may, at
the option of the Bank (in its sole and absolute discretion), be automati-
cally converted to Domestic Rate Loans bearing interest at the Default Rate
either immediately upon such occurrence or on the last day of the Interest
Period relating thereto.
(c) In the event that the Borrower or the LP does not notify the
Bank of its election hereunder with respect to any Revolving Credit Loan,
such Revolving Credit Loan shall be automatically converted to a Domestic
Rate Loan at the end of the applicable Interest Period.
(d) Any conversion to or from Eurodollar Rate Loans shall be in
such amounts and be made pursuant to such elections so that, after giving
effect thereto, the aggregate principal amount of all Eurodollar Rate Loans
having the same Interest Period shall not be less than $1,000,000 or an
integral multiple of $100,000 in excess thereof.
2.2. REPAYMENT OF THE REVOLVING CREDIT LOANS.
2.2.1. Maturity. (a) The Borrower and the LP each promises to pay on
the Revolving Credit Maturity Date, and there shall become absolutely due
and payable on the Revolving Credit Maturity Date, all of their respective
Revolving Credit Loans outstanding on such date, together with any and all
accrued and unpaid interest thereon.
(b) On the Revolving Credit Maturity Date, the Borrower and the
LP shall each cause to be returned to the Bank all undrawn Letters of
Credit.
2.2.2. Mandatory Repayments of Revolving Credit Loans. If at any time
the sum of the outstanding amount of the Revolving Credit Loans exceed the
Borrower Availability or the LP Availability, as applicable, then the
Borrower or the LP, as applicable, shall immediately pay the amount of such
excess to the Bank for application to the Revolving Credit Loans made to
the Borrower or the LP, as applicable.
2.2.3. Optional Repayments of Revolving Credit Loans. The Borrower
and/or the LP, in addition to the payments to be made pursuant to 2.2.4,
below, shall have the right, at its election, to repay the outstanding
amount of the Revolving Credit Loans, as a whole or in part, at any time
without penalty or premium, subject, however, to the terms and conditions
set forth in 4.8, below; provided that the full or partial prepayment of
the outstanding amount of any Eurodollar Rate Loans pursuant to this 2.2.3
may be made only on the last day of the Interest Period relating thereto.
Except with respect to the payments to be made pursuant to 2.2.4, below,
the Borrower and/or the LP shall give the Bank, no later than 10:00 a.m.,
Boston time, at least three (3) Eurodollar Business Days' prior written
notice of any proposed repayment pursuant to this 2.2.3 of Eurodollar Rate
Loans, specifying the proposed date of payment of Revolving Credit Loans
and the principal amount to be paid. Each such partial prepayment of the
Eurodollar Rate Loans (other than payments to be made pursuant to 2.2.4,
below) shall be in an integral multiple of $10,000, and shall be accompa-
nied by the payment of accrued interest on the principal repaid to the date
of payment. In the absence of instruction by the Borrower or the LP,
partial prepayments of outstanding Revolving Credit Loans shall be applied
first to the principal of Domestic Rate Loans and then to the principal of
Eurodollar Rate Loans.
2.2.4. Periodic Payments of Revolving Credit Loans. (a) (i) Whether
or not there is then existing a Suspension Event or an Event of Default,
each of the Parties shall cause all payments, checks, drafts, letters of
credit, and other items which represent payment on account of the Notes
Receivables, and any proceeds and collections of the Notes Receivable to be
delivered by the Note Obligors and/or any other Person directly to a lock
box/blocked account or accounts (the "Lock Box Account") at Bank One,
Arizona, or its successors (the "Depository"), or similar recipient.
(ii) Until the within Agreement is terminated by a duly
authorized officer of the Bank, and provided there is then existing no
Suspension Event or Event of Default, weekly (on Tuesday of each week), the
Borrower and the LP shall, pursuant to the terms and conditions of the
Agency Agreement (hereinafter, the "Agency Agreement") entered into by and
among the Borrower, the LP, the Bank and the Depository, instruct the
Depository to transfer all available (collected) funds in the Lock Box
Account to the Bank in the manner provided for in the Agency Agreement.
The Borrower and the LP each acknowledges and agrees that except with
respect to its (and/or its servicing agent's) ability to instruct the
Depository to transfer funds to the Bank, and its (and/or its servicing
agent's) ability to monitor the status of the Lock Box Account by virtue of
its (and/or its servicing agent's) on-line computer networking with the
Depository, neither the Borrower, the LP nor their respective servicing
agents shall have any right to control, manage or otherwise direct the
Depository to take any action with respect to, the Lock Box Account.
(b) To the extent that any payments, checks, drafts, payments or
the proceeds of any drawing of any letters of credit, and other items
representing payment on account of the Notes Receivable are received by any
of the Parties, each of the Parties shall deliver to the Lock Box Account,
in the same form as so received, all of such payments, checks, drafts,
payments or the proceeds of any drawing of any letters of credit issued for
the benefit of any of the Parties, and other items which represent payments
on account of the Notes Receivable and any proceeds and collections of the
Notes Receivable, each of which payments, checks, drafts, payments or the
proceeds of any drawing of any letters of credit, and other items shall be
endorsed (in form and substance satisfactory to the Bank and the Bank's
counsel) in favor of, and delivered to the Lock Box.
(c) (i) Payments on account of the outstanding amount of the
Revolving Credit Loans shall be paid, from time to time, by application by
the Bank of payments received by the Bank from the Depository on account of
the Notes Receivable.
(ii) All items received in payment toward the Borrower's or
the LP's Obligations prior to 3:00 p.m. Boston Time on the date of receipt
shall be credited against the Obligations on the date of receipt, provided,
however, all items received in payment towards the Obligations after 3:00
p.m. Boston Time on the date of receipt shall not be credited against such
Obligations until the next Business Day, and all such credits shall be
subject to collectability by the Bank of each such item. All payments may
be applied to the Borrower's Revolving Credit Note, the LP's Revolving
Credit Note and the other Obligations in such order and manner as the Bank
in its reasonable discretion determines.
(d) Notwithstanding the application of payments described
herein, the Borrower and the LP shall be responsible for all required
payments whether or not payments are received by the Bank on account of the
Notes Receivable.
2.3. Letters of Credit.
2.3.1. Issuance of Letters of Credit. (a) Subject to the terms and
conditions set forth in this Agreement and the applicable Reimbursement
Agreement, upon the written request to the Bank by the Borrower or the LP
(with respect to new Letters of Credit), or by the Borrower, the LP or
MAXXAM (with respect to the extension or renewal of any existing Letter of
Credit), the Bank agrees to: (a) issue, for the account of the Parties, on
any Business Day after the date hereof but prior to the Revolving Credit
Maturity Date (provided, however, no Letters of Credit to be issued shall
have an expiry date that is later in time than the Revolving Credit
Maturity Date), one or more irrevocable stand-by Letters of Credit, and (b)
extend or renew, for the account of the Parties or MAXXAM, any outstanding
Letter of Credit issued for the account of the Parties or MAXXAM prior to
the date hereof, the aggregate of which ((a) and (b)) shall not exceed the
Letter of Credit Amount. Any Letters of Credit previously issued for the
account of the Parties or MAXXAM prior to the date hereof that remain
outstanding as of the date hereof may remain outstanding or be extended or
renewed (subject to the Letter of Credit Amount) provided, however, no new
Letters of Credit will be issued for the account of MAXXAM (or any affili-
ated entity of MAXXAM which is not also a Party), subsequent to the date
hereof. Each written request (including a completed application on the
Bank's form) for the issuance (in favor of the Parties), or the extension
or renewal (on behalf of the Parties or MAXXAM) of a Letter of Credit
hereunder shall be received by the Bank at least three Business Days prior
to the proposed date of issuance. The expiry dates, amounts and bene-
ficiaries of the Letters of Credit will be as agreed by the Borrower, the
LP, or MAXXAM (where applicable) and the Bank (in its reasonable
discretion), and each Letter of Credit shall be in a form acceptable to the
Bank in its discretion. Each Letter of Credit issued subsequent to the
date hereof shall be issued pursuant to a Reimbursement Agreement to be
entered into between the Borrower and/or the LP and the Bank; provided,
however, that to the extent that the terms and conditions of any
Reimbursement Agreement are in conflict with or are inconsistent with the
terms and conditions of this Agreement, the obligations of the Bank, the
Borrower and/or the LP with respect to Letters of Credit shall be governed
by the terms and conditions of this Agreement.
(b) (i) The Borrower and the LP each acknowledges that
notwithstanding anything to the contrary contained herein in any Reimburse-
ment Agreement, and/or on any of the other Loan Documents, the Borrower and
the LP shall each be primarily obligated to the Bank for the prompt,
punctual and faithful payment and performance of any drawings under any
Letter of Credit, L/C Fees (as defined herein) and any other costs and
expenses incurred by the Bank in connection with any Letter of Credit,
whether or not such Letter of Credit is issued for the account of the
Borrower, the LP or for the account of MAXXAM or any of the other Parties.
(ii) The Borrower and the LP each hereby agrees that the
Bank may at any time, and from time to time, without thereby releasing the
Borrower or the LP from any liability on account of the matters referred to
in Subsection (i), above, and without notice to or further consent from the
Borrower or the LP, either with or without consideration: release or
surrender any lien or other security of any kind or nature whatsoever held
by it or by any person, firm or corporation on its behalf or for its
account, securing any of the Obligations; substitute for any collateral so
held by it, other collateral of like kind, or of any kind; modify the terms
of any Letter of Credit issued for the account of MAXXAM or any of the
Parties or any instrument, document, or agreement relating to such Letter
of Credit between the Bank and MAXXAM or any such Party; extend or renew
the Obligations for any period; grant releases, compromises and indulgences
with respect to the Obligations or the Loan Documents and to any persons or
entities now or hereafter liable thereunder or hereunder; release MAXXAM or
any Party, surety, endorser or accommodation party of the Obligations, the
Security Documents or any other Loan Documents; or take or fail to take any
action permitted or required pursuant to the Loan Documents.
2.3.2. Interest on Letters of Credit. Notwithstanding anything to
the contrary contained herein, any drawing under any Letters of Credit
shall bear interest at the Letter of Credit Interest Rate, compounded daily
(to the extent permitted by law) and shall be payable ON DEMAND.
2.3.3. Effects of Drawings. Each drawing under a Letter of Credit
shall be payable ON DEMAND. The liability of the Borrower and the LP under
this Agreement to repay the Bank in respect of drawings under Letters of
Credit shall be Obligations secured pursuant to the Security Documents and
such liability shall rank pari passu with the Obligations of the Parties
to repay all other Loans hereunder.
3. FEES.
3.1. Facility Fee. The Borrower and/or the LP shall pay the Bank,
monthly in arrears for each month hereafter until the Revolving Credit
Maturity Date, a facility fee equal to
(i) the difference between
(A) Fourteen Million Dollars ($14,000,000.00)
and
(B) the average outstanding balance owed by the
Borrower and the LP in the aggregate to the Bank for borrowings
made under the Revolving Credit Loan during the subject month,
(ii) multiplied by 0.375,
(iii) divided by twelve (12).
3.2. Administration Fee. In order to compensate the Bank for its
administration of the Revolving Credit Loan, the Borrower and/or the LP
shall pay to the Bank, a quarterly administration fee (the "Administration
Fee") in the amount equal to the product of (a) the Commitment and (b) one
quarter of one-half percent (e.g. based on a $14,000,000.00 Commitment, the
quarterly Administration Fee would be $17,500.00). The quarterly Admin-
istration Fee shall be deemed fully earned on the first day of each quarter
that any Revolving Credit Loan is in effect and shall be nonrefundable even
if all Revolving Credit Loans are paid in full during any such quarter.
The Administration Fee shall be paid in consecutive quarterly payments on
the first day of every April, July, October and January of each calendar
year during the term of this Agreement. Notwithstanding anything to the
contrary contained herein, in the event that the Obligations are paid in
full and the within Agreement is terminated by a duly authorized officer of
the Bank on the Revolving Credit Maturity Date, the Administration Fee due
and owing for the last quarterly period covered by the Agreement that is
less than a full quarterly period shall be prorated for the number of days
of the subject quarter on a quarterly per diem basis.
3.3. L/C Fee. (a) The Borrower and/or the LP shall pay to the Bank
a fee (hereinafter, the "L/C Fee") with respect to the Letters of Credit
equal to two percent (2.0%) per annum of the face amount of any outstanding
Letters of Credit, the L/C Fee being determined and payable as follows:
(b) The L/C Fee shall be determined based upon a 360 day year
over actual number of days elapsed.
(c) (i) For all Letters of Credit to be issued or renewed by
the Bank (including, without limitation, for any renewal of any existing
Letters of Credit), the entire L/C Fee shall be paid in advance. (ii)
Provided there is then existing no Suspension Event or Event of Default,
for any Letter of Credit, the face amount of which is reduced, or for any
Letter of Credit returned (undrawn) to the Bank prior to the expiry date,
the Bank agrees (subject to the terms and conditions set forth herein) to
refund (on a pro-rata basis) that portion of the L/C Fee equal to: (x) the
difference between (A) the number of days for which the Letter of Credit
was initially issued, less (B) the number of days for which the Letter of
Credit remained outstanding prior to return or reduction, (y) divided by
the number of days of the initial term of the Letter of Credit, (z) (i) in
the event of any returned Letter of Credit, multiplied by the L/C Fee, and
(ii) in the event of a reduction of any Letter of Credit, multiplied by the
amount by which the face amount of such Letter of Credit was reduced,
divided by the original face amount of such Letter of Credit and multiplied
by the L/C Fee, provided, however, with respect to any new Letter of Credit
(other than the renewal of any Letters of Credit) returned (undrawn) to the
Bank prior to the expiry date, or reduced from the initial amount, the L/C
Fee to be paid (as provided for herein) shall not, in any event, be less
than an L/C Fee based upon an entire Letter of Credit outstanding for a six
(6) month period. (iii) Except as provided for herein, there shall be no
refund of any portion of the L/C Fee in the event of the expiration,
termination or other modification of, or drawing under, any Letter of
Credit during any month.
4. CERTAIN GENERAL PROVISIONS.
4.1. Funds for Payments.
(a) Unless otherwise agreed to by the Bank, all payments of
principal, interest, Facility Fees, Administrative Fees, L/C Fees, closing
fees and any other amounts due hereunder or under any of the other Loan
Documents shall be made to the Bank at its head office at 100 Federal
Street, Boston, Massachusetts 02110, or at such other location in the
Boston, Massachusetts area that the Bank may from time to time designate,
in each case in immediately available funds, provided, however, the payment
of principal, interest, Facility Fees, Administrative Fees, L/C Fees,
closing fees and any other amounts due hereunder or under any of the other
Loan Documents may be automatically debited by the Bank from the Loan
Account (or any subsequent or replacement account maintained by the
Borrower at the Bank).
(b) All payments by any of the Parties hereunder and under any of the
other Loan Documents shall be made without setoff or counterclaim and free
and clear of and without deduction for any taxes, levies, imposts, duties,
charges, fees, deductions, withholdings, compulsory loans, restrictions or
conditions of any nature now or hereafter imposed or levied by any
jurisdiction or any political subdivision thereof or taxing or other
authority therein unless any of the Parties are compelled by law to make
such deduction or withholding. If any such obligation is imposed upon any
of the Parties with respect to any amount payable by it hereunder or under
any of the other Loan Documents, each of the Parties will pay to the Bank,
on the date on which such amount is due and payable hereunder or under such
other Loan Document, such additional amount in Dollars as shall be
necessary to enable the Bank to receive the same net amount which the Bank
would have received on such due date had no such obligation been imposed
upon any of the Parties. Each of the Parties will deliver promptly to the
Bank certificates or other valid vouchers for all taxes or other charges
deducted from or paid with respect to payments made by the Borrower
hereunder or under such other Loan Document. Except as otherwise provided
for in the within Agreement, nothing contained in the within Section shall
be deemed to impose any liability or obligation upon the Parties for the
payment of any such obligation incurred by the Bank for ordinary income
taxes generally paid by the Bank on account of the Bank's income or profit.
4.2. Computations. All computations of interest on the Loans, the
Facility Fees, L/C Fees and Administration Fees to the extent applicable
shall be based on a 360-day year and actual number of days elapsed. Except
as otherwise provided in the definition of the term "Interest Period" with
respect to Eurodollar Rate Loans, whenever a payment hereunder or under any
of the other Loan Documents becomes due on a day that is not a Business
Day, the due date for such payment shall be extended to the next succeeding
Business Day, and interest shall accrue during such extension. The
outstanding amount of the Loans as reflected on the Revolving Credit Note
Record from time to time shall be considered correct and binding on the
Borrower and/or the LP unless within thirty (30) Business Days after
receipt of any notice by the Borrower or the LP of such outstanding amount,
the Borrower or the LP shall notify the Bank to the contrary. The Bank
will endeavor to furnish the Borrower or the LP with notice of any
discrepancy or inconsistency between the Bank's records and information
furnished by the Borrower or the LP to the Bank provided, however, the Bank
shall be under no obligation to furnish the Borrower or the LP with notice
of any such inconsistency or discrepancy and shall have no liability on
account of its failure to furnish such notice to the Borrower or the LP.
4.3. Inability to Determine Eurodollar Rate. In the event, prior to
the commencement of any Interest Period relating to any Eurodollar Rate
Loan, the Bank shall determine that adequate and reasonable methods do not
exist for ascertaining the Eurodollar Rate that would otherwise determine
the rate of interest to be applicable to any Eurodollar Rate Loan during
any Interest Period, the Bank shall forthwith give notice of such
determination (which shall be conclusive and binding on the Borrower and
the LP) to the Borrower and the LP. In such event (a) any Loan Request
with respect to Eurodollar Rate Loans shall be automatically withdrawn and
shall be deemed a request for Domestic Rate Loans, (b) each Eurodollar Rate
Loan will automatically, on the last day of the then current Interest
Period thereof, become a Domestic Rate Loan, and (c) the obligations of the
Bank to make Eurodollar Rate Loans shall be suspended until the Bank
determines that the circumstances giving rise to such suspension no longer
exist, whereupon the Bank shall so notify the Borrower and the LP.
4.4. Illegality. Notwithstanding any other provisions herein, if any
present or future law, regulation, treaty or directive or in the
interpretation or application thereof shall make it unlawful for the Bank
to make or maintain Eurodollar Rate Loans, the Bank shall forthwith give
notice of such circumstances to the Borrower and the LP and thereupon (a)
the commitment of the Bank to make Eurodollar Rate Loans or convert Loans
of another Type to Eurodollar Rate Loans shall forthwith be suspended and
(b) the Eurodollar Rate Loans then outstanding shall be converted auto-
matically to Domestic Rate Loans on the last day of each Interest Period
applicable to such Eurodollar Rate Loans or within such earlier period as
may be required by law. The Borrower and the LP each hereby agrees to pay
the Bank, upon receipt of the Certificate (or any subsequent Certificates)
provided for in 4.8, herein, any additional amounts necessary to compensate
the Bank for any costs incurred by the Bank in making any conversion in
accordance with this 4.4, including any interest or fees payable by the
Bank to lenders of funds obtained by it in order to make or maintain its
Eurodollar Loans hereunder.
4.5. Additional Costs, Etc. If any present or future applicable law,
which expression, as used herein, includes statutes, rules and regulations
thereunder and interpretations thereof by any competent court or by any
governmental or other regulatory body or official charged with the
administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made
upon or otherwise issued to the Bank by any central bank or other fiscal,
monetary or other authority (whether or not having the force of law),
shall:
(a) subject the Bank to any tax, levy, impost, duty, charge,
fee, deduction or withholding of any nature with respect to this Agreement,
the other Loan Documents, the Commitment or the Loans (other than taxes
based upon or measured by the income or profits of the Bank), or
(b) materially change the basis of taxation (except for changes
in taxes on income or profits) of payments to the Bank of the principal of
or the interest on any Loans or any other amounts payable to the Bank under
this Agreement or the other Loan Documents, or
(c) impose or increase or render applicable (other than to the
extent specifically provided for elsewhere in this Agreement) any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held
by, or deposits in or for the account of, or loans by, or commitments of an
office of the Bank, or
(d) impose on the Bank any other conditions or requirements with
respect to this Agreement, the other Loan Documents, the Loans, the
Commitment, or any class of loans or commitments of which any of the Loans
or the Commitment forms a part; and the result of any of the foregoing is
(i) to increase the cost to the Bank of making, funding,
issuing, renewing, extending or maintaining any of the Loans or the
Commitment, or
(ii) to reduce the amount of principal, interest or other
amount payable to the Bank hereunder on account of the Commitment or
any of the Loans, or
(iii) to require the Bank to make any payment or to
forego any interest or other sum payable hereunder, the amount of
which payment or foregone interest or other sum is calculated by
reference to the gross amount of any sum receivable or deemed received
by the Bank from the Borrower hereunder,
then, and in each such case, upon receipt of the Certificate (or any
subsequent Certificates) provided for in 4.8, herein, the Borrower and the
LP each will, from time to time, pay to the Bank such additional amounts
set forth in the Certificate, which will be sufficient to compensate the
Bank for such additional cost, reduction, payment or foregone interest or
other sum.
4.6. Capital Adequacy. If any present or future law, governmental
rule, regulation, policy, guideline or directive (whether or not having the
force of law) or the interpretation thereof by a court or governmental
authority with appropriate jurisdiction affects the amount of capital
required or expected to be maintained by the Bank or any corporation
controlling the Bank and the Bank determines that the amount of capital
required to be maintained by it is increased by or based upon the existence
of the Loans made or deemed to be made pursuant hereto, then the Borrower
and the LP each shall upon its receipt of the Certificate (or any
subsequent Certificates) provided for in 4.8, herein, pay to the Bank, from
time to time, as an additional fee payable hereunder, such amount as set
forth in such Certificate or Certificates, which amount(s) will adequately
compensate the Bank in light of these circumstances for its increased costs
of maintaining such capital. The Bank shall allocate such cost increases
among its customers in good faith and on an equitable basis.
4.7. Indemnity. If, due to payments or Conversion Requests or due to
acceleration of the maturity of the Revolving Credit Loans pursuant to the
Note or due to any other reason, including without limitation the occur-
rence of an Event of Default, the Bank receives payments of principal of,
or is subject to a conversion of a Eurodollar Rate Loan into another Type
of Revolving Credit Loan other than on the last day of an Interest Period
relating thereto, the Borrower and/or the LP shall, upon its receipt of the
Certificate (or any subsequent Certificates) provided for in 4.8, pay to
the Bank any amounts required to compensate the Bank for any losses, costs
or expenses which it may reasonably incur as a result of such payment or
conversion, including, without limitation, any loss, costs or expenses
incurred by reason of the liquidation or reemployment of deposits or other
funds acquired by the Bank to fund or maintain such Revolving Credit Loans.
Such compensation, and any additional compensation provided for in the Note
shall include, without limitation, an amount calculated as follows:
(i) First, the Bank shall determine the amount by which (A)
the total amount of interest which would have otherwise accrued
hereunder on each installment of principal so paid or not borrowed,
during the period beginning on the date of such payment or failure to
borrow (after having been given proper notice with a Loan Request or
Conversion Request and ending on the date such installment would have
been due (the "Reemployment Period"), exceeds (B) the total amount of
interest which would accrue, during the Reemployment Period, on any
readily marketable bond or other obligation of the United States of
America designated by the Bank in its sole discretion at or about the
time of such payment, such bond or other obligation of the United
States of America to be in an amount equal (as nearly as may be) to
the amount of principal so paid or not borrowed and to have a maturity
comparable to the Reemployment Period, and the -interest to accrue
thereon to take account of amortization of any discount from par or
accretion of premium above par at which the same is selling at the
time of designation. Each such amount is hereafter referred to as an
"Installment Amount".
(ii) Second, each Installment Amount shall be treated as
payable as of the date on which the related principal installment
would have been payable by the Borrower or the LP, as applicable, had
such principal installment not been prepaid or not borrowed.
(iii) Third, the amount to be paid on each such date
shall be the present value of the Installment Amount determined by
discounting the amount thereof from the date on which such Installment
Amount is to be treated as payable, at the same annual interest rate
as that payable upon the bond or other obligation of the United States
of America designated as aforesaid by the Bank.
4.8. Certificate. A certificate (hereinafter, the "Certificate")
setting forth the calculation of any additional amounts payable pursuant to
4.4, 4.5, 4.6, 4.7 or 14 and a brief explanation of the circumstances
giving rise to such amounts which are due, submitted by the Bank to the
Borrower or the LP, shall be prima facie evidence that such amounts are due
and owing.
4.9. Interest on Overdue Amounts. After the occurrence of an Event
of Default, all principal and (to the extent permitted by applicable law)
accrued and unpaid interest on the Revolving Credit Loans and all other
amounts due and payable hereunder or under any of the other Loan Documents
shall, at the Bank's option, bear interest at the Default Rate, compounded
daily (to the extent permitted by law), until such amount shall be paid in
full (after as well as before judgment).
4.10. Late Charge. Without derogating from the right of Bank to
accelerate the maturity of the Obligations upon the occurrence of an Event
of Default, if any payment due hereunder is not received by Bank within
thirty (30) days of the date such payment is due, the Borrower shall pay to
the Bank on demand a late charge equal to three percent (3%) of the amount
of such payment.
5. COLLATERAL.
5.1. Grant of Collateral. Except with respect to any of the
Borrower's Collateral (as defined below) located in the State of California
(hereinafter, the "MCO California Collateral"), whether now existing or
hereafter arising, which MCO California Collateral shall only be granted to
the Bank to secure the payment and performance of the Obligations due and
owing to the Bank, the payment and performance of the Obligations
(including, without limitation, the payment and performance of the Guaran-
ties), shall be secured by (where applicable as indicated below), a first
mortgage interest in and to each of the Party's Mortgaged Property, a
continuing security interest in and lien on (or an assignment of rights for
collateral purposes, as appropriate) each of the Party's respective
properties, assets and rights of every kind and nature, wherever located,
whether now owned or hereafter acquired or arising (other than the
properties and assets listed on Schedule 5.1 annexed hereto, or as
otherwise provided for in Subsection (xiii), below), including, without
limitation, a pledge of all of the Parties' Notes Receivable (except as set
forth on Schedule 5.2(iii) annexed hereto), and an assignment of all
mortgages or deeds of trust or other collateral granted by any Note Obligor
and held by a Party to secure the payment of such Notes Receivable, and an
assignment of certain rights of each of the Parties with respect to each of
the Mortgaged Property, and all proceeds and products thereof, subject only
to Permitted Liens, including, without limiting the generality of the
foregoing, the following properties, assets and rights of each of the
Parties:
(i) all Notes Receivable, together with all collateral security
granted by all Note Obligors as collateral security for the payment of
all Notes Receivable;
(ii) the Mortgaged Property including all Buildings;
(iii) all building materials, supplies, furniture,
furnishings, fixtures, equipment, contract rights, inventory,
accounts, plans and specifications, trade names and other articles of
personal property relating to, located on or used solely in connection
with the construction, use, occupancy, operation or maintenance of any
of the Mortgaged Property;
(iv) the architect's contracts, the general contractor's
contracts, agreements with soils, mechanical or structural engineers,
if any, all subcontracts, all warranties, and all other rights,
licenses, permits, approvals and agreements in any way relating to the
construction of any of the Mortgaged Property, the Buildings or the
use, occupancy, operation or maintenance of any of the Mortgaged
Property;
(v) all Leases for use or occupancy of any of the Mortgaged
Property and of all rents, issues and profits of any of the Mortgaged
Property;
(vi) Service Agreements for the Notes Receivable;
(vii) all of the issued and outstanding common stock of the
Borrower;
(viii) all goods, cash, bank accounts (including, without
limitation, the Loan Account and the Lock Box Account), receivables
and contract rights, under any contract for the sale of any of its
properties to any Person and under all instruments, security
agreements and other documents related thereto;
(ix) all rights to the payment of money, including tax refund
claims (other than tax refunds payable to MAXXAM), insurance proceeds
and tort claims;
(x) all chattel paper, documents, instruments (including
intercompany promissory notes) and securities, together with all
income therefrom, increases therein and proceeds thereof;
(xi) all general intangibles, patents, trademarks, trade names,
including without limitation, all right, title and interest in and to
the trademarks, service marks, registrations of trademarks and
servicemarks, patents and applications for patents set forth on the
attached Schedule 5.2(iv) (collectively, the "Patents and
Trademarks"), together with all right, title and interest of each of
the Parties, in and to all patents and trademarks which it may
hereinafter acquire, the right to file and prosecute applications for
patents and trademarks, including the Patents and Trademarks, and
similar intellectual property anywhere in the world and the good will
of the business connected with the use of and symbolized by the
Patents and Trademarks, together with all assets which uniquely
reflect the good will of the business of each of the Parties,
including but not limited to, its trade names, customer lists, trade
secrets, corporate and other business records, license rights,
advertising materials, operating manuals, methods, processes, know-
how, sales literature, drawings, specifications, descriptions,
inventions, name plates, catalogues, copyrights, dealer contracts,
supplier contracts, distribution agreements, proprietary information,
consulting agreements, engineering contracts and engineering drawings;
(xii) all furniture, fixtures, equipment, inventory, raw
materials, work in progress, books and records;
(xiii) except with respect to the properties and assets listed
on Schedule 5.1, annexed hereto, all interests and rights in, on or
over real property pursuant to the terms of each of the mortgages,
deeds of trust, assignments of rents, security agreements and the
financing statements, collateral assignments of leases and rents, and
such other documents as may be permitted or required in order to
effect or exercise an interest or right in real property in the
jurisdictions in which such property is located (collectively, the
"Mortgages" ) granted by each of the Parties, (a) prior to the date
hereof, with respect to any of the Strategic Projects and/or Non-
Strategic Projects, and (b) with respect to all real property
hereafter acquired by each of the Parties, as and when such hereafter
acquired property which has not theretofore been pledged to the Bank
aggregates an amount in excess of $500,000 in form and substance
satisfactory to the Bank;
(xiv) all of the partnership interests of the general
partner(s) and limited partner(s) in the L.P.; and
(xv) all right, title, and interest in and to SunRidge Canyon
L.L.C., a limited liability company organized under the laws of the
State of Arizona, including all proceeds, interest, dividends, rights
to payment, allocations of profit and losses and other distributions
arising out of, related to, or in connection with such company.
All such assets subject to such Security Documents are collectively
referred to herein as the "Collateral".
Each of the Parties shall execute or deliver or cause to be executed
or delivered to the Bank any and all documents, instruments and/or
agreements, including, mortgages and/or deeds of trust, security
agreements, assignments, and amendments to any existing collateral security
documents, as Bank's counsel shall prepare in order to create the
collateral security interests in and to the above described Collateral,
together with such financing statements and other documents as are required
to comply with and create and perfect a security interest under the Uniform
Commercial Code. The Bank, and its counsel, shall, where permissible (as
determined by the Bank and its counsel), endeavor to prepare amendment
documents in order to effectuate documentation of the Loan.
5.2. Warranty of Title. Each of the Parties each represent and
warrant to the Bank, effective as of the date of the execution of this
Agreement and effective as of the Closing Date, as follows:
(i) Except for Permitted Liens, each of the Parties is the owner
of the Collateral free and clear of all security interests, liens,
defects, irregularities, encumbrances, easements, rights of way and
clouds on title and has validly and effectively granted to the Bank a
security interest in and lien upon such Collateral.
(ii) Except as described on Schedule 5.1, none of the Parties has
equity or ownership rights of any nature in any real property or
fixtures attached to real property other than the real property and
fixtures described in the Security Documents;
(iii) Except as described on Schedule 5.1, none of the
Parties has rights as the lessee of real estate or fixtures attached
to real estate under any form of tenancy other than, and with respect
to, such rights under those leases described in the Security
Documents;
(iv) None of the Parties has ownership rights of any name or
nature in and to any patent, copyright, trademark, service mark or
trade name (or any applications with respect to the foregoing) other
than those patents, copyrights, trademarks, service marks and trade
names (and applications) listed in Schedule 5.2(iv) annexed hereto;
and
(v) Collateral consisting of tangible personal property
(including without limitation, all machinery, equipment, goods and
inventory) is maintained (except for the use of motor vehicles in the
conduct of each of the Party's businesses and the occasional temporary
removal of any items of Collateral in connection with repairs) only at
the Strategic Projects, the Non-Strategic Projects and its offices at
5847 San Felipe, Houston, Texas.
(vi) Except as described on the Schedule entitled Existing Notes
Receivable, and on Schedule 5.2(vi), none of the Parties have any
interest in any Notes Receivable.
5.3. Pro Rata Security. All amounts owing with respect to the
Obligations shall be secured pro rata by the Collateral without distinction
as to whether some Obligations are then due and payable and other
Obligations are not then due and payable, provided that all costs and
expenses as provided in 14 hereof shall first be paid before any proceeds
are applied to any other Obligations.
6. REPRESENTATIONS AND WARRANTIES. Each of the Parties each repre-
sent and warrant to the Bank as follows.
6.1. Corporate Authority; Etc.
(a) Incorporation; Good Standing. The Borrower is a Delaware
corporation; Westcliff is a Texas corporation; Horizon is a Delaware
corporation; HPC is a Delaware corporation and the LP is a limited
partnership duly organized under the laws of the State of Delaware. Each
are validly existing and in good standing under the laws of their
respective states of incorporation or organization, as applicable, and have
all requisite power to own property and conduct their respective businesses
as now conducted and as presently contemplated, and are in good standing as
foreign entities and are duly authorized to do business in the respective
jurisdictions where any of its Mortgaged Property is located and in each
other jurisdiction where such qualification is necessary except where a
failure to be so qualified in such other jurisdiction would not have a
materially adverse effect on the business, assets or financial condition of
the Parties.
(b) Authorization. The execution, delivery and performance of
this Agreement, the Security Documents and the other Loan Documents to
which any of the Parties, is to become a party and the transactions
contemplated hereby and thereby (i) are within the authority of each of the
Parties, (ii) have been duly authorized by all necessary proceedings on the
part of each such Person, (iii) do not conflict with or result in any
breach or contravention of any provision of law, statute, rule or regula-
tion to which any of the Parties, is subject or any judgment, order, writ,
injunction, license or permit applicable to any of the Parties, and (iv) do
not conflict with any provision of any of the Parties' respective Articles
of Organization, Certificates of Incorporation, By-Laws, partnership
agreements, or other charter documents or bylaws of, or any agreement or
other instrument binding upon, any of the Parties.
(c) Enforceability. The execution and delivery of this
Agreement, the Security Documents, and the other Loan Documents to which
any of the Parties, is or is to become a party will result in valid and
legally binding obligations of each of the Parties, enforceable against
each of them in accordance with the respective terms and provisions hereof
and thereof.
6.2. Governmental Approvals. The execution, delivery and performance
by each of the Parties, of this Agreement, the Security Documents, and the
other Loan Documents to which any of the Parties, is or is to become a
party and the transactions contemplated hereby and thereby do not require
the approval or consent of, or filing with, any governmental agency or
authority, except with respect to the recording and filing of the Security
Documents and related financing statements in the appropriate records
office with respect thereto.
6.3. Title to Properties; Leases. Except as indicated on Schedule
6.3 hereto, each of the Parties own all of the assets reflected in the
consolidated balance sheet of the Parties as of the Balance Sheet Date or
acquired since that date (except property and assets sold or otherwise
disposed of in the ordinary course of business since that date), subject to
no rights of others, including any mortgages, leases, conditional sales
agreements, title retention agreements, liens or other encumbrances except
Permitted Liens as described in Section 8.2, annexed hereto.
6.4. No Material Changes, Etc. Except as stated on Schedule 6.4,
since the Balance Sheet Date, there has occurred no materially adverse
change in the financial condition or business of any of the Parties, or any
of their respective Subsidiaries as shown on or reflected in the consol-
idated balance sheet of each of the Parties, as of the Balance Sheet Date,
or the consolidated statement of income for the fiscal year then ended,
other than changes in the ordinary course of business that have not had any
materially adverse effect either individually or in the aggregate on the
business or financial condition of the Parties.
6.5. Franchises, Patents, Copyrights, Etc. Each of the Parties
possess all franchises, patents, copyrights, trademarks, trade names, li-
censes and permits, and rights in respect of the foregoing, adequate for
the conduct of its business substantially as now conducted without known
conflict with any rights of others.
6.6. Litigation. Except as stated on Schedule 6.6 there are no
actions, suits, proceedings or investigations of any kind pending or
threatened against any of the Parties, or any of their respective Subsid-
iaries before any court, tribunal or administrative agency or board that,
if adversely determined, might, in any case materially adversely affect the
properties, assets, financial condition or business of the Parties, or
materially impair the right of any of the Parties, and their respective
Subsidiaries to carry on business substantially as now conducted by each of
them, or result in any substantial liability not adequately covered by
insurance, or for which adequate reserves are not maintained on the balance
sheet of each of the Parties, or which question the validity of this
Agreement, the Security Documents or any of the other Loan Documents, or
any action taken or to be taken pursuant hereto or thereto.
6.7. No Materially Adverse Contracts, Etc. Except as set forth on
Schedule 6.7, annexed hereto, none of the Parties, nor any of their
respective Subsidiaries are subject to any charter, corporate or other
legal restriction, or any judgment, decree, order, rule or regulation that
has or is expected in the future to have a materially adverse effect on the
business, assets or financial condition of any of the Parties. None of the
Parties, nor any of their respective Subsidiaries are a party to any
contract or agreement that has or is expected, in the judgment of each of
the Party's officers, to have any materially adverse effect on the business
of any of the Parties, or their respective Subsidiaries.
6.8. Compliance With Other Instruments, Laws, Etc. (a) None of the
Parties, nor any of their respective Subsidiaries is in violation of any
provision of its respective charter or other organization documents, by-
laws, or any agreement or instrument to which they may be subject or by
which they or any of their properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing
cases in a manner that could result in the imposition of substantial penal-
ties or materially and adversely affect the financial condition, properties
or business of any of the Parties, or any of their respective Subsidiaries.
(b) Except as disclosed on Schedule 6.6, none of the Parties,
any of their respective subsidiaries, or any of their respective directors,
officers, agents or employees is or at any time in the past has been
advised by any governmental agency having jurisdiction that it was (unless
otherwise cured, satisfied or released), or is, in violation of (i) the
Interstate Land Sales Full Disclosure Act (the "Interstate Land Sales Act")
or similar laws pertaining to land sales in any state in which any of the
Parties, or any of their respective subsidiaries, owns, sells, transfers,
manages, operates, develops or otherwise disposes of real property (ii) any
federal or state securities law, (iii) the federal Truth in Lending Act
(including regulations written under such Act by the Board of Governors of
the Federal Reserve System) or any similar state statute, (iv) the federal
Equal Credit Opportunity Act (including regulations written under such Act
by the Board of Governors of the Federal Reserve System) or any similar
state statute, or (v) any judgment, decree, order, law, license, rule or
regulation arising under such statutes or with respect to the matters
covered thereby.
6.9. Tax Status. Except as provided for in 7.8, herein, each of the
Parties (a) have made or filed all federal and state income and all other
tax returns, reports and declarations required by any jurisdiction to which
they are subject, (b) have paid all taxes and other governmental
assessments and charges shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith and by
appropriate proceedings and (c) have set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to
the periods to which such returns, reports or declarations apply. Except
as provided for in 7.8, herein, there are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and
the officers of any of the Parties know of no basis for any such claim.
6.10. No Suspension Event or Event of Default. No Suspension Event
or Event of Default has occurred and is continuing.
6.11. Holding Company and Investment Company Acts. None of the
Parties nor any of their respective Subsidiaries are a "holding company",
or a "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company", as such terms are defined in the Public Utility Holding
Company Act of 1935; nor are any of them an "investment company", or an
"affiliated company" or a "principal underwriter" of an "investment
company", as such terms are defined in the Investment Company Act of 1940.
6.12. Absence of UCC Financing Statements, Etc. Except with respect
to Permitted Liens, there is no financing statement, security agreement,
chattel mortgage, real estate mortgage or other document filed or recorded
with any filing records, registry, or other public office, that purports to
cover, affect or give notice of any present or possible future lien on, or
security interest in, any Collateral, or rights thereunder.
6.13. Setoff, Etc. The Collateral and the Bank's rights with respect
to the Collateral are not subject to any setoff, claims, withholdings or
other defenses.
6.14. Certain Transactions. None of the officers, trustees,
directors, or employees of any of the Parties, or any of their respective
Subsidiaries are presently a party to any transaction with the other, or
any of their respective Subsidiaries (other than for services and benefits
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, trustee, director or such
employee or, to the knowledge of the Parties, any corporation, partnership,
trust or other entity in which any officer, trustee, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
6.15. Employee Benefit Plans; Multiemployer Plans; Guaranteed Pension
Plans. Except as set forth on Schedule 6.15 annexed hereto, none of the
Parties, nor any ERISA Affiliate maintains or contributes to any Employee
Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan.
6.16. Regulations U and X. No portion of any Loan is to be used for
the purpose of purchasing or carrying any "margin security" or "margin
stock" as such terms are used in Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224.
6.17. Environmental Compliance. Each of the Parties, have taken all
reasonable steps to investigate the past and present condition and usage of
the Real Estate and the operations conducted thereon and, based upon such
diligent investigation, make the following representations and warranties:
(a) Except as set forth on Schedule 6.17, with respect to any of
the Mortgaged Property, and any other Real Estate, none of the
Parties, nor any of their respective Subsidiaries or any operator of
the Real Estate, or any operations thereon is in violation, or alleged
violation, of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without
limitation, those arising under the Resource Conservation and Recovery
Act ("RCRA"), the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amend
ments and Reauthorization Act of 1986 ("SARA"), the Federal Clean
Water Act, the Federal Clean Air Act, the Toxic Substances Control
Act, or any state or local statute, regulation, ordinance, order or
decree relating to health, safety or the environment (hereinafter
"Environmental Laws"), which violation involves any of the Mortgaged
Property or involves other Real Estate which would have a material
adverse effect on the environment or the business, assets or financial
condition of any of the Parties.
(b) Except as set forth on Schedule 6.17, annexed hereto, none
of the Parties, nor any of their respective Subsidiaries have received
notice from any federal, state or local governmental authority, (i)
that it has been identified by the United States Environmental
Protection Agency ("EPA) as a potentially responsible party under
CERCLA with respect to a site listed on the National Priorities List,
40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste,
as defined by 42 U.S.C. 9601(5), any hazardous substances as defined
by 42 U.S.C. 9601(14), any pollutant or contaminant as defined by 42
U.S.C. 9601(33) or any toxic substances, oil or hazardous materials or
other chemicals or substances regulated by any Environmental Laws
("Hazardous Substances") which it has generated, transported or
disposed of have been found at any site at which a federal, state or
local agency or other third party has conducted or has ordered that
any of the Parties, or any of their respective Subsidiaries conduct a
remedial investigation, removal or other response action pursuant to
any Environmental Law; or (iii) that any of them are or shall be a
named party to any claim, action, cause of action, complaint, or legal
or administrative proceeding (in each case, contingent or otherwise)
arising out of any third party's incurrence of costs, expenses, losses
or damages of any kind whatsoever in connection with the release of
Hazardous Substances.
(c) With respect to any of the Mortgaged Property, and any other
Real Estate, except as set forth on Schedule 6.17 attached hereto: (i)
no portion of the Real Estate has been used for the handling,
processing, storage or disposal of Hazardous Substances except in
accordance with applicable Environmental Laws; and no underground tank
or other underground storage receptacle for Hazardous Substances is
located on any portion of the Mortgaged Property; (ii) in the course
of any activities conducted by any of the Parties, or any of their
respective Subsidiaries or to the best of their knowledge the opera
tors of the Real Estate, no Hazardous Substances have been generated
or are being used on the Real Estate except in accordance with
applicable Environmental Laws; (iii) there has been no release i.e.
any past or present releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, disposing or
dumping (a "Release") or threatened Release of Hazardous Substances
on, upon, into or from the Mortgaged Property, or, on upon, into or
from the other properties of any of the Parties, or any of their
respective Subsidiaries, which Release would in the case of such other
properties have a material adverse effect on the value of any of the
Real Estate or adjacent properties or the environment; (iv) there have
been no Releases on, upon, from or into any real property in the
vicinity of any of the Real Estate which, through soil or groundwater
contamination, may have come to be located on, and which would have a
material adverse effect on the value of, the Real Estate; and (v) any
Hazardous Substances that have been generated on any of the Real
Estate have been transported off-site only by carriers having an
identification number issued by the EPA, and to the best of each of
the Parties knowledge, treated or disposed of only by treatment or
disposal facilities maintaining valid permits as required under
applicable Environmental Laws, which transporters and facilities have
been and are, to the best of each of the Party's knowledge, operating
in compliance with such permits and applicable Environmental Laws.
(d) Except as set forth on Schedule 6.17, annexed hereto, none
of the Parties, nor any of the Mortgaged Property is subject to any
applicable Environmental Law requiring the performance of Hazardous
Substances site assessments, or the removal or remediation of
Hazardous Substances, or the giving of notice to any governmental
agency or the recording or delivery to other Persons of an
environmental disclosure document or statement by virtue of the
transactions set forth herein and contemplated hereby, or as a
condition to the recording of the Security Documents or to the effec
tiveness of any other transactions contemplated hereby.
6.18. Subsidiaries. Schedule 6.18 sets forth all of the Subsidiaries
of each of the Parties.
6.19. Material Lease Summaries. Each of the Parties, has delivered
to the Bank Material Lease Summaries dated as of the date hereof relating
to the Material Leases. Such Material Lease Summaries are true, accurate
and complete summaries and representations of the material terms of all
Material Leases relating to the Mortgaged Property as of the date thereof.
6.20. Loan Documents. All of the representations and warranties of
each of the Parties, made in the other Loan Documents or any document or
instrument delivered to the Bank pursuant to or in connection with any of
the Loans are true and correct in all material respects.
6.21. Mortgaged Property. Each of the Parties, make the following
representations and warranties concerning all of the Mortgaged Property:
(a) Off-Site Utilities. Only with respect to the Developed
Lots, all water, sewer, electric, gas, telephone and other utilities
are adequate to service the Developed Lots in full compliance with
applicable law.
(b) Access; Etc. The streets abutting each of the Mortgaged
Property (based upon the outside perimeter of each of the Mortgaged
Property), are public roads, to which the Mortgaged Property has
direct access by trucks and other motor vehicles and by foot, or are
private ways (with direct access by trucks and other motor vehicles
and by foot to public roads) to which the Mortgaged Property (based
upon the outside perimeter of each of the Mortgaged Property), has
direct access without charge or liability for maintenance or repair.
(c) No Required Real Property Consents, Permits, Etc. (i) None
of the Parties, has received any notices of, or has any knowledge of,
any approvals, consents, licenses, permits, utility installations and
connections (including, without limitation, drainage facilities), curb
cuts and street openings, for the Developed Lots, which have not or
will not be granted, effected, or performed and completed (as the case
may be) or any fees or charges therefor which have not been fully
paid. No such approvals, consents, permits or licenses, (including,
without limitation, any railway siding agreements) will terminate, or
become void or voidable or terminable on any foreclosure sale of the
Developed Lots pursuant to the Security Documents.
(ii) Except as set forth on Schedule 6.21(c), annexed
hereto, there are no outstanding notices, suits, orders, decrees or
judgments relating to adverse zoning, building use and occupancy,
fire, health, sanitation, or other violations affecting, against, or
with respect to, the Mortgaged Property or any part thereof that, if
adversely determined, might materially adversely affect the use of the
Mortgaged Property, the ability of any of the Parties, and their
respective Subsidiaries, to carry on business substantially as now
conducted by each of them, or the ability of any of the Parties, and
their respective Subsidiaries to comply with any of the terms of the
within Agreement.
(d) Insurance. None of the Parties, has received any notices
from any insurer or its agent requiring performance of any work with
respect to the Mortgaged Property or cancelling or threatening to
cancel any policy of insurance, and the Mortgaged Property complies
with the requirements of all insurance carriers.
(e) Real Property Taxes; Special Assessments. There are no
unpaid or outstanding real estate or other taxes or assessments, or
other governmental charges on or against the Mortgaged Property or any
part thereof which are payable by any of the Parties other than (i)
real estate taxes not yet due and payable); (ii) real estate taxes,
the validity or amount of which are currently being contested in good
faith by appropriate proceedings, and in which payment is not required
prior to contesting the validity or amount of such real estate taxes,
and in which the Parties, or any of their respective Subsidiaries have
set aside on their books adequate reserves with respect thereto; and
(iii) miscellaneous real estate taxes not exceeding Two Hundred Fifty
Thousand Dollars ($250,000.00) for property not essential to the
continued use or operation of the Mortgaged Property. The Parties and
each Subsidiary of any of the Parties will pay all such taxes,
assessments, charges, levies or claims forthwith upon the commencement
of proceedings to foreclose any lien that may have attached as
security therefor. Except as set forth on Schedule 6.21(e), annexed
hereto, no abatement proceedings are pending with reference to any
real estate taxes assessed against the Mortgaged Property. Except as
set forth on the Title Insurance Policies, there are no betterment
assessments or other special assessments presently pending with
respect to any portion of the Mortgaged Property, and none of the
Parties has received any notice of any such special assessment being
contemplated.
(f) Historic Status. The Mortgaged Property is not located
within any historic district pursuant to any federal, state or local
law or governmental regulation.
(g) Eminent Domain. There are no pending eminent domain
proceedings against any of the Mortgaged Property or any part thereof,
and, to each of the Party's knowledge, no such proceedings are
presently threatened or contemplated by any taking authority.
(h) Agreements Relating to the Mortgaged Property. Except with
respect to agreements for which payments thereunder do not exceed Four
Thousand Dollars ($4,000.00) per month, there are no agreements
relating to the operation and maintenance of the Mortgaged Property,
or any portion thereof, except as listed on Schedule 6.21(h). To the
best of each of the Party's knowledge, there are no adverse claims or
any basis for adverse claims in respect of the Mortgaged Property or
its operation, by any party to any Agreements Relating to the
Mortgaged Property.
(i) Service Agreements. Except as listed on Schedule 6.21(i),
there are no Service Agreements relating to servicing rights relevant
to the servicing of any of the Notes Receivable. To the best of each
of the Party's knowledge, there are no adverse claims or any basis for
adverse claims in respect of servicing rights relevant to the Notes
Receivable.
(j) Other Material Real Property Agreements; No Options. Except
as set forth on Schedule 6.21(j), and except for any existing Amenity
Sales Contracts, Bulk Land Sales Contracts, Retail Lot Contracts, and
Home Mortgages, there are no material agreements pertaining to the
Mortgaged Property or the operation or maintenance thereof other than
as described in this Agreement (including the Schedules hereto) or
otherwise disclosed in writing to the Bank by any of the Parties; and
no person or entity has any right or option to acquire the Mortgaged
Property or any portion thereof or interest therein.
6.22. Existing Notes Receivable Value. Each of the Parties represent
and warrant that as of May 31, 1995, the total aggregate balance of the
Existing Notes Receivable is at least equal to $21,500,000.00.
6.23. Existing Lots and Undeveloped Acres. As set forth on Schedule
6.23 entitled Existing Lots and Undeveloped Acres, each of the Parties
represent and warrant that as of May 31, 1995, the aggregate total of lots
owned by the Parties exceeds nine thousand lots (9,000), and the aggregate
total of undeveloped acres owned by the Parties exceeds eighteen thousand
(18,000) acres.
6.24. Non-Underwriting Criteria Loans. The Borrower and the LP may
enter into any loan arrangements, or otherwise extend credit to any Person
in the ordinary course of the Borrower's or the LP's business, provided,
however, the Bank shall be under no obligation to deem any Note Receivable
not satisfying the Underwriting Criteria as an Acceptable New Note
Receivable or an Acceptable Existing Note Receivable.
6.25. Amended and Restated Credit and Security Agreement Dated
December 29, 1992. Each of the Parties acknowledge, confirm and agree that
the within Agreement is intended to amend, restate and replace certain
terms and conditions set forth in a certain Amended and Restated Revolving
Credit Loan and Security Agreement dated December 29, 1992, as amended, by
and among the Bank, MCO Properties, Inc., MCO Properties L.P., Westcliff
Development Corporation, Horizon Properties and Horizon Properties
Corporation, as previously amended.
6.26. LP Partners. The sole general partner of the LP is, and
shall remain, the Borrower. The sole limited partner of LP is, and shall
remain, MCOP Limited Partner, Inc.
6.27. LP Assets and Liabilities. (A) The only assets of the LP
as of the date hereof are the LP Assets. All Notes Receivable of the LP
are set forth on Schedule 1.1(g) annexed hereto. No LP Assets are subject
to any rights of others, including any mortgages, leases, conditional sales
agreements, title retention agreements, liens or other encumbrances, except
in favor of the Bank or liens permitted pursuant to Section 8.2.
(B) The LP has no Indebtedness as of the date hereof other than
Indebtedness in favor of the Bank or indebtedness permitted pursuant to
Section 8.1.
7. AFFIRMATIVE COVENANTS OF THE PARTIES. Each of the Parties
covenant and agree that, so long as any Loan or Note is outstanding or the
Bank has any obligation to make any Loans:
7.1. Punctual Payment. Each of the Parties will duly and punctually
pay or cause to be paid the principal and interest on the Loans and all
interest and fees provided for in this Agreement, all in accordance with
the terms of this Agreement, the Note and the Guaranties, as well as all
other sums owing pursuant to the Loan Documents.
7.2. Maintenance of Office. Each of the Parties will maintain their
respective chief executive offices in the locations set forth in the Pre-
amble of this Agreement, or at such other place in the United States of
America as the Parties, shall designate upon thirty (30) days prior written
notice to the Bank, where notices, presentations and demands to or upon the
Parties, in respect of the Loan Documents may be given or made.
7.3. Records and Accounts. Each of the Parties will (a) keep, and
cause each of its Subsidiaries to keep, true and accurate records and books
of account in which full, true and correct entries will be made in
accordance with generally accepted accounting principles and (b) maintain
adequate accounts and reserves for all taxes (including income taxes),
depreciation and amortization of its properties and the properties of its
Subsidiaries, contingencies, and other reserves.
7.4. Financial Statements, Certificates and Information. (a) Each of
the Parties will deliver to the Bank:
(i) Monthly, within thirty (30) days following the end of
each month, (A) the Borrowing Base Report (whether or not the Borrower
or the LP intends to request a loan or advance under the Loan) setting
forth the information necessary to calculate the Borrower Availability
and the LP Availability as of the last day of the preceding calendar
month and setting forth information necessary to reconcile to the most
recent Borrowing Base Report submitted to the Bank; (B) internally
prepared financial statements of: (x) the Borrower's financial
condition at, and the results of operations for, the period ending
with the end of the subject month, which shall include, at a minimum,
a balance sheet and a cash flow and income statement and the
Borrower's monthly management report which sets forth cash flow and
earnings information, for each of the Strategic Projects and the Non-
Strategic Projects; and (y) cash flow statements for each of the
Strategic Projects and the Non-Strategic Projects, and in connection
with the statements, reports and information to be furnished pursuant
to (x) and (y), herein, a comparison of same against each of the
Party's financial projections set forth in the Borrower's business
plans previously prepared and delivered to the Bank for the subject
monthly period;
(ii) Quarterly, within forty-five (45) days following the
end of the Borrower's fiscal quarter, internally prepared
(consolidated and consolidating) financial statements (prepared in
accordance with generally accepted accounting principals consistently
applied) of the Borrower's financial condition at, and the results of
the Borrower's operations for the year-to-date period ending with the
end of the subject quarter, which statements shall include, at a
minimum, a balance sheet and a cash flow and income statement,
together with a Certificate of Compliance executed by the Parties.
(iii) Annually, within ninety (90) days following the
end of the Borrower's fiscal year, original signed counterparts of (A)
the Borrower's consolidated annual audited financial statements, which
statements shall have been prepared by Borrower and bear the
unqualified opinions of, the Borrower's independent certified public
accountants (which accountants shall be subject to the Bank's
approval), and (B) the Borrower's Certificate of Compliance; and (C)
the Borrower's consolidating annual financial statements, which
statements shall have been prepared by the Borrower.
(iv) quarterly, within forty-five (45) days after the end of
each of the fiscal quarters of each of the Parties, and promptly after
execution of a new Material Lease or the amendment of any Material
Lease, updated Material Lease Summaries with respect to any of the
Mortgaged Property.
(b) In addition to the foregoing, each of the Parties and MAXXAM
shall furnish the Bank with such other financial information as may be
reasonably requested by the Bank, including, without limitation, additional
financial information pertaining to the Borrower, the LP, any of the
Guarantors and/or any of the Strategic Projects and Non-Strategic Projects.
(c) None of the Parties or MAXXAM will change their respective
fiscal years (which each of the Parties acknowledge and agree is from
January 1 to December 31 of each calendar year) without prior written
notice to the Bank.
(d) (i) Annually, the Bank may conduct a Commercial Finance
Exam (hereinafter, the "Commercial Finance Exam") of each or any of the
Parties, the Strategic Projects or the Non-Strategic Projects, the Notes
Receivable and/or any other matters determined by the Bank (in its sole and
absolute discretion) to be necessary in connection with the Loan, the
reasonable out-of-pocket costs of which shall be borne by the Borrower
and/or the other Parties (jointly and severally) and paid to the Bank on
Demand.
(ii) Each of the Parties agree to assist the Bank, or any
other independent contractor conducting such exams, in connection with the
conducting of such Commercial Finance Exam, and in connection therewith
shall make each of the Party's and the Strategic Projects and Non-Strategic
Projects books and records available to the Bank or any other independent
contractor for review.
(e) Except with respect to the financial information and reports
set forth in 7.4(a)(i), above, all financial information and/or reports to
be furnished by the Parties and MAXXAM to the Bank shall each be prepared
in accordance with generally accepted accounting principles consistently
applied.
7.5. Notices.
(a) Defaults. The Borrower or the applicable Party will
promptly notify the Bank in writing of the occurrence of any Suspension
Event or Event of Default. In addition, if any Person shall give any
notice or take any other action in respect of a claimed default (whether or
not constituting an Event of Default) under this Agreement or under any
note, evidence of indebtedness, indenture or other obligation to which or
with respect to which any of the Parties, or any of their respective Sub-
sidiaries are a party or obligor, whether as principal or surety, and such
default would permit the holder of such note or obligation or other
evidence of indebtedness to accelerate the maturity thereof, which
acceleration would have a material adverse effect on any of the Parties,
each of the Parties, shall forthwith give written notice thereof to the
Bank, describing the notice or action and the nature of the claimed
default.
(b) Environmental Events. Each of the Parties will promptly
give notice to the Bank (i) of any violation of any Environmental Law that
the Parties or any of their respective Subsidiaries reports in writing or
is reportable by such Person in writing (or for which any written report
supplemental to any oral report is made) to any federal, state or local
environmental agency and (ii) upon becoming aware thereof by a notice from
any public agency of any inquiry, proceeding, investigation, or other
action, of potential environmental liability, or any federal, state or
local environmental agency or board, that in either case involves the Real
Estate or has the potential to materially affect the assets, liabilities,
financial conditions or operations of each of the Parties or the Bank's
security interests pursuant to the Security Documents.
(c) Notification of Claims against Collateral. Each of the
Parties will, immediately upon becoming aware thereof, notify the Bank in
writing of any setoff, claims (including, with respect to the Mortgaged
Property, environmental claims), withholdings or other defenses to which
any of the Collateral, or the Bank's rights with respect to the Collateral,
are or may be subject.
(d) Notice of Litigation and Judgments. Each of the Parties
will, or will cause each of their respective Subsidiaries to, give notice
to the Bank in writing within twenty (20) days of becoming aware of any
litigation or proceedings threatened in writing or any pending litigation
and proceedings affecting any of the Parties, or any of their respective
Subsidiaries or to which any of the Parties, or any of their respective
Subsidiaries are or are to become a party involving an uninsured claim
against any of the Parties, or any of their respective Subsidiaries that
could reasonably be expected to have a materially adverse effect on any of
the Parties and stating the nature and status of such litigation or
proceedings. Each of the Parties will, and will cause each of its
Subsidiaries to, give notice to the Bank, in writing, in form and detail
satisfactory to the Bank, within ten (10) days of any judgment not covered
by insurance, final or otherwise, against any of the Parties, or any of
their respective Subsidiaries in an amount in excess of $250,000.00.
7.6. Existence; Maintenance of Properties. Each of the Parties will
do or cause to be done all things necessary to preserve and keep in full
force and effect their existence as corporations in the states of incor-
poration indicated in the Preamble of this Agreement. Each of the Parties
will do or cause to be done all things necessary to preserve and keep in
full force all of their respective rights and franchises and those of their
Subsidiaries. Each of the Parties (a) will cause all of their respective
properties and those of their respective Subsidiaries used or useful in the
conduct of their respective business or the business of their respective
Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment, (b) will cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Parties may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times, and (c) will, and will
cause each of their respective Subsidiaries to, continue to engage
primarily in the businesses now conducted by each of them and in related
businesses.
7.7. Insurance. Each of the Parties: (a) will obtain and maintain
with respect to the Strategic Projects and the Non-Strategic Projects, such
insurance as the Bank may reasonably require, including: (i) "all risks"
property insurance written on a builder's risk, completed value, non-re-
porting form, in connection with the construction of any improvements,
including, without limitation, the construction of any Building on the
Mortgaged Property; (ii) flood insurance, if the Strategic Projects or the
Non-Strategic Projects are located in any federally designated "special
hazard area"; (iii) commercial general liability insurance and owner's
contingent or protective liability insurance; (iv) employer's liability
insurance; (v) umbrella liability insurance; and (vi) workmen's
compensation insurance. The insurance provided for in clauses (i) and (ii)
shall name the Bank as mortgagee and loss payee and shall be first payable
in case of loss to the Bank pursuant to standard non-contributory mortgage
clauses and lender's loss payable endorsements. The insurance provided for
in clauses (iii) and (v) shall name the Bank as an additional insured.
(b) will require its general contractor to obtain and maintain
at all times the insurance customarily required by a general contractor's
contract.
(c) will require its architect, engineer and any other design
professional providing design or engineering services to obtain and
maintain professional liability insurance customarily required by an
architect's, engineer's or other design professional's contract.
(d) All insurance referred to in this paragraph 7.7 shall be in
such amounts and form, shall include such coverages, endorsements and
deductibles, and shall be issued by such insurers as shall be approved by
the Bank, and shall contain the written agreement of the insurer to give
the Bank thirty (30) days prior written notice of cancellation, non-
renewal, modification or expiration.
7.8. Taxes. Each of the Parties will pay taxes, assessments and
other governmental charges against the Mortgaged Property and will duly pay
and discharge, or cause to be paid and discharged, before the same shall
become overdue, all taxes, assessments and other governmental charges
imposed upon it and its other real properties, sales and activities, or any
part thereof, or upon the income or profits therefrom, as well as all
claims for labor, materials, or supplies that if unpaid might by law become
a lien or charge upon any of its property; provided that any such tax,
assessment, charge, levy or claim need not be paid if:
(a) the aggregate of any taxes for any part of the Mortgaged
Property not essential to the continued current use and operation of
the Mortgaged Property does not exceed Two Hundred Fifty Thousand
Dollars ($250,000.00), or
(b) the validity or amount thereof shall currently be contested
in good faith by appropriate proceedings and if any of the Parties, or
any of their respective Subsidiaries shall have set aside on its books
adequate reserves with respect thereto; and provided further that the
Parties and each Subsidiary of any of the Parties will pay all such
taxes, assessments, charges, levies or claims forthwith upon the
commencement of proceedings to foreclose any lien that may have
attached as security therefor.
7.9. Inspection of Properties and Books. Each of the Parties shall
permit the Bank at the Bank's expense prior to the occurrence of any
Suspension Event or Event of Default, but thereafter at the Party's
expense, to visit and inspect any of the properties of any of the Parties,
or any of their respective Subsidiaries to examine the books of account of
each of the Parties and each of their respective Subsidiaries (and to make
copies thereof and extracts therefrom) and to discuss the affairs, finances
and accounts of each of the Parties and their respective Subsidiaries with,
and to be advised as to the same by, its officers, all at such reasonable
times and intervals as the Bank may reasonably request, provided, however,
nothing contained herein shall in any way affect the Borrower's or the LP's
obligation to reimburse the Bank for the Bank's reasonable out-of-pocket
costs incurred in connection with the Commercial Finance Exams to be
conducted by the Bank, as provided for in 7.4(d), herein.
7.10. Compliance with Laws, Contracts, Licenses, and Permits. Each
of the Parties will comply with, and will cause each of their respective
Subsidiaries to comply with (a) all applicable laws and regulations now or
hereafter in effect wherever its business is conducted, including all
Environmental Laws, (b) the provisions of its corporate charter, and other
charter documents and by-laws, (c) all agreements and instruments to which
it is a party or by which it or any of its properties may be bound and (d)
all applicable decrees, orders, and judgments. If at any time while any
Loan or Note is outstanding or the Bank has any obligation to make Loans
hereunder, any authorization, consent, approval, permit or license from any
officer, agency or instrumentality of any government shall become necessary
or required in order that any of the Parties, may fulfill any of their
obligations hereunder, each of the Parties will immediately take or cause
to be taken all reasonable steps within the power of each of the Parties,
to obtain such authorization, consent, approval, permit or license and
furnish the Bank with evidence thereof.
7.11. Use of Availability. (a) (i) The proceeds of the Loans shall
be used: (x) subject to the limitations contained herein and in the Loan
Documents, for general business purposes of the Parties; (y) to assist in
financing the construction of certain infrastructure improvements and resi-
dential development at the Strategic Projects or Non-Strategic Projects;
(z) to assist in financing certain carrying costs of the Strategic Projects
and the Non-Strategic Projects; (ii) Availability under the Loan may be
used for the issuance (up to the Letter of Credit Amount) by the Bank of
Letters of Credit for the account of the Parties subsequent to the date
hereof, and/or for the extension or renewal of any Letters of Credit issued
for the account of the Parties or MAXXAM prior to the date hereof.
(b) (i) Each of the Parties shall be permitted to make, and
each of the Parties shall be entitled to receive, loans (individually and
collectively, the "On-Loan") to be utilized for payments due and owing on
account of the liabilities of the Parties; provided, however, the aggregate
amount of any such On-Loans to each of the Parties shall not, at any time,
exceed the Book Value of all collateral security individually granted by
any of the Parties to the Bank as collateral security for the payment and
performance of each of their respective Guaranties, as provided for herein,
and in each instance, each On-Loan shall be evidenced by an instrument of
indebtedness (in form and substance satisfactory to the Bank, in its sole
and absolute discretion), endorsed (in form and substance satisfactory to
the Bank and the Bank's counsel), delivered and collaterally assigned to
the Bank, and subordinate to the Obligations. To the extent that any
collateral security is granted by any of the Parties (other than the
Borrower or the LP) to the Borrower or the LP to secure the payment and
performance of such On-Loan( s), all such collateral security shall be
collaterally assigned to the Bank.
(ii) Each of the Parties acknowledge, confirm and agree that
each shall be liable (jointly and severally) to the Bank for the payment of
the Obligations, whether or not any On-Loan is made by the Parties to
another Party.
(c) (i) Each of the Parties acknowledge, confirm and agree that
the Bank may (without any request for a loan or advance by the Borrower),
except as otherwise provided herein, use the proceeds of the Revolving
Credit Loans to pay for any and all reasonable costs and expenses incurred
by the Bank in connection with the matters set forth in the within
Agreement, including, without limitation, costs and expenses associated
with attorneys' fees, appraisals and Commercial Finance Exams. Without
limiting the Bank's rights set forth in the within subsection, the Bank
will endeavor to furnish the Parties with notice of such use of the
proceeds but shall be under no obligation to furnish such notice.
(ii) Each of the Parties acknowledge, confirm and agree that
interest on any advance made by the Bank pursuant to Subsection (c)(i),
above, shall accrue and be payable at the Domestic Rate.
7.12. Further Assurances. Each of the Parties will cooperate with,
and will cause each of its Subsidiaries to cooperate with the Bank and
execute such further instruments and documents as the Bank shall reasonably
request to carry out to its satisfaction the transactions contemplated by
this Agreement and the other Loan Documents.
7.13. Appraisals. (a) (i) The Bank at its option, shall have the
right to obtain updated Appraisals of the Strategic Projects and/or the
Non-Strategic Projects at any time during the term of the Loan. (ii) The
costs of such Appraisals for any of the Non-Strategic Projects shall be
borne by the Bank.
(iii) Without limiting the terms of Subsections (b) and
(c), below, the Borrower and the LP each acknowledges, confirms and agrees
that upon the occurrence of a Suspension Event or an Event of Default, all
costs and expenses incurred by the Bank with respect to Appraisals for any
of the Strategic Projects shall be borne by the Borrower and the LP, as
applicable, if, such additional Appraisals for any of the Strategic
Projects were ordered by the Bank during the period of a Suspension Event
not otherwise cured or after the occurrence of an Event of Default.
(b) To the extent that any Revolving Credit Loans are made under
the Loan based upon Availability created by Developed Lots at either of the
Lake Havasu City, Arizona, or Rancho Mirage/Mirada, California properties,
the Borrower or the LP, as applicable, shall pay all costs and expenses
incurred by the Bank in connection with the Bank's procurement of an ap-
praisal for such Developed Lots giving rise to Availability under the Loan.
(c) The Bank has received an Appraisal prepared by an appraiser
designated by the Bank stating that the Fountain Hills, Arizona property,
with improvements located thereon, which has a fair value that is
satisfactory to the Bank, in the Bank's reasonable discretion. Provided
that so long as no Suspension Event or Event of Default shall have occurred
(and not been cured) under the Loan, the LP shall not be obligated to pay
for the expenses associated with any additional appraisal for the Fountain
Hills, Arizona, property prior to the Revolving Credit Maturity Date.
7.14. Notification Letters. At closing, each of the Parties shall
execute and deliver to the Bank notification letters (hereinafter, the
"Notification Letters"), substantially in the form of Schedule 7.14,
advising each Note Obligor to make payment on account of all Note
Receivables to the Bank. At the time any of the Parties enter into any
additional Amenity Sales Contracts, Retail Lot Contracts, Bulk Land Sales
Contracts and/or Home Mortgages, concurrent with the delivery of the Bank
of Note Receivable generated on account thereof, the Parties shall deliver
to the Bank a Notification Letter for each such Note Receivable. As
provided for herein, the Bank may only forward the Notification Letters to
each Note Obligor directing them to make payment on account of all Notes
Receivable to the Bank after the occurrence of an Event of Default.
7.15. Hazardous Substance Remedial Action. Each of the Parties
shall, at the Bank's (or its engineer's) request, take all additional
action as may be recommended by any Phase I environmental assessment report
furnished to the Bank pursuant to 10.10, below, including, without
limitation, take all remedial action as may be recommended therein.
8. CERTAIN NEGATIVE COVENANTS OF THE PARTIES. Each of the Parties
covenant and agree that, so long as any Loan or Note is outstanding or the
Bank has any obligation to make any Loans:
8.1. Restrictions on Indebtedness. (a) Each of the Parties will not,
and will not permit any of its Subsidiaries to, create, incur, assume,
guarantee or be or remain liable, contingently or otherwise, with respect
to any Indebtedness other than:
(i) Indebtedness to the Bank arising under any of the Loan
Documents;
(ii) Indebtedness created or incurred on account of any On-
Loan;
(iii) current liabilities of the Parties, or their
respective Subsidiaries incurred in the ordinary course of business but not
incurred through (i) the borrowing of money, or (ii) the obtaining of
credit except for credit on an open account basis customarily extended and
in fact extended in connection with normal purchases of goods and services;
(iv) Indebtedness in respect of taxes, assessments,
governmental charges or levies and claims for labor, materials and supplies
to the extent that payment therefor shall not at the time be required to be
made in accordance with the provisions of 7.8;
(v) endorsements for collection, deposit or negotiation and
warranties of products or services, in each case incurred in the ordinary
course of business;
(vi) Indebtedness existing on the date of this Agreement and
listed and described on Schedule 8.1 hereto, including any refinancing of
any debt listed on Schedule 8.1 hereto, so long as such refinancing is not
for an amount in excess of 100% of the fair market value of the asset being
refinanced;
(vii) Indebtedness of the Parties in respect of obli-
gations to complete subdivision improvements; and
(viii) Indebtedness approved or previously approved by
the Bank in its sole and absolute discretion.
(b)(i) Notwithstanding anything to the contrary herein
contained, the aggregate amount of the Borrower's (including its
Subsidiaries and the LP) recourse Indebtedness on a consolidated basis
(exclusive of Indebtedness, the repayment of which is subordinated to the
Bank pursuant to the Subordination Agreement and also exclusive of accounts
payable, accrued liabilities, estimated obligations for lot improvements,
deferred taxes, and other liabilities not commonly characterized as third-
party debt, but inclusive of the amount set forth in 8.2(ix), below)
(collectively, the "Other Liabilities")), shall not, at any time, exceed
the aggregate of the then outstanding principal balance of the Loans, plus
$13,900,000.00.
(ii) Notwithstanding anything to the contrary herein contained,
the aggregate amount of the Borrower's (including its Subsidiaries and
the LP) recourse Indebtedness (other than on account of the Loans,
Indebtedness due to affiliates of the Borrower and subordinated to the
Bank, and the Other Liabilities) on a consolidated basis with respect to
the Strategic Projects and Non-Strategic Projects (other than the Fountain
Hills, Arizona Project) shall not, at any time, exceed $7,500,000.00.
8.2. Restrictions on Liens, Etc. Each of the Parties will not, and
will not permit any of its Subsidiaries to, (a) create or incur or suffer
to be created or incurred or to exist any lien, encumbrance, mortgage,
pledge, charge, restriction or other security interest of any kind upon any
of its property or assets of any character whether now owned or hereafter
acquired, or upon the income or profits therefrom; (b) transfer any of its
property or assets or the income or profits therefrom for the purpose of
subjecting the same to the payment of Indebtedness or performance of any
other obligation in priority to payment of its general creditors; (c)
acquire, or agree or have an option to acquire, any property or assets upon
conditional sale or other title retention or purchase money security
agreement, device or arrangement; (d) suffer to exist for a period of more
than thirty (30) days after the same shall have been incurred any Indebted-
ness or claim or demand against it that if unpaid might by law or upon
bankruptcy or insolvency, or otherwise, be given any priority whatsoever
over its general creditors; or (e) sell, assign, pledge or otherwise
transfer any accounts, contract rights, general intangibles, chattel paper
or instruments, with or without recourse; provided that each of the Parties
and any Subsidiary of any of the Parties may create or incur or suffer to
be created or incurred or to exist:
(i) liens in favor of any of the Parties, on all or part of
their respective Subsidiaries securing Indebtedness owing by Subsidiaries
to any of the Parties, or by any of Westcliff, Horizon, HPC or MAXXAM to
the Borrower or to the LP on account of the On-Loans;
(ii) liens on properties other than the Mortgaged Property to
secure taxes, assessments and other government charges or claims for labor,
material or supplies in respect of obligations not overdue;
(iii) deposits or pledges made in connection with, or to
secure payment of, workmen's compensation, unemployment insurance, old age
pensions or other social security obligations;
(iv) liens on properties other than the Mortgaged Property in
respect of judgments or awards, the Indebtedness with respect to which is
permitted by 8.1(iv);
(v) liens of carriers, warehousemen, mechanics and materialmen
and other like liens and liens imposed by law, created in the ordinary
course of business, for amounts not yet due or which are being contested in
good faith by appropriate proceedings in accordance with applicable law and
as to which adequate reserves or other appropriate provisions are being
maintained in accordance with generally accepted accounting principles;
(vi) pledges or deposits made in connection with workmen's
compensation, employee benefit plans, unemployment or other insurance, old
age pensions, or other Social Security benefits;
(vii) encumbrances on properties consisting of easements,
rights of way, zoning restrictions, restrictions on the use of real
property and defects and irregularities in the title thereto, landlord's or
lessor's liens under leases to which any of the Parties is a party, and
other minor liens or encumbrances none of which interferes materially with
the use of the property affected in the ordinary conduct of the business of
each of the Parties, which defects do not individually or in the aggregate
have a materially adverse effect on the business of any of the Parties, or
any of their respective Subsidiaries on a consolidated basis.
(viii) presently outstanding liens listed on Schedule 8.2
hereto;
(ix) purchase money security interests in or purchase money
mortgages not exceeding $500,000 on real or personal property acquired
after the date hereof to secure purchase money indebtedness incurred in
connection with the acquisition of such property, which security interests
or mortgages cover only the real or personal property so acquired;
(x) liens in favor of the Bank under the Loan Documents;
(xi) other liens and encumbrances expressly permitted under the
terms of the Security Documents; and
(xii) other liens and encumbrances approved or previously
approved by the Bank in its sole and absolute discretion.
8.3. Restrictions on Investments. Each of the Parties will not, and
will not permit any of their respective Subsidiaries to, make or permit to
exist or to remain outstanding any Investment except Investments in:
(a) Cash Equivalents;
(b) SunRidge Canyon L.L.C., a limited liability company
organized under the laws of the State of Arizona in an amount not to exceed
$5,000,000.00.
(c) Investments existing on the date hereof and listed on
Schedule 8.3 hereto; and
(d) any other Investments made in the ordinary course of each of
the Party's businesses in a manner consistent with past practice, provided
that the aggregate value of all Investments under this subsection (d), on a
consolidated basis, shall not exceed at any time $10,000,000.
8.4. Merger, Consolidation. (a) Each of the Parties will not, and
will not permit any of its Subsidiaries to, become a party to any merger or
consolidation, or agree to or effect any asset acquisition or stock
acquisition or disposition (other than the acquisition or disposition of
assets other than the Mortgaged Property in the ordinary course of business
consistent with past practices).
(b) Notwithstanding the foregoing (i) the merger, acquisition or
consolidation of any of the assets or stock of MAXXAM (other than any
merger, acquisition or consolidation with the Borrower or any of the
Guarantors) shall be permitted provided Charles E. Hurwitz continues to
maintain a controlling interest in MAXXAM, and (ii) mergers, acquisitions
or consolidations of the assets or stock of (i) the Borrower into any of
its Subsidiaries, (ii) any of the Borrower's Subsidiaries into the
Borrower, (iii) any of the Borrower's Subsidiaries into another of the
Borrower's Subsidiaries and (iv) any of the Parties into any of the other
Parties, shall be permitted subject, however, to any lien or encumbrance in
favor of the Bank, and only after execution of any documents reasonably
requested by the Bank, or the Bank's counsel in connection therewith.
8.5. Sale and Leaseback. Without the prior written approval of the
Bank (which approval shall not be unreasonably withheld), none of the
Parties will enter into any arrangement, directly or indirectly, whereby
the Parties shall sell or transfer any property owned by it in order then
or thereafter to lease such property or lease other property that the
Parties intend to use for substantially the same purpose as the property
being sold or transferred; notwithstanding the foregoing restrictions, the
Borrower shall be entitled to sell and leaseback up to three (3) model
homes per year, provided however, that no such property shall have a Fair
Market Value greater than Three Hundred Thousand Dollars ($300,000.00)
(other than properties at Mirada which shall not have a Fair Market Value
greater than $2,500,000.00).
8.6. Compliance with Environmental Laws. Each of the Parties will
not, and will not permit any of their respective Subsidiaries to, do any of
the following (except in compliance with all applicable environmental laws,
regulations or statutes, and provided the allowance of any of the following
does not change the current use of the Real Estate): (a) use any of the
Real Estate or any portion thereof as a facility for the handling,
processing, storage or disposal of Hazardous Substances, (b) cause or
permit to be located on any of the Real Estate any underground tank or
other underground storage receptacle for Hazardous Substances except in
full compliance with Environmental Laws, (c) generate any Hazardous
Substances on any of the Real Estate except in full compliance with
Environmental Laws, or (d) conduct any activity at any Real Estate or use
any Real Estate in any manner so as to cause a Release.
8.7. Distributions. (a) Except as set forth herein, neither the
Borrower nor the LP shall pay any Distributions to Westcliff, Horizon, HPC
or MAXXAM or any affiliated or related entity of the Borrower.
(b) Provided no Suspension Event or Event of Default has oc-
curred (and not been cured), the Borrower and the LP shall be entitled to
make Distributions to MAXXAM so that the cumulative amount of cash
Distributions made to MAXXAM after July 1, 1995 shall not exceed the
amounts shown below as of the dates shown below:
December 31, 1995 $16,500,000
December 31, 1996 $22,500,000
December 31, 1997 $36,000,000
May 15, 1998 $45,000,000
(c) Provided no Suspension Event or Event of Default has
occurred (and not been cured), the Borrower shall be entitled to pay
dividends to the shareholder(s) of its Class A 7% Cumulative Exchangeable
Preferred Stock.
(d) At the time of the payment of any of the amounts referred to
in 8.7(b), above, the Borrower and the LP shall deliver to the Bank, a
letter (substantially in the form of Schedule 8.7) setting forth the total
amount paid to MAXXAM during such fiscal year and that there is then
existing no Suspension Event or Event of Default.
8.8 Cash Transactions with Affiliated Entities.
(a) The Borrower, its Subsidiaries and the LP shall not make
cash payments with respect to transactions with affiliated entities, except
in accordance with the provisions of Section 7-11(b), and, provided no
Suspension Event or Event of Default has occurred (and not been cured), the
Borrower, its Subsidiaries or the LP may make cash payments:
(i) with respect to transactions permitted by Section 8.7;
(ii) with respect to amounts which may be due and owing under tax
sharing agreements by and between MAXXAM, on the one hand, and the
Borrower and its Subsidiaries, on the other hand; and
(iii) to reimburse MAXXAM or MAXXAM Property Co. for expenses
incurred on behalf of the Borrower and its Subsidiaries and/or with
respect to an allocation of overhead from MAXXAM or MAXXAM Property
Co. to Borrower; and
(iv) with respect to goods and services actually purchased from
such affiliated entity for a price which shall not differ in a
material adverse manner from that which would have been charged in an
arms length transaction.
(b) Borrower may receive reimbursement from non-subsidiary real
estate affiliated entities equal to a portion of the amount, if any,
included in the Borrower's allocation of overhead from MAXXAM and MAXXAM
Property Co. for such affiliated entities.
8.9. Material Leases. No Material Leases shall be entered into by
any of the Parties, without the approval of Bank nor shall any such
approved Material Lease, be modified or amended without such approval by
the Bank.
8.10. Restrictions on Compromise of Notes Receivable. Each of the
Parties may reduce, compromise, or otherwise discount the amounts due and
owing by any Note Obligor under any of the Notes Receivable, provided,
however, (i) the amount of such reduction, compromise or discount shall not
exceed the dollar equivalent of the product of: (x) the then outstanding
principal amount of the Note Receivable, multiplied by (y) the difference
between (A) one hundred percent (100%), less (B) the percentage that is
equal to the advance rate (as such advance rates are set forth in 1.1 under
the defined term "Availability") applicable to such Note Receivable, (ii)
each such Note Receivable that is the subject of any reduction, compromise,
or other discount shall, contemporaneous with any reduction, compromise or
discount, be paid in full, and (iii) the Borrower shall furnish the Bank
with prompt written notice of any discount, compromise or reduction,
together with copies of any documents, instruments or agreements evidencing
such discount, compromise or reduction and the payment in full of the Note
Receivable effected by any such discount, compromise or reduction.
8.11. Subsidiaries. The Parties will not permit any of their
respective Subsidiaries to take, and the Parties' respective Subsidiaries
will not take, any action that might materially adversely affect the use or
value of the Mortgaged Property, the ability of any of the Parties to carry
on business substantially as now conducted by each of them, the financial
condition of the Parties, or any of their respective Subsidiaries, or the
ability of any of the Parties, and each of their respective Subsidiaries,
to comply with each and all of the terms of the within Agreement.
8.12. Change in Ownership. Except as provided in Section 8.4, none
of the Parties shall permit any direct or indirect change in the ownership
of such Person from that existing as of the date hereof. Without limiting
the generality of the foregoing, except as provided in Section 8.4, none of
the Parties shall permit any Person not a stockholder or a partner as of
the date hereof to become such a stockholder or partner.
9. FINANCIAL COVENANTS OF THE BORROWER. The Borrower and the LP
covenant and agree that, so long as any Loan or Note is outstanding or the
Bank has any obligation to make any Loans, the Borrower and the LP shall,
on a combined basis, maintain Minimum Capital (to be tested quarterly,
commencing as of June 30, 1995) in an amount equal to at least Thirty
Million Dollars ($30,000,000.00).
As used herein, the term Minimum Capital shall mean, all as determined
on a consolidated basis and in accordance with generally accepted
accounting principles: the Borrower's Net Worth, plus without duplication
(A) the aggregate of (i) Indebtedness of the Borrower that is subordinated
to the Indebtedness of the Borrower to the Bank (upon terms and conditions
satisfactory to the Bank) and (ii) deferred income tax liabilities of the
Borrower, if any; less without duplication (B) the aggregate of (i) all of
the Borrower's receivables and other amounts due and owing from MAXXAM and
(ii) all of the Borrower's deferred income tax assets.
10. CLOSING CONDITIONS. The obligation of the Bank to make the
initial Revolving Credit Loans, or to issue any Letters of Credit, shall be
subject to the satisfaction of the following conditions precedent on or
prior to the Closing Date:
10.1. Loan Documents. (a) Each of the Loan Documents shall have been
duly executed and delivered by the respective parties thereto and, shall be
in full force and effect and shall be in form and substance satisfactory to
the Bank. The Bank shall have received a fully executed copy of each such
document.
(b) The Bank shall have received from each of the Parties, the
Notification Letters.
10.2. Certified Copies of Organization Documents. The Bank shall
have received from each of the Parties copies, certified by the appropriate
officer of the State in which each of the Parties, is organized, and/or in
the State in which any of the Parties conduct their respective businesses,
to be true and complete, of the corporate charter, partnership agreement,
and any other organization documents of Parties, as in effect on such date
of certification, including, without limitation, Certificates of Legal
Existence and Certificates of Qualification To Do Business. In addition,
the Bank shall have received the information described above with respect
to SunRidge Canyon L.L.C.
10.3. By-laws; Resolutions. All action on the part of each of the
Parties, necessary for the valid execution, delivery and performance by
each of the Parties, of this Agreement and the other Loan Documents to
which they are or shall become a party shall have been duly and effectively
taken, and evidence thereof satisfactory to the Bank shall have been
provided to the Bank. The Bank shall have received from each of the
Parties, true copies of their respective by-laws and certificates of the
resolutions adopted by their partners, shareholders and boards of directors
authorizing the transactions described herein, each certified by their
respective clerks of the Parties as of a recent date to be true and com-
plete.
10.4. Incumbency Certificate; Authorized Signers. The Bank shall
have received from each of the Parties incumbency certificates, dated as of
the Closing Date, signed by duly authorized officers of each of the Parties
and giving the name and bearing a specimen signature of each individual who
shall be authorized: (a) to sign, in the name and on behalf of each of the
Parties, each of the Loan Documents to which each of the Parties, is or is
to become a party; (b) to make Loan and Conversion Requests; and (c) to
give notices and to take other action on behalf of each of the Parties,
under the Loan Documents.
10.5. Validity of Liens. The Security Documents shall be effective
to create in favor of the Bank a legal, valid and enforceable first (except
for Permitted Liens entitled to priority under applicable law) mortgage and
security interest in the Collateral. All filings, recordings, deliveries
of instruments and other actions necessary or desirable in the opinion of
the Bank to protect and preserve such security interests shall have been
duly effected. The Bank shall have received evidence thereof in form and
substance satisfactory to the Bank.
10.6. Survey and Taxes. (a) To the extent necessary to continue the
deletion (if presently existing) of the survey exception from any existing
Title Policy for which any update or endorsement shall be issued with
respect to any of the Strategic Projects, or to remove the survey exception
from any new Title Insurance Policy to be issued in connection with the
Loan with respect to any of the Strategic Projects except for (i) any addi-
tional Developed Lots at the Strategic Project known as Fountain Hills,
Arizona, and (ii) until satisfaction of the Mirada Preconditions, any
Developed Lots of the Strategic Project known as Mirada/Rancho Mirage,
California, up-to-date instrument surveys or plans or engineer's
certificates, including, date-down surveys, for each of the Strategic
Projects, each satisfactory to the Bank, its counsel and the Title
Insurance Company, which surveys shall be certified to the Title Insurance
Company and to the Bank, such certificates to be satisfactory to the Bank,
its counsel and the Title Insurance Company. The surveys shall be prepared
by registered land surveyors or engineers in accordance with the Bank's
survey requirements and shall, to the extent necessary to continue the
deletion of the survey exception (as provided for herein), show dimensions
and locations of any improvements, easements, rights of way, adjoining
sites, encroachments and the extent thereof, established building lines and
street lines, the distance to, and names of, the nearest intersecting
streets and such other details as the Bank may require.
(b) Evidence of payment of all real estate taxes and other
municipal charges on the Strategic Projects and the Non-Strategic Projects
and any existing improvements thereon which are due and payable prior to
the Closing Date, as provided herein.
10.7. Title Insurance; Title Exception Documents; UCC Searches. (a)
The Bank shall have received (i) the Title Policies for each of the Insured
Projects, each issued by Title Insurance Companies approved by the Bank
(with such reinsurance or co-insurance as the Bank may require, any such
reinsurance to be with direct access endorsements), each in the amounts set
forth in Section 1.1, herein, each insuring the Bank that each of the
Parties (as applicable) hold marketable or insurable (as applicable in each
state in which any of the Insured Projects are situated) fee simple title
to the Insured Projects and that the Security Documents (relevant to the
Insured Projects) create valid, enforceable and first priority liens on
each of Party's title to the Insured Projects, subject only to such excep-
tions as the Bank may approve in writing, and which shall contain no
exceptions for mechanic's liens, or (except as provided for in 10.6,
herein) other matters which would be shown by a survey, shall not insure
over any matter except to the extent that any such affirmative insurance is
acceptable to Bank in its sole discretion, and shall contain a pending
disbursements clause or endorsement and such other endorsements and
affirmative insurance as the Bank in its reasonable discretion may require.
(ii) Title Update Letters for the Rio Communities and
Paradise Hills, New Mexico projects.
(b) Uniform Commercial Code lien searches disclosing no
conditional sales agreements, security agreements, chattel mortgages,
leases of personalty, financing statements or title retention agreements
with respect to any Collateral granted to secure the Obligations, except as
same may be reasonably acceptable to the Bank.
10.8. Leases and Service Contracts. The Bank shall have received
from each of the Parties true copies of all Material Leases and all
agreements (reflected on Schedule 6.21(h)), together with Material Lease
Summaries.
10.9. Certificates of Insurance. The Bank shall have received (a) a
certificate of insurance as to the insurance maintained by each of the
Parties, on the Mortgaged Property (including flood insurance if necessary)
from the insurer or an independent insurance broker dated as of the Closing
Date, identifying insurers, types of insurance, insurance limits, and
policy terms; (b) copies of all policies evidencing such insurance (or
certificates therefor signed by the insurer or an agent authorized to bind
the insurer), and if requested by the Bank, certified copies of all
policies evidencing such insurance; and (c) such further information and
certificates from each of the Parties, its insurers and insurance brokers
as the Bank may request.
10.10. Hazardous Substance Assessments. The Bank shall have received
current Phase I environmental site assessment reports for those Developed
Lots at the Strategic Projects which are included in the calculation of the
Borrower's Availability, and any existing improvements thereon, which is
complete and free of qualification, prepared by qualified and reputable
civil or environmental engineers acceptable to the Bank, all at Borrower's
expense indicating that the Developed Lots (except for the Developed Lots
listed on Schedule 10.10, annexed hereto) are free and clear of Hazardous
Substances. Such reports will be reviewed by an independent professional
engineering firm designated by the Bank, the costs of such review to be
borne by each of the Parties.
10.11. Environmental Indemnity. The Bank shall have received
individual Environmental Indemnity Agreements from each of the Parties,
pursuant to which each of the Parties agree to indemnify and hold harmless
the Bank with respect to the release or threatened release of any hazardous
materials and noncompliance with environmental laws at the Strategic
Projects and the Non-Strategic Projects, which agreement shall survive
termination of this Agreement, and/or the repayment of the Loans and the
exercise by the Bank of any of its rights and remedies under the Security
Documents.
10.12. Opinions of Counsel Concerning Organization and Loan
Documents. The Bank shall have received: Opinions of counsel for each of
the Parties satisfactory to the Bank and the Bank's counsel (i) stating
that all Loan Documents have been duly authorized, executed and delivered
by each of the Parties and are valid, binding and enforceable against each
of the Parties, including, without limitation, the choice of law provisions
of the Loan Documents, (ii) indicating the due organization, legal
existence and good standing of each of the Parties, in its state of
organization and also in the state where the Strategic Projects and Non-
Strategic Projects are located, (iii) stating that the Loans are not
usurious under applicable laws and regulations (without resort to any
"usury savings" clause in the Loan Documents), (iv) indicating that the
Loan Documents create in favor of the Bank legal, valid and enforceable
first priority liens and security interests in and to the Collateral to
secure the Obligations, and all filings and recordings necessary to perfect
such liens and security interests have been duly affected, and (v) stating
that there is no action, suit or proceeding pending or to the best of the
Parties' knowledge threatened against or affecting any of the Parties, or
the Strategic Projects or the Non-Strategic Projects, before any court,
administrative agency, arbitrator or governmental authority, except as will
be fully disclosed by each of the Parties in the Loan documents or such
Opinion and approved by the Bank.
10.13. Financial Information. The Bank shall have received current
financial statements of the Borrower and MAXXAM as of December 31, 1994,
prepared or reviewed and approved by a certified public accountant
satisfactory to the Bank, and other appropriate evidence to establish at
Loan closing that there has been no adverse change in the business, assets,
conditions (financial or otherwise), operations or prospects of the
Borrower or MAXXAM from that which was originally presented to the Bank,
and if none has been presented to the Bank, then such statements shall be
subject to the Bank's determination that such conditions are satisfactory.
10.14. Payment of Fees. The Borrower and the LP shall have paid to
the Bank all fees due and owing pursuant to 3.
10.15. Zoning, Environmental and Land Use Compliance. The Bank shall
have received the agreements listed on Schedule 6.21(j), annexed hereto, to
which each of the Parties, is a party, which agreements materially affect
or materially relate to the use, operation, development, construction or
management of the Strategic Projects and Non-Strategic Projects.
10.16. Borrowing Base Report. The Borrower and the LP shall each
have furnished the Bank with an initial Borrowing Base Report.
10.17. Guaranties. The Guaranties shall have been duly executed and
delivered to the Bank.
10.18. Lock Box Account(s). The Lock Box Account(s) shall have been
established.
10.19. Subordination. Each of Westcliff, Horizon, HPC and MAXXAM,
and any affiliated or related entity of the Borrower, or the LP, pursuant
to the Subordination Agreement (which shall be duly executed and delivered
to the Bank) shall subordinate all indebtedness of Borrower and the LP now
or hereafter owing to any of Westcliff, Horizon, HPC and MAXXAM and/or any
affiliated or related entity of the Borrower to all Obligations of Borrower
and/or the LP to Bank.
10.20. Commercial Finance Exam. The Bank shall have received a
satisfactory (in the Bank's sole and absolute discretion) Commercial
Finance Exam to be conducted by the Bank (prior to the Closing Date), with
respect to each of the Parties, the Strategic Projects and/or the Non-
Strategic Projects, the Notes Receivable and/or any other matters deter-
mined by the Bank (in its sole and absolute discretion) to be necessary in
connection with the establishment of the Loan, the reasonable out-of-pocket
costs of which shall be borne by the Borrower and the LP.
10.21. Evidence of Licenses, Permits, Utilities, Etc. Evidence (in
form and substance satisfactory to the Bank and/or the Bank's counsel) from
the Parties, and/or the Party's counsel indicating the issuance of all
licenses, permits, approvals and utilities, including, without limitation,
all water, electric and sanitary sewer facilities, for sale of each of the
Developed Lots at the Strategic Projects.
10.22. Additional Matters. Each of the Parties shall furnish the
Bank with such additional information (financial or otherwise) as may be
reasonably requested by the Bank, and shall execute and/or deliver any and
all additional documents, instruments and/or agreements requested by the
Bank in order to effectuate the matters set forth herein.
11. CONDITIONS TO ALL BORROWINGS. The obligations of the Bank to
make any Revolving Credit Loan and/or to issue any Letters of Credit,
whether on or after the Closing Date, shall be subject to satisfaction of
the conditions set forth in 10, and shall also be subject to the satis-
faction of the following conditions precedent:
11.1. Representations True; No Event of Default. Each of the
representations and warranties of each of the Parties contained in this
Agreement, the other Loan Documents or in any document or instrument
delivered pursuant to or in connection with this Agreement shall be true as
of the date as of which they were made and shall also be true at and as of
the time of the making of any Loan, with the same effect as if made at and
as of that time (except to the extent of changes resulting from trans-
actions contemplated or permitted by this Agreement and the other Loan
Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and except to the
extent that such representations and warranties relate expressly to an
earlier date) and no Suspension Event or Event of Default shall have
occurred and be continuing. The Bank shall have received a certificate
from each of the Parties signed by an authorized officer of each of the
Parties to such effect.
11.2. No Legal Impediment. No change shall have occurred in any law
or regulations thereunder or interpretations thereof that in the reasonable
opinion of the Bank would make it illegal for the Bank to make any Loan.
11.3. Governmental Regulation. The Bank shall have received such
statements in substance and form reasonably satisfactory to the Bank as the
Bank shall require for the purpose of compliance with any applicable
regulations of the Comptroller of the Currency or the Board of Governors of
the Federal Reserve System.
11.4. Proceedings and Documents. All proceedings in connection with
the transactions contemplated by this Agreement, the other Loan Documents
and all other documents incident thereto shall be satisfactory in substance
and in form to the Bank and its counsel, and the Bank and such counsel
shall have received all information and such counterpart originals or
certified or other copies of such documents as the Bank may reasonably re-
quest.
12. EVENTS OF DEFAULT; ACCELERATION; ETC.
12.1 Events of Default and Acceleration. If any of the following
events ("Events of Default") shall occur:
(a) the Borrower or the LP shall fail to pay any principal of
the Loans, or interest due thereon, when the same shall become due and
payable, whether at the stated date of maturity or any accelerated date of
maturity or at any other date fixed for payment;
(b) the Borrower or the LP shall fail to pay any other sums due
hereunder or under any of the other Loan Documents, within ten (10) days of
when the same shall become due and payable, whether at the stated date of
maturity or any accelerated date of maturity or at any other date fixed for
payment;
(c) (i) any of the Parties, or any of their respective
Subsidiaries (where applicable), shall fail to comply with any of its
covenants contained in 7.1, 7.2, 7.3, 7.4(a)(i)(A), 7.4(c), 7.4(d)(i) and
(ii), 7.4(e), 7.7, 7.9, 7.11, 7.12, 7.13, 7.14, 8.1, 8.2, 8.3, 8.4, 8.5,
8.7, 8.8, 8.9, 8.10 or 8.12; and
(ii) any of the Parties, or any of their respective
Subsidiaries (where applicable), shall fail to comply with any of its
covenants contained in 7.4(a)(i)(B), 7.4(a)(ii), 7.4(a)(iii), 7.4(a)(iv),
7.4(b), or 9 within ten (10) days of when due, or when to be performed; and
(iii) any of the Parties, or any of their respective
Subsidiaries (where applicable), shall fail to perform any other term,
covenant or agreement contained herein or in any of the other Loan
Documents (other than those specified elsewhere in this 12, or in such
other Loan Documents) for thirty (30) days after written notice of such
failure has been given to the Borrower by the Bank;
(d) any representation or warranty of any of the Parties in this
Agreement or any of the other Loan Documents or in any other document or
instrument delivered pursuant to or in connection with this Agreement shall
prove to have been false in any material respect upon the date when made or
deemed to have been made or repeated;
(e) any of the Parties shall fail to pay at maturity, or within
any applicable period of grace, any obligation for borrowed money or credit
received in an amount greater than $500,000, or fail to observe or perform
any material term, covenant or agreement contained in any agreement by
which they are bound, evidencing or securing borrowed money or credit
received (in an amount greater than $500,000) for such period of time as
would permit (assuming the giving of appropriate notice if required) the
holder or holders thereof, including, without limitation, the Bank, or of
any obligations issued thereunder, to accelerate the maturity thereof;
(f) any of the Parties shall make an assignment for the benefit
of creditors, or admit in writing their inability to pay or generally fail
to pay their debts as they mature or become due, or shall petition or apply
for the appointment of a trustee or other custodian, liquidator or receiver
of any of the Parties of any substantial part of the assets of any of the
Parties or shall commence any case or other proceeding relating to any of
the Parties under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation or similar law of any
jurisdiction, now or hereafter in effect, or shall take any action to
authorize or in furtherance of any of the foregoing, or if any such peti-
tion or application shall be filed or any such case or other proceeding
shall be commenced against any of the Parties and any of the Parties or
shall indicate its approval thereof, consent thereto or acquiescence
therein;
(g) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating any of the Parties
bankrupt or insolvent, or approving a petition in any such case or other
proceeding, or a decree or order for relief is entered in respect of any of
the Parties in an involuntary case under federal bankruptcy laws as now or
hereafter constituted;
(h) there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty (30) days, any uninsured final judgment
against any of the Parties, or any of their respective Subsidiaries that,
with other outstanding uninsured final judgments, undischarged, against any
of the Parties, or any of their respective Subsidiaries exceeds in the
aggregate $250,000;
(i) if any of the Loan Documents shall be cancelled, terminated,
revoked or rescinded otherwise than in accordance with the terms thereof or
with the express prior written agreement, consent or approval of the Bank,
or any action at law, suit or in equity or other legal proceeding to
cancel, revoke or rescind any of the Loan Documents shall be commenced by
or on behalf of any of the Parties, or any of their respective Subsidiaries
or any of their respective holders of Voting Interests, or any court or any
other governmental or regulatory authority or agency of competent jurisdic-
tion shall make a determination that, or issue a judgment, order, decree or
ruling to the effect that, any one or more of the Loan Documents is
illegal, invalid or unenforceable in accordance with the terms thereof;
(j) any of the Parties, any of their respective officers, or any
of their respective Subsidiaries shall be indicted for a federal crime, a
punishment for which could include the forfeiture of any assets of any of
the Parties, or of such Subsidiaries; or
(k) The occurrence of any event of default under any document,
instrument and/or agreement between MAXXAM and the Bank, including, without
limitation, certain Unconditional Guaranties of Payment and Performance
(hereinafter, individually and collectively, the "MAXXAM Guaranty") dated
December 29, 1992 (as amended) and December 29, 1993, and/or a certain
Pledge Agreement (hereinafter, the "MAXXAM Pledge Agreement") executed and
delivered by MAXXAM to the Bank, or under any document, instrument and/or
agreement executed and/or delivered by MAXXAM to the Bank, whether such
document, instrument and/or agreement now exists or hereafter arises
(notwithstanding that the Bank may not have exercised its rights upon
default under any such document, instrument and/or agreement), then, and in
any such event, so long as the same may be continuing, the Bank may by
notice in writing to the Parties declare all amounts owing with respect to
this Agreement, the Note and the other Loan Documents to be, and they shall
thereupon forthwith become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by each of the Parties; provided that in the event
of any Event of Default specified in 12(g) or 12(h), all such amounts shall
become immediately due and payable automatically and without any re-
quirement of notice from the Bank.
(l) Any direct or indirect change in the ownership of MAXXAM
Property Company or MCOP Limited Partners, Inc. from that existing as of
the date hereof.
12.2 Termination of Commitment. If any one or more Events of Default
specified in 12(f) or 12(g) shall occur, any unused portion of the credit
hereunder shall forthwith terminate and the Bank shall be relieved of all
obligations to make Loans to the Borrower and the LP. If any other Event
of Default shall have occurred and be continuing, or if on any Drawdown
Date the conditions precedent to the making of the Loans to be made on such
Drawdown Date are not satisfied, the Bank may by notice to the Borrower and
the LP, terminate the unused portion of the credit hereunder, and upon such
notice being given such unused portion of the credit hereunder shall
terminate immediately and the Bank shall be relieved of all further
obligations to make Loans. So long as there continues to remain
outstanding Loans, no termination of the credit hereunder shall relieve any
of the Parties of any of the Obligations or any of its existing obligations
to the Bank arising under other agreements or instruments.
12.3 Remedies. (a) In case any one or more of the Events of Default
shall have occurred and be continuing beyond any applicable grace period
uncured, and whether or not the Bank shall have accelerated the maturity of
the Revolving Credit Loans pursuant to 12.1, the Bank, if owed any amount
with respect to the Loans, may proceed to protect and enforce its rights
and remedies under this Agreement, the Security Documents, the Note, the
Collateral Note, or any of the other Loan Documents by suit in equity,
action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Agreement, the
Security Documents and the other Loan Documents or any instrument pursuant
to which the Obligations are evidenced, including to the full extent
permitted by applicable law the obtaining of the ex parte appointment of a
receiver, and, if such amount shall have become due, by declaration or
otherwise, proceed to enforce the payment thereof or any other legal or
equitable right of the Bank, including, without limitation, the forwarding
of the Notification Letters to the Note Obligors. No remedy herein con-
ferred upon the Bank or the holder of any Note and/or Collateral Note is
intended to be exclusive of any other remedy and each and every remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
any other provision of law.
(b) In addition to the remedies provided for herein in
subsection (a), above, upon the occurrence of a Suspension Event or an
Event of Default, the Bank may hold any Collateral (or any cash proceeds
derived therefrom) and retain same as collateral security for the payment
and performance of any outstanding Letters of Credit.
12.4 Distribution of Collateral Proceeds. In the event that,
following the occurrence or during the continuance of any Suspension Event
or Event of Default, the Bank receives any monies in connection with the
enforcement of any of the Security Documents, or otherwise with respect to
the realization upon any of the Collateral, such monies shall be
distributed for application as follows:
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Bank for or in respect of all reasonable costs,
expenses, disbursements and losses which shall have been incurred or
sustained by the Bank in connection with the collection of such monies by
the Bank, for the exercise, protection or enforcement by the Bank of all or
any of the rights, remedies, powers and privileges of the Bank under this
Agreement or any of the other Loan Documents or in respect of the Collat-
eral or in support of any provision of adequate indemnity to the Bank
against any taxes or liens which by law shall have, or may have, priority
over the rights of the Bank to such monies;
(b) Second, to all other Obligations in such order or preference
as the Bank may determine; provided, however, that the Bank may in its
discretion make proper allowance to take into account any Obligations not
then due and payable;
(c) Third, upon payment and satisfaction in full or other
provisions for payment in full satisfaction to the Bank of all of the
Obligations, to the payment of any obligations required to be paid pursuant
to 9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of
Massachusetts; and
(d) Fourth, the excess, if any, shall be returned to the
Borrower or to such other Persons as are entitled thereto.
13. SETOFF. Regardless of the adequacy of any collateral, during the
continuance of any Event of Default, any deposits (general or specific,
time or demand, provisional or final), regardless of currency, maturity, or
the branch of the Bank where such deposits are held, or other sums credited
by or due from the Bank to any of the Parties and any securities or other
property of any of the Parties in the possession of the Bank may be applied
to or set off against the payment of Obligations and any and all other
liabilities, direct, or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, of any of the Parties to the Bank.
14. EXPENSES. Except as otherwise provided for herein, and (where
applicable), upon presentation of the Certificate provided for in 4.8,
herein, the Borrower and the LP jointly and severally agree to pay (a) the
reasonable costs of producing and reproducing this Agreement, the other
Loan Documents and the other agreements and instruments mentioned herein,
(b) any taxes (including any interest and penalties in respect thereto)
payable by the Bank (other than ordinary taxes based upon the Bank's net
income), including any recording, mortgage, documentary or intangibles
taxes in connection with the Security Deed and other Loan Documents, or
other taxes payable on or with respect to the transactions contemplated by
this Agreement, including any taxes payable by the Bank after the Closing
Date (the Borrower and the LP each hereby agreeing to indemnify the Bank
with respect thereto), (c) all title insurance premiums, appraisal fees,
engineer's fees, and the reasonable fees, expenses and disbursements of the
Bank's counsel or any local counsel to the Bank incurred in connection with
the preparation, administration or interpretation of the Loan Documents and
other instruments mentioned herein, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, (d) the
reasonable fees, expenses and disbursements of the Bank incurred in
connection with the preparation, administration or interpretation of the
Loan Documents and other instruments mentioned herein, (e) all reasonable
out-of-pocket expenses (including reasonable attorneys' fees and costs,
which attorneys may be employees of the Bank) and the fees and costs of
appraisers, engineers, investment bankers or other experts retained by the
Bank in connection with any such enforcement proceedings incurred by the
Bank in connection with (i) the enforcement of or preservation of rights
under any of the Loan Documents against any of the Parties, or any of their
respective Subsidiaries or the administration thereof, and (ii) any litiga-
tion, proceeding or dispute whether arising hereunder or otherwise, in any
way related to the Bank's relationship with any of the Parties, or any of
their respective Subsidiaries, unless, in either instance, the Bank is not
the successful party under any such enforcement proceedings, and (f) all
reasonable fees, expenses and disbursements of the Bank incurred in connec-
tion with UCC searches, UCC filings or mortgage recordings. The covenants
of this 14 shall survive payment or satisfaction of payment of amounts
owing with respect to the Note.
15. INDEMNIFICATION. Each of the Parties, agree to indemnify and
hold harmless the Bank from and against any and all claims, actions and
suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and expenses of every nature and character
arising out of this Agreement or any of the other Loan Documents or the
transactions contemplated hereby including, without limitation, (a) any
actual or proposed use by any of the Parties, or any of their respective
Subsidiaries of the proceeds of any of the Loans, (b) any actual or alleged
infringement of any patent, copyright, trademark, service mark or similar
right of any of the Parties, or any of their Subsidiaries comprised in the
Collateral, (c) any of the Parties or any of their respective Subsidiaries
entering into or performing this Agreement or any of the other Loan
Documents or (d) with respect to any of the Parties and their respective
Subsidiaries and their respective properties and assets, the violation of
any Environmental Law, the Release or threatened Release of any Hazardous
Substances or any action, suit, proceeding or investigation brought or
threatened with respect to any Hazardous Substances (including, but not
limited to claims with respect to wrongful death, personal injury or damage
to property), in each case including, without limitation, the reasonable
fees and disbursements of counsel and allocated costs of internal counsel
incurred in connection with any such investigation, litigation or other
proceeding. In litigation, or the preparation therefor, the Bank shall be
entitled to select its own counsel and, in addition to the foregoing
indemnity, each of the Parties agree to pay promptly the reasonable fees
and expenses of such counsel. If, and to the extent that the obligations
of each of the Parties under this 15 are unenforceable for any reason, each
of the Parties hereby agree to make the maximum contribution to the payment
in satisfaction of such obligations which is permissible under applicable
law. The provisions of this 15 shall survive the repayment of the Loan and
the termination of the obligations of the Bank hereunder.
16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
representations and warranties made herein, the 1992 Agreement (as
amended), the 1988 Agreement, in the Note, any of the other Loan Documents
or in any documents or other papers delivered by or on behalf of each of
the Parties, or any of their respective Subsidiaries (other than such
covenants, agreements, representations and warranties which have been
replaced in their entirety pursuant to the within Agreement, and/or any
other documents, instruments or agreement to be executed and/or delivered
in connection herewith) pursuant hereto shall be deemed to have been relied
upon by the Bank, notwithstanding any investigation heretofore or hereafter
made by it, and shall survive the making by the Bank of the Loans, as
herein contemplated, and shall continue in full force and effect so long as
any amount due under this Agreement or the Note or any of the other Loan
Documents remains outstanding or the Bank has any obligation to make any
Loans. The indemnification obligations of each of the Parties provided
herein and the other Loan Documents shall survive the full repayment of
amounts due and the termination of the obligations of the Bank hereunder
and thereunder to the extent provided herein and therein. All statements
contained in any certificate or other paper delivered to the Bank at any
time by or on behalf of each of the Parties or MAXXAM pursuant hereto or in
connection with the transactions contemplated hereby shall constitute
representations and warranties by each of the Parties.
17. PERMITTED SALES/RELEASE OF LIEN.
17.1. Permitted Sales. (a) If:
(i) an intended sale or disposition of any lot(s)
comprising any part of any of the Strategic Projects is for a purchase
price in excess of $350,000.00;
(ii) is evidenced by a bona-fide Agreement to an
unaffiliated third-party acquiror;
(iii) is for adequate consideration (as determined by
the Bank in its reasonable discretion); and
(iv) provided there is then existing no Suspension Event or
Event of Default,
such sale or disposition shall not constitute an Event of Default under the
Loan, and the Bank agrees to release its lien against the subject property
upon payment to the Bank (for credit against the Obligations of the
Borrower and/or the LP under this Agreement) of all Net Proceeds realized
on account of any such sale or disposition. The provisions of this Section
shall not apply, however, to one of a series of sales to a single purchaser
and/or such purchaser's affiliates.
(b) If:
(i) an intended sale or disposition of any lot(s)
comprising part of any of the Strategic Projects is for a purchase
price less than $350,000.00;
(ii) is evidenced by a bona-fide Agreement to an
unaffiliated third-party acquiror;
(iii) is for adequate consideration (as determined by
the Bank in its reasonable discretion); and
(iv) provided there is then existing no Suspension Event or
Event of Default,
such sale or disposition shall not constitute an Event of Default under the
Loan, and the Bank agrees to release its lien against the subject property
upon presentation to the Bank of an Affidavit substantially in the form of
Schedule 17, annexed hereto. The provisions of this Section shall not
apply, however, to one of a series of sales to a single purchaser and/or
such purchaser's affiliates.
(c) If:
(i) an intended sale or disposition of any lot(s)
comprising part of any of the Non-Strategic Projects is for a purchase
price in excess of $1,000,000.00;
(ii) is evidenced by a bona-fide Agreement to an
unaffiliated third-party acquiror;
(iii) is for adequate consideration (as determined by
the Bank in its reasonable discretion); and
(iv) provided there is then existing no Suspension Event or
Event of Default,
such sale or disposition shall not constitute an Event of Default under the
Loan, and the Bank agrees to release its lien against the subject property
upon payment to the Bank (for credit against the Obligations of the
Borrower and/or the LP under this Agreement) of all Net Proceeds realized
on account of any such sale or disposition. The provisions of this Section
shall not apply, however, to one of a series of sales to a single purchaser
and/or such purchaser's affiliates.
(d) If:
(i) an intended sale or disposition of any lot(s)
comprising any part of any of the Non-Strategic Projects is for a
purchase price less than $1,000,000.00;
(ii) is evidenced by a bona-fide Agreement to an
unaffiliated third-party acquiror;
(iii) is for adequate consideration (as determined by
the Bank in its reasonable discretion); and
(iv) provided there is then existing no Suspension Event or
Event of Default,
such sale or disposition shall not constitute an Event of Default under the
Loan, and the Bank agrees to release its lien against the subject property
upon presentation to the Bank of an Affidavit substantially in the form of
Schedule 17, annexed hereto. The provisions of this Section shall not
apply, however, to one of a series of sales to a single purchaser and/or
such purchaser's affiliates.
(e) Notwithstanding anything to the contrary set forth in
Subsections (a) and (c), above, if a sale or distribution complies with the
foregoing terms and conditions, upon written request by the Borrower or the
LP to the Bank, and subject to the terms and conditions set forth in 8.7,
herein, the Net Proceeds of such sale or distribution may be used to make
payment on account of any Permitted Distribution.
17.2. Release of Collateral. Provided there is no existing
Suspension Event or Event of Default, upon Borrower's or LP's request, the
Bank agrees to consider, from time to time, the release of its lien against
portions of the Collateral not included in the determination of Borrower
Availability or LP Availability. Any such release shall not require the
payment of any consideration in connection therewith. Nothing contained
herein shall constitute the Bank's legal obligation to so release its liens
and any determination to release Collateral shall be in the Bank's sole and
absolute discretion; rather the foregoing is intended to reflect the Bank's
willingness to consider such a request in good faith and not to
unreasonably withhold its consent to any such request.
18. ASSIGNMENT; PARTICIPATIONS; ETC.
18.1. Assignment by the Bank. The Bank may assign all or a portion
of its rights under this Agreement and the same portion of its Commitment,
the Loans at the time owing to it, provided that such assignment is in
writing (the "Assignment"). Upon execution and delivery of the Assignment
the assignee thereunder shall be a party hereto and, to the extent provided
in such assignment, shall have the rights and obligations of the Bank
hereunder and under the Loan Documents. Upon the effective date of such
Assignment the commitment of the Bank shall be reduced and the Bank shall
be relieved from its obligations hereunder to the extent assigned to the
assignee pursuant to the Assignment. Each of the Parties shall, on request
of the Bank, execute such further documents and instruments as may be
necessary to carry out the purposes of the Assignment.
18.2. Participations. The Bank may sell participations to one or
more banks or other entities in all or a portion of the Bank's rights and
obligations under this Agreement and the other Loan Documents; provided
that (a) any such sale or participation shall not affect the rights and
duties of the Bank hereunder to any of the Parties and (b) the only rights
granted to the participant pursuant to such participation arrangements with
respect to waivers, amendments or modifications of the Loan Documents shall
be the rights to approve waivers, amendments or modifications that would
reduce the principal of or the interest rate on any Loans, or extend any
regularly scheduled payment date for principal or interest.
18.3. Disclosure. Each of the Parties agree that in addition to
disclosures made in accordance with standard banking practices the Bank may
disclose information obtained by the Bank pursuant to this Agreement to
assignees or participants and potential assignees or participants
hereunder, subject, however, to reasonable confidentiality agreements to be
executed by such prospective purchaser(s), the form of which confidential-
ity agreements shall be substantially in the form of Schedule 18.3, annexed
hereto.
18.4. Pledge by Bank. The Bank may at any time pledge all or any
portion of its interest and rights under this Agreement (including all or
any portion of the Note) to any of the twelve Federal Reserve Banks
organized under 4 of the Federal Reserve Act, 12 U.S.C. 341. No such
pledge or the enforcement thereof shall release the Bank from its
obligations hereunder or under any of the other Loan Documents.
18.5. No Assignment by Parties. None of the Parties shall assign or
transfer any of their rights or obligations under any of the Loan Documents
without the prior written consent of the Bank.
19. AGENTS, ATTORNEYS, TRUSTEES. (a) The Bank shall have full power
and authority to appoint such agents, attorneys and trustees as it may from
time to time designate to act for it under this Agreement, in such
capacities and with such powers as the Bank may specify. The Bank, in its
sole discretion, shall have authority to revoke any such appointment and
shall have authority to designate a new agent, attorney or trustee for
itself any time, such action to be taken by an instrument in writing
addressed to such agent, attorney or trustee, counterparts of which shall
be sent to the Borrower or the LP. Such agent, attorney or Trustee shall
not have any authority to act for the Bank in any capacity except as
expressly set forth in any agreement to which the Bank is a party.
Furthermore, as more specifically set forth in 15, herein, each of the
Parties agree to save and hold the Bank, and each such agent, attorney or
trustee harmless from any action or nonaction of such agent, attorney or
trustee.
(b) Each of the Parties acknowledge, confirm and agree that they
will recognize and fully cooperate with any such agent, attorney or trustee
so appointed by the Bank.
20. NOTICES, ETC. Except as otherwise expressly provided in this
Agreement, all notices and other communications made or required to be
given pursuant to this Agreement or the Note shall be in writing and shall
be delivered in hand, mailed by United States registered or certified first
class mail, postage prepaid, sent by overnight courier, or sent by
telegraph, telecopy, telefax or telex and confirmed by delivery via courier
or postal service, addressed as follows:
(a) 5847 San Felipe, Houston, Texas, Attention: Treasurer, with
a copy to the Parties (at the address set forth herein), Attention: General
Counsel, or at such other address for notice as the Borrower shall last
have furnished in writing to the Bank; and
(b) if to the Bank, at 100 Federal Street, Boston, Massachusetts
02110, USA, Attention: Real Estate Department, or such other address for
notice as the Bank shall last have furnished in writing to the Borrower,
and (except for Borrowing Base Reports and other financial reports), with a
copy to David S. Berman, Esquire, Riemer & Braunstein, Three Center Plaza,
Boston, Massachusetts 02108.
Any such notice or demand shall be deemed to have been duly given or
made and to have become effective (i) if delivered by hand, overnight
courier or facsimile to a responsible officer of the party to which it is
directed, at the time of the receipt thereof by such officer or the sending
of such facsimile and (ii) if sent by registered or certified first-class
mail, postage prepaid, on the third Business Day following the mailing
thereof.
21. PUBLICITY. Each of the Parties will permit the Bank to obtain
publicity in connection with the making of the Loan through press releases,
tombstones, and participation in such events as ground breaking and opening
ceremonies subject to Borrower's or LP's reasonable approval.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE. THIS
AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS, EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH COMMONWEALTH (EXCLUDING
THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH OF THE PARTIES
AGREE THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENT TO THE NON-
EXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH
SUIT BEING MADE UPON EACH OF THE PARTIES BY MAIL AT THE ADDRESS SPECIFIED
IN 20. EACH OF THE PARTIES HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH
SUIT IS BROUGHT IN AN INCONVENIENT COURT.
23. HEADINGS. The captions in this Agreement are for convenience of
reference only and shall not define or limit the provisions hereof.
24. COUNTERPARTS. This Agreement and any amendment hereof may be
executed in several counterparts and by each party on a separate
counterpart, each of which when so executed and delivered shall be an
original, and all of which together shall constitute one instrument. In
proving this Agreement it shall not be necessary to produce or account for
more than one such counterpart signed by the party against whom enforcement
is sought.
25. ENTIRE AGREEMENT, ETC. The Loan Documents and any other
documents executed in connection herewith or therewith express the entire
understanding of the parties with respect to the transactions contemplated
hereby. Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated, except as provided in 27.
26. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS. EACH OF THE
PARTIES AND THE BANK HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN
CONNECTION WITH THIS AGREEMENT, OR ANY OF THE OTHER LOAN DOCUMENTS, ANY
RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH
RIGHTS AND OBLIGATIONS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW,
EACH OF THE PARTIES HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO CLAIM OR
RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OF THE PARTIES (A) CERTIFY
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANK HAD REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGA-
TION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGE THAT THE
BANK HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS TO WHICH IT IS A OBLIGOR BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED HEREIN.
27. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise
expressly provided in this Agreement, any consent or approval required or
permitted by this Agreement may be given, and any term of this Agreement or
of any other instrument related hereto or mentioned herein may be amended,
and the performance or observance by each of the Parties of any terms of
this Agreement or such other instrument or the continuance of any
Suspension Event or Event of Default may be waived (either generally or in
a particular instance and either retroactively or prospectively) with, but
only with, the written consent of the Bank. No waiver shall extend to or
affect any obligation not expressly waived or impair any right consequent
thereon. No course of dealing or delay or omission on the part of the Bank
in exercising any right shall operate as a waiver thereof or otherwise be
prejudicial thereto. No notice to or demand upon the Borrower shall
entitle the Borrower to other or further notice or demand in similar or
other circumstances.
28. SEVERABILITY. The provisions of this Agreement are severable,
and if any one clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity
or unenforceability shall affect only such clause or provision, or part
thereof, in such jurisdiction, and shall not in any manner affect such
clause or provision in any other jurisdiction, or any other clause or
provision of this Agreement in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as a sealed instrument as of the date first set forth above.
MCO PROPERTIES INC.
By: /s/ James D. Noteware
Name: James D. Noteware
Title: President
WESTCLIFF DEVELOPMENT
CORPORATION
By: /s/ James D. Noteware
Name: James D. Noteware
Title: President
HORIZON CORPORATION
By: /s/ James D. Noteware
Name: James D. Noteware
Title: President
HORIZON PROPERTIES CORPORATION
By: /s/ James D. Noteware
Name: James D. Noteware
Title: President
MCO PROPERTIES, L.P.
By: Its General Partner
MCO PROPERTIES, INC.
By: /s/ James D. Noteware
Name: James D. Noteware
Title: President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Jared H. Ward
Name: Jared H. Ward
Title: Vice President
EIGHTH AMENDMENT TO LOAN AGREEMENT
THIS EIGHTH AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT") is executed
as of October 21, 1995, by and among GENERAL ELECTRIC CAPITAL CORPORATION,
a New York corporation ("LENDER"), MXM MORTGAGE, L.P., a Delaware limited
partnership ("NEW BORROWER"), and MXM MORTGAGE CORP., a Delaware
corporation ("OLD BORROWER"; New Borrower and Old Borrower being herein
together sometimes called "BORROWER"), on the following terms and
conditions:
RECITALS:
A. Lender and Old Borrower entered into that Loan Agreement dated
June 17, 1991, as amended by letter amendment dated August 22, 1991, as
further amended by First Renewal, Extension and Modification Agreement (the
"FIRST MODIFICATION") dated June 17, 1992 among Lender, Old Borrower, and
Maxxam Inc. and Maxxam Group Inc., as further amended by Loan Increase,
Extension and Modification Agreement (the "INCREASE MODIFICATION") dated
December 30, 1992 among Lender, Old Borrower, Maxxam Inc. and Maxxam Group
Inc., as further amended by Fourth Amendment to Loan Agreement (the "FOURTH
AMENDMENT") dated as of December 30, 1993, among Lender, Old Borrower, and
New Borrower, as further amended by Fifth Amendment to Loan Agreement (the
"FIFTH AMENDMENT") dated as of March 31, 1994, among Lender, Old Borrower,
and New Borrower, as further amended by that Sixth Amendment to Loan
Agreement (the "SIXTH AMENDMENT") dated as of January 13, 1995 among
Lender, Old Borrower and New Borrower, and as further amended by that
Seventh Amendment to Loan Agreement (the "SEVENTH AMENDMENT") dated as of
March 31, 1995 among Lender, Old Borrower, and New Borrower (said Loan
Agreement, as amended, being herein called the "LOAN AGREEMENT"), pursuant
to which Lender has agreed to make a loan to Borrower (the "LOAN"), as
evidenced by a $115,220,000 Promissory Note dated June 17, 1991, (the
"ORIGINAL NOTE"), and a $17,740,000 Promissory Note dated December 30, 1992
(the "INCREASE NOTE"; the Original Note and the Increase Note being herein
together called the "NOTES"), each of the Notes bearing interest and being
payable to the order of Lender as therein provided;
B. Unless otherwise defined herein, all capitalized terms in this
Agreement shall have the same meanings assigned to such terms in the Loan
Agreement, and, as applicable, in the First Modification, the Increase
Modification, the Fourth Amendment, the Fifth Amendment, the Sixth
Amendment, and the Seventh Amendment;
C. Taking into account releases of collateral, the indebtedness
evidenced by the Original Note and the Increase Note is secured by, among
other collateral, the following:
(1) the following instruments styled First Deed of Trust and Security
Agreement (collectively called the "FIRST LIEN DEED OF TRUST"):
(a) that First Deed of Trust and Security Agreement of even date
with the Loan Agreement, executed by Old Borrower, recorded
in Volume 5091, Page 0751, et seq., of the Official Public
Records of Real Property of Bexar County, Texas [Southwest
Medical, Redondo Place, Med Centre Pointe, Nacon Plaza],
under Film Code No. 037-12-1689 and corrected and refiled
under Film Code No. 038-03-0657 of the Official Public
Records of Real Property of Harris County, Texas [Spring
Valley, Westminster];
(b) that First Deed of Trust and Security Agreement dated
November 5, 1991, executed by Old Borrower, filed for
recording in the Office of the County Clerk of Harris County, Texas under
Clerk's File No. 403252 and recorded at
Film Code No. 006-52-1287, et seq., of the Official Public
Records of Real Property of Harris County, Texas [Richmond
Square];
(c) that First Deed of Trust and Security Agreement dated
February 4, 1992, executed by Old Borrower, filed for
recording in the Office of the County Clerk of Harris
County, Texas under Clerk's File No. N527998 and recorded at
Film Code No. 014-55-1789, et seq., of the Official Public
Records of Real Property of Harris County, Texas
[Westchase];
(d) that First Deed of Trust and Security Agreement dated
September 7, 1993, executed by Old Borrower, recorded at
Volume 5792, Page 1933, et seq., of the Official Public
Records of Real Property of Bexar County, Texas [Pipers
Creek, Shadow Valley], filed for recording in the Office of
the County Clerk of Harris County, Texas under Clerk's File
No. P442690 and recorded at Film Code No. 169-55-3591, et
seq., of the Official Public Records of Real Property of
Harris County, Texas [Colonies], and recorded at Volume
11231, Page 0137, et seq., of the Deed of Trust Records of
Tarrant County, Texas [Bentley Village]; and
(e) that First Deed of Trust and Security Agreement dated
March 7, 1995, executed by New Borrower, filed for recording
in the Office of the County Clerk of Harris County, Texas
under Clerk's File No. R303497 and recorded at Film Code No.
###-##-####, et seq., of the Official Public Records of Real
Property of Harris County, Texas [Park North Tech];
each such instrument encumbering the real and other property
described therein (the "REAL PROPERTY"); and
(2) the following instruments styled Assignment of Rents and Leases
(collectively called the "RENTAL ASSIGNMENT"):
(a) that Assignment of Rents and Leases dated of even date
with the Loan Agreement, executed by Old Borrower and
recorded in Volume 5091, Page 0826, et seq., of the
Official Public Records of Real Property of Bexar
County, Texas [Southwest Medical, Redondo Place, Med
Centre Pointe, Nacon Plaza], under Film Code No.
###-##-#### of the Official Public Records of Real
Property of Harris County, Texas [Spring Valley,
Westminster];
(b) that Assignment of Rents and Leases dated November 5, 1991,
executed by Old Borrower, filed for recording in the Office
of the County Clerk of Harris County, Texas under Clerk's
File No. N403253 and recorded at Film Code No. 006-52-1312,
et seq., of the Official Public Records of Real Property of
Harris County, Texas [Richmond Square];
(c) that Assignment of Rents and Leases dated February 4, 1992,
executed by Old Borrower, filed for recording in the Office
of the County Clerk of Harris County, Texas under Clerk's
File No. N527999 and recorded at Film Code No. 014-55-1816,
et seq., of the Official Public Records of Real Property of
Harris County, Texas [Westchase];
(d) that Assignment of Rents and Leases dated September 7, 1993,
executed by Old Borrower, recorded at Volume 5792, Page
1961, et seq., of the Official Public Records of Real
Property of Bexar County, Texas [Pipers Creek, Shadow
Valley], filed for recording in the Office of the County
Clerk of Harris County, Texas under Clerk's File No.
P442691, and recorded at Film Code No. 169-55-3618, et seq.,
of the Official Public Records of Real Property of Harris
County, Texas [Colonies], and recorded at Volume 11231, Page
0179, et seq., of the Deed Records of Tarrant County, Texas
[Bentley Village]; and
(e) that Assignment of Rents and Leases dated March 7, 1995,
executed by New Borrower, filed for recording in the Office
of the County Clerk of Harris County, Texas under Clerk's
File No. R303498 and recorded at Film Code No. 503-07-0124,
et seq., of the Official Public Records of Real Property of
Harris County, Texas [Park North Tech]
(3) that Second Deed of Trust and Security Agreement dated December
30, 1992, executed by Old Borrower and recorded in Volume 5581,
Page 1347, et seq., of the Real Property Records of Bexar County,
Texas [Southwest Medical, Redondo Place, Med Centre Pointe,
Nacon Plaza], at Clerk's File No. P101069 and Film Code No.
###-##-####, et seq., of the Real Property Records of Harris
County, Texas [Spring Valley, Westminster, Richmond Square,
Westchase] (the "SECOND DEED OF TRUST"; the First Deed of Trust
and the Second Deed of Trust being herein collectively called the
"DEED OF TRUST"); and
(4) that Security Agreement and Pledge of Mortgage Loans and Mortgage
Loan Documents (the "MORTGAGE PLEDGE AGREEMENT") of even date
with the Loan Agreement executed by Old Borrower and Lender and
pledging to Lender, as security for the Loan, certain mortgage
loans (the "MORTGAGE LOANS") [Balcones, Enfield Courts];
(the Loan Agreement, the Notes, the Deed of Trust, the Rental Assignment,
the Mortgage Pledge Agreement, the First Modification, the Increase
Modification, and all other Security Instruments (as such term is defined
in the Loan Agreement) or other documents evidencing, governing,
guaranteeing, securing, or otherwise pertaining to the Loan being
hereinafter collectively referred to as the "SECURITY INSTRUMENTS");
D. Lender, Old Borrower, New Borrower, Maxxam Inc. and Maxxam Group
Inc. entered into that Consent and Assumption Agreement dated December 10,
1993, under which Lender consented to the transfer and conveyance of the
Real Property, the Mortgage Loans, and the rights of Old Borrower under the
Loan Agreement to New Borrower (and pursuant to) which Old Borrower has
transferred and conveyed the Real Property, the Mortgage Loans, and the
rights of Old Borrower under the Loan Agreement to New Borrower), and New
Borrower has assumed the obligations and liabilities of Old Borrower under
the Loan and the Security Instruments;
E. Section 2.1 of the Loan Agreement provides that to the extent of
certain principal reductions the Loan shall be a revolving line of credit
and that subject to the terms of the Loan Agreement portions of the
principal sum of the Original Note may be advanced, repaid, and readvanced;
F. After application of proceeds from the sale of Assets and the
payment and satisfaction of Mortgage Loans, the principal balance of the
Loan is $8,000,000 as of the date hereof;
G. Under the Fifth Amendment, Lender and Borrower extended to
December 31, 1994 the period during which the amount available to be
advanced under the Loan for general business purposes (the "GENERAL FUNDING
AVAILABILITY AMOUNT") may be readvanced under the Loan Agreement;
H. Under the Sixth Amendment, Lender and Borrower further extended
to March 31, 1995 the period during which the General Funding Availability
Amount may be readvanced under the Loan Agreement;
I. Under the Seventh Amendment, Lender and Borrower further extended
to September 30, 1995 the period during which the General Funding
Availability Amount may be readvanced under the Loan Agreement and such
date was extended to October 21, 1995 by letter agreement dated October 2,
1995 between Lender and Borrower; and
J. Borrower has requested that Lender further extend the period
during which the General Funding Availability Amount may be readvanced
under the Loan Agreement and Lender is agreeable to further extending such
period on the terms of this Agreement;
AGREEMENT:
NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00)
and other good and valuable consideration, including the payment by
Borrower to Lender of the Funding Extension Fee (as hereinafter defined),
the receipt and sufficiency of which are hereby acknowledged, Lender and
Borrower agree as follows:
1. ADDITIONAL RE-ADVANCES. Provided Borrower is not then in default
under the Loan Documents, Lender will make available to Borrower, as
Subsequent Advances to be re-advanced under the Loan, up to $17,317,050.08
of principal reductions of the Original Note.
(a) $16,234,281.46 of which shall be available for general
business purposes, which amount Borrower agrees to borrow
and, subject to the applicable conditions to Subsequent
Advances, Lender shall fund on or before March 31, 1996, and
(b) $1,082,768.62 of which shall be available for Subsequent
Advances for payment of Taxes.
Borrower shall initiate requests for such Subsequent Advances in accordance
with the application procedure set forth in Section 2.4 of the Loan
Agreement and funding for such Subsequent Advances shall originate from
re-advances of principal reductions of the Original Note. Borrower and
Lender acknowledge and agree that the principal balance of the Loan is
$8,000,000. In accordance with the foregoing, Section 2.1 of the Loan
Agreement is amended and restated as follows:
2.1 Commitment of Lender; Revolving Line of Credit.
Subject to the provisions of this Agreement, and provided that an
Event of Default does not then exist, Lender will make Advances
to Borrower subject to the conditions of this Agreement. As the
first Advance hereunder, Lender shall disburse $109,864,700.
Thereafter, Lender shall make Advances for, among other purposes,
the Renovation of the Real Property and Leasing Costs, in
accordance with Approved Budget in the amount of up to the sum of
all principal reductions which actually have been paid to Lender;
provided, however, (a) that the sum of all Subsequent Advances
from and after October 21, 1995 shall not exceed $16,234,281.46
(exclusive of Subsequent Advances for Taxes under Section 2.21 of
this Agreement), (b) that said $16,234,281.46 shall only be
available to be advanced prior to March 31, 1996, but may be advanced for
Borrower's general business purposes and shall not
be subject to the requirements of Section 1.64 of this Agreement
regarding the purpose of Subsequent Advances, Section 2.2(c) and
Subsections 2.2(d)(ii) and 2.2(d)(iii) of this Agreement in
connection with renovation of the Real Property, Section 2.4,
Section 2.5, and Section 2.10 of this Agreement relating to
Renovation Requirements and Leasing Costs, or the use
requirements of Section 2.6 of this Agreement, and (ii)
Subsequent Advances from and after October 21, 1995, other than
the General Funding Availability Amount, shall not be available.
To the extent reductions of principal are made available for
Subsequent Advances under this Agreement, the Loan shall be a
"revolving line of credit"; that is, subject to the terms hereof,
portions of the principal sum of the Note may be advanced,
repaid, and readvanced. The books and records of Lender shall be
prima facie evidence of all sums due Lender under the Note and
the other Security Instruments. Notwithstanding the foregoing,
Borrower shall continue to be entitled to Subsequent Advances for
Taxes in the amount of aggregate monthly principal reductions and
in accordance with Section 2.21 of this Agreement.
2. SECURITY INSTRUMENTS. Section 1.63 of the Loan Agreement is
hereby modified to include in the definitions of Security Instruments under
the Loan Agreement, this Amendment.
3. FUNDING EXTENSION FEE. In consideration for Lender's extension
of the period during which the General Funding Availability Amount may be
readvanced under the Loan Agreement, and as a condition precedent to the
effectiveness of this Amendment, Borrower shall pay to Lender a funding
extension fee of $100,000 (the "FUNDING EXTENSION FEE").
4. COSTS AND EXPENSES. Borrower agrees to pay all costs incurred in
connection with the execution and consummation of this Amendment, including
but not limited to, all recording costs, the premium for such endorsements
to the policies of title insurance insuring the First Lien Deed of Trust
and the Second Lien Deed of Trust as may be required by Lender with respect
to this Amendment and the reasonable fees and actual expenses of Lender's
counsel. Borrower further covenants to deliver or cause to be delivered
such evidence of existence, capacity, authorization, qualification, or
enforceability of its obligations as Lender may require in connection with
this Amendment.
5. LIMITATION ON INTEREST. All agreements between Borrower and
Lender, whether now existing or hereafter arising and whether written or
oral, are hereby expressly limited so that in no contingency, whether by
reason of acceleration of the maturity of the Notes or otherwise, shall the
interest contracted for, charged, received, paid or agreed to be paid to
the holder of the Notes exceed the maximum amount permissible under
applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to the holder of the Notes in an amount in excess of
the maximum lawful amount, the interest payable to the holder of the Notes
shall be reduced to the maximum amount permitted by applicable law; and if
from any circumstance the holder of the Notes shall ever receive anything
of value deemed interest by applicable law in excess of the maximum amount
allowed by law, an amount equal to any excessive interest shall be applied
to the reduction of the principal amount owing under the Notes, and not to
the payment of interest, or if such excessive interest exceeds such unpaid
balance of principal of the Notes, such excess shall be refunded to
Borrower. All interest paid or agreed to be paid to the holder of the
Notes, shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the Notes
(including the period of any renewal or extension thereof) so that the
interest on the Notes shall not exceed the maximum amount permitted by
applicable law. This Section shall control all agreements between Borrower
and the holder of the Notes.
6. FULL FORCE AND EFFECT. As previously modified in the First
Modification, the Increase Modification, the Fourth Amendment, the Fifth
Amendment, the Sixth Amendment, and the Seventh Amendment and as further
modified by this Amendment, the Loan Agreement remains in full force and
effect.
EXECUTED as of the date and year first above written.
BORROWER:
OLD BORROWER: MXM MORTGAGE CORP., a Delaware
corporation
By: ERIK ERIKSSON, JR.
Erik Eriksson, Jr., Vice President
NEW BORROWER: MXM MORTGAGE, L.P., a Delaware limited
partnership
By: MXM GENERAL PARTNER, INC., a
Delaware corporation, General Partner
By: ERIK ERIKSSON, JR.
Erik Eriksson, Jr., Vice President
LENDER: GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation
By: LAURA D. OWEN
Laura D. Owen, Investment Manager
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, dated as of ____________________________, is by and
between MAXXAM INC., a Delaware corporation (the "Company"), and
_______________________ (the "Employee"), currently residing at
_________________________________________________________________.
WITNESSETH:
WHEREAS, the Employee currently serves as a[n] __________________ of
the Company and receives compensation from the Company in that capacity;
and
WHEREAS, the Employee desires to enter into an arrangement providing
for the deferral of salary and/or bonus compensation; and
WHEREAS, the Company is agreeable to such an arrangement;
NOW, THEREFORE, it is agreed as follows:
1. The Employee irrevocably elects to defer receipt, subject to the
provisions of this Agreement, of [select A or B]:
A. _____ percent of gross salary per pay period otherwise
payable to the Employee during calendar year ________, not
to exceed $_________ for the year [may not exceed 20%]; and
B. _____ percent of any bonus which may otherwise become
payable to the Employee for the calendar year _____, not to
exceed $___________ for the year [may not exceed 20%]; and
which relate to services performed in a calendar year that commences after
the date hereof. Such election shall continue in effect with respect to
any salary and/or bonus which may otherwise become payable to the Employee
for any calendar year subsequent to the dates of this election unless,
prior to January 1 of such year, the Employee shall have delivered to the
Vice President - Chief Personnel Officer a written revocation of such
election with respect to salary and/or bonus for services performed in a
calendar year that commences after the date of such revocation. Until such
time as the election made under this paragraph is revoked, the percentages
specified above shall apply on each occasion on which salary or bonus would
otherwise be paid to the Employee. Salary and/or bonus amount with respect
to which the Employee shall have elected to defer receipt are hereinafter
referred to as "Deferred Compensation."
2. The Company shall credit the amount of Deferred Compensation to a
book account (the "Deferred Compensation Account") as of the date such
salary or bonus amount would have been paid to the Employee had this
Agreement not been in effect.
3. Earnings shall be credited to the Deferred Compensation Account
as follows:
The balance credited to the Deferred Compensation Account as of
the last business day of each quarter shall be increased by an
amount reflecting interest on such balance for such quarter
calculated using one-quarter of (i) the sum of the Prime Rate
plus (ii) 2 percent on the first day of such quarter. For this
purpose the "Prime Rate" shall mean the highest prime rate (or
base rate) reported for such date in the Money Rates column or
section of The Wall Street Journal as the rate in effect for
corporate loans at large U.S. money center commercial banks
(whether or not such rate has actually been charged by any such
bank) as of such date. In the event The Wall Street Journal
ceases publication of such rate, the "Prime Rate" shall mean the
prime rate (or base rate) reported for such date in such other
publication that publishes such prime rate information as the
Company may choose to rely upon.
4. The Company shall provide an annual statement to the Employee
showing such information as is appropriate, including the Deferred
Compensation, earnings and aggregate amount credited to the Deferred
Compensation Account, as of a reasonably current date. If amounts which
are a part of the Deferred Compensation Account which, prior to payment of
such account to the Employee, are determined to be taxable to the Employee,
such taxable amounts shall be immediately paid to the Employee less
required withholding taxes.
5. The Company's obligation to make payments from the Deferred
Compensation Account shall be a general obligation of the Company and such
payments shall be made from the Company's general assets. The Employee's
relationship to the Company under this Agreement shall be only that of a
general unsecured creditor, and this Agreement (including any action taken
pursuant hereto) shall not, in and of itself, create or be construed to
create a trust or fiduciary relationship of any kind between the Company
and the Employee, his or her designated beneficiary or any other person, or
a security interest of any kind in any property of the Company in favor of
the Employee or any other person. The arrangement created by this
Agreement is intended to be unfunded and no trust, security, escrow, or
similar account shall be required to be established for the purposes of
payment hereunder. However, the Company may in its discretion establish a
"rabbi trust" (or other arrangement having equivalent taxation
characteristics under the Internal Revenue Code or applicable regulations
or rulings) to hold assets, subject to the claims of the Company's
creditors in the event of insolvency, for the purpose of making payments
hereunder. If the Company establishes such a trust, amounts paid therefrom
shall discharge the obligations of the Company hereunder to the extent of
the payments so made.
6. Deferred Compensation, including all earnings credited to the
Deferred Compensation Account pursuant to paragraph 3, shall be paid in
cash to the Employee or his or her designated beneficiary as soon as
practicable following the date the Employee ceases for any reason to be an
Employee of the Company. Payments shall be made:
/ / in a lump sum; or
/ / in ____________________ annual installments (not to exceed
10).
Each annual installment payment shall be made as of March 31 and shall be
an amount equal to the balance credited to the Deferred Compensation
Account as of that date divided by the number of installments (including
the one then due) remaining to be paid.
Amounts credited to the Deferred Compensation Account during the period in
which installments are paid shall be adjusted to reflect the crediting of
earnings in accordance with paragraph 3.
7. Payments hereunder shall be made to the Employee except that:
(a) in the event that the Employee shall be determined by a
court of competent jurisdiction to be incapable of managing
his financial affairs, and if the Company has actual notice
of such determination, payment shall be made to the
Employee's personal representative(s); and
(b) in the event of the Employee's death, payment shall be made
to the last beneficiary designated by the Employee for
purposes of receiving such payment in such event in a
written notice delivered to the Secretary of the Company;
provided, that if such beneficiary has not survived the
Employee, or no valid beneficiary designation is in effect,
payment shall instead be made to the Employee's estate.
The Company shall deduct from any payment hereunder any amounts required
for federal and/or State and/or local withholding tax purposes.
8. Any balance credited to the Deferred Compensation Account shall
not in any way be subject to the debts or other obligations of the Employee
and, except as provided in paragraph 7(b), shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, garnishment or other legal or equitable process.
9. This Agreement shall not be construed to confer on the Employee
any right to be or remain in the employ of the Company or to receive any,
or any particular rate of, Compensation.
10. Interpretations of, and determinations related to, this
Agreement, including any determinations of the amount credited to the
Deferred Compensation Account, shall be made by the Compensation Committee
of the Board of Directors of the Company and shall be conclusive and
binding upon all parties. The Company shall incur no liability to the
Employee for any such interpretation or determination so made or for any
other action taken by it in connection with this Agreement in good faith.
11. This Agreement contains the entire understanding and agreement
between the parties with respect to the subject matter hereof, and may not
be amended, modified or supplemented in any respect except by a subsequent
written agreement entered into by both parties.
12. This Agreement shall be binding upon, and shall inure to the
benefit of, the Company and its successors and assigns and the Employee and
his or her heirs, executors, administrators and personal representatives.
13. No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. Any waiver by either party hereto of
a breach of any provision of this Agreement by the other party shall not
operate or be construed as a waiver by such party of any subsequent breach
thereof.
14. In the event that any provision of this Agreement is declared
invalid and not binding on the parties hereto on a final decree or order
issued by a court of competent jurisdiction, such declaration shall not
offset the validity of the other provisions of this Agreement to which such
declaration of invalidity does not relate and such other provisions shall
remain in full force and effect.
15. This Agreement shall be governed and construed in accordance with
the laws of the state of Texas, without regard to principles of choice of
law, except to the extent preempted to the Employee Retirement Income
Security Act of 1974, as amended, or other applicable federal law.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer, and the Employee has
executed this Agreement, on the date first written above.
ATTEST: MAXXAM INC.
____________________________
Nawasa Lafferty, Assistant By:___________________________
Secretary Byron L. Wade, Vice
President,
Secretary & Deputy
General Counsel
______________________________
[Employee]
DESIGNATION OF BENEFICIARY(IES)
Dated as of ____________________________
To the Vice President - Chief Personnel Officer of MAXXAM Inc.:
In accordance with the provisions of the Deferred Compensation
Agreement dated as of ________________ ___, 199__, between the undersigned
Employee and MAXXAM Inc., I hereby designate _____________________________
_____________________________________________________* currently residing
at ______________________________________________________________________,
whose Social Security number(s) is (are)____________________________, as
my beneficiary(ies) to receive payments thereunder in the event of my death
before payments due thereunder have been made in full. In the event that
the said beneficiary(ies) predecease(s) me, I hereby designate ____________
________________ currently residing at ___________________________________,
whose Social Security number(s) is (are) ___________________, as my
beneficiary(ies) thereunder.
I intend that my execution and delivery of this Designation of
Beneficiary(ies) form shall revoke any and all prior designation(s) of
beneficiary(ies) that I may have made under the Agreement.
EMPLOYEE:
______________________________
______________________________
[Printed Name of
Employee]
- ---------------
*If more than one beneficiary is to be designated, list the
beneficiaries and specify the percentage of each payment to be received by
each beneficiary.
MAXXAM INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following summary of consolidated financial information for each of the
five years ended December 31, 1995 is not reported upon herein by
independent public accountants and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are contained
elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
(In millions of dollars, except share amounts) 1995 1994 1993 1992 1991
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Net sales $ 2,565.2 $ 2,115.7 $ 2,031.1 $ 2,202.6 $ 2,254.5
Operating income (loss) 257.6 7.3 (96.1) 130.8 235.5
Income (loss) before extraordinary item and
cumulative effect of changes in
accounting principles 57.5 (116.7) (131.9) (7.3) 57.5
Extraordinary item, net - (5.4) (50.6) - -
Cumulative effect of changes in accounting
principles, net - - (417.7) - -
Net income (loss) 57.5 (122.1) (600.2) (7.3) 57.5
Per common and common equivalent share:
Income (loss) before extraordinary item
and cumulative effect of changes in
accounting principles 6.08 (12.35) (13.95) (0.77) 6.08
Extraordinary item, net - (.57) (5.35) - -
Cumulative effect of changes in
accounting principles, net - - (44.17) - -
Net income (loss) 6.08 (12.92) (63.47) (0.77) 6.08
Consolidated balance sheet at end of period:
Total assets 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0
Long-term debt 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9
Stockholders' equity (deficit) (83.8) (275.3) (167.9) 443.9 459.6
Stockholders' equity (deficit) per common and
common equivalent share (8.94) (29.36) (17.91) 47.34 49.12
Cash dividends declared - - - - -
</TABLE>
MAXXAM INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 MAXXAM Group Inc.
("MGI") and its wholly owned subsidiaries, principally The Pacific Lumber
Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("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 the
Company's Consolidated Financial Statements and the Notes thereto which are
contained elsewhere herein.
ALUMINUM OPERATIONS
Aluminum operations account for the substantial portion of the Company'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, Kaiser Aluminum & Chemical Corporation ("KACC"),
operates in two business segments: bauxite and alumina, and aluminum
processing. The following table presents selected operational and
financial information for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
(In millions of dollars, except shipments and prices) 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Shipments: (1)
Alumina 2,040.1 2,086.7 1,997.5
Aluminum products:
Primary aluminum 271.7 224.0 242.5
Fabricated aluminum products 368.2 399.0 373.2
---------- ---------- ----------
Total aluminum products 639.9 623.0 615.7
========== ========== ==========
Average realized sales price:
Alumina (per ton) $ 208 $ 169 $ 169
Primary aluminum (per pound) .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina $ 424.8 $ 352.8 $ 338.2
Other (2) (3) 89.4 79.7 85.2
---------- ---------- ----------
Total bauxite and alumina 514.2 432.5 423.4
---------- ---------- ----------
Aluminum processing:
Primary aluminum 488.0 292.0 301.7
Fabricated aluminum products 1,218.6 1,043.0 981.4
Other (3) 17.0 14.0 12.6
---------- ---------- ----------
Total aluminum processing 1,723.6 1,349.0 1,295.7
---------- ---------- ----------
Total net sales $ 2,237.8 $ 1,781.5 $ 1,719.1
========== ========== ==========
Operating income (loss) $ 216.5 $ (50.3) $ (117.4)
========== ========== ==========
Income (loss) before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles $ 108.7 $ (145.8) $ (201.7)
========== ========== ==========
Capital expenditures $ 79.4 $ 70.0 $ 67.7
========== ========== ==========
<FN>
- ---------------
(1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
</TABLE>
NET SALES
Bauxite and alumina. Net sales to third parties for the bauxite and
alumina segment increased 19% in 1995 compared to 1994 and increased 2% in
1994 compared to 1993. Revenue from alumina increased 20% in 1995 compared
to 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 minority interest in Alumina Partners of Jamaica
("Alpart").
Aluminum processing. Net sales to third parties for the aluminum
processing segment increased 28% in 1995 compared to 1994 and increased 4%
in 1994 compared to 1993. The bulk of this 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 Kaiser's 90%-owned Volta Aluminium
Company Limited ("Valco") aluminum smelter in Ghana.
Revenue from primary aluminum increased 67% in 1995 compared to 1994 due
primarily to higher average realized prices and higher shipments. 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. In 1995, Kaiser's average realized
price from sales of primary aluminum was approximately $.81 per pound,
compared to the average Midwest United States transaction price of
approximately $.86 per pound.
Revenue from primary aluminum decreased 3% in 1994 compared to 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 with respect to 1994 shipments, which was initiated prior
to then-recent improvements in metal prices. 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 to approximately
36% in 1994 and 39% in 1993.
Revenue from fabricated aluminum products increased 17% in 1995 compared to
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 compared to 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 Operations"),
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 the Company to the bauxite and alumina and aluminum processing
segments based upon those segments' ratio of sales to unaffiliated
customers.
Bauxite and alumina. Operating 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 operating losses of $55.9 million
in 1994 and operating losses 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 Bonneville Power Administration during the first quarter
of 1993 of the amount of power it normally provides to Kaiser, and the
increased cost of substitute power in such quarter. 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. 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.
As described in Note 1 to the 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 the Consolidated
Financial Statements, eliminated Kaiser's equity with respect to its common
stock; accordingly, the Company recorded 100% of Kaiser's losses in the
third and fourth quarters of 1993 and all of 1994, without regard to the
minority interests represented by Kaiser's other common stockholders (as
described in Note 7 to the Consolidated Financial Statements). The Company
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.
Information concerning net sales, operating income (loss) and assets
attributable to certain geographic areas and industry segments is set forth
in Note 11 to the Consolidated Financial Statements.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI through its
principal operating subsidiaries, Pacific Lumber and Britt. MGI's business
is seasonal in that the forest products business generally experiences
lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. The following
table presents selected operational and financial information for the years
ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(In millions of dollars, except shipments and prices) 1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 46.5 52.9 68.3
Redwood common grades 216.7 218.4 184.7
Douglas-fir upper grades 7.4 8.6 10.7
Douglas-fir common grades and other 76.0 66.3 46.4
---------- ---------- ----------
Total lumber 346.6 346.2 310.1
========== ========== ==========
Logs (2) 12.6 17.7 18.6
========== ========== ==========
Wood chips (3) 214.0 210.3 156.8
========== ========== ==========
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,495 $ 1,443 $ 1,275
Redwood common grades 477 460 469
Douglas-fir upper grades 1,301 1,420 1,218
Douglas-fir common grades 392 444 447
Logs (4) 440 615 704
Wood chips (5) 102 83 81
Net sales:
Lumber, net of discount $ 211.3 $ 216.5 $ 202.6
Logs 5.6 10.9 13.1
Wood chips 21.7 17.4 12.7
Cogeneration power 2.5 3.5 3.8
Other 1.5 1.3 1.3
---------- ---------- ----------
Total net sales $ 242.6 $ 249.6 $ 233.5
========== ========== ==========
Operating income $ 74.3 $ 79.1 $ 54.3
========== ========== ==========
Operating cash flow (6) $ 99.6 $ 103.8 $ 78.8
========== ========== ==========
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles $ 6.4 $ (5.2) $ (17.7)
========== ========== ==========
Capital expenditures $ 9.9 $ 11.3 $ 11.1
========== ========== ==========
<FN>
- ---------------
(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 before depletion and depreciation, also referred to as "EBITDA."
</TABLE>
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.
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-Forest Products Operations"), 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.
NET SALES
Revenues from 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.
Revenues from 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.
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-Forest Products Operations." 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 plant. This manufactured lumber results in a significant
increase in lumber recovery and produces a standard size upper grade
product which is sold at a premium price compared to common grade products
of similar dimensions. Pacific Lumber has instituted a number of measures
at its sawmills during the past several years designed to enhance the
efficiency of its operations such as expansion of its manufactured lumber
facilities and other improvements in lumber recovery, automated lumber
handling and the modification of its production scheduling to maximize
cogeneration power revenues.
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 was $6.4 million for
1995 compared to a loss of $5.2 million in 1994. This improvement resulted
from increased investment, interest and other income reported for 1995
compared to 1994, partially offset by the decrease in operating income as
previously described. Investment, interest and other income for 1994
included the loss of $21.2 million for the settlement of litigation,
partially offset by the receipt of a $7.2 million franchise tax refund,
both of which are described further in the following paragraph and in Note
1 to the Consolidated Financial Statements. Additionally, investment,
interest and other income included net gains on marketable securities of
$4.9 million for 1995, an increase of $2.9 million as compared to 1994.
The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles decreased for 1994 as
compared to 1993. This decrease resulted from the increase in operating
income and decreased interest expense, partially offset by the loss on
litigation settlement. In addition, investment, interest and other income
(expense) for 1994 includes the receipt of a franchise tax refund of $7.2
million (the substantial portion of which represented interest) from the
State of California and net gains on marketable securities of $2.0 million.
The litigation settlement in the second quarter of 1994 resulted in a pre-
tax loss of $21.2 million which consists of Pacific Lumber's $14.8 million
cash payment to the settlement fund, a $2.0 million accrual for certain
contingent claims, and $4.4 million of related legal fees. 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. Investment, interest and other income for
1993 includes net gains on marketable securities of $6.7 million.
REAL ESTATE AND OTHER OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In millions of dollars) 1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 84.8 $ 84.6 $ 78.5
Operating loss (13.6) (10.0) (13.5)
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of changes in accounting principles (.8) (1.5) 38.1
</TABLE>
NET SALES
Net sales includes revenues from (i) sales of developed lots, bulk acreage
and real property associated with the Company's real estate developments,
(ii) resort and other commercial operations conducted at certain of the
Company'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 Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas
limited partnership which owns and operates a Class 1 horse racing facility
in the greater Houston metropolitan area (see "-Financial Condition and
Investing and Financing Activities-Real Estate and Other Operations"). Net
sales for 1995 were essentially unchanged from 1994. Revenues 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 the Company'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 the Company'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 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. Investment, interest and other income for 1993
includes a pre-tax gain of $47.8 million attributable to the sale of these
properties from the RTC Portfolio in December 1993 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>
Years Ended December 31,
-------------------------------------
(In millions of dollars) 1995 1994 1993
---------- --------- -----------
<S> <C> <C> <C>
Operating loss $ (19.6) $ (11.5) $ (19.5)
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles (19.8) (19.3) (30.1)
</TABLE>
OPERATING LOSS
The operating losses represent corporate general and administrative
expenses that are not attributable to the Company'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 the Company's real estate subsidiaries, were exercised
in 1995. See Note 8 to the 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 the Company'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 the Company's
14% Senior Subordinated Reset Notes due May 20, 2000 (the "Reset Notes").
Investment, interest and other income (expense) for 1994 includes the
equity in losses of affiliates attributable to the Company's equity
interest in SHRP, Ltd., offset by net gains on marketable securities.
Affiliates of the Company 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, the Company's interest increased to
approximately 45%. The Company 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
The Company'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. The Company's provision for income taxes as reflected in its
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.
MINORITY INTERESTS
Minority interests represent the minority stockholders' interest in the
Company'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 the 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").
The refinancing activities of KACC and Pacific Lumber in the first quarter
of 1993 and MGI in the third quarter of 1993, as described in Note 4 to the
Consolidated Financial Statements, resulted in an extraordinary loss of
$50.6 million, net of benefits for minority interests of $2.8 million and
income taxes of $27.5 million. The extraordinary loss consists primarily
of the respective tender and redemption premiums paid and the write-off of
unamortized discount and deferred financing costs on 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, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"),
Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions ("SFAS 106") and Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits ("SFAS 112") as more fully described in Notes 5 and
6 to the Consolidated Financial Statements. The cumulative effect of the
change in accounting principle for the adoption of SFAS 109 increased 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 the
Company's cash outlays for postretirement and postemployment benefits, nor
does the cumulative effect of the changes in accounting principles affect
the Company's compliance with its existing debt covenants. 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. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to
amend or terminate these benefits.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
Since 1993, subsidiaries of the Company'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 included
public offerings for approximately $1.4 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 the Company's Consolidated Financial Statements and the
Notes thereto.
THE COMPANY
The Company conducts its operations primarily through its subsidiaries.
Creditors of and holders of minority interests in subsidiaries of the
Company have priority with respect to the assets and earnings of such
subsidiaries over the claims of the creditors of the Company, including the
holders of the Company's public debt. As of December 31, 1995, the
indebtedness of the subsidiaries and the minority interests reflected on
the Company's Consolidated Balance Sheet were $1,568.6 million and $223.2
million, respectively. Certain of the Company's subsidiaries, principally
Kaiser and MGI, are restricted by their various debt agreements as to the
amount of funds that can be paid in the form of dividends or loaned to the
Company. KACC's 1994 Credit Agreement (as amended, the "1994 KACC Credit
Agreement") and the indentures governing KACC's 9-7/8% Senior Notes due
2002 (the "KACC Senior Notes") and 12-3/4% Senior Subordinated Notes due
2003 (the "KACC Senior Subordinated Notes" and, together with the KACC
Senior Notes, the "KACC Notes") contain covenants which, among other
things, limit Kaiser's ability to pay cash dividends and restrict
transactions between Kaiser and its affiliates. 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 MGI's
11-1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and 12-1/4%
Senior Secured Discount Notes due 2003 (the "MGI Discount Notes" and,
together with the MGI Senior Notes, the "MGI Notes") contains various
covenants which, among other things, limit the payment of dividends and
restrict transactions between MGI and its affiliates. On September 29,
1995, MGI paid dividends of $4.8 million. As of December 31, 1995, an
additional $1.9 million of dividends could be paid by MGI, of which $1.6
million was paid in January 1996. Under the most restrictive covenants
governing debt of the Company's real estate and other subsidiaries,
approximately $23.5 million of dividends could be paid as of December 31,
1995.
During 1994, the Company sold 1,239,400 of Kaiser's Depositary Shares (as
defined in "Aluminum Operations" below) for aggregate net proceeds of $10.3
million. The Company 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 Consolidated Financial Statements.
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 million 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 this 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.
On October 6, 1995, wholly owned subsidiaries of the Company 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 the Company 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."
As of December 31, 1995, the Company (excluding its subsidiaries) had cash
and marketable securities of approximately $29.9 million. The Company
expects that its general and administrative costs, net of cost
reimbursements from subsidiaries and non-cash accruals for contingencies
and other items, will range from $9.0 to $14.0 million for the next year.
The Company's cash outlays for interest and sinking fund obligations with
respect to parent company indebtedness will aggregate approximately $6.0
million in 1996 and $9.0 million in 1997. The Company believes that its
existing cash, cash equivalents and marketable securities (excluding such
items owned by its subsidiaries), together with the funds available to it,
will be sufficient to fund its working capital requirements for the next
year. With respect to its long-term liquidity, the Company 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. Although there are no restrictions on the Company's
ability to pay dividends on its capital stock, the Company has not paid any
dividends for a number of years and has no present intention to do so.
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 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
million 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
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 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.
On January 5, 1996, the Company filed a shelf registration statement with
the Securities and Exchange Commission ("SEC") for up to $200.0 million
aggregate principal amount of debt securities. The Company has not
determined the initial amount, collateral, interest rates, conversion
features (if any), or any of the specific terms under which such debt
securities may be offered. The debt securities may be secured by, or
convertible into, shares of Kaiser common stock owned by the Company. In
that regard, Kaiser also filed a shelf registration statement with the SEC
on January 5, 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 all or portions of its
Reset Notes and 12-1/2% Subordinated Debentures due December 15, 1999 (see
Note 4 to the Consolidated Financial Statements); any remaining net
proceeds would be used for working capital and general corporate purposes.
The Company 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, and to pay interest on
any newly issued debt securities which may be sold; however, there can be
no assurance that the Company's cash resources, together with the cash
available from subsidiaries and other sources of financing, will be
sufficient for such purposes or that the Company would be able to refinance
or repay at maturity such debt securities which may be sold.
ALUMINUM OPERATIONS
On February 22, 1996, Kaiser announced that it had proposed on February 8,
1996 to acquire all of the outstanding shares of Alumax Inc. ("Alumax"), a
leading corporation in the aluminum industry, for a combination of cash and
equity securities of Kaiser at a combined value of $40 to $45 per common
share, of which $30 would be paid in cash and the balance in equity
securities of Kaiser. Alumax rejected the proposal and subsequently
adopted a "poison pill," a defensive, self-protective measure. Although
management of Kaiser remains convinced that a combination of Kaiser and
Alumax would offer stockholders of both companies an opportunity to realize
enhanced value, on March 2, 1996, Kaiser announced its decision to withdraw
its proposal and to not submit proxy materials for consideration by
stockholders of Alumax. Kaiser is currently evaluating various acquisition
and financing transactions, in which the issuance of Common Shares
(pursuant to the proposed recapitalization as described below) could be
involved, but there is no specific plan to issue additional equity or
convertible securities.
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. As of February 29, 1996, $174.9 million (of
which $72.4 million 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.
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 the 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 8.255% Preferred Redeemable Increased
Dividend Equity Securities (the "PRIDES") and the Depositary Shares, and
the subsequent redemption of the Depositary Shares, the Company'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 Senior
Subordinated Notes and the KACC Senior 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
indentures governing the KACC Notes, at December 31, 1995, $66.0 million
was available for payment of dividends on Kaiser's common stock. However,
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.
On February 5, 1996, Kaiser announced that it had filed a preliminary proxy
statement with the SEC 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 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 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.
Kaiser's capital expenditures of approximately $217.1 million (of which
$25.2 million was funded by Kaiser's minority partners in certain foreign
joint ventures) during the three years ended December 31, 1995 were made
primarily to improve production efficiency, reduce operating costs, expand
capacity at existing facilities and construct new facilities. Kaiser's
capital expenditures were $79.4 million in 1995, compared to $70.0 million
in 1994 and $67.7 million in 1993 (of which $8.3 million, $7.5 million and
$9.4 million were funded by such minority partners in 1995, 1994 and 1993,
respectively). Kaiser's capital expenditures (of which approximately 10%
is expected to be funded by such minority partners) are expected to be
between $123.0 million and $143.0 million per year in the 1996 - 1998
period, subject to necessary approvals, if required, from the lenders under
the 1994 KACC Credit Agreement. A portion of the capital expenditures is
spent on environmental matters.
Kaiser has historically participated in various raw material joint ventures
outside the United States. At December 31, 1995, Kaiser was
unconditionally obligated for $88.9 million of indebtedness of one such
joint venture affiliate.
Kaiser has developed a unique micromill for the production of can sheet
from molten metal based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot rolling and cold
rolling mills. The first micromill will be constructed in Nevada in 1996
as a demonstration production facility. KACC currently intends to finance
the cost of the construction of the Nevada micromill, estimated to be $45.0
million, from general corporate funds, including possible borrowings under
the 1994 KACC Credit Agreement, although KACC is in discussions with third
parties which might provide some or all of such funding.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL") was formed to
participate in the privatization, modernization and operation of aluminum
smelting facilities in the People's Republic of China (the "PRC"). KYRIL
has entered into a joint venture agreement and related agreements with the
Lanzhou Aluminum Smelters 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
organized under the laws of the PRC (the "Joint Venture").
KYRIL contributed $9.0 million to 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.
As described in Note 9 to the 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 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. At December 31, 1995, the balance of such
accruals, which is primarily included in other noncurrent liabilities, was
$38.9 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 actions 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 million to $9.0 million
for the years 1996 through 2000 and an aggregate of approximately $10.0
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
$23.0 million 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.
Additionally, 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, 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 million, 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 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 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 that 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 those policies, that substantial recoveries from
the insurance carriers are probable. Accordingly, an estimated aggregate
insurance recovery of $137.9 million, 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.
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 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.
Kaiser expects that its existing cash resources, together with cash flow
from operations and borrowings under the 1994 KACC Credit Agreement, will
be sufficient to satisfy its working capital and capital expenditure
requirements for the next year. With respect to its long-term liquidity,
Kaiser believes that its history of prior operating cash flow, together
with 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. Kaiser enters into forward sales and hedging
transactions to mitigate the effect declining prices for primary aluminum
could have on its results of operations and liquidity. See
"-Trends-Aluminum Operations-Sensitivity to Prices and Hedging Programs."
FOREST PRODUCTS OPERATIONS
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.
As of December 31, 1995, the indebtedness of the subsidiaries reflected on
MGI's Consolidated Balance Sheet was $586.0 million. The indentures
governing Pacific Lumber's 10-1/2% Senior Notes due 2003 (the "Pacific
Lumber Senior Notes") and the 7.95% Timber Collateralized Notes due 2015
(the "Timber Notes") and Pacific Lumber's revolving credit agreement (as
amended and restated, 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 Holding Company ("Scotia Pacific," a wholly
owned subsidiary of Pacific Lumber), exclusive of the net income and
depletion of Scotia Pacific for as long as any Timber Notes are
outstanding. As of December 31, 1995, under the most restrictive of these
covenants, approximately $15.7 million of dividends could be paid by
Pacific Lumber. Pacific Lumber paid an aggregate of $22.0 million and
$24.5 million of dividends in 1995 and 1994, respectively.
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. MGI expects that Pacific Lumber will provide a major
portion of its future operating cash flow. Pacific Lumber is dependent
upon Scotia Pacific for a significant portion of its timber requirements
from which it generates the substantial 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 of creditors of MGI with respect to the assets and cash
flows of Pacific Lumber. Under the terms of the indenture governing the
Timber Notes (the "Timber Note Indenture"), 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. Once appropriate provision is made
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 $59.0 million, $88.9 million and $58.3 million of dividends to Pacific
Lumber during the years ended December 31, 1995 and 1994 and 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
its other indebtedness would also be materially impaired. See Note 4 to
the Consolidated Financial Statements for a description of the principal
payment requirements of the Timber Notes.
During the years ended December 31, 1995, 1994 and 1993, Pacific Lumber's
operating income plus depletion and depreciation ("operating cash flow")
amounted to $90.5 million, $95.9 million and $76.6 million, respectively,
which exceeded interest accrued on all of its indebtedness in those years
by $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.
As of December 31, 1995, MGI (excluding Pacific Lumber and its subsidiary
companies) had cash and marketable securities of approximately $58.4
million. MGI believes, although there can be no assurance, that the
aggregate dividends which will be available to it from Pacific Lumber and
Britt, during the period in which cash interest will not be payable on the
MGI Discount Notes, will exceed its cash interest payments on the MGI
Senior Notes. When cash interest payments on the MGI Discount Notes
commence on February 1, 1999, MGI believes that it 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.
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 Lumber and Britt and 28 million shares of Kaiser's
common stock owned by the Company. See Note 4 to the 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; 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 Note 4 to the 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 December 31, 1995,
$48.1 million of borrowings was available under the Pacific Lumber Credit
Agreement, of which $3.1 million was available for letters of credit and
$30.0 million was restricted to timberland acquisitions. No borrowings
were outstanding as of December 31, 1995, and letters of credit outstanding
amounted to $11.9 million. The Pacific Lumber Credit Agreement contains
covenants substantially similar to those contained in the indenture
governing the 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 $9.9 million, $11.3 million and $11.1 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Capital
expenditures for 1996 are expected to be $12.5 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 December 31, 1995, MGI and its subsidiaries had consolidated working
capital of $124.2 million and long-term debt of $732.9 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 "-Trends-Forest Products
Operations."
REAL ESTATE AND OTHER OPERATIONS
As of December 31, 1995, approximately $8.0 million was outstanding
pursuant to a loan agreement secured by the RTC Portfolio (the "RTC
Portfolio Loan"). The loan agreement governing the RTC Portfolio Loan
provides for additional borrowings of up to approximately $12.1 million on
or before March 31, 1996. The Company anticipates that such amount will be
borrowed if such date is not extended. 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. The entire amount of
the loan must also be paid if the principal balance declines to less than
$8.0 million.
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 (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 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 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 December 31, 1995, $10.6 million of additional
borrowings was available under the MCOP Credit Agreement; outstanding
borrowings and letters of credit outstanding amounted to $.7 million and
$2.1 million, respectively.
In July 1993, the Company, through various subsidiaries, acquired various
interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1
million. The Company 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 the Company 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 the Company contributed $5.8 million) to SHRP, Ltd.
Additionally, a wholly owned subsidiary of the Company 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 the Company. SHRP Managing General Partner was
issued a 1% interest in the 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 the Company 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 the Company
hold, directly or indirectly, approximately 78.8% of the equity in the
reorganized SHRP, Ltd.
As of December 31, 1995, the Company's real estate and other subsidiaries
had approximately $22.7 million available for use under various credit
agreements. The substantial portion of the availability was attributable
to the credit availability pursuant to the RTC Portfolio Loan and the MCOP
Credit Agreement. The Company 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, the Company 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.
TRENDS
ALUMINUM OPERATIONS - SENSITIVITY TO PRICES AND HEDGING PROGRAMS
KACC enters into primary aluminum hedging transactions in the normal course
of business. The prices realized by KACC under certain sales contracts for
alumina, primary aluminum and fabricated aluminum products, as well as the
costs incurred by KACC for certain items, such as aluminum scrap, rolling
ingot, power and bauxite, fluctuate with the market price of primary
aluminum, together resulting in a "net exposure" of earnings. The primary
aluminum hedging transactions are designed to mitigate the net exposure of
earnings to declines in the market price of primary aluminum, while
retaining the ability to participate in favorable pricing environments that
may materialize. KACC has employed strategies which include forward sales
of primary aluminum at fixed prices and the purchase or sale of options for
primary aluminum. With respect to its 1996 anticipated net exposure, at
December 31, 1995, KACC had purchased approximately 53,300 tons of primary
aluminum at fixed prices as a partial hedge against approximately 161,100
tons of fabricated aluminum products sold to customers at fixed or capped
prices, and had sold forward 15,750 tons of primary aluminum at fixed
prices.
In addition, as of December 31, 1995, KACC had sold approximately 75% and
45% of the alumina available to it in excess of its projected internal
smelting requirements for 1996 and 1997, respectively. Approximately 56% of
such alumina sold for 1996 and all of such alumina sold for 1997 has been
sold at prices linked to the future prices of primary aluminum as a
percentage of the price of primary aluminum ("Variable Price Contracts"),
and approximately 44% of such alumina sold for 1996 has been sold at fixed
prices ("Fixed Price Contracts"). The average realized prices of alumina
sold under Variable Price Contracts will depend on future prices of primary
aluminum, and the average realized prices of alumina sold under Fixed Price
Contracts will substantially exceed Kaiser's manufacturing cost of alumina.
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 December 31, 1995, KACC had net forward foreign
exchange contracts totaling $102.8 million for the purchase of 142.4
million Australian dollars through April 30, 1997.
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 December 31, 1994, KACC
had $50.5 million on deposit with various counterparties with respect to
such deposit requirements. These amounts are recorded in prepaid expenses
and other current assets.
Since December 31, 1995, KACC has entered into additional hedge positions
with respect to its anticipated 1996, 1997, and 1998 production. As of
February 29, 1996, KACC had sold forward an additional 19,500 metric tons
of primary aluminum at fixed prices, had purchased 20,150 metric tons of
primary aluminum under forward purchase contracts at fixed prices, and had
purchased put options to establish a minimum price for 45,000 metric tons
of primary aluminum. It has also entered into additional forward foreign
exchange contracts totaling $12.8 million for the purchase of 18.0 million
Australian dollars from March 1996 through December 1997 with respect to
its commitments for 1996 and 1997 expenditures denominated in Australian
dollars.
At February 29, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of
$1,747 per metric ton ($.79 per pound) of primary aluminum, and forward
foreign exchange contracts was $13.3 million.
FOREST PRODUCTS OPERATIONS
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, water
quality and air and water pollution. 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 and California Endangered Species Act 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 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 regulations under certain of these laws are modified from
time to time. The Company does not expect that Pacific Lumber's compliance
with such existing laws and regulations will have a material adverse effect
on Pacific Lumber's future consolidated operating results, financial
position or liquidity; however, there can be no assurance that future
legislation, governmental regulations or judicial or administrative
decisions would not adversely affect Pacific Lumber or its ability to sell
lumber, logs or timber.
In 1994, the 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
("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.
In 1995, the U.S. Fish and Wildlife Service ("USFWS") published its
proposed final designation ("Proposed Designation") of critical habitat for
the marbled murrelet, 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. It is impossible for the Company to determine the potential
adverse impact of such designation on Pacific Lumber's consolidated
financial position, results of operations or liquidity until such time as
the Proposed Designation 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
its consolidated financial position, results of operations or liquidity.
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
regulatory taking.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the
estimated future cash flows expected to result from the use and eventual
disposition of an asset is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss is based
on the fair value of the asset. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value, less cost to sell. SFAS 121 is
effective for financial statements for fiscal years beginning after
December 31, 1995. The Company does not expect that the adoption of SFAS
121 will have a material impact on the Company's consolidated financial
statements.
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. The
Company 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.
MAXXAM INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM Inc.
(a Delaware corporation) and subsidiaries as of December 31, 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
MAXXAM Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------------
(In millions of dollars, except share amounts) 1995 1994
---------- ----------
<S> <C> <C>
Assets
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.
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(In millions of dollars, except share amounts) 1995 1994 1993
---------- ---------- ----------
<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.
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(In millions of dollars) 1995 1994 1993
---------- ---------- ----------
<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 on
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.
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(In millions of Preferred Common Stock Retained Pension
dollars and Stock ----------------------- Additional Earnings Liability Treasury
shares) ($.50 Par) Shares ($.50 Par) Capital (Deficit) Adjustment Stock Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<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.
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 1 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 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.
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 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).
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
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.
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 SHRP, 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.
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 SHRP, 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.
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.
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 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, 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 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 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.
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>
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>
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.
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 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>
The Company New Kaiser Tax Group
----------------------- -----------------------
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.
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 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>
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.
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.
$.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 (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.
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.
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 common stock
in all cash dividends, other than cash dividends on the common stock
in any fiscal year to the extent not exceeding $.05 per share. Stock
dividends declared on the common stock will result in the holders of
the Class A Preferred Stock receiving an identical stock dividend
payable in shares of Class A Preferred Stock. At the option of the
holder, the Class A Preferred Stock is convertible at any time into
shares of common stock at the rate of one share of common stock for
each share of Class A Preferred Stock. Each holder of Class A
Preferred Stock is generally entitled to ten votes per share on all
matters presented to a vote of the Company's stockholders.
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, 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
these 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 had been exercised.
SHARES RESERVED FOR ISSUANCE
At December 31, 1995, the Company had the following shares reserved
for future issuance:
<TABLE>
<CAPTION>
<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 to acquire beneficial ownership, of
15% or more of the Company's common stock, or announces a tender offer
that would result in beneficial ownership of 15% or more of the
outstanding common stock. Any person or group of affiliated or
associated persons who, as of November 29, 1989, was the beneficial
owner of at least 15% of the outstanding common stock will not be
deemed to be an Acquiring Person unless such person or group acquires
beneficial ownership of additional shares of common stock (subject to
certain exceptions). Each Series A Right, when exercisable, entitles
the registered holder to purchase from the Company one share of Class
A Preferred Stock at an exercise price of $165.00, subject to
adjustment. Each Series B Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a
share of the Company's new Class B Junior Participating Preferred
Stock, with a par value of $.50 per share (the "Junior Preferred
Stock"), at an exercise price of $165.00, subject to adjustment.
Under certain circumstances, including if any person becomes an
Acquiring Person other than through certain offers for all outstanding
shares of stock of the Company, or if an Acquiring Person engages in
certain "self-dealing" transactions, each Series A Right would enable
its holder to buy Class A Preferred Stock (or, under certain
circumstances, preferred stock of an acquiring company) having a value
equal to two times the exercise price of the Series A Right, and each
Series B Right shall enable its holder to buy common stock of the
Company (or, under certain circumstances, common stock of an acquiring
company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an
Acquiring Person will be null and void. In addition, under certain
circumstances, the Board is authorized to exchange all outstanding and
exercisable Rights for stock, in the ratio of one share of Class A
Preferred Stock per Series A Right and one share of common stock of
the Company per Series B Right. The Rights, which do not have voting
privileges, expire in 1999, but may be redeemed by action of the Board
prior to that time for $.01 per right, subject to certain
restrictions.
VOTING CONTROL
Federated Development 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, 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 claims and litigation
based upon such laws. KACC is currently subject to a number of
lawsuits under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, (as amended by the Superfund Amendments
Reauthorization Act of 1986, "CERCLA") and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based 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, 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 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 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 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.
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.
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.
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.
Summary quarterly financial information for the years ended December
31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
(In millions of dollars, except share amounts) March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1995:
Net sales $ 581.3 $ 673.3 $ 638.0 $ 672.6
Operating income 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) (.11) 2.69 1.13 2.37
1994:
Net sales $ 489.0 $ 543.8 $ 544.9 $ 538.0
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 (.57) - - -
Net loss (4.22) (4.57) (1.58) (2.55)
</TABLE>
The Company's common stock is traded on the American, Pacific and
Philadelphia Stock Exchanges. The stock symbol is MXM. The following
table sets forth for the calendar periods indicated the high and low
sales prices per share of the Company's common stock as reported on
the American Stock Exchange Consolidated Composite Tape.
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
1995:
First Quarter $33 1/8 $27 1/4
Second Quarter 36 1/8 28 3/4
Third Quarter 67 5/8 35 5/8
Fourth Quarter 48 5/8 30 3/4
1994:
First Quarter $44 1/2 $35 3/8
Second Quarter 37 1/8 32 5/8
Third Quarter 38 3/8 29 1/2
Fourth Quarter 37 3/4 29 5/8
</TABLE>
The following table sets forth the number of record holders of the
Company's publicly owned equity securities as of March 1, 1996.
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- ---------------------------------------------------------------------- -------------------
<S> <C>
Common Stock 5,148
Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock 38
</TABLE>
The Company has not declared any cash dividends on its common stock or
its Class A Preferred Stock and has no present intention to do so.
