<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY , 1997
REGISTRATION NO. 333-18723
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MAXXAM GROUP HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3334 76-0518669
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
5847 SAN FELIPE, SUITE 2600 ANTHONY R. PIERNO
HOUSTON, TEXAS 77057-3010 VICE PRESIDENT AND GENERAL COUNSEL
(713) 975-7600 MAXXAM GROUP HOLDINGS INC.
(Address, including zip code, and telephone 5847 SAN FELIPE, SUITE 2600
number, HOUSTON, TEXAS 77057-3010
including area code, of registrant's (713) 975-7600
principal executive offices) (Name, address including zip code, and
telephone number,
including area code, of agent for service)
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SEE TABLE OF ADDITIONAL REGISTRANT
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Copies of all communications to:
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BERNARD L. BIRKEL HOWARD A. SOBEL, ESQ.
SENIOR CORPORATE COUNSEL KRAMER, LEVIN, NAFTALIS & FRANKEL
MAXXAM GROUP HOLDINGS INC. 919 THIRD AVENUE
5847 SAN FELIPE, SUITE 2600 NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77057-3010 (212) 715-9100
(713) 267-3669
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the registration statement becomes effective and all other
conditions to the exchange offer described in the enclosed Prospectus have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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================================================================================================
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
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12% Series B Senior
Secured Notes due
2003.................. $130,000,000 100%(1) $130,000,000(1) $39,393.94(2)
- ------------------------------------------------------------------------------------------------
Guarantees of the 12%
Series B Senior
Secured Notes due
2003.................. $130,000,000 -- (3) -- --
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(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933.
(2) Previously paid.
(3) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate
consideration is payable for the Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
ADDITIONAL REGISTRANT
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STATE OR OTHER
JURISDICTION PRIMARY
EXACT NAME OF STANDARD ADDRESS, INCLUDING ZIP CODE, AND
OF REGISTRANT INCORPORATION INDUSTRIAL IRS EMPLOYER TELEPHONE NUMBER, INCLUDING AREA
AS SPECIFIED IN OR CLASSIFICATION IDENTIFICATION CODE, OF REGISTRANT'S PRINCIPAL
ITS CHARTER ORGANIZATION CODE NUMBER NUMBER EXECUTIVE OFFICES
- --------------- -------------- --------------- ------------ --------------------------------
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MAXXAM Inc. Delaware 3334 95-2078752 5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
(713) 975-7600
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY , 1997
PROSPECTUS
MAXXAM GROUP HOLDINGS INC.
OFFER TO EXCHANGE
ANY AND ALL OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
($130,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 12% SERIES B SENIOR SECURED NOTES DUE 2003
GUARANTEED BY MAXXAM INC.
The Exchange Offer (defined below) and withdrawal rights will expire at
5:00 p.m., New York City time, on , 1997 (as such date may be
extended, the "Expiration Date").
MAXXAM Group Holdings Inc. (the "Company") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of its 12% Series B Senior
Secured Notes due 2003 (the "New Notes") for each $1,000 in principal amount of
its outstanding 12% Senior Secured Notes due 2003 (the "Old Notes") (the Old
Notes and the New Notes are sometimes collectively referred to herein as the
"Notes") held by Eligible Holders (defined below). An aggregate principal amount
of $130.0 million of Old Notes is outstanding. See "The Exchange Offer." For
purposes of the Exchange Offer, "Eligible Holder" shall mean the registered
owner of any Old Notes that remain Registrable Securities (defined below) as
reflected on the records of First Bank National Association, as registrar for
the Old Notes (in such capacity, the "Registrar"), or any person whose Old Notes
are held of record by the depository of the Old Notes. For purposes of the
Exchange Offer, "Registrable Securities" means each Old Note until the earliest
to occur of (i) the date on which such Old Note has been exchanged for a New
Note in the Exchange Offer and is thereafter freely tradeable by the holder
thereof not an affiliate of the Company or MAXXAM Inc. ("MAXXAM" or the
"Guarantor"), (ii) the date on which such Old Note is registered under the
Securities Act of 1933, as amended (the "Securities Act"), and disposed of in
accordance with a registration statement, (iii) the date on which such Old Note
is distributed to the public pursuant to Rule 144 under the Securities Act, or
(iv) the date on which such Old Note shall have ceased to be outstanding.
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived by the Company, and to the terms and provisions of the Registration
Rights Agreement, dated as of December 23, 1996 (the "Registration Rights
Agreement") among the Company, the Guarantor (which has guaranteed the Old Notes
and has agreed to guarantee the New Notes), and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation (collectively, the "Initial
Purchasers"). The Old Notes may be tendered only in multiples of $1,000. See
"The Exchange Offer."
(continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 19 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is January , 1997.
<PAGE> 4
The Old Notes were issued in a transaction (the "Offering") pursuant to
which the Company issued an aggregate of $130,000,000 principal amount of the
Old Notes to the Initial Purchasers on December 23, 1996 (the "Closing Date")
pursuant to a purchase agreement, dated December 17, 1996 (the "Purchase
Agreement"), among the Company, the Guarantor, and the Initial Purchasers. The
Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act and certain other exemptions under the Securities Act.
The Company, the Guarantor, and the Initial Purchasers also entered into the
Registration Rights Agreement, pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
The Old Notes were issued under an indenture, dated as of December 23, 1996
(the "Indenture"), among the Company, the Guarantor, and First Bank National
Association, as trustee (in such capacity, the "Trustee"). The New Notes will be
issued under the Indenture as it relates to the New Notes. The form and terms of
the New Notes will be identical in all material respects to the form and terms
of the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of New Notes will
not be entitled to Additional Interest (as defined in the Registration Rights
Agreement) otherwise payable under the terms of the Registration Rights
Agreement in respect of Old Notes held by such holders during any period in
which a Registration Default (as defined in the Registration Rights Agreement)
is continuing, and (iii) holders of New Notes will not be, and upon the
consummation of the Exchange Offer Eligible Holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the delivery by the Company to the Registrar under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of
Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description of
New Notes."
The New Notes will bear interest at a rate equal to 12% per annum from and
including their date of issuance. Interest on the New Notes is payable
semi-annually on February 1 and August 1 of each year (each, an "Interest
Payment Date"). Eligible Holders whose Old Notes are accepted for exchange will
have the right to receive interest accrued thereon from the date of their
original issuance or the last Interest Payment Date, as applicable, to, but not
including, the date of issuance of the New Notes, such interest to be payable
with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue on the day prior to the issuance of
the New Notes. The New Notes will mature on August 1, 2003. See "Description of
New Notes."
The New Notes are redeemable at the option of the Company, in whole or in
part, on or after August 1, 2000, at the redemption prices set forth herein,
plus accrued and unpaid interest, or at the Make-Whole Price (as defined
herein), plus accrued and unpaid interest, if redeemed prior to August 1, 2000.
Upon the first occurrence of a Change of Control (as defined herein), the
Company will be required to make an offer to purchase from each holder all or
any part of the holder's Notes for which a Change of Control Purchase Notice (as
defined herein) shall have been delivered as provided in the Indenture and not
withdrawn at 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. See "Description of New
Notes -- Offer to Purchase the Notes."
The New Notes will be secured by a pledge of all of the capital stock of
the Company's wholly owned subsidiary, MAXXAM Group Inc. ("MGI"). In addition,
concurrently with the consummation of the Offering, MAXXAM transferred to the
Company 27,938,250 shares of the common stock (the "Kaiser Shares") of Kaiser
Aluminum Corporation ("Kaiser"). The Kaiser Shares are pledged to secure the
$225.7 million aggregate principal amount of public indebtedness of MGI. The
Company has agreed that if any Kaiser Shares are released as security for MGI's
public indebtedness by reason of early retirement of such indebtedness (other
than by reason of a refinancing of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the Notes. The Notes will be
guaranteed on a senior unsecured basis by MAXXAM.
2
<PAGE> 5
The New Notes will be senior indebtedness of the Company and will rank pari
passu in right and priority of payment with any future senior indebtedness of
the Company. The Notes will be effectively subordinated to liabilities of the
Company's subsidiaries, including trade payables. As of September 30, 1996, the
outstanding indebtedness of such subsidiaries was $772.9 million and the other
outstanding liabilities of such subsidiaries, including trade payables and
accrued expenses, was $65.0 million. See "Risk Factors -- Substantial
Indebtedness; Structural Subordination and Asset Encumbrances -- The Company"
and "Description of New Notes." See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Company -- Financial
Condition and Investing and Financing Activities." The Indenture permits the
Company and its subsidiaries to incur additional Indebtedness, including
additional secured Indebtedness, subject to certain limitations. See
"Description of New Notes."
Based on positions of the staff of the Securities and Exchange Commission
(the "Commission") enunciated in Morgan Stanley & Co., Incorporated (available
June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988),
and interpreted in the Commission's letters to Shearman & Sterling (available
July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and
similar no-action or interpretive letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange Offer to an Eligible
Holder in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such Eligible Holder, other than as set forth below, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Eligible Holder is not an affiliate of the
Company or the Guarantor within the meaning of Rule 405 under the Securities
Act, is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Eligible Holders wishing to
accept the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that acquired Old Notes
directly from the Company and that receives New Notes for its own account
pursuant to the Exchange Offer must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction (unless an exemption from registration is otherwise
available). See "The Exchange Offer -- Resales of the New Notes." Each
broker-dealer that receives New Notes in exchange for Old Notes that were
acquired by such broker-dealer as a result of market-making or other trading
activities must, in connection with any resale of such New Notes, comply with
the prospectus delivery requirements of the Securities Act and must acknowledge
that it will deliver a prospectus in connection with any such resale. The
Company has agreed that, for a period of 180 days after the effective date of
this Prospectus, it will make this Prospectus, as it may be amended or
supplemented from time to time, available for use by any broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities.
As of January 7, 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of $
million aggregate principal amount of the Old Notes and held such Old Notes for
of its participants. The Company believes that no such participant is an
affiliate (as such term is defined in Rule 405 of the Securities Act) of the
Company or the Guarantor. There has previously been only a limited secondary
market, and no public market, for the Old Notes. The Old Notes are eligible for
trading in the Private Offering, Resales and Trading through Automatic Linkages
("PORTAL") market. There can be no assurance as to the liquidity of the trading
market for either the New Notes or the Old Notes. The New Notes constitute
securities for which there is no established trading market, and the Company
does not currently intend to list the New Notes on any securities exchange. If
such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors -- Absence of Public Market for the New
Notes."
3
<PAGE> 6
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear all
expenses incident to the Company's consummation of the Exchange Offer and
compliance with the Registration Rights Agreement.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
$124,750,000 aggregate principal amount of the Old Notes were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, DTC, as the initial depository with respect to
the Old Notes (in such capacity, the "Depository"). The Global Old Note is
registered in the name of Cede, as nominee of DTC, and beneficial interests in
the Global Old Note are shown on, and transfers thereof are effected only
through, records maintained by the Depository and its participants. The use of
the Global Old Note to represent certain of the Old Notes permits the
Depository's participants, and anyone holding a beneficial interest in an Old
Note registered in the name of such a participant, to transfer interests in the
Old Notes electronically in accordance with the Depository's established
procedures without the need to transfer a physical certificate. Except as
provided below, the New Notes will also be issued initially as a note in global
form (the "Global New Note", and together with the Global Old Note, the "Global
Notes") and deposited with, or on behalf of, the Depository. Notwithstanding the
foregoing, holders of Old Notes that are held, at any time, by a person that is
not a qualified institutional buyer under Rule 144A under the Securities Act (a
"Qualified Institutional Buyer"), and any Eligible Holder that is not a
Qualified Institutional Buyer that exchanges Old Notes in the Exchange Offer,
will receive the New Notes in certificated form and is not, and will not be,
able to trade such securities through the Depository unless the New Notes are
resold to a Qualified Institutional Buyer. After the initial issuance of the
Global New Note, New Notes in certificated form will be issued in exchange for a
holder's proportionate interest in the Global New Note only as set forth in the
Indenture.
TABLE OF CONTENTS
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PAGE
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Available Information................................................................. 5
Prospectus Summary.................................................................... 6
Risk Factors.......................................................................... 19
The Exchange Offer.................................................................... 33
Capitalization of the Company......................................................... 41
Capitalization of MAXXAM.............................................................. 42
Selected Historical and Pro Forma Consolidated Financial Data of the Company.......... 44
Selected Historical and Pro Forma Consolidated Financial Data of MAXXAM............... 50
Management's Discussion and Analysis of Financial Condition and Results of Operations
of the Company...................................................................... 56
Management's Discussion and Analysis of Financial Condition and Results of Operations
of MAXXAM........................................................................... 67
Business of the Company............................................................... 86
Business of MAXXAM.................................................................... 97
Legal Proceedings..................................................................... 116
Management............................................................................ 125
Executive Compensation................................................................ 131
Certain Transactions.................................................................. 138
Description of Principal Indebtedness................................................. 142
Description of New Notes.............................................................. 150
Certain Federal Income Tax Consequences............................................... 190
Plan of Distribution.................................................................. 192
Incorporation of Certain Documents By Reference....................................... 193
Legal Matters......................................................................... 193
Experts............................................................................... 193
Index to Consolidated Financial Statements............................................ F-1
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4
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
(the "Registration Statement") with respect to the securities offered by this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Each statement made in this Prospectus referring to a document filed as an
exhibit or schedule to the Registration Statement is not necessarily complete
and is qualified in its entirety by reference to the exhibit or schedule for a
complete statement of its terms and conditions. In addition, the Guarantor is
subject to, and upon the effectiveness of the Registration Statement the Company
will become subject to, the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, the Company and the Guarantor will file periodic reports and other
information with the Commission relating to its business, financial statements
and other matters. Any interested parties may inspect and/or copy the
Registration Statement, its schedules and exhibits, and the periodic reports and
other information filed in connection therewith, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained at prescribed rates by
addressing written requests for such copies to the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a site on
the World Wide Web, the address of which is http://www.sec.gov, that contains
reports, proxy and information statements and other information regarding
issuers, such as the Company, that file electronically with the Commission. The
obligations of the Company under the Exchange Act to file periodic reports and
other information with the Commission may, to the extent that such obligations
arise from the registration of the New Notes, be suspended, under certain
circumstances, if the New Notes are held of record by fewer than 300 holders at
the beginning of any fiscal year and are not listed on a national securities
exchange. The Company and the Guarantor have agreed that, whether or not it is
required to do so by the rules and regulations of the Commission, for so long as
any of the Notes remain outstanding, they will (i) furnish to the holders of the
Notes and file with the Commission (unless the Commission will not accept such a
filing) all annual, quarterly and current reports that the Company is or would
be required to file with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act and (ii) furnish to the holders of the Notes and to securities
analysts and prospective investors, upon request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE COMPANY,
INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR
BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT
CHARGE FROM MAXXAM GROUP HOLDINGS INC., 5847 SAN FELIPE, SUITE 2600, HOUSTON,
TEXAS 77057-3010, ATTENTION: GENERAL COUNSEL. TELEPHONE REQUESTS MAY BE DIRECTED
TO THE COMPANY AT (713) 267-3675. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY JANUARY 30, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
5
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the Notes thereto) appearing
elsewhere in this Prospectus. MAXXAM Group Holdings Inc. (the "Company") is a
newly formed holding company and a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM"). The Company engages in forest products operations through its wholly
owned subsidiary, MAXXAM Group Inc. ("MGI"), and MGI's wholly owned
subsidiaries, The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber
Co., Inc. ("Britt"). Pacific Lumber's principal wholly owned subsidiaries are
Scotia Pacific Holding Company ("Scotia Pacific") and Salmon Creek Corporation
("Salmon Creek"). As used herein, the terms "Company," "MGI," "MAXXAM," "Pacific
Lumber" and "Kaiser" refer to the respective companies and their subsidiaries,
unless otherwise noted or the context otherwise requires. For example, reference
to "MAXXAM" in connection with the guaranty of the Notes, the issuance, pledge
of and payments with respect to the Intercompany Note (as defined herein), and
the transfer of Kaiser shares to the Company are references to MAXXAM Inc.
THE COMPANY
The Company's operations are conducted principally by Pacific Lumber and
Britt. Pacific Lumber, which has been in continuous operation for over 125
years, engages in all principal aspects of the lumber industry -- the growing
and harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber products and the manufacturing of lumber into a variety of value-added
finished products. Pacific Lumber is the largest producer of redwood lumber in
the world, including upper grade redwood lumber. Pacific Lumber owns and manages
approximately 192,000 acres of commercial timberlands and other real property in
northern California. Approximately 75% of Pacific Lumber's timber consists of
redwood, with the balance consisting substantially of Douglas fir. Redwood
lumber, particularly in the upper (defect-free) grades, is a premium wood
product that generally commands higher prices and has been more resistant to
cyclical demand and price fluctuations than most other lumber products. Old
growth redwood trees (trees which have been growing for approximately 200 years
or longer) currently constitute a principal source of upper grade redwood
lumber. The industry-wide inventory of commercially harvestable old growth
redwood trees has been decreasing due to the expansion of national and state
redwood parks, increasing restrictions on timber harvesting on publicly and
privately owned lands and harvesting by the industry. The Company believes that
Pacific Lumber owns more old growth redwood timber than any of its competitors.
Pacific Lumber's timberlands are virtually contiguous, are located in close
proximity to its mills and contain an extensive network of roads. These factors
significantly reduce harvesting costs and facilitate the implementation of
Pacific Lumber's forest management techniques, including its extensive program
of replanting redwood and Douglas-fir seedlings to supplement natural forest
regeneration. Pacific Lumber believes that its timberlands have an average
volume per acre (on a gross board foot basis) approximately twice that of the
composite average volume of all other privately and publicly held timber
properties in California. Pacific Lumber believes that the relatively large
amount of timber on its timberlands is principally attributable to the species
mix, favorable soil and climate conditions along the northern California coast
and the forest stewardship techniques which Pacific Lumber has historically
employed.
Pacific Lumber owns and operates four sawmills which are supplied almost
entirely by Pacific Lumber's own timberlands and contain highly mechanized log
and lumber milling systems. In addition, Pacific Lumber owns and operates 34
kilns which dry certain of its lumber, a finishing plant, an end and edge glue
facility which manufactures longer, wider and more valuable lumber from short
and narrow boards, a lumber remanufacturing facility, and a highly modernized
cogeneration power plant which is fueled almost entirely by residue from Pacific
Lumber's milling and production operations and generates a substantial portion
of Pacific Lumber's energy requirements. In a continuing effort to increase the
efficiency of its operations, improve the yield from harvested trees and enhance
the value of its lumber products, Pacific Lumber has invested over $132.3
million in capital expenditures during the past ten years.
On September 28, 1996, Pacific Lumber and MAXXAM (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for acquisition by the United States
6
<PAGE> 9
of America ("United States") and the State of California ("California") of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). A substantial portion of the Headwaters Timberlands consist of
"virgin old growth" timberlands (those which have never been harvested). The
Headwaters Agreement provides that the Headwaters Timberlands would be
transferred to the government in exchange for (a) property or other
consideration (possibly including cash) from the United States and California
having an aggregate fair market value of $300 million and (b) approximately
7,775 acres of adjacent timberlands (the "Elk River Timberlands") to be acquired
by the United States and California from a third party. The Pacific Lumber
Parties have agreed not to conduct logging operations (including salvage
logging) on the Headwaters Timberlands while the Headwaters Agreement is in
effect.
The Headwaters Agreement requires the United States and/or California to
furnish Pacific Lumber a list of property interests owned or controlled by the
United States and/or California with a good faith estimated fair market value
equal to or in excess of $300 million which are available and acceptable to
Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity counties in California, and surplus acreage next to a federal building
in Laguna Niguel, California. The California list contained a variety of
properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available" as legislative action would be required for the exchange of certain
of the properties.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon a multi-species habitat conservation plan ("Multi-Species HCP") which
is to cover all of Pacific Lumber's existing timber properties and any timber
properties acquired as a result of the Headwaters Agreement. The agreement also
requires expedited processing by California of a Sustained Yield Plan ("SYP").
The Company expects that receipt of the Permit would expedite the approval time
and reduce the costs associated with its timber harvesting plans ("THPs"). The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions over a ten month period. The parties to the
Headwaters Agreement are working to satisfy these conditions; however, there can
be no assurance that the Headwaters Agreement will be consummated. See "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- The Headwaters Agreement"
and "Business of the Company -- Pacific Lumber Operations -- Headwaters
Agreement."
Britt is a leading producer of redwood fence stock and is located in
Arcata, California, approximately 45 miles north of Pacific Lumber's
headquarters in Scotia, California. Britt manufactures a variety of fencing and
decking products principally from small diameter redwood logs purchased from
Pacific Lumber and other timberland owners. Britt processes logs at its mill
into a variety of different fencing products, including "dog-eared" 1" X 6"
fence stock, 4" X 4" fence posts and other fencing products. In 1995, Britt sold
approximately 78 million board feet of lumber products to approximately 100
different customers in California, Arizona, Colorado and Hawaii. Britt's
manufacturing operations are conducted in a 46,000 square foot mill constructed
in 1980.
Concurrently with the consummation of the Offering on December 23, 1996,
MAXXAM transferred to the Company 27,938,250 shares (the "Kaiser Shares") of the
common stock of Kaiser. The Kaiser Shares are pledged to secure the $225.7
million aggregate principal amount of public indebtedness of MGI, consisting of
$100.0 million principal amount of 11 1/2% Senior Secured Notes (the "MGI Senior
Notes") and $125.7 million principal amount of 12 1/2% Senior Secured Discount
Notes (the "MGI Discount Notes," and together with the MGI Senior Notes, the
"MGI Notes"). The Company has agreed that if any Kaiser Shares are released as
security for MGI's public indebtedness by reason of early retirement of such
indebtedness (other
7
<PAGE> 10
than by reason of a refinancing of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the Notes. See "Description of New
Notes -- Security."
The Company beneficially owns 34.7% of Kaiser's common equity (after giving
pro forma effect to the conversion of each share of Kaiser's outstanding 8.255%
PRIDES, Convertible Preferred Stock, par value $.05 per share (the "PRIDES"),
into one share of Kaiser's common stock (the "Kaiser Common Stock")). The
Company does not expect its investment in the Kaiser Shares will provide a
significant source of cash dividends during the next several years.
The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz
and a wholly owned subsidiary of Federated Development Company ("Federated")
collectively own 61.1% of the aggregate voting power of MAXXAM. Mr. Hurwitz is
Chairman of the Board, Chief Executive Officer and President of the Company and
of MAXXAM. Federated is a New York business trust of which Mr. Hurwitz is
Chairman of the Board and Chief Executive Officer and which is wholly owned by
Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof.
The principal executive offices of the Company are located at 5847 San
Felipe, Suite 2600, Houston, Texas 77057-3010. The telephone number of the
Company is (713) 975-7600.
THE GUARANTOR
The New Notes will be guaranteed on a senior unsecured basis by MAXXAM.
MAXXAM engages in aluminum operations through Kaiser, forest products operations
through the Company, real estate operations principally through various wholly
owned subsidiaries, and other operations, including operation of the Sam Houston
Race Park horse racing facility in Houston, Texas.
KAISER ALUMINUM
Concurrently with the consummation of the Offering, MAXXAM transferred to
the Company 27,938,250 shares of the common stock of Kaiser. As a result of the
contribution of the Kaiser Shares, MAXXAM directly owns 22,061,750 shares of
Kaiser Common Stock, and as a result of the Company's ownership of the Kaiser
Shares, MAXXAM beneficially owns 62% of Kaiser's common equity (after giving pro
forma effect to the conversion of each share of Kaiser's outstanding PRIDES,
into one share of Kaiser's Common Stock). Kaiser accounts for a substantial
portion of MAXXAM's revenues and operating results.
Kaiser, through its wholly owned subsidiary Kaiser Aluminum & Chemical
Corporation ("KACC"), engages in all principal aspects of the aluminum
industry -- the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum and the manufacture of fabricated and semi-fabricated aluminum
products. Kaiser is one of the largest U.S. aluminum producers in terms of
primary smelting capacity and is the Western world's second largest
producer/seller of alumina, accounting for approximately 7% of the Western
world's alumina capacity in 1995. Kaiser's production levels of alumina and
primary aluminum exceed its internal processing needs, which allows it to be a
major net seller of alumina (approximately 2.0 million tons in 1995 or 72% of
production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of
production). Kaiser is also a major domestic supplier of fabricated aluminum
products, shipping approximately 6% of domestic tonnage of such products in 1995
(approximately 368,200 tons). See "Business of MAXXAM -- Aluminum Operations."
REAL ESTATE AND OTHER OPERATIONS
MAXXAM, principally through its wholly owned subsidiaries, is also engaged
in the business of residential and commercial real estate investment and
development, primarily in Arizona, California, Texas and Puerto Rico. MAXXAM
derives revenue and cash flow from the sale of its real estate properties,
rental income and payments received on real estate receivables. As of September
30, 1996, MAXXAM's real estate subsidiaries had a combined net worth of
approximately $122.3 million. See "Business of MAXXAM -- Real Estate and Other
Operations." MAXXAM, through wholly owned subsidiaries, is also the general
partner of
8
<PAGE> 11
and holds directly or indirectly approximately 78.8% of the equity in Sam
Houston Race Park, Ltd. ("SHRP, Ltd."). SHRP, Ltd. is the owner and operator of
Sam Houston Race Park, a Texas Class 1 horse racing facility located in Houston,
Texas. See "Business of MAXXAM -- Real Estate and Other Operations -- Sam
Houston Race Park."
CORPORATE ORGANIZATION
Organizational Chart showing that (i) Maxxam Inc. owns 100% of its real
estate operations, 78.8% of Sam Houston Race Park, Ltd., 100% of the Company,
and 27.3% of Kaiser, (ii) the Company owns 100% of MGI, (iii) MGI owns 100% of
Britt and Pacific Lumber, and (iv) Pacific Lumber owns 100% of Scotia Pacific
and Salmon Creek.
- ---------------
(1) Reflects fully diluted ownership assuming conversion of each share of
Kaiser's PRIDES into one share of Kaiser Common Sock. Also gives effect to
the transfer of the Kaiser Shares to the Company by MAXXAM.
ISSUANCE OF THE OLD NOTES
$130.0 million principal amount of the Old Notes were sold by the Company
to the Initial Purchasers on the Closing Date pursuant to a Purchase Agreement.
The Initial Purchasers subsequently resold the Old Notes in reliance on Rule
144A under the Securities Act and other available exemptions under the
Securities Act. The Company also entered into the Registration Rights Agreement,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes. Under the Registration Rights
Agreement, the Company agreed, for the benefit of the holders of the Old Notes
that it would, at its own cost, (i) within 60 days after the Closing Date file a
registration statement with the Commission with respect to a registered offer to
exchange the Old Notes for New Notes, which will have terms substantially
identical to the Old Notes and (ii) use its reasonable best efforts to cause
such registration statement to be declared effective under the Securities Act
within 150 days after the Closing Date. If the Company is unable to effect such
an Exchange Offer or if for any other reason the Exchange Offer is not
consummated within 210 days after the Closing Date, the Company is obligated
under the Registration Rights Agreement to file a shelf registration statement
with the Commission covering resales of the Old Notes. If the Company defaults
with respect to its obligations under the Registration Rights Agreement (as
defined herein, a "Registration Default"), the Company will be obligated to pay
Additional Interest of 0.25% per annum for the first 90-day period and an
additional 0.25% per annum for each subsequent 90-day period (up to a maximum
aggregate of
9
<PAGE> 12
1.00% per annum) until all Registration Defaults have been cured. The Exchange
Offer is intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement with respect to the Old Notes. See "-- The
Exchange Offer" and "The Exchange Offer -- Purpose and Effect."
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering, upon the terms and subject
to the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal
amount of the New Notes, for each $1,000 in
principal amount of the outstanding Old Notes (the
"Exchange Offer"). As of the date of this
Prospectus, $130.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all Notes.
As of January 7, 1997, there were registered
holders of the Old Notes, including Cede which held
$ million aggregate principal amount of the Old
Notes for of its participants. See "The Exchange
Offer -- Terms of the Exchange Offer."
Expiration Date............ 5:00 p.m., New York City time, on February ,
1997, as the same may be extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer
is subject to the condition that it does not
violate any applicable law or interpretation of the
staff of the Commission. See "The Exchange
Offer -- Conditions of the Exchange Offer."
Termination of Certain
Rights..................... Pursuant to the Registration Rights Agreement and
the Old Notes, Eligible Holders of Old Notes (i)
have rights to receive the Additional Interest and
(ii) have certain rights intended for the holders
of unregistered securities. "Additional Interest"
means the increase in the interest rate borne by
Registrable Securities during the period in which a
Registration Default is continuing pursuant to the
terms of the Registration Rights Agreement (in
general, one-quarter of one percent (0.25%) per
annum for the first 90-day period immediately after
the first such Registration Default and an
additional one-quarter of one percent (0.25%) per
annum for each subsequent 90-day period until all
Registration Defaults have been cured, provided
that the aggregate increase in such interest rate
shall not exceed one percent (1.00%) per annum).
Holders of New Notes generally will not be and,
upon consummation of the Exchange Offer, Eligible
Holders of Old Notes will generally no longer be,
entitled to (i) the right to receive the Additional
Interest, except in certain limited circumstances,
and (ii) certain other rights under the
Registration Rights Agreement intended for holders
of unregistered securities. See "The Exchange
Offer -- Termination of Certain Rights" and
"-- Procedures for Tendering Old Notes."
Accrued Interest on the Old
Notes.................... The New Notes will bear interest at a rate equal to
12% per annum from and including their date of
issuance. Eligible Holders whose Old Notes are
accepted for exchange will have the right to
receive interest accrued thereon from the date of
original issuance of the Old Notes or the last
Interest Payment Date, as applicable, to, but not
including, the date of
10
<PAGE> 13
issuance of the New Notes, such interest to be
payable with the first interest payment on the New
Notes. Interest on the Old Notes accepted for
exchange, which accrues at the rate of 12% per
annum, will cease to accrue on the day prior to the
issuance of the New Notes.
Procedures for Tendering
Old Notes................ Unless a tender of Old Notes is effected pursuant
to the procedures for book-entry transfer as
provided herein, each Eligible Holder desiring to
accept the Exchange Offer must complete and sign
the Letter of Transmittal, have the signature
thereon guaranteed if required by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company
and who wishes to tender Old Notes in the Exchange
Offer, should instruct such entity or person to
promptly tender on such Beneficial Owner's behalf.
See "The Exchange Offer -- Procedures for Tendering
Old Notes." By tendering Old Notes for exchange,
each registered holder will represent to the
Company that, among other things, (i) neither the
Eligible Holder nor any Beneficial Owner is an
affiliate of the Company or the Guarantor within
the meaning of Rule 405 under the Securities Act,
(ii) any New Notes to be received by the Eligible
Holder or any Beneficial Owner are being acquired
in the ordinary course of business, (iii) neither
the Eligible Holder nor any Beneficial Owner has an
arrangement or understanding with any person to
participate in the distribution of the New Notes,
and (iv) if the Eligible Holder or Beneficial
Owner, as applicable, is a broker-dealer that
acquired Old Notes for its own account as a result
of market making or other trading activities, such
Eligible Holder or Beneficial Owner must comply
with the prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the New Notes acquired by
such person and must agree that it will deliver a
prospectus in connection with any such resale.
Guaranteed Delivery
Procedures............... Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely
basis), may tender their Old Notes according to the
guaranteed delivery procedures set forth in the
Letter of Transmittal. See "The Exchange Offer --
Procedures for Tendering Old Notes -- Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes.... Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the
11
<PAGE> 14
Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. See
"The Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
Certain Federal Income Tax
Considerations........... Generally, the exchange pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Consequences -- The Exchange Offer."
The Exchange Agent......... First Bank National Association is the exchange
agent (in such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- The
Exchange Agent; Assistance."
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. See "The Exchange Offer -- Solicitation of
Tenders; Fees and Expenses."
Resales of the New Notes... Based on positions of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings
Corporation (available May 13, 1988), and
interpreted in the Commission's letters to Shearman
& Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14,
1993), and similar no-action or interpretive
letters issued to third parties, the Company
believes that New Notes issued pursuant to the
Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by such Eligible Holder
(other than (i) a broker-dealer who purchased the
Old Notes directly from the Company for resale
pursuant to Rule 144A under the Securities Act or
any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the
Company or the Guarantor within the meaning of Rule
405 under the Securities Act), without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that the
Eligible Holder is acquiring the New Notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. If any Eligible
Holder acquires New Notes in the Exchange Offer for
the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder
cannot rely on the position of the staff of the
Commission set forth in the above no-action and
interpretive letters and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with a
secondary resale transaction, unless an exemption
from registration is otherwise available. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old
Notes were acquired by such broker as a result of
market making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer -- Resales of the New Notes"
and "Plan of Distribution."
12
<PAGE> 15
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes, except
in limited circumstances, will not be entitled to Additional Interest, and (iii)
holders of the New Notes will not be, and upon consummation of the Exchange
Offer, Eligible Holders of the Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for the holders of
unregistered securities. See "Exchange Offer -- Termination of Certain Rights."
The Exchange Offer shall be deemed consummated upon the occurrence of the
delivery by the Company to the Registrar under the Indenture of New Notes in the
same aggregate principal amount as the aggregate principal amount of Old Notes
that are validly tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for
Tendering Old Notes" and "Description of New Notes."
Maturity................... August 1, 2003.
Interest................... 12% payable in cash semi-annually in arrears, from
the date of issuance, calculated on the basis of a
360-day year consisting of twelve 30-day months.
Interest Payment Dates..... February 1 and August 1.
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, on or after
August 1, 2000, upon not less than 15 or more than
60 days notice, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the redemption date, or at the Make-Whole Price,
plus accrued and unpaid interest, if any, to the
redemption date if redeemed prior to August 1,
2000. In addition, until August 1, 2000, upon any
Public Equity Offering (as defined) with respect to
the Company or MGI, the New Notes may be redeemed
at the option of the Company, in part, with cash in
the amount of the proceeds of such Public Equity
Offering, at the Call Price (110% of the principal
amount of the New Notes), plus accrued and unpaid
interest, if any, to the redemption date; provided,
however, that after any such redemption the
aggregate principal amount of Notes outstanding
must be equal to at least 65% of such principal
amount upon consummation of the Offering. See
"Description of New Notes -- Optional Redemption."
MAXXAM Guaranty............ The New Notes will be guaranteed on a senior
unsecured basis by MAXXAM.
Security................... The Notes will be secured by a pledge of all of the
capital stock of MGI. In addition, concurrently
with the closing of the Offering, MAXXAM
transferred to the Company the 27,938,250 Kaiser
Shares. The Kaiser Shares are pledged to secure the
$225.7 million aggregate principal amount of the
MGI Notes. The Company has agreed that if any
Kaiser Shares are released as security for the MGI
Notes by reason of early retirement of such
indebtedness (other than by reason of a refinancing
of such indebtedness), it will pledge up to
16,055,000 of such shares as security for the
Notes.
Ranking.................... The New Notes will be senior indebtedness of the
Company and will rank pari passu in right and
priority of payment with any future senior
indebtedness of the Company. The New Notes will be
effectively subordinated to liabilities of the
Company's subsidiaries, including trade payables.
As of September 30, 1996, the outstanding
indebtedness of such subsidiaries was $772.9
million and the other outstanding liabilities
13
<PAGE> 16
of such subsidiaries, including trade payables and
accrued expenses, were $65.0 million. The Company's
consolidated cash flow has historically been
utilized in substantial part to service the
indebtedness of these subsidiaries, and the Company
therefore expects that its ability to service the
New Notes will be largely dependent on cash
interest payments received from MAXXAM pursuant to
an intercompany note payable by MAXXAM to the
Company (the "Intercompany Note") and, to a
considerably lesser extent, dividends received from
MGI and capital contributions from MAXXAM. See
"Risk Factors -- Ability to Service Indebtedness."
Change of Control.......... In the event of a Change of Control (as defined),
the holders of the New Notes will have the right to
require the Company to purchase their New Notes at
a price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. See
"Description of New Notes -- Change of Control."
Principal Covenants........ The Indenture restricts, among other things, the
ability of the Company and its Restricted
Subsidiaries (as defined) to (a) incur additional
Indebtedness (as defined), (b) grant Liens (as
defined) on their assets, (c) make distributions on
and repurchases of the Company's capital stock, (d)
redeem or repurchase Indebtedness of the Company
subordinate to the New Notes which is scheduled to
mature subsequent to the final maturity date of the
New Notes, (e) make Investments (as defined) in
Unrestricted Subsidiaries (as defined), (f) engage
in transactions with Affiliates (as defined) of the
Company, (g) make Asset Sales (as defined), (h)
merge or consolidate with, or transfer all or
substantially all of its assets to, another entity,
(i) make Restricted Investments (as defined), and
(j) issue or otherwise dispose of any Capital Stock
or Redeemable Stock (each as defined) or assets of
any Restricted Subsidiary, except under certain
circumstances.
Absence of a Public Market
for the New Notes.......... The New Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchasers
have advised the Company that they currently intend
to make a market in the New Notes. However, none of
the Initial Purchasers is obligated to do so, and
any market making with respect to the New Notes may
be discontinued at any time without notice. The
Company does not intend to apply for listing of the
New Notes on a securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE
"RISK FACTORS."
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<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following summary of historical consolidated financial data for the nine
months ended September 30, 1996 and 1995 and each of the years in the three year
period ended December 31, 1995 are derived from the Selected Historical and Pro
Forma Consolidated Financial Data of the Company appearing elsewhere in this
Prospectus, and should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company" appearing elsewhere herein. The Company was formed on
November 4, 1996 to facilitate the offering of the Old Notes. Subsequent to its
formation, the Company received from MAXXAM, as a capital contribution, 100% of
the capital stock of MGI. Concurrently with the consummation of the Offering,
MAXXAM transferred the Kaiser Shares to the Company as an additional capital
contribution. The contribution of MGI's capital stock has been accounted for as
a reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to all of MGI's historical
operations. The contribution of the Kaiser Shares has been reflected in the
following consolidated financial information of the Company as if such
contribution occurred as of January 1, 1991 (the beginning of the earliest
period presented) at MAXXAM's historical cost using the equity method of
accounting. The following historical consolidated financial information of the
Company reflects the historical operating results of MGI, the equity in earnings
(losses) attributable to its investment in the Kaiser Shares and MAXXAM's
purchase accounting adjustments attributable to MGI's timber and depreciable
assets for each period presented. The purchase accounting adjustments arose from
MAXXAM's acquisition of MGI in May 1988. The following consolidated pro forma
operating data for the nine months ended September 30, 1996 and for the year
ended December 31, 1995 give effect to the issuance of the Old Notes and the
loan of the net proceeds therefrom to MAXXAM (collectively the "Transactions")
as if they occurred on January 1, 1995. The consolidated pro forma balance sheet
data gives effect to the Transactions as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ -------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Historical Operating Data:
Net sales................................................................. $199.6 $180.9 $242.6 $249.6 $ 233.4
Cost of sales (exclusive of depreciation and depletion)................... 114.6 96.0 127.1 129.6 134.6
Gross profit.............................................................. 85.0 84.9 115.5 120.0 98.8
Selling, general and administrative expenses.............................. 11.3 12.2 15.9 16.3 20.1
Depreciation and depletion................................................ 20.2 19.0 25.3 24.7 24.5
Operating income.......................................................... 53.4 53.7 74.3 79.1 54.2
Investment, interest and other income (expense)........................... 8.4 6.8 9.4 14.4 10.0
Interest expense.......................................................... 58.4 58.2 77.8 77.4 81.9
Interest expense, net of earnings on invested cash, cash equivalents and
marketable securities................................................... 51.2 51.9 69.0 72.6 72.5
Income (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of changes in accounting
principles.............................................................. 3.4 2.3 5.9 16.1 (17.7)
Income (loss) from continuing operations before extraordinary items and
cumulative effect of changes in accounting principles................... 4.5 1.6 4.2 19.2 (286.1)
Net income (loss)(1)(2)(3)................................................ 4.5 1.6 4.2 4.4 (538.0)
Other Historical Data:
Fixed charge coverage deficiency.......................................... -- -- -- -- 17.7
Ratio of earnings to fixed charges........................................ 1.1x 1.0x 1.1x 1.2x --
Capital expenditures...................................................... 9.0 6.6 9.9 11.3 11.1
Summary of cash flow information(4):
Cash provided by operating activities................................... 30.7 18.0 25.4 34.9 19.3
Cash provided (used) by investing activities............................ (8.9) (4.1) (7.3) (10.2) (22.6)
Cash provided (used) by financing activities............................ (17.1) (18.5) (18.2) (15.2) (12.0)
EBITDA(4)(5).............................................................. 73.6 72.7 99.6 103.8 78.7
Pro Forma Operating Data(6):
Investment, interest and other income (expense)........................... 18.7 23.2
Interest expense.......................................................... 70.7 94.2
Interest expense, net of earnings on the Intercompany Note, invested cash,
cash equivalents and marketable securities.............................. 53.2 71.6
Income from continuing operations before income taxes, extraordinary items
and cumulative effect of changes in accounting principles............... 1.3 3.2
Ratio of earnings to fixed charges........................................ 1.0x 1.0x
EBITDA(4)(5).............................................................. 73.5 99.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
---------------------- ---------------------------
ACTUAL PRO FORMA(6) 1995 1994 1993
------- ------------ ------- ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities(7)............. $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8
Working capital................................................. 126.6 126.6 126.2 104.5 83.9
Total assets.................................................... 713.3 843.3 740.9 744.5 743.0
Total indebtedness.............................................. 772.9 902.9 778.5 782.5 788.4
Stockholder's deficit(3)........................................ (125.9) (125.9) (126.5) (125.9) (130.3)
</TABLE>
(footnotes are on the following page)
15
<PAGE> 18
- ---------------
(1) In August 1993, MGI executed a number of transactions (the "Forest Products
Group Formation") pursuant to which substantially all of its non-forest
products related assets and liabilities were transferred to MAXXAM. The
Forest Products Group Formation required MGI to restate its financial
statements to present the historical results of operations relating to the
net assets transferred to MAXXAM in a manner similar to that which would be
presented as if MGI had discontinued the operations relating to such net
assets. See Note 1 to the Company's Audited Consolidated Financial
Statements for a description of the transactions referred to as the Forest
Products Group Formation.
(2) The extraordinary loss for 1994 of $14.9 million (net of tax benefits of
$6.3 million), relates to the settlement of litigation which arose from
MGI's acquisition of Pacific Lumber in February 1986. The extraordinary loss
for 1993 of $31.5 million (net of tax benefits of $16.2 million), arose from
the early extinguishment of debt for both MGI and Pacific Lumber. See Notes
6 and 10 to the Company's Audited Consolidated Financial Statements for a
description of these transactions.
(3) As of January 1, 1993, the Company adopted SFAS 109 and SFAS 106 as more
fully described in Notes 7 and 8 to the Company's Audited Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased results of operations by
$22.8 million. The cumulative effect of the change in accounting principle
for the adoption of SFAS 106 reduced results of operations by $2.3 million,
net of related benefits for income taxes of $1.6 million. The accounting
standards had no effect on the Company's cash outlays for postretirement and
postemployment benefits, nor did the cumulative effect of the changes in
accounting principles affect the Company's compliance with its debt
covenants. The Company recorded aggregate charges of $204.8 million, net of
related income taxes and minority interests as of January 1, 1993,
attributable to the net assets transferred to MAXXAM resulting from the
adoption of the new accounting standards described above. Additionally, as a
result of the contribution of the Kaiser Shares, the Company incurred
charges of $240.9 million as of January 1, 1993 in respect of its equity
investment in Kaiser resulting from the adoption of the new accounting
standards. See Notes 2 and 5 to the Company's Audited Consolidated Financial
Statements.
(4) Reference is made to the Statement of Cash Flows contained in the Company's
Consolidated Financial Statements contained elsewhere in this Prospectus for
a complete presentation of cash flows from operating, investing and
financing activities prepared in accordance with generally accepted
accounting principles. EBITDA means operating income plus depreciation and
depletion. EBITDA is not intended to represent cash flow, an alternative to
net income or any other measure of performance in accordance with generally
accepted accounting principles; it is included because the Company believes
that certain investors find it a useful tool for measuring the ability of
the Company to service its consolidated debt. This definition of EBITDA
differs from the definition of EBITDA contained in the Indenture. See
"Description of New Notes -- Certain Definitions."
(5) Because the Company operates through subsidiaries and limits exist on
dividends payable by such subsidiaries to the Company, earnings and cash
flows of such subsidiaries would generally not be available to service the
Company's obligations on the Notes. The Company's ability to service its
indebtedness will be largely dependent on cash interest payments received
from MAXXAM pursuant to the terms of the Intercompany Note and, to a
considerably lesser extent, dividends received from MGI and capital
contributions from MAXXAM. See "Risk Factors -- Ability to Service
Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Financial Condition
and Investing and Financing Activities."
(6) The pro forma information for the Company reflects the issuance of $130.0
million aggregate principal amount of Notes, and that the net proceeds from
the Offering of approximately $125.0 million were loaned to MAXXAM. MAXXAM
will use approximately $42.6 million of the proceeds of such loan to repay
approximately $17.6 million aggregate principal amount of its 12 1/2%
Subordinated Debentures due December 15, 1999 (the "Subordinated
Debentures") and approximately $25.0 million aggregate principal amount of
its 14% Senior Subordinated Reset Notes due May 20, 2000 (the "Reset Notes,"
and together with the Subordinated Debentures, the "Old MAXXAM Notes"),
together with accrued interest thereon through the date of redemption and
the remaining net proceeds will be used for general corporate purposes
including possible repurchases of its common stock. The pro forma operating
data for: (a) the nine months ended September 30, 1996 reflects (i) the
incurrence of $11.7 million of interest expense on the Notes and $0.6
million of amortization related to deferred financing costs associated with
the Offering, and (ii) interest income from the Intercompany Note of $10.3
million, and (b) the year ended December 31, 1995 reflects (i) the
incurrence of $15.6 million of interest expense on the Notes and $0.8
million of amortization related to deferred financing costs associated with
the Offering, and (ii) interest income from the Intercompany Note of $13.8
million. The pro forma balance sheet data reflects that: (a) the net
proceeds from the Offering of approximately $125.0 million was loaned to
MAXXAM pursuant to the Intercompany Note, and (b) the $5.0 million of
estimated costs associated with the Offering will be capitalized.
(7) Cash, cash equivalents and marketable securities of the Company at September
30, 1996 includes the following amounts held by each of the following
subsidiaries of the Company in the amounts indicated: MGI -- $72.5 million;
Scotia Pacific -- $6.8 million; Pacific Lumber -- $5.5 million; and
Britt -- $0.2 million. Further, Scotia Pacific had $30.5 million of
restricted cash deposits held for the benefit of its 7.95% Timber
Collateralized Notes (the "Timber Notes") which is classified as a
noncurrent asset in the Company's Consolidated Financial Statements. Cash
held by the Company's subsidiaries is generally not available to service the
obligations on the Notes. See "Risk Factors -- Ability to Service
Indebtedness."
16
<PAGE> 19
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF MAXXAM
The following summary historical consolidated financial data for the nine
months ended September 30, 1996 and 1995 and each of the years in the three year
period ended December 31, 1995 are derived from the Selected Historical and Pro
Forma Consolidated Financial Data of MAXXAM appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of MAXXAM and the Notes thereto (including the unconsolidated Parent
only, condensed financial information of MAXXAM) and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM" appearing elsewhere herein. The following consolidated pro
forma operating data for the nine months ended September 30, 1996 and for the
year ended December 31, 1995 give effect to the Transactions and KACC's issuance
of $175.0 million aggregate principal amount of 10 7/8% Senior Notes due 2006
(the "KACC New Senior Notes") and $50.0 million aggregate principal amount of
10 7/8% Series C Senior Notes due 2006 ("KACC New Series C Senior Notes" and
together with the KACC New Senior Notes, the "KACC New Notes") and the
application of the net proceeds therefrom, as if they occurred on January 1,
1995. The consolidated pro forma balance sheet data gives effect to the
Transactions and the issuance of the KACC New Notes and the application of the
net proceeds therefrom as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
Historical Operating Data:
Net sales.................................................. $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1
Cost of sales (exclusive of depreciation and depletion).... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6
Gross profit............................................... 354.6 418.4 574.3 297.8 243.5
Selling, general and administrative expenses............... 152.9 140.5 195.8 169.4 183.0
Depreciation and depletion................................. 92.9 91.0 120.9 121.1 120.8
Operating income (loss).................................... 108.8 186.9 257.6 7.3 (96.1)
Investment, interest and other income (expense)............ 35.1 8.7 18.2 (2.2) 69.8
Interest expense........................................... 135.5 136.1 181.3 176.9 185.1
Interest expense, net of earnings on invested cash, cash
equivalents and marketable securities.................... 125.1 125.1 166.3 166.5 174.0
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles.................................... 8.4 59.5 94.5 (171.8) (211.4)
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles............... 28.0 35.1 57.5 (116.7) (131.9)
Net income (loss)(1)(2).................................... 28.0 35.1 57.5 (122.1) (600.2)
Other Historical Data:
Fixed charge coverage deficiency........................... 5.6 -- -- 213.1 225.8
Ratio of earnings to fixed charges......................... -- 1.1x 1.2x -- --
Capital expenditures....................................... 108.0 54.9 97.7 89.3 86.2
Summary of cash flow information(3):
Cash provided by operating activities.................... 13.5 53.0 137.9 4.5 52.1
Cash provided (used) by investing activities............. (75.4) (39.7) (75.4) (67.9) 44.6
Cash provided (used) by financing activities............. 78.2 2.3 (42.9) 64.1 (94.7)
EBITDA(3)(4)............................................... 201.7 277.9 378.5 128.4 24.7
Pro Forma Operating Data(5):
Investment, interest and other income (expense)............ 35.1 16.3
Interest expense........................................... 157.6 211.7
Interest expense, net of earnings on invested cash, cash
equivalent and marketable securities..................... 147.2 196.7
Income (loss) from continuing operations before
extraordinary item and cumulative effect of changes in
accounting principles.................................... (13.7) 62.2
Fixed charge coverage deficiency........................... 27.7 --
Ratio of earnings to fixed charges......................... -- 1.1x
EBITDA(3)(4)............................................... 201.7 378.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
------------------------- ---------------------------------
ACTUAL PRO FORMA(5) 1995 1994 1993
-------- ------------ -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities(6).... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6
Working capital........................................ 624.5 794.0 546.8 413.5 414.3
Total assets........................................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0
Long-term debt, less current portion................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9
Minority interests..................................... 217.9 217.9 223.2 344.3 224.3
Total stockholders' equity (deficit)(2)................ (55.2) (55.8) (83.8) (275.3) (167.9)
</TABLE>
(footnotes are on the following page)
17
<PAGE> 20
- ---------------
(1) The extraordinary loss for 1994 of $5.4 million (net of tax benefits of $2.9
million), arose from the early extinguishment of debt for Kaiser. The
extraordinary loss for 1993 of $50.6 million (net of minority interests and
tax benefits of $2.8 million and $27.5 million, respectively), arose from
the early extinguishment of debt for Kaiser, MGI and Pacific Lumber. See
Note 4 to MAXXAM's Audited Consolidated Financial Statements for a
description of these transactions.
(2) As of January 1, 1993, MAXXAM adopted SFAS 109, SFAS 106 and SFAS 112 as
more fully described in Notes 5 and 6 to MAXXAM's Audited Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased results of operations by
$26.6 million. The cumulative effect of the change in accounting principle
for the adoption of SFAS 106 reduced results of operations by $437.9
million, net of related benefits for minority interests of $63.6 million and
income taxes of $236.8 million. The cumulative effect of the change in
accounting principle for the adoption of SFAS 112 reduced results of
operations by $6.4 million, net of related benefits for minority interests
of $1.0 million and income taxes of $3.4 million. These accounting standards
had no effect on MAXXAM's cash outlays for postretirement and postemployment
benefits, nor does the cumulative effect of the changes in accounting
principles affect MAXXAM's compliance with its existing debt covenants.
(3) Reference is made to the Statement of Cash Flows contained in MAXXAM's
Consolidated Financial Statements contained elsewhere in this Prospectus for
a complete presentation of cash flows from operating, investing and
financing activities prepared in accordance with generally accepted
accounting principles. EBITDA means operating income plus depreciation and
depletion. EBITDA is not intended to represent cash flow, an alternative to
net income or any other measure of performance in accordance with generally
accepted accounting principles; it is included because MAXXAM believes that
certain investors find it a useful tool for measuring the ability to service
debt. This definition of EBITDA differs from the definition of EBITDA
contained in the Indenture. See "Description of New Notes -- Certain
Definitions."
(4) Because MAXXAM operates through subsidiaries and limits exist on dividends
payable by the Company and Kaiser to MAXXAM, earnings and cash flows of such
subsidiaries will generally not be available to service MAXXAM's obligations
on the Intercompany Note and its guaranty. See "Risk Factors -- Ability to
Service Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of MAXXAM -- Financial Condition and
Investing and Financing Activities." See MAXXAM's parent only financial
statements included elsewhere herein.
(5) The pro forma information for MAXXAM reflects: (a) the issuance of $130.0
million aggregate principal amount of the Notes, (b) the loan to MAXXAM of
the net proceeds from the Offering of approximately $125.0 million, and (c)
the issuance of Kaiser's $225.0 million aggregate principal amount of the
KACC New Notes and the application of the net proceeds therefrom. MAXXAM
will use approximately $42.6 million of the proceeds of the loan from the
Company to repay the Old MAXXAM Notes, together with accrued interest
thereon through the date of redemption and the remaining net proceeds will
be used for general corporate purposes including possible repurchases of
MAXXAM's common stock. The pro forma operating data for: (a) the nine months
ended September 30, 1996 reflects (i) the incurrence of $11.7 million of
interest expense on the Notes and $0.7 million of amortization related to
deferred financing costs associated with the Notes and the consent fee paid
by MAXXAM in connection with an amendment to the Indenture governing the MGI
Notes, which amendment was related to the Offering (the "Consent Fee"), (ii)
the incurrence of $18.4 million of interest expense and $0.5 million of
amortization related to deferred financing costs associated with the KACC
New Notes, (iii) the elimination of $4.4 million of interest expense
associated with the Old MAXXAM Notes, and (iv) the elimination of $4.8
million of interest expense associated with the reduction of outstanding
borrowings under the 1994 KACC Credit Agreement (as amended, the "1994 KACC
Credit Agreement"), and (b) for the year ended December 31, 1995 reflects
(i) the incurrence of $15.6 million of interest expense on the Notes and
$0.9 million of amortization related to deferred financing costs associated
with the Notes and the Consent Fee paid by MAXXAM, (ii) the incurrence of
$24.3 million of interest expense and $0.7 million of amortization related
to deferred financing costs associated with the KACC New Notes, (iii) the
elimination of $6.0 million of interest expense associated with the Old
MAXXAM Notes, (iv) the elimination of $5.1 million of interest expense
associated with the reduction of outstanding borrowing under the 1994 KACC
Credit Agreement, and (v) the write off of $1.7 million of debt discount and
$0.2 million of unamortized deferred financing costs attributable to the Old
MAXXAM Notes. The pro forma balance sheet data reflects that: (a) the
estimated net proceeds from the Offering, of approximately $125.0 million,
were loaned to MAXXAM pursuant to the Intercompany Note and the estimated
costs associated with the Offering of $5.0 million and the Consent Fee of
approximately $1.0 million paid by MAXXAM will be capitalized, and reflects:
(i) the redemption of $42.6 million aggregate principal amount of the Old
MAXXAM Notes, (ii) the payment of $1.9 million of accrued interest thereon,
and (iii) the write off of approximately $0.9 million of debt discount and
$0.1 million of unamortized deferred financing costs, net of estimated
income tax benefits of $0.4 million, attributable to the Old MAXXAM Notes,
and (b) the sale of the KACC New Notes which reflects: (i) the receipt of
$219.3 million of net proceeds, (ii) the repayment of borrowings outstanding
under the 1994 KACC Credit Agreement, and (iii) the capitalization of
approximately $6.6 million of costs related to that transaction. MAXXAM did
not receive any of the net proceeds from the sale of the KACC New Notes.
(6) Cash, cash equivalents and marketable securities of MAXXAM at September 30,
1996, excluding cash, cash equivalents and marketable securities held by
subsidiaries, was $56.6 million.
18
<PAGE> 21
RISK FACTORS
Holders of the Notes should carefully consider the following risk factors,
as well as the other information contained in, and incorporated by reference in,
this Prospectus, before making an investment in the New Notes. Information
contained or incorporated by reference in this Prospectus contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of MAXXAM," "Business of the Company," "Business of
MAXXAM" and "Legal Proceedings." No assurance can be given that the future
results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
SUBSTANTIAL INDEBTEDNESS; STRUCTURAL SUBORDINATION AND ASSET ENCUMBRANCES
The Company
The Company is a newly formed holding company with no business operations
or source of income of its own, and conducts all of its operations through its
subsidiaries. As of September 30, 1996, the Company's assets, on a pro forma
basis after giving effect to (i) the formation of the Company, (ii) the transfer
of the capital stock of MGI and the Kaiser Shares to the Company, and (iii) the
consummation of the Offering, consist solely of the capital stock of MGI (which
are pledged as collateral for the Notes), the 27,938,250 Kaiser Shares (subject
to a pledge securing the MGI Notes) and the Intercompany Note. The Notes will
not be obligations of, or guaranteed by, any of the Company's subsidiaries.
Accordingly, in the event of a default under the Indenture, only the assets of
the Company and MAXXAM (to the extent available after satisfaction of the
obligations of MAXXAM's other subsidiaries and creditors as discussed below)
will be available to satisfy the Company's obligations under the Notes and
MAXXAM's obligations under its guaranty and the Intercompany Note, respectively.
The holders of the Notes will not have claims as creditors of the Company's
subsidiaries.
Any indebtedness of the Company's subsidiaries, including but not limited
to indebtedness evidenced by the MGI Notes, Pacific Lumber's 10 1/2% Senior
Notes (the "Pacific Lumber Senior Notes"), Pacific Lumber's credit agreement
(the "Pacific Lumber Credit Agreement") and Scotia Pacific's Timber Notes, will
be effectively senior to the claims of the holders of the Notes with respect to
the assets of such subsidiaries, and the rights of the Company and its
creditors, including holders of the Notes, to realize upon the assets of any
subsidiary upon such subsidiary's liquidation or reorganization (and the
consequent right of holders of the Notes to participate in those assets) will be
subject to the prior claims of such subsidiary's creditors, except to the extent
that the Company may itself be a creditor with recognized claims against such
subsidiary. In such case, the Company's claims would still be subordinate to any
security interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to the claims of the Company.
As of September 30, 1996, and after giving effect to the Offering, the
indebtedness of the Company and its subsidiaries reflected on the Company's
consolidated balance sheet (the "Company's Consolidated Indebtedness") would
have been approximately $902.9 million, of which approximately $772.9 million
consists of indebtedness of subsidiaries of the Company. Approximately $391.8
million aggregate principal amount of such indebtedness is scheduled to mature
prior to the maturity of the Notes, assuming the Timber Notes are paid in
accordance with Scheduled Amortization (see "Description of Principal
Indebtedness -- The Company -- Timber Notes"). Approximately $286.9 million
aggregate principal amount of such indebtedness is scheduled to mature prior to
the maturity of the Notes assuming the Timber Notes are paid in accordance with
Rated Amortization (see "Description of Principal Indebtedness -- The Company --
Timber Notes"). The $225.7 million aggregate principal amount of the MGI Notes
is scheduled to mature
19
<PAGE> 22
contemporaneously with the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Financial
Condition and Investing and Financing Activities." The MGI Notes aggregated
approximately $201.0 million as of September 30, 1996, and are scheduled to
accrete to approximately $225.7 million aggregate principal amount at August 1,
1998. A substantial majority of the Company's consolidated assets are owned by
MGI, substantially all of MGI's consolidated assets are owned by Pacific Lumber,
and a significant portion of Pacific Lumber's assets are owned by Scotia
Pacific. As of September 30, 1996, Pacific Lumber had outstanding $235.0 million
of Pacific Lumber Senior Notes and Scotia Pacific had outstanding approximately
$336.1 million aggregate principal amount of Timber Notes. The Timber Notes are
senior secured obligations of Scotia Pacific, secured by a pledge of Scotia
Pacific's timberlands (subject to certain harvesting rights by Pacific Lumber)
and other property, which constitutes substantially all of Scotia Pacific's
assets. See "Description of Principal Indebtedness -- The Company -- Timber
Notes." In addition, the Pacific Lumber Credit Agreement is secured by Pacific
Lumber's trade accounts receivable and inventories. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Company -- Financial Condition and Investing and Financing Activities" and Note
6 to the Company's Audited Consolidated Financial Statements.
Concurrently with the closing of the Offering, MAXXAM transferred to the
Company the 27,938,250 Kaiser Shares. The Kaiser Shares were previously pledged,
and after the transfer continue to be pledged, as security for the MGI Notes.
The Company has agreed that if any Kaiser Shares are released as security for
the MGI Notes by reason of early retirement of such indebtedness (other than by
reason of a refinancing of such indebtedness), it will pledge up to 16,055,000
of such shares as security for the Notes. There can be no assurance that any
Kaiser Shares will be released from the lien of the indenture governing the MGI
Notes (the "MGI Indenture") or will be pledged as collateral to secure the Notes
at any time. Further, in order for the maximum amount of Kaiser Shares to be
pledged as collateral for the Notes, all of the MGI Notes would have to be
repaid (other than by means of a refinancing) prior to scheduled maturity. The
MGI Notes mature concurrently with the Notes, and there can be no assurance that
any MGI Notes will be retired early. See "Description of Principal
Indebtedness -- The Company -- MGI Notes."
The Guarantor
MAXXAM also conducts substantially all of its operations through its
subsidiaries. As of September 30, 1996, MAXXAM's assets (exclusive of deferred
income tax assets and other miscellaneous assets) consisted of (i) $56.6 million
in cash, cash equivalents and marketable securities, excluding amounts
attributable to subsidiaries, (ii) 50,000,000 shares of Kaiser Common Stock,
27,938,250 of which are pledged to secure the MGI Notes and were transferred to
the Company concurrently with the closing of the Offering, (iii) the capital
stock of the Company, (iv) the capital stock of certain other direct wholly
owned subsidiaries engaged in real estate operations (the "Real Estate
Subsidiaries"), and (v) the interests in SHRP, Ltd. held by wholly owned
subsidiaries of MAXXAM. See "Business of MAXXAM."
Any indebtedness of MAXXAM's subsidiaries will be effectively senior to the
claims of the holders of the Notes with respect to the assets of such
subsidiaries, and the rights of MAXXAM and its creditors, including holders of
the Notes, to realize upon the assets of any subsidiary upon such subsidiary's
liquidation or reorganization (and the consequent right of holders of the Notes
to participate in those assets) will be subject to the prior claims of such
subsidiary's creditors and of the holders of certain minority interests, except
to the extent that MAXXAM may itself be a creditor with recognized claims
against such subsidiary. In such case, MAXXAM's claims would still be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to the claims of MAXXAM.
As of September 30, 1996, the indebtedness of MAXXAM and its subsidiaries
reflected on MAXXAM's consolidated balance sheet was approximately $1,710.3
million, of which approximately $1,668.6 million consisted of indebtedness of
the subsidiaries of MAXXAM, and minority interests were approximately $217.9
million. Additionally, at September 30, 1996, Kaiser was unconditionally
obligated for $93.3 million of indebtedness of a foreign joint venture.
Approximately $774.6 million of such indebtedness of MAXXAM's subsidiaries is
secured. The Kaiser Shares and the capital stock of Pacific Lumber and Britt are
pledged as security for the MGI Notes pursuant to the MGI Indenture. In
addition, MAXXAM has guaranteed a $14.0
20
<PAGE> 23
million credit facility of one of its real estate subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities."
MAXXAM and its subsidiaries frequently review acquisition and investment
opportunities, some of which may be material. MAXXAM and/or its subsidiaries
could, in connection with such opportunities or otherwise, incur additional
indebtedness, which indebtedness could be material in amount. Indebtedness
incurred by MAXXAM could rank pari passu in right and priority of payment with
the Intercompany Note and MAXXAM's guaranty of the Notes, and could also be
secured by assets of MAXXAM (including approximately 22 million unpledged shares
of Kaiser Common Stock). Any such secured indebtedness would effectively rank
senior to the Intercompany Note and MAXXAM's guaranty of the Notes.
ABILITY TO SERVICE INDEBTEDNESS
The Company's ability to service its indebtedness will be largely dependent
on cash interest payments received from MAXXAM pursuant to the terms of the
Intercompany Note and, to a considerably lesser extent, dividends received from
MGI and capital contributions from MAXXAM. The MGI Indenture contains various
covenants which, among other things, limit the payment of dividends and restrict
transactions between MGI and its affiliates. Under the MGI Indenture, MGI was
permitted to pay no dividends in respect of the period from August 31, 1993 to
December 31, 1993, $4.9 million of dividends in respect of the 1994 fiscal year,
$1.8 million of dividends in respect of the 1995 fiscal year, and $2.0 million
of dividends in respect of the nine months ended September 30, 1996. MGI did not
pay any dividends from August 1993 to December 31, 1994. MGI paid dividends of
$4.8 million during 1995 and an additional $3.9 million during the nine months
ended September 30, 1996. As of September 30, 1996, no additional dividends
could be paid by MGI. The Company does not expect to receive a significant
amount of cash dividends from MGI for the next several years. Moreover, MGI is
itself a holding company and is dependent upon dividends distributed to it from
its subsidiaries, Pacific Lumber and Britt.
Pacific Lumber is restricted by the terms of the indenture governing the
Pacific Lumber Senior Notes (the "Pacific Lumber Indenture") and the Pacific
Lumber Credit Agreement as to the amount of funds that can be paid in the form
of dividends or loans to MGI. Pacific Lumber is dependent upon its principal
subsidiary, Scotia Pacific, for the log requirements from which Pacific Lumber
generates a substantial portion of its operating cash flow. Pacific Lumber
harvests and purchases logs from Scotia Pacific's timberlands at prices
established pursuant to a Master Purchase Agreement (see "Business of the
Company -- Pacific Lumber Operations -- Relationships with Scotia Pacific and
Britt"). Under the terms of the indenture governing the Timber Notes (the
"Timber Note Indenture"), Scotia Pacific will not have cash available for
distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations
exceeds the amounts required by the Timber Note Indenture to be reserved for the
payment of current debt service (including interest, principal and premiums) on
the Timber Notes, capital expenditures and certain other operating expenses.
Once Scotia Pacific has made appropriate provision for expenditures for
operating and capital costs and current debt service, as provided in the Timber
Note Indenture, and in the absence of certain Trapping Events (as described in
the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture
does not limit monthly distributions of available cash from Scotia Pacific to
Pacific Lumber. However, in the event Scotia Pacific's cash flows are not
sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's
ability to pay interest on the Pacific Lumber Senior Notes, to service its other
indebtedness and to pay dividends to MGI would be materially impaired, and
therefore MGI's ability to pay interest on the MGI Notes and to pay dividends to
the Company would also be materially impaired. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company -- Financial Condition and Investing and Financing Activities" and
"Description of Principal Indebtedness -- The Company." The operating
performance of Pacific Lumber and Scotia Pacific are also subject to certain
regulatory developments that could adversely affect such performance. See "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and
Environmental Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Trends."
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Cash flows from operations of the Company and its subsidiaries are unlikely
to be sufficient to pay principal on the Notes. The ability of the Company and
its subsidiaries to refinance their respective indebtedness at or prior to the
respective maturities thereof will depend on a number of factors, including
their respective financial condition, results of operations and cash flows, and
then-prevailing interest rates and market conditions. There can be no assurance
that such refinancing will be available, or available on reasonable terms. The
failure of any of the Company's subsidiaries to refinance their indebtedness
could materially adversely affect the ability of the Company to satisfy its
obligations under the Notes.
MAXXAM is also a holding company and its ability to satisfy its financial
obligations will be largely dependent on dividends distributed to MAXXAM from
its real estate subsidiaries (the "Real Estate Subsidiaries") and the sale of
assets. The debt agreements of Kaiser contain significant restrictions on the
amounts of funds that could be paid as dividends from Kaiser to MAXXAM or the
Company. The KACC 1994 Credit Agreement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial
Condition and Investing and Financing Activities -- Aluminum Operations") does
not permit Kaiser to pay any dividends on its common stock. In addition, the
indentures governing the KACC New Notes, KACC's 9 7/8% Senior Notes due 2002
(the "KACC Senior Notes") and KACC's 12 3/4% Senior Subordinated Notes due 2003
(the "KACC Senior Subordinated Notes" and, together with the KACC New Notes and
the KACC Senior Notes, the "KACC Notes") contain covenants which, among other
things, limit KACC's ability to pay cash dividends and restrict transactions
between KACC and its affiliates. In addition, under certain circumstances,
dividends paid by Kaiser will be required to remain pledged as security for the
MGI Notes. See "Description of Principal Indebtedness -- The Company -- MGI
Notes." Kaiser has paid no dividends on the Kaiser Common Stock since 1992 and
is not certain when or if Kaiser will resume the payment of dividends in respect
of its common stock.
Because the substantial portion of MAXXAM's consolidated results of
operations and cash flows are attributable to the operations of Kaiser and MGI,
the substantial portion of MAXXAM's consolidated results of operations and cash
flows are generally not available to the Company or MAXXAM (and therefore are
generally unavailable to service MAXXAM's obligations to the Company under the
Intercompany Note or MAXXAM's guaranty of the Notes). As of September 30, 1996,
MAXXAM (excluding its subsidiaries) had cash, cash equivalents and marketable
securities of approximately $56.6 million and approximately $12.1 million
available from its subsidiaries. Based upon the limited amount of cash that
MAXXAM expects will be available to the Company from MGI on an annual basis,
MAXXAM anticipates that it will be required to make cash interest payments on
the Intercompany Note of approximately $13.8 million per year for the next
several years. There can be no assurance that MAXXAM's cash resources, together
with the cash proceeds from the sale of assets, distributions from its
subsidiaries and other sources of financing, will be sufficient for such
purposes or that MAXXAM would be able to refinance or pay at maturity the
aggregate principal amount of the Intercompany Note.
During the three years ended December 31, 1995, MAXXAM's corporate general
and administrative expenses, net of cost reimbursements from its subsidiaries,
have ranged between $11.0 million and $19.0 million per year. During the nine
months ended September 30, 1996, MAXXAM's corporate general and administrative
expenses were $28.8 million, of which $21.9 million represented an accrual for
certain legal contingencies of which a substantial portion relates to legal fees
and expenses that MAXXAM may incur in connection with matters related to (i) a
civil action filed by the Federal Deposit Insurance Corporation (the "FDIC")
against Mr. Charles Hurwitz seeking damages in excess of $250.0 million based on
the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of United Savings Association of Texas ("USAT"), and was
involved in certain decisions which contributed to the insolvency of USAT and
(ii) formal administrative proceedings initiated by the United States Department
of Treasury's Office of Thrift Supervision (the "OTS") against MAXXAM and others
alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and the other respondents
with respect to the failure of USAT. The OTS seeks, among other things,
unspecified damages in excess of $138.0 million from MAXXAM and Federated and
civil penalties. See "Legal Proceedings -- USAT Matters." Although MAXXAM cannot
predict when or whether the expenses represented by such accrual will be
incurred, there can be no assurance that such accrual will be adequate or that
MAXXAM's recurring corporate general and administrative expenses will not
increase. Any
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adverse outcome of this litigation could materially adversely affect MAXXAM's
ability to make payments under the Intercompany Note and satisfy its obligations
under its guaranty. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of MAXXAM -- Results of Operations."
MAXXAM expects that for at least the next two to three years, the Real
Estate Subsidiaries will continue to constitute the primary source of dividends
to MAXXAM. As of September 30, 1996, the Real Estate Subsidiaries had
approximately $11.0 million available for borrowing under a credit agreement.
All of such amount could be distributed to MAXXAM. As of September 30, 1996, the
Real Estate Subsidiaries had total assets of approximately $173.1 million, total
liabilities of approximately $50.8 million (including total indebtedness of
approximately $12.5 million) and combined net worth of approximately $122.3
million. The Real Estate Subsidiaries had significant operating losses in each
of the last several years; however the ability of the Real Estate Subsidiaries
to distribute dividends to MAXXAM is not currently dependent upon their ability
to generate any specified level of income or cash flows from operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Real Estate and Other Operations." In June 1991, a wholly owned
subsidiary of MAXXAM purchased from the Resolution Trust Corporation ("RTC") at
an auction, for approximately $122.3 million, the RTC portfolio, which consisted
of 27 parcels of income producing real property and 28 loans secured by real
property. MAXXAM has realized a substantial portion of its cash flow over the
last several years from the sale of properties by the Real Estate Subsidiaries
and the sale or repayment of loans and the sale of properties from its RTC
portfolio, as described under "Business of MAXXAM -- Real Estate and Other
Operations." The remaining assets in the RTC Portfolio consist of two loans and
eight properties with an aggregate net book value of $18.2 million.
Consequently, MAXXAM does not expect the Real Estate Subsidiaries will be able
to generate cash flow distributable to MAXXAM at or near recent historical
levels.
SECURITY FOR THE NEW NOTES
The New Notes will be, and the Old Notes are, secured, among other things,
by a first priority pledge (subject only to a lien in favor of the Trustee) of:
(i) all outstanding shares of capital stock of MGI, (ii) all dividends
distributed with respect to and property received in exchange for any of the
Pledged MGI Shares (other than distributions in respect of Salmon Creek's
property), provided that, in the absence of certain defaults, the Company will
be entitled to receive and retain certain distributions on Pledged MGI Shares,
and (iii) the Intercompany Note. There can be no assurance that the proceeds
from the sale of all of the Pledged MGI Shares or any other collateral would be
sufficient to satisfy the amounts due on the Notes in the event of a default
under the Indenture. Although the Trustee may require the Company to use its
best efforts to register the Pledged MGI Shares in the event of foreclosure,
currently there is no market for the Pledged MGI Shares.
The Indenture provides that the proceeds of sales of Pledged MGI Shares
(and the proceeds that are distributed to the Company of issuances of shares by
MGI) and any dividends constituting Extraordinary Distributions (as defined)
will be released from the lien of the Indenture if an offer to purchase the
Notes is made, in accordance with the terms of the Indenture, at a price of 110%
of the principal amount of the Notes, plus accrued and unpaid interest, if any,
to (but not including) the date of purchase. The proceeds of such a sale (or
issuance) may also be released from the lien of the Indenture to the extent such
proceeds are actually utilized to purchase Notes in an offer that is made at a
price of at least 101% of the principal amount of the Notes, plus accrued and
unpaid interest, if any, or, in certain circumstances, to purchase or redeem
Notes. See "Description of New Notes -- Security -- Offers to Purchase Notes
with Certain Proceeds of Collateral."
If the Trustee were to foreclose upon, or obtain voting rights with respect
to, the Pledged MGI Shares, such foreclosure, or the obtaining of such voting
rights, would constitute a change of control under instruments governing certain
indebtedness of MGI and Pacific Lumber. Such occurrence would enable the holders
of such indebtedness to require the issuer to repurchase such indebtedness.
There can be no assurance that the assets of MGI and Pacific Lumber would be
sufficient to enable them to effect such a repurchase. In such event, there is a
substantial risk that assets of MGI would not be available to the holders of the
Notes and the
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value of the Collateral represented by the Pledged MGI Shares would be
substantially diminished or eliminated.
As discussed above, the Kaiser Shares are pledged to secure the payment of
the MGI Notes, and the holders of the Notes will have no security interest
therein, unless and until the Kaiser Shares are released from the lien of the
MGI Indenture by reason of early retirement of MGI's public indebtedness (other
than by reason of a refinancing of such indebtedness). There can be no assurance
that any Kaiser Shares will be released from the lien of the MGI Indenture, or
will become collateral securing the Notes at any time. Any early retirement of
the MGI Notes will be at the option of MGI. The MGI Notes mature
contemporaneously with the Notes, and holders of the Notes should be aware that
the Kaiser Shares may never be pledged to secure the Notes at any time. See
"Description of Principal Indebtedness -- The Company -- MGI Notes."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The net proceeds received by the Company from the sale of the Old Notes in
the Offering were utilized to make an intercompany loan to MAXXAM (the
"Intercompany Loan"), which proceeds MAXXAM will use to retire existing
indebtedness and for general corporate purposes, including possible repurchases
of its common stock. Under applicable provisions of the United States Bankruptcy
Code (the "Bankruptcy Code") or comparable provisions of state law, if, at the
time the Company incurs indebtedness from the sale of the Old Notes in the
Offering and/or makes the Intercompany Loan to MAXXAM, the Company (a) does so
with the intent of hindering, delaying or defrauding current or future creditors
or (b) receives less than reasonably equivalent value or fair consideration
therefor and either (i) is or is rendered insolvent by reason thereof, (ii) is
engaged in a business or transaction for which the assets remaining with the
Company constitute unreasonably small capital or (iii) intends to incur, or
believes that it would incur, debts beyond its ability to pay such debts as they
mature, then some or all of the Notes, payments of principal and interest
thereon and/or pledges securing the Notes could be either avoided or
subordinated to the claims of future creditors of the Company.
Similarly, if after giving effect to the transfer of the 27,938,250 Kaiser
Shares to the Company, the borrowing from the Company evidenced by the
Intercompany Note and MAXXAM's use of the proceeds of such borrowing, including
possible repurchases of its common stock, (a) MAXXAM either (i) is or is
rendered insolvent by reason thereof, (ii) is engaged in a business or
transaction for which the assets remaining with MAXXAM constitute unreasonably
small capital or (iii) intends to incur, or believes that it would incur debts
beyond its ability to pay such debts as they mature or (b) MAXXAM has effected
such transactions with the intent of hindering, delaying or defrauding current
or future creditors, then some or all of MAXXAM's obligations under the
Intercompany Note, its guaranty of the Notes and/or payments of such obligations
could be either avoided or subordinated to the claims of future creditors of
MAXXAM.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company or MAXXAM
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation or if the
present fair saleable value of its assets was less than the amount that would be
required to pay the probable liability on its existing debts, including
contingent liabilities, as they may become absolute and mature. In addition, an
entity may be presumed insolvent under some fraudulent transfer laws if it is
not generally paying its debts as they become due.
The Company and MAXXAM believe that the indebtedness represented by the Old
Notes and the Intercompany Note and MAXXAM's guaranty of the Old Notes were
incurred for proper purposes and in good faith. The Company and MAXXAM also
believe that neither MAXXAM nor the Company was, at the time of or as a result
of the incurrence of indebtedness represented by the Old Notes or the use of the
proceeds thereof, insolvent, that neither MAXXAM nor the Company was at such
time engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, and that neither MAXXAM nor the Company
at such time intended to or believed that it would incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however,
that a court passing on such questions would agree with the above.
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PREFERENCE CONSIDERATIONS
Since the holders of the Notes will not, at the time the Notes are issued,
possess any lien upon the Kaiser Shares, any subsequent pledge of the Released
Kaiser Shares to secure the Notes may be subject to avoidance as a "preference"
pursuant to Section 547 of the Bankruptcy Code. Under Section 547(b) of the
Bankruptcy Code, the granting of a lien upon property of a debtor to or for the
benefit of a creditor for or on account of an antecedent debt owed by the debtor
before such transfer was made is avoidable to the extent that it is: (i) made
while the debtor was insolvent, (ii) made on or within 90 days (one year if the
creditor was an insider at the time of the transfer) before the date of the
filing of the debtor's bankruptcy petition, and (iii) enables such creditor to
receive more than such creditor would receive if (a) the case were a case under
Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made and (c)
such creditor received payment of such debt to the extent provided by the
provisions of the Bankruptcy Code.
RISK FACTORS RELATING TO PACIFIC LUMBER
Leverage
Pacific Lumber is the Company's principal operating subsidiary. Pacific
Lumber is highly leveraged, with total consolidated indebtedness of $571.9
million and stockholder's deficit of $15.2 million at September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company." As a result, Pacific Lumber will be more sensitive
than less leveraged companies to factors affecting its operations, including
governmental regulations and litigation affecting its timber harvesting
practices, increased competition from other lumber producers or alternative
building products and general economic conditions.
Pacific Lumber's high leverage could have important consequences,
including: impairment of Pacific Lumber's ability to obtain additional financing
in the future for working capital, capital expenditures or general corporate
purposes; restrictions on Pacific Lumber's flexibility in responding to changing
business and economic conditions; and a requirement that Pacific Lumber dedicate
a significant portion of its cash flow from operations to the payment of the
principal of and interest on its indebtedness (including the monthly reservation
by Scotia Pacific of funds to make required semiannual principal amortization
payments on the Timber Notes). In addition, due to the dividend restrictions
contained in Pacific Lumber's indebtedness, such consequences could further
limit the availability of cash flow to MGI, and consequently to the Company,
from Pacific Lumber's operations.
Regulatory and Environmental Factors
Regulatory and environmental issues play a significant role in Pacific
Lumber's forest products operations. Pacific Lumber's forest products operations
are subject to a variety of California and federal laws and regulations dealing
with timber harvesting, endangered species and critical habitat, and air and
water quality. These laws include the California Forest Practice Act (the
"Forest Practice Act"), which requires that timber harvesting operations be
conducted in accordance with detailed requirements set forth in the Forest
Practice Act and in the regulations promulgated thereunder by the California
Board of Forestry (the "BOF"). The federal Endangered Species Act (the "ESA")
and California Endangered Species Act (the "CESA") provide in general for the
protection and conservation of specifically listed fish, wildlife and plants
which have been declared to be endangered or threatened. The California
Environmental Quality Act ("CEQA") provides, in general, for protection of the
environment of the state, including protection of air and water quality and of
fish and wildlife. In addition, the California Water Quality Act requires, in
part, that Pacific Lumber's operations be conducted so as to reasonably protect
the water quality of nearby rivers and streams. The ability of Pacific Lumber to
harvest timber depends upon its ability to obtain regulatory approval of its
THPs. THPs are required to be developed by registered professional foresters and
must be filed with, and approved by, the California Department of Forestry (the
"CDF") prior to the harvesting of timber. The CDF's evaluation of proposed THPs
incorporates review and analysis of such THPs by several California and federal
agencies and public comments received with respect to such THPs. Pacific Lumber
regularly operates under numerous THPs governing various timber parcels and
applies for new THPs on a continuous basis.
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Pacific Lumber is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future legislation, government regulations or judicial or
administrative decisions would not materially adversely affect the Company.
In March 1992, the marbled murrelet (a sea bird that nests in coastal
timberlands) was approved for listing as endangered under the CESA. In October
1992, the United States Fish and Wildlife Service (the "USFWS") issued its final
rule listing the marbled murrelet as a threatened species under the ESA in the
tri-state area of Washington, Oregon and California. Pacific Lumber has
incorporated, and will continue to incorporate as required, mitigation measures
into its THPs to protect and maintain habitat for the marbled murrelet on its
timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled
murrelet surveys to provide certain site specific mitigations in connection with
THPs covering virgin old growth timber and unusually dense stands of residual
old growth timber. Such surveys can only be conducted during a portion of the
murrelet's nesting and breeding season, which extends from April through
mid-September. Accordingly, such surveys are expected to delay the review and
approval process with respect to certain of the THPs filed by Pacific Lumber.
The results of such surveys to date (based upon current survey protocols) have
indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled
murrelet habitat. A substantial portion of this land contains virgin and
residual old growth timber and the bulk of it falls within the areas designated
as critical habitat for the marbled murrelet (see below). Pacific Lumber is
unable to predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published the final designation of critical habitat
for the marbled murrelet (the "Final Designation"), designating over four
million acres as critical habitat for the marbled murrelet. Although nearly all
of the designated habitat is public land, approximately 33,000 acres of the
Company's timberlands are included in the Final Designation, the substantial
portion of such acreage being young growth timber. In order to mitigate the
impact of the Final Designation, particularly with respect to timberlands
occupied by the marbled murrelet, Pacific Lumber over the last few years has
attempted to develop a habitat conservation plan for the marbled murrelet (the
"Murrelet HCP"). Due to, among other things, the unfavorable response of the
USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation
(see, "Legal Proceedings -- Pacific Lumber" for a description of the Takings
Litigation, which is currently stayed pursuant to the Headwaters Agreement). It
is impossible to determine the potential adverse effect of the Final Designation
on the Company's consolidated financial position, results of operations or
liquidity until such time as the material regulatory and legal issues are
resolved; however, if Pacific Lumber is unable to harvest, or is severely
limited in harvesting, on timberlands designated as critical habitat for the
marbled murrelet, such effect could be materially adverse. There continue to be
other regulatory actions and lawsuits seeking to have various other species
listed as threatened or endangered under the ESA and/or the CESA and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by Pacific Lumber. It
is uncertain what impact, if any, such listings and/or designations of critical
habitat would have on the Company's consolidated financial position, results of
operations or liquidity. See also "Legal Proceedings -- Pacific Lumber
Litigation" for a description of the pending Marbled Murrelet action.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish a long-term sustained yield ("LTSY") harvest level
that takes into account environmental and economic considerations. The SYP must
demonstrate that the average annual harvest over any rolling ten-year period
will not exceed the LTSY harvest level and that Pacific Lumber's projected
timber inventory is capable of sustaining the LTSY harvest level in the last
decade of the
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100-year planning period. On December 17, 1996, Pacific Lumber submitted a
proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest over
the last five years. The proposed SYP also indicates that Pacific Lumber's
average annual timber harvest during the first decade of the SYP would
approximate the LTSY harvest level. During the second decade of the proposed
SYP, Pacific Lumber's average annual timber harvest would be approximately 8%
less than that proposed for the first decade. The SYP, when approved, will be
valid for ten years. Thereafter, revised SYPs will be prepared every decade that
will address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources. The proposed SYP assumes that
the transactions contemplated by the Headwaters Agreement will be consummated
and that the Multi-Species HCP will permit Pacific Lumber to harvest its
timberlands (including over the next two decades a substantial portion of its
old growth timberlands not transferred pursuant to the Headwaters Agreement) to
achieve maximum sustained yield. The SYP is subject to review and approval by
the CDF, and there can be no assurance that the SYP will be approved in its
proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable
to predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and submitting
corresponding amendments to its SYP; however, there can be no assurance that it
would be able to do so and the amount of such acquisitions would be limited by
Pacific Lumber's available financial resources. The Company is unable to predict
the ultimate impact the sustained yield regulations will have on its future
financial position, results of operations or liquidity.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of Pacific Lumber's THPs and other timber harvesting operations, and
Pacific Lumber expects that such groups and individuals will continue to file
such objections. In addition, lawsuits are pending or threatened which seek to
prevent Pacific Lumber from implementing certain of its approved THPs or which
challenge other operations by Pacific Lumber. These challenges have severely
restricted Pacific Lumber's ability to harvest old growth timber on its
property. To date, challenges with respect to Pacific Lumber's THPs relating to
young growth timber have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its timber harvesting operations are
likely to occur in the future, particularly with respect to virgin and residual
old growth timber. Although such challenges have delayed or prevented Pacific
Lumber from conducting a portion of its operations, they have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. Nevertheless, it is impossible to predict the future
nature or degree of such challenges or their ultimate impact on the consolidated
operating results, financial position or liquidity of the Company. See also
"Legal Proceedings -- Pacific Lumber Litigation" for a description of the
pending Marbled Murrelet action.
Laws and regulations dealing with Pacific Lumber's operations are subject
to change and new laws and regulations are frequently introduced concerning the
California timber industry. From time to time, bills are introduced in the
California legislature and the U.S. Congress which relate to the business of
Pacific Lumber. It is impossible to predict the content of any such bills, the
likelihood of any of the bills passing or the impact of any of these bills on
the future liquidity, consolidated financial position or operating results of
the Company. See also "Business of the Company -- Pacific Lumber
Operations -- Regulatory and Environmental Factors."
Risk of Loss from Earthquakes, Fire or Other Casualties
In April 1992, an earthquake and a series of aftershocks occurred in
northern California which produced a significant amount of damage in and around
the area where Pacific Lumber's forest products operations are located. A large
number of kilns used to dry upper grade redwood lumber and one of Pacific
Lumber's sawmills were not operational for a period of approximately six weeks.
In order to recover some of this lost production time, Pacific Lumber initiated
additional shifts at two of its other sawmills. Although certain of Pacific
Lumber's production facilities were temporarily idled as a result of such
earthquake, standing timber
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on Pacific Lumber's timberlands suffered virtually no damage. Pacific Lumber
believes that it possesses adequate insurance coverage relating to damage to its
facilities and equipment and the disruption of its business from earthquakes.
Consistent with the past practices of Pacific Lumber and the owners of most
other timber tracts in the United States, Pacific Lumber does not intend to
maintain earthquake insurance in respect of standing timber. See "Business of
the Company -- Pacific Lumber Operations -- Production Facilities."
Pacific Lumber assumes substantially all risks of loss from fire and other
casualties on its timberlands, similar to the risks currently assumed by the
owners of most other timber tracts in the United States. The risk of forest fire
damage to Pacific Lumber's timberlands is relatively low as a result of the
foggy climate along the northern California coast and the natural fire
resistance of redwood timber. Pacific Lumber is a participant with the CDF and
other timberland owners in cooperative fire fighting and aerial fire
surveillance programs. The extensive roads on Pacific Lumber's timberlands also
serve as fire breaks and facilitate implementation of fire control techniques
and utilization of fire fighting equipment. The last forest fire of any
significance affecting Pacific Lumber's timberlands occurred in 1990 and
resulted in damage to approximately 2,000 acres, which were salvaged during 1992
with minimal loss and the area has been replanted. Consistent with the past
practices of Pacific Lumber and the owners of most other timber tracts in the
United States, Pacific Lumber does not intend to acquire fire insurance in
respect of standing timber.
Industry Conditions
The demand for lumber products is influenced by conditions in the housing,
construction and remodeling industries. The housing, construction and remodeling
industries are highly cyclical and are affected by numerous factors, including
real estate prices, interest rates, credit availability, property taxes, federal
and state income tax policy, energy costs and general economic conditions, all
of which are beyond the control of the Company.
Headwaters Agreement
MAXXAM and Pacific Lumber have entered into the Headwaters Agreement (see
"Business of the Company -- Pacific Lumber Operations -- Headwaters Agreement").
A substantial portion of the timberlands which would be transferred to the
government pursuant to the Headwaters Agreement are part of the timberlands
owned by Salmon Creek (the "Salmon Creek Property"). The Pacific Lumber
Indenture permits Pacific Lumber to distribute to MGI the proceeds of any sale
or other disposition of the Salmon Creek Property; however, the MGI Indenture
contains limitations on the ability of MGI to distribute any such proceeds to
the Company (generally, 50% of the proceeds in excess of $62 million received as
distributions in respect of the Salmon Creek Property, except in connection with
the harvesting of timber located on the Salmon Creek Property). The Indenture
will permit the Company to distribute to MAXXAM approximately 50% of such
distributions from MGI in respect of the Salmon Creek Property. See "Description
of New Notes -- Limitations on Restricted Payments." If consummated, the
Headwaters Agreement could expedite the approval time and reduce the costs
associated with Pacific Lumber's THPs. There can be no assurance that the
Headwaters Agreement will be consummated.
LITIGATION
MAXXAM and certain of its subsidiaries, affiliates, directors and officers
(the "MAXXAM Parties") are defendants (or threatened defendants) in a variety of
pending or threatened actions, including, but not limited to (a) actions by and
on behalf of the federal government relating to the insolvency of USAT (see
"-- Ability to Service Indebtedness"), (b) actions with respect to certain
transactions between certain Real Estate Subsidiaries and Federated, a principal
shareholder of MAXXAM, (c) lawsuits relating to Pacific Lumber's THPs and other
timber harvesting operations (see "-- Risk Factors Relating to Pacific Lumber --
Regulatory and Environmental Factors"), (d) environmental and asbestos
litigation involving Kaiser (see "-- Risk Factors Relating to
Kaiser -- Environmental Matters and Litigation"), and (e) federal antitrust
investigations with respect to Kaiser. Certain of these actions make claims for
substantial damages against the MAXXAM Parties, including subsidiaries of the
Company. Adverse determinations and/or unfavorable settlements with respect to
one or more of such actions in respect of the Company's subsidiaries could
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materially impair the Company's ability to satisfy its obligations under the
Notes. Adverse determinations and/or unfavorable settlements with respect to one
or more of such actions in respect of MAXXAM itself could materially and
adversely affect the financial condition, results of operations and liquidity of
MAXXAM and MAXXAM's ability to pay principal and interest on the Intercompany
Note and to honor its guaranty of the Notes. See "-- Ability to Service
Indebtedness." For information concerning these litigation matters, see "Legal
Proceedings" and Notes 9 and 7 to the Audited and Unaudited Consolidated
Financial Statements of MAXXAM, respectively.
RISK FACTORS RELATING TO KAISER
Sensitivity to Prices
Kaiser accounts for the substantial portion of MAXXAM's revenues and
operating results. Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products and also depend to a
significant degree upon the volume and mix of all products sold. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Trends -- Aluminum Operations -- Sensitivity to Prices
and Hedging Programs," "-- Recent Trends and Developments," and "-- Fourth
Quarter Results," and "Business of MAXXAM -- Aluminum Operations -- Industry
Overview."
Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the period January 1, 1993 through January
3, 1997, the average Midwest U.S. transaction price (the "AMT Price") for
primary aluminum has ranged from approximately $.50 to $1.00 per pound. For the
week ended January 3, 1997, the AMT Price for primary aluminum was approximately
$.74 per pound. Alumina prices as well as fabricated aluminum product prices
(which vary considerably among products) are significantly influenced by changes
in the price of primary aluminum but generally lag behind primary aluminum.
Leverage
Kaiser is highly leveraged, with total consolidated indebtedness of $867.3
million and stockholders' equity of $63.4 million at September 30, 1996. On a
pro forma basis, as of September 30, 1996, after giving effect to the issuance
of the KACC New Senior Notes (on October 23, 1996) and the issuance of the KACC
New Series C Senior Notes (on December 23, 1996) and the application of the
proceeds therefrom, Kaiser would have had total consolidated indebtedness of
$962.0 million. Kaiser's ability to generate sufficient cash to meet its debt
service obligations is subject to many factors, certain of which are beyond its
control, including economic conditions, aluminum prices, and competition. While
Kaiser believes that, based on current levels of operations, its cash generated
from operations, together with other sources of liquidity, will be adequate to
meet such obligations, there can be no assurance that such sources of funds will
in fact be sufficient to service such obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations." Kaiser's leverage is substantially greater than the leverage of
most of its North American competitors, which generally have greater financial
resources than Kaiser. Due to its highly leveraged condition, Kaiser is more
sensitive than less leveraged companies to factors affecting its operations,
including changes in the prices for its products, the rates charged for power at
its various facilities, and general economic conditions.
Environmental Matters and Litigation
Kaiser and KACC are subject to a wide variety of international, federal,
state and local environmental laws and regulations (the "Environmental Laws").
From time to time, Kaiser and KACC are subject, with respect to their current
and former operations, to fines or penalties assessed for alleged breaches of
the Environmental Laws and to claims and litigation based upon such laws. KACC
is currently subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). Under
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CERCLA and other related laws, past disposal of wastes, whether on-site or at
other locations, may result in the imposition of clean-up obligations by federal
or state regulatory authorities. KACC's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. In addition, KACC, along
with numerous other entities, has been named as a potentially responsible party
("PRP") for remedial costs at certain third-party sites listed on the National
Priorities List. In certain instances, KACC may be exposed to joint and several
liability for remedial action or damages to natural resources, which could
effectively expose KACC to liability for all costs associated with any such
remedial actions irrespective of its degree of culpability for the environmental
damages related thereto. Further, future environmental regulations are expected
to impose stricter compliance requirements on the aluminum industry. For a
discussion of certain KACC environmental litigation and other environmental
matters, including the reserves established with respect thereto, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," "Business of MAXXAM -- Aluminum
Operations -- Environmental Matters" and "Legal Proceedings -- Kaiser
Litigation -- Environmental Litigation" and Notes 9 and 7, respectively, to the
Audited and Unaudited Consolidated Financial Statements of MAXXAM.
In addition, KACC is subject to a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced or
sold by KACC (which products have generally not been manufactured by KACC for at
least 15 years). While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the actual costs
that ultimately may be incurred and insurance recoveries that will be received,
Kaiser currently believes that, based on the factors discussed below under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on KACC's
consolidated financial position, results of operations, or liquidity. For a
discussion of KACC's asbestos related litigation, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations" Financial Condition and Investing and Financing
Activities -- Aluminum Operations" and Notes 9 and 7, respectively, of the Notes
to the Audited and Unaudited Consolidated Financial Statements of MAXXAM.
Power Supply
Electric power represents an important production cost for KACC at its
aluminum smelters. In 1995, KACC successfully restructured electric power
purchase agreements for its smelting facilities in the Pacific Northwest, which
has resulted in significantly lower electric power costs in 1996 for the Mead
and Tacoma, Washington, smelters compared with 1995 electric power costs. A
number of lawsuits challenging the restructuring have been filed and the effect,
if any, of such lawsuits on KACC's power purchase and transmission arrangements
is not known at the current time. In addition, while KACC has entered into long
term arrangements with respect to the power supply for its 90%-owned Volta
Aluminium Company Limited ("Valco") smelter in Ghana, there can be no assurance
that the requisite power supply will be available. For a discussion of KACC's
power supply arrangements, see "Business of MAXXAM -- Aluminum Operations --
Production Operations."
Foreign Activities
Kaiser's operations are located in many foreign countries, including
Australia, Canada, China, Ghana, Jamaica and the United Kingdom. Foreign
operations in general may be more vulnerable than domestic operations due to a
variety of political and other risks. See "Business of MAXXAM -- Aluminum
Operations -- Production Operations" and "-- International Business
Development."
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CONTROL OF THE COMPANY
The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz,
the Chairman of the Board, Chief Executive Officer and President of MAXXAM,
together with Federated Development Inc. ("FDI"), collectively own 2,735,219
shares of MAXXAM's common stock and 680,574 shares of MAXXAM's Class A $.05
Non-Cumulative Participating Convertible Preferred Stock (the "Preferred
Stock"), which has ten votes per share, aggregating approximately 61.2% of the
aggregate voting power of MAXXAM. FDI is a wholly owned subsidiary of Federated,
a New York business trust of which Mr. Hurwitz is Chairman of the Board and
Chief Executive Officer and which is wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof. Accordingly, Mr. Hurwitz
will be able to control the election of the directors of the Company and to
determine the corporate and management policies of the Company, including
decisions relating to any merger or acquisition of the Company, the sale of
substantially all of the assets of the Company and other significant corporate
transactions.
HIGHLY LEVERAGED TRANSACTIONS
The Indenture does not contain any provisions specifically intended to
protect holders of the Notes in the event of a future highly leveraged
transaction involving the Company. The Indenture will limit the Company's
ability to incur additional Indebtedness and to grant liens on its assets to
secure Indebtedness, limit the Company from selling its assets under certain
circumstances, restrict transactions with Affiliates and require the Company to
make a Change of Control Offer (as defined), each under certain circumstances
described herein. These provisions could limit the ability of the Company to
engage in a highly leveraged transaction (including a leveraged buyout initiated
or supported by the Company, the management of the Company or an affiliate of
the Company or its management). These provisions may not be waived or amended
without the consent of a majority in aggregate principal amount of the Notes.
See "Description of the New Notes -- Change of Control" and "-- Certain
Covenants."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company or the Guarantor within the
meaning of Rule 405 under the Securities Act and other than any broker-dealer
who purchased Old Notes directly from the Company for resale pursuant to Rule
144A under the Securities Act or any other available exemption under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Each broker-dealer that acquired Old Notes for its own account as a
result of market making or other trading activities and that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that, by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the effective date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, to comply with the securities laws of
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<PAGE> 34
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions or
an exemption from registration or qualification is available and is complied
with. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
will be adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are a new issue of securities, have no established trading
market, and may not be widely distributed. The Company does not intend to list
the New Notes on any national securities exchange or the Nasdaq Stock Market or
to seek the admission thereof to trading on any automated quotation system. No
assurance can be given that an active public or other market will develop for
the New Notes or as to the liquidity of or the trading market for the New Notes.
If a trading market does not develop or is not maintained, holders of the New
Notes may experience difficulty in reselling the New Notes or may be unable to
sell them at all. If a market for the New Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the New Notes,
future trading prices of the New Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities, and the price at which the
holders of New Notes will be able to sell such New Notes is not assured and the
New Notes could trade at a premium or discount to their purchase price or face
value. Depending on prevailing interest rates, the market for similar securities
and other facts, including the financial condition of the Company, the New Notes
may trade at a discount from their principal amount.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on
December 23, 1996, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to February 21, 1997, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its reasonable best efforts to cause such registration statement
to be declared effective by the Commission on or prior to May 22, 1997, and
(iii) to cause the Exchange Offer to remain open for a period of not less than
30 days. This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the conditions, terms
and provisions of the Registration Rights Agreement. The form and terms of the
New Notes will be identical in all material respects to the form and terms of
the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of New Notes will
not be entitled to Additional Interest, and (iii) holders of New Notes will not
be, and upon consummation of the Exchange Offer, Eligible Holders of Old Notes
will no longer be, entitled to certain rights under the Registration Rights
Agreement intended for holders of unregistered securities. See "-- Conditions of
the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $130.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of January 7, 1997, there were registered
holders of the Old Notes, including Cede, which held $ million of aggregate
principal amount of the Old Notes for of its participants. Solely for
reasons of administration (and for no other purpose), the Company has fixed the
close of business on January 7, 1997, as the record date (the "Record Date") for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only an Eligible Holder of the Old Notes
(or such Eligible Holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Eligible Holders of the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
such Eligible Holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company or of the Guarantor.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
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If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1997 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will, in accordance with applicable law, file a post-effective
amendment to the Registration Statement (a "Post-effective Amendment") and
resolicit the registered holders of the Old Notes. If the Company files a
Post-effective Amendment, it will notify the Exchange Agent of an extension of
the Exchange Offer by oral or written notice, and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the effectiveness of such Post-effective Amendment. Such
notice and public announcement shall set forth the new Expiration Date, which
new Expiration Date shall be no less than five days after the then applicable
Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, notwithstanding any other
provisions of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue the New Notes in exchange for, any Old Notes, if the
Exchange Offer violates any applicable law or interpretation of the staff of the
Commission. The Company expects that the foregoing conditions will be satisfied.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), Eligible
Holders of Old Notes are entitled to receive Additional Interest. Additional
Interest means the increase in the interest rate borne by Registrable Securities
during the period in which a Registration Default is continuing pursuant to the
terms of the Registration Rights Agreement (in general, one-quarter of one
percent (0.25%) per annum for the first 90-day period immediately after the
first such Registration Default and an additional one-quarter of one percent
(0.25%) per annum for each subsequent 90-day period until all Registration
Defaults have been cured, provided that the aggregate increase in such interest
rate shall not exceed one percent (1.00%) per annum). A "Registration Default"
with respect to the Exchange Offer shall generally occur if: (i) the
registration statement concerning the exchange offer (the "Registration
Statement") has not been filed with the Commission on or prior to February 21,
1997; (ii) the Registration Statement is not declared effective on or prior to
May 22, 1997, or (iii) the Exchange Offer is not consummated on or prior to June
21, 1997. Holders of New Notes will not be and, upon consummation of the
Exchange Offer, Holders of Old Notes will no longer be, entitled to (i) the
right to receive Additional Interest, except in certain limited circumstances,
and (ii) certain other rights under the Registration Rights Agreement intended
for holders of Registrable Securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the
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Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer.
ACCRUED INTEREST ON THE OLD NOTES
The New Notes will bear interest at a rate equal to 12% per annum from and
including their date of issuance. Eligible Holders whose Old Notes are accepted
for exchange will have the right to receive interest accrued thereon from the
date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange, which interest accrued at the
rate of 12% per annum, will cease to accrue on the day prior to the issuance of
the New Notes. See "Description of New Notes -- General."
PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by
an Eligible Institution (as defined below). In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm which is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
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(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes
are being acquired by the Eligible Holder and each Beneficial Owner in the
ordinary course of business of the Eligible Holder and each Beneficial Owner,
(ii) the Eligible Holder and each Beneficial Owner are not participating, do not
intend to participate, and have no arrangement or understanding with any person
to participate, in the distribution of the New Notes, (iii) the Eligible Holder
and each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and
Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in
the Commission's letters to Shearman & Sterling (available July 2, 1993) and
K-III Communications Corporation (available May 14, 1993), and similar no-action
or interpretive letters issued to third parties, (iv) that if the Eligible
Holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the Eligible Holder and
each Beneficial Owner understand that a secondary resale transaction described
in clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company or the Guarantor except as otherwise disclosed to the
Company in writing. In connection with a book-entry transfer, each participant
will confirm that it makes the representations and warranties contained in the
Letter of Transmittal.
Guaranteed Delivery Procedures. Eligible Holders who wish to tender their
Old Notes and (i) whose Old Notes are not immediately available or (ii) who
cannot deliver their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Eligible Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing
36
<PAGE> 39
that, within three (3) business days after the date of delivery of the Notice of
Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of
Transmittal and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) such properly completed and
executed documents required by the Letter of Transmittal and the tendered Old
Notes in proper form for transfer (or confirmation of a book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC) must be received by the
Exchange Agent within three (3) business days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
Book-Entry Delivery. The Exchange Agent will establish an account with
respect to the Old Notes at DTC (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing such
facility to transfer Old Notes into the Exchange Agent's account in accordance
with such facility's procedure for such transfer. Even though delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or a manually signed facsimile thereof), with
any required signature guarantees, or an Agent's Message (as defined below) in
connection with a book-entry transfer, and other documents required by the
Letter of Transmittal, must, in any case, be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover of this
Prospectus before the Expiration Date, or the guaranteed delivery procedure set
forth above must be followed. Delivery of the Letter of Transmittal and any
other required documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. The term "Agent's Message" means a message
transmitted by the Book-Entry Transfer Facility to, and received by, the
Exchange Agent and forming a part of a book-entry confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Transfer Facility tendering the Old
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and that the Company may enforce such agreement
against such participant.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes,
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Eligible Holder in the same manner as the original signature on the
Letter of Transmittal by
37
<PAGE> 40
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by a bond power in the name of the person withdrawing the
tender, in satisfactory form as determined by the Company in its sole
discretion, duly executed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution together with the other documents required
by the Indenture upon transfer, and (iv) specify the name in which such Old
Notes are to be re-registered, if different from the Depositor, pursuant to such
documents of transfer. Any questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
in its sole discretion. The Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are withdrawn will be
returned to the Eligible Holder thereof without cost to such Eligible Holder as
soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer -- Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
First Bank National Association is the Exchange Agent. All tendered Old
Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand/Overnight Express: Facsimile
First Bank National Association First Bank National Association Transmission:
180 E. 5th Street 180 E. 5th Street (612) 244-0711
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Richard Prokosch Attention: Richard Prokosch To confirm receipt:
Trust Officer Trust Officer (612) 244-0721
</TABLE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will offers be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction permissible and extend the Exchange Offer to holders of
Old Notes in such jurisdiction.
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing copies of the Prospectus), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and the Guarantor, (v) fees and disbursements of
independent certified public accountants, (vi) rating agency fees, (vii)
internal expenses of the Company and the Guarantor (including, without
limitation, all salaries and expenses of officers and employees of the Company
and the Guarantor performing legal or accounting duties), and (ix) fees and
expenses incurred in connection with the listing, if any, of the New Notes on a
securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company,
38
<PAGE> 41
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on interpretations by the staff of the Commission enunciated in
Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), and interpreted in the
Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14, 1993), and similar no-action or
interpretive letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
such Eligible Holder (other than (i) a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company or the Guarantors within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the Eligible
Holder is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. The Company has not requested
or obtained an interpretive letter from the Commission staff with respect to
this Exchange Offer, and the Company and the Eligible Holders are not entitled
to rely on interpretive advice provided by the staff to other persons, which
advice was based on the facts and conditions represented in such letters.
However, the Exchange Offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in such letters. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Company has agreed that for a period of
180 days after the effective date of this Prospectus, it will make this
Prospectus, as amended and supplemented, available to any broker-dealer who
receives New Notes in the Exchange Offer for use in connection with any such
resale. See "Plan of Distribution."
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exception from, or in a transaction not subject to, the
Securities Act and applicable states securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors -- Consequences of Failure to Exchange."
39
<PAGE> 42
OTHER
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisers in making their own decisions
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights, and limitations applicable thereto, under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. See "Description of New Notes." All untendered Old Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
40
<PAGE> 43
CAPITALIZATION OF THE COMPANY
The following table summarizes the unaudited consolidated capitalization of
the Company at September 30, 1996, and as adjusted to give effect to the
Offering and the application of the proceeds therefrom. This table should be
read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1).................... $ 85.0 $ 85.0
======= =======
SHORT-TERM DEBT:
Current maturities of long-term debt(2).............................. $ 16.3 $ 16.3
------- -------
LONG-TERM DEBT:
12% MAXXAM Group Holdings Inc. Senior Secured Notes due
August 1, 2003.................................................... -- 130.0
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015... 320.0 320.0
10 1/2% Pacific Lumber Senior Notes due March 1, 2003................ 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003.................. 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of
discount(3)....................................................... 101.0 101.0
Other................................................................ .6 .6
------- -------
Total long-term debt.............................................. 756.6 886.6
------- -------
STOCKHOLDER'S DEFICIT:
Common stock......................................................... -- --
Additional capital................................................... 89.8 89.8
Accumulated deficit(4)............................................... (215.7) (215.7)
------- -------
Total Stockholder's Deficit....................................... (125.9) (125.9)
------- -------
Total Capitalization......................................... $ 647.0 $ 777.0
======= =======
</TABLE>
- ---------------
(1) Cash, cash equivalents and marketable securities of the Company includes the
following amounts held by each of the following subsidiaries of the Company
in the amounts indicated: MGI -- $72.5 million; Scotia Pacific -- $6.8
million; Pacific Lumber -- $5.5 million; and Britt -- $0.2 million. Further,
Scotia Pacific had $30.5 million of restricted cash deposits held for the
benefit of the Timber Notes which is classified as a noncurrent asset in the
Company's Consolidated Financial Statements. Cash held by the Company's
subsidiaries is generally not available to service its obligations on the
Notes. See "Risk Factors -- Ability to Service Indebtedness."
(2) Reflects current maturities of $16.1 million relating to the Timber Notes
and $0.2 million of other debt of Pacific Lumber.
(3) Net of discount of $24.7 million. The MGI Discount Notes will accrete to an
aggregate principal amount of $125.7 million on August 1, 1998, and for
periods thereafter MGI will be required to make cash interest payments of
approximately $7.7 million in respect of this indebtedness each February 1
and August 1 thereafter.
(4) Stockholder's deficit reflects aggregate one time charges (recorded in 1993)
relating to the implementation of SFAS 106 and SFAS 109. See Note 2 to the
Summary Historical and Pro Forma Consolidated Financial Data of the Company.
41
<PAGE> 44
CAPITALIZATION OF MAXXAM
The following table summarizes the unaudited consolidated capitalization of
MAXXAM at September 30, 1996, and as adjusted to give effect to the retirement
of the Old MAXXAM Notes (the "Retirement"), the issuance of the Notes
(collectively with the Retirement, the "Refinancing"), the issuance of $225.0
million aggregate principal amount of the KACC New Notes, and the application of
the net proceeds therefrom. (See Note 6 to the Summary Historical and Pro Forma
Financial Data of MAXXAM). This table should be read in conjunction with the
Consolidated Financial Statements of MAXXAM and the Notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1)..................................... $ 171.1 $ 338.7
======== ========
SHORT-TERM DEBT:
Current maturities of long-term debt(2)............................................... $ 26.4 $ 26.4
-------- --------
LONG-TERM DEBT:
MAXXAM:
Old MAXXAM Notes:
14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000......................... 25.0 --
12 1/2% MAXXAM Subordinated Debentures due December 15, 1999(3)..................... 16.7 --
Aluminum Operations:
1994 KACC Credit Agreement.......................................................... 131.2 --
9 7/8% KACC Senior Notes due February 15, 2002(4)................................... 224.0 224.0
10 7/8% KACC New Notes due October 15, 2006(5)...................................... -- 225.9
Alpart CARIFA Loan.................................................................. 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003......................... 400.0 400.0
Other............................................................................... 43.2 43.2
Forest Products Operations:
12% MAXXAM Group Holdings Inc. Senior Secured Notes due
August 1, 2003.................................................................... -- 130.0
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015.................. 320.0 320.0
10 1/2% Pacific Lumber Senior Notes due March 1, 2003............................... 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003................................. 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount....... 101.0 101.0
Other............................................................................... .6 .6
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due
September 1, 2001, net of discount................................................ 15.6 15.6
RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3%........ 3.8 3.8
Other notes and contracts, secured by receivables, buildings, real estate and
equipment.......................................................................... 7.8 7.8
-------- --------
Total long-term debt.............................................................. 1,683.9 1,866.9
-------- --------
MINORITY INTERESTS...................................................................... 217.9 217.9
STOCKHOLDERS' DEFICIT:
Preferred stock....................................................................... $ .3 $ .3
Common stock.......................................................................... 5.0 5.0
Additional capital.................................................................... 155.6 155.6
Accumulated deficit(6)................................................................ (180.5) (181.1)(7)
Pension liability adjustment.......................................................... (16.1) (16.1)
Treasury stock........................................................................ (19.5) (19.5)
-------- --------
Total Stockholders' Deficit....................................................... (55.2) (55.8)
-------- --------
Total Capitalization............................................................ $1,873.0 $ 2,055.4
======== ========
</TABLE>
- ---------------
(footnotes are on the following page)
42
<PAGE> 45
- ---------------
(1) Cash, cash equivalents and marketable securities held by MAXXAM, excluding
amounts held by subsidiaries, was $56.6 million and, on a pro forma basis
$136.1 million after the retirement of the Old MAXXAM Notes but prior to
any other use of proceeds from the Offering.
(2) Reflects current maturities of approximately $8.9 million, $16.3 million and
$1.2 million, relating to the Company's aluminum operations, forest
products operations, and real estate and other operations, respectively.
(3) Net of discount of $0.9 million.
(4) Net of discount of $1.0 million.
(5) The KACC New Notes include the KACC New Senior Notes of $175.0 million
aggregate principal amount, net of discount of $0.9 million, and the KACC
New Series C Senior Notes of $50.0 million aggregate principal amount
including a premium of $1.8 million. The net proceeds from the sale of the
KACC New Notes were used to repay the outstanding borrowings under the 1994
KACC Credit Agreement. The remaining net proceeds are held by KACC for
general corporate purposes. MAXXAM did not receive any proceeds from the
sale of the KACC New Notes.
(6) Stockholders' deficit reflects aggregate one time charges (recorded in 1993)
of approximately $417.7 million relating to the implementation of SFAS 106,
SFAS 109 and SFAS 112. See Note 1 to the Summary Historical and Pro Forma
Financial Data of MAXXAM.
(7) Assumes the write-off of approximately $0.9 million of unamortized discount
and $0.1 million of deferred financing costs attributable to the Old MAXXAM
Notes, net of an estimated income tax benefit of $0.4 million.
43
<PAGE> 46
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected historical consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company"
appearing elsewhere in this Prospectus. The Company was formed on November 4,
1996 to facilitate the offering of the Old Notes. Subsequent to its formation,
the Company received from MAXXAM, as a capital contribution, 100% of the capital
stock of MGI. Further, concurrently with the consummation of the Offering,
MAXXAM transferred to the Company the Kaiser Shares as an additional capital
contribution. The contribution of MGI's capital stock has been accounted for as
a reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to all of MGI's historical
operations. The contribution of the Kaiser Shares has been reflected in the
following consolidated financial information of the Company as if such
contribution occurred as of January 1, 1991 (the beginning of the earliest
period presented) at MAXXAM's historical cost using the equity method of
accounting. The following historical consolidated financial information of the
Company reflects the historical operating results of MGI, the equity in earnings
(losses) attributable to its investment in the Kaiser Shares and MAXXAM's
purchase accounting adjustments (principally relating to MGI's timber and
depreciable assets) for each accounting period presented. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
selected historical consolidated financial data as of and for the five years
ended December 31, 1995 are derived from the Consolidated Financial Statements
of the Company which have been audited by independent public accountants. The
selected historical consolidated financial data as of and for the nine months
ended September 30, 1996 and 1995 has not been audited, but in the opinion of
management contain all adjustments (including those of a normal recurring
nature) necessary to present fairly the financial position and results of
operations of the Company as of such dates and for such periods. The following
consolidated pro forma operating data for the nine months ended September 30,
1996 and for the year ended December 31, 1995 give effect to the Transactions as
if they occurred on January 1, 1995. The consolidated pro forma balance sheet
data gives effect to the Transactions as if they occurred on September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------- ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING DATA:
Net sales..................................... $199.6 $180.9 $242.6 $249.6 $ 233.4 $223.3 $205.7
Cost of sales (exclusive of depreciation and
depletion).................................. 114.6 96.0 127.1 129.6 134.6 113.8 103.3
Gross profit.................................. 85.0 84.9 115.5 120.0 98.8 109.5 102.4
Selling, general and administrative
expenses.................................... 11.3 12.2 15.9 16.3 20.1 17.1 16.6
Depreciation and depletion.................... 20.2 19.0 25.3 24.7 24.5 28.4 30.4
Operating income.............................. 53.4 53.7 74.3 79.1 54.2 64.1 55.3
Investment, interest and other income
(expense)................................... 8.4 6.8 9.4 14.4 10.0 16.6 81.0
Interest expense.............................. 58.4 58.2 77.8 77.4 81.9 91.4 94.2
Interest expense, net of earnings on invested
cash, cash equivalents and marketable
securities.................................. 51.2 51.9 69.0 72.6 72.5 93.6 77.6
Income (loss) from continuing operations
before income taxes, extraordinary items and
cumulative effect of changes in accounting
principles.................................. 3.4 2.3 5.9 16.1 (17.7) (10.7) 42.1
Income (loss) from continuing operations
before extraordinary items and cumulative
effect of changes in accounting
principles.................................. 4.5 1.6 4.2 19.2 (14.1) (12.0) 36.4
Income (loss) from the net assets transferred
to MAXXAM, net of minority interests and
related income taxes(1)..................... -- -- -- -- (272.0) 17.5 40.0
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items, net of related income
taxes(2).................................... $ -- $ -- $ -- $(14.9) $ (31.5) $ -- $ --
Cumulative effect of changes in accounting
principles(3)............................... -- -- -- -- (220.4) -- --
Net income (loss)............................. 4.5 1.6 4.2 4.4 (538.0) 5.5 76.4
OTHER HISTORICAL DATA:
Fixed charge coverage deficiency.............. -- -- -- -- 17.7 10.7 --
Ratio of earnings to fixed charges............ 1.1x 1.0x 1.1x 1.2x -- -- 1.5x
Capital expenditures.......................... 9.0 6.6 9.9 11.3 11.1 8.7 6.4
Summary of cash flow information(4):
Cash provided (used) by operating
activities................................ 30.7 18.0 25.4 34.9 19.3 32.5 (1.6)
Cash provided (used) by investing
activities................................ (8.9) (4.1) (7.3) (10.2) (22.6) (32.4) 149.8
Cash provided (used) by financing
activities................................ (17.1) (18.5) (18.2) (15.2) (12.0) (5.3) (129.4)
EBITDA(4)(5).................................. 73.6 72.7 99.6 103.8 78.7 92.5 85.7
PRO FORMA OPERATING DATA(6):
Investment, interest and other income
(expense)................................... 18.7 23.2
Interest expense.............................. 70.7 94.2
Interest expense, net of earnings on the
Intercompany Note, invested cash, cash
equivalents and marketable securities....... 53.2 71.6
Income (loss) from continuing operations
before income taxes, extraordinary items and
cumulative effect of changes in accounting
principles.................................. 1.3 3.2
Ratio of earnings to fixed charges............ 1.0x 1.0x
EBITDA(4)(5).................................. 73.5 99.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------- DECEMBER 31,
PRO -------------------------------------------------
ACTUAL FORMA(6) 1995 1994 1993 1992 1991
------- ------------ ------- ------- ------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash, cash equivalents and
marketable securities(7)......... $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8 $ 77.0 $ 113.6
Working capital.................... 126.6 126.6 126.2 104.5 83.9 107.4 147.2
Total assets....................... 713.3 843.3 740.9 744.5 743.0 1,200.5 1,212.1
Total indebtedness................. 772.9 902.9 778.5 782.5 788.4 677.9 677.7
Stockholder's equity
(deficit)(3)..................... (125.9) (125.9) (126.5) (125.9) (130.3) 458.5 468.2
</TABLE>
- ---------------
See "Summary Historical and Pro Forma Consolidated Financial Data of the
Company" for the text of footnotes (1) through (7).
45
<PAGE> 48
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY
SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS
------------------------
ISSUANCE
OF INTERCOMPANY AS
ACTUAL NOTES NOTE ADJUSTED
------ -------- ------------ --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 53.1 $125.0 $ (125.0) $ 53.1
Marketable securities............................... 31.9 -- -- 31.9
Receivables......................................... 13.9 -- -- 13.9
Inventories......................................... 78.1 -- -- 78.1
Prepaid expenses and other current assets........... 5.6 -- -- 5.6
------ ----- -------- ------
Total current assets........................ 182.6 125.0 (125.0) 182.6
------ ----- -------- ------
Property, plant and equipment, net.................... 101.2 -- -- 101.2
Timber and timberlands, net........................... 303.0 -- -- 303.0
Receivable from MAXXAM................................ -- -- 125.0 125.0
Restricted cash....................................... 30.5 -- -- 30.5
Deferred income taxes................................. 65.2 -- -- 65.2
Deferred financing costs and other assets............. 30.8 5.0 -- 35.8
------ ----- -------- ------
$713.3 $130.0 $ -- $843.3
====== ====== ======== ======
Current liabilities:
Accounts payable.................................... $ 5.4 $ -- $ -- $ 5.4
Accrued interest.................................... 9.2 -- -- 9.2
Accrued compensation and related benefits........... 9.8 -- -- 9.8
Deferred income taxes............................... 11.5 -- -- 11.5
Other accrued liabilities........................... 3.8 -- -- 3.8
Current maturities of long-term debt................ 16.3 -- -- 16.3
------ ------ -------- ------
Total current liabilities................... 56.0 -- -- 56.0
------ ------ -------- ------
Long-term debt, less current maturities............... 756.6 130.0 -- 886.6
Other noncurrent liabilities.......................... 26.6 -- -- 26.6
------ ------ -------- ------
Total liabilities........................... 839.2 130.0 -- 969.2
------ ------ -------- ------
Contingencies
Stockholder's deficit:
Common stock........................................ -- -- -- --
Additional capital.................................. 89.8 -- -- 89.8
Accumulated deficit................................. (215.7) -- -- (215.7)
------ ------ -------- ------
Total stockholder's deficit................. (125.9) -- -- (125.9)
------ ------ -------- ------
$713.3 $130.0 $ -- $843.3
====== ====== ======== ======
</TABLE>
The Unaudited Pro Forma Consolidated Balance Sheet of the Company
should be read in conjunction with the accompanying notes.
46
<PAGE> 49
NOTE TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET OF THE COMPANY
SEPTEMBER 30, 1996
The Unaudited Pro Forma Consolidated Balance Sheet reflects the
Transactions as if they occurred on September 30, 1996. The Transactions reflect
the issuance of $130.0 million aggregate principal amount of the Notes, the loan
of $125.0 million to MAXXAM pursuant to the Intercompany Note and the
capitalization of $5.0 million of estimated costs associated with the Offering.
MAXXAM will use a portion of the proceeds from the Intercompany Note to repay
the Old MAXXAM Notes together with accrued interest thereon through the date of
redemption; the remaining amounts will be used for general corporate purposes
including possible repurchases of MAXXAM Common Stock.
47
<PAGE> 50
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS ESTIMATED
--------------------------- GENERAL AND
ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS
ACTUAL NOTES NOTE EXPENSES ADJUSTED
------ ----------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $199.6 $ -- $ -- $ -- $199.6
Costs and expenses..................... (146.2) -- -- (0.1) (146.3)
------ ------ ------ ------ ------
Operating income....................... 53.4 -- -- (0.1) 53.3
Other income (expense):
Investment, interest and other....... 8.4 -- 10.3 -- 18.7
Interest expense..................... (58.4) (12.3) -- -- (70.7)
------ ------ ------ ------ ------
Income before income taxes............. $ 3.4 $ (12.3) $ 10.3 $ (0.1) $ 1.3
====== ====== ====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
TRANSACTIONS ESTIMATED
--------------------------- GENERAL AND
ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS
ACTUAL NOTES NOTE EXPENSES ADJUSTED
------ ----------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Net sales.............................. $242.6 -- -- -- $242.6
Costs and expenses..................... (168.3) -- -- (0.1) (168.4)
------ ------ ------ ------ ------
Operating income....................... 74.3 -- -- (0.1) 74.2
Other income (expense):
Investment, interest and other....... 9.4 -- 13.8 -- 23.2
Interest expense..................... (77.8) (16.4) -- -- (94.2)
------ ------ ------ ------ ------
Income before income taxes............. $ 5.9 $ (16.4) $ 13.8 $ (0.1) $ 3.2
====== ====== ====== ====== ======
</TABLE>
The Unaudited Pro Forma Consolidated Statements of Operations
of the Company should be read in conjunction with the accompanying notes.
48
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996, and the Unaudited Pro Forma Consolidated
Statement of Operations for the year ended December 31, 1995, reflect the
Transactions as if they occurred on January 1, 1995.
I. The Transactions reflect the issuance of $130.0 million aggregate
principal amount of the Notes, the loan of $125.0 million to MAXXAM
pursuant to the Intercompany Note and the capitalization of $5.0 million
of estimated costs associated with the Offering. MAXXAM will use a
portion of the proceeds from the Intercompany Note to repay the Old
MAXXAM Notes together with accrued interest thereon through the date of
redemption; the remaining amounts will be used for general corporate
purposes including possible repurchases of MAXXAM Common Stock. The
Unaudited Consolidated Statements of Operations of the Company reflect
the following adjustments:
a. The incurrence of $11.7 million and $15.6 million of interest expense
on the Notes and $0.6 million and $0.8 million of amortization related
to deferred financing costs associated with the Offering for the nine
months ended September 30, 1996 and for the year ended December 31,
1995, respectively.
b. Interest income of $10.3 million and $13.8 million from the
Intercompany Note for the nine months ended September 30, 1996 and for
the year ended December 31, 1995, respectively.
c. The incurrence of estimated general and administrative costs for the
Company of approximately $0.1 million annually.
49
<PAGE> 52
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA OF MAXXAM
The following selected historical consolidated financial data should be
read in conjunction with the Consolidated Financial Statements of MAXXAM and the
Notes thereto (including the unconsolidated Parent only, condensed financial
information of MAXXAM) and the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations of MAXXAM"
appearing elsewhere in this Prospectus. The selected historical financial data
as of and for the five years ended December 31, 1995 are derived from the
Consolidated Financial Statements of MAXXAM which have been audited by
independent public accountants. The selected historical consolidated financial
data as of and for the nine months ended September 30, 1996 and 1995 have not
been audited, but in the opinion of management contain all adjustments
(including those of a normal recurring nature) necessary to present fairly the
financial position and results of operations of MAXXAM as of such dates and for
such periods. The following consolidated pro forma operating data for the nine
months ended September 30, 1996 and for the year ended December 31, 1995 give
effect to the Transactions and the issuance of the KACC New Notes and the
application of the net proceeds therefrom (none of which were received by
MAXXAM), as if they occurred on January 1, 1995. The consolidated pro forma
balance sheet data give effect to the Transactions, the issuance of the KACC New
Notes, and the application of the net proceeds therefrom, as if they occurred on
September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING DATA:
Net sales.......................... $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1 $2,202.6 $2,254.5
Cost of sales (exclusive of
depreciation and depletion)...... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6 1,786.9 1,735.6
Gross profit....................... 354.6 418.4 574.3 297.8 243.5 415.7 518.9
Selling, general and administrative
expenses......................... 152.9 140.5 195.8 169.4 183.0 173.5 177.3
Depreciation and depletion......... 92.9 91.0 120.9 121.1 120.8 111.4 106.1
Restructuring of aluminum
operations....................... -- -- -- -- 35.8 -- --
Operating income (loss)............ 108.8 186.9 257.6 7.3 (96.1) 130.8 235.5
Investment, interest and other
income (expense)................. 35.1 8.7 18.2 (2.2) 69.8 51.6 42.8
Interest expense................... 135.5 136.1 181.3 176.9 185.1 195.6 210.9
Interest expense, net of earnings
on invested cash, cash
equivalents and marketable
securities....................... 125.1 125.1 166.3 166.5 174.0 197.4 196.7
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of
changes in accounting
principles....................... 8.4 59.5 94.5 (171.8) (211.4) (13.2) 67.4
Income (loss) before extraordinary
item and cumulative effect of
changes in accounting
principles....................... 28.0 35.1 57.5 (116.7) (131.9) (7.3) 57.5
Extraordinary items, net of related
income taxes(1).................. -- -- -- (5.4) (50.6) -- --
Cumulative effect of changes in
accounting principles(2)......... -- -- -- -- (417.7) -- --
Net income (loss).................. 28.0 35.1 57.5 (122.1) (600.2) (7.3) 57.5
OTHER HISTORICAL DATA:
Fixed charge coverage deficiency... 5.6 -- -- 213.1 225.8 21.1 --
Ratio of earnings to fixed
charges.......................... -- 1.1x 1.2x -- -- -- 1.3x
Capital expenditures............... 108.0 54.9 97.7 89.3 86.2 132.7 130.9
Summary of cash flow
information(3):
Cash provided by operating
activities..................... 13.5 53.0 137.9 4.5 52.1 30.6 125.0
Cash provided (used) by investing
activities..................... (75.4) (39.7) (75.4) (67.9) 44.6 (84.7) (138.0)
Cash provided (used) by financing
activities..................... 78.2 2.3 (42.9) 64.1 (94.7) 30.9 51.8
EBITDA(3)(4)....................... 201.7 277.9 378.5 128.4 24.7 242.2 341.6
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA OPERATING DATA(5):
Investment, interest and other
income (expense)................. $ 35.1 $ 16.3
Interest expense................... 157.6 211.7
Interest expense, net of earnings
on invested cash, cash
equivalents and marketable
securities....................... 147.2 196.7
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of changes in accounting
principles....................... (13.7) 62.2
Fixed charge coverage deficiency... 27.7 --
Ratio of earnings to fixed
charges.......................... -- 1.1x
EBITDA(3)(4)....................... 201.7 378.5
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31,
------------------------- ------------------------------------------------------------
ACTUAL PRO FORMA(5) 1995 1994 1993 1992 1991
-------- ------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
(AT END OF PERIOD):
Cash, cash equivalents and
marketable securities(6)......... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6 $ 152.5 $ 159.2
Working capital.................... 624.5 794.0 546.8 413.5 414.3 466.0 424.2
Total assets....................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0
Long-term debt, less current
portion.......................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9
Minority interests................. 217.9 217.9 223.2 344.3 224.3 176.7 179.2
Stockholders' equity
(deficit)(2)..................... (55.2) (55.8) (83.8) (275.3) (167.9) 443.9 459.6
</TABLE>
- ---------------
See "Summary Historical and Pro Forma Consolidated Financial Data of MAXXAM" for
the text of notes (1) through (6).
51
<PAGE> 54
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF MAXXAM
SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
ISSUANCE REPAYMENT
PAYMENT OF OF KACC OF
CONSENT NEW OLD MAXXAM AS
ACTUAL TRANSACTIONS FEE NOTES NOTES ADJUSTED
-------- ------------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 120.5 $125.0 $ (1.0) $88.1 $(44.5) $ 288.1
Marketable securities............. 50.6 -- -- -- -- 50.6
Receivables....................... 288.6 -- -- -- -- 288.6
Inventories....................... 623.6 -- -- -- -- 623.6
Prepaid expenses and other current
assets......................... 156.5 -- -- -- -- 156.5
-------- ------ ------ ----- ------ --------
Total current assets...... 1,239.8 125.0 (1.0) 88.1 (44.5) 1,407.4
-------- ------ ------ ----- ------ --------
Property, plant and equipment,
net............................... 1,252.4 -- -- -- -- 1,252.4
Timber and timberlands.............. 303.0 -- -- -- -- 303.0
Investments in and advances to
unconsolidated affiliates......... 186.3 -- -- -- -- 186.3
Deferred income taxes............... 435.5 -- -- -- 0.4 435.9
Long-term receivables and other
assets............................ 466.1 5.0 1.0 6.6 (0.1) 478.6
-------- ------ ------ ----- ------ --------
$3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6
======== ====== ====== ===== ====== ========
Current liabilities:
Accounts payable.................. $ 170.7 $ -- $ -- $ -- $ -- $ 170.7
Accrued interest.................. 24.8 -- -- -- (1.9) 22.9
Accrued compensation and related
benefits....................... 126.2 -- -- -- -- 126.2
Other accrued liabilities......... 170.6 -- -- -- -- 170.6
Payable to affiliates............. 96.6 -- -- -- -- 96.6
Current maturities of long-term
debt........................... 26.4 -- -- -- -- 26.4
-------- ------ ------ ----- ------ --------
Total current
liabilities............. 615.3 -- -- -- (1.9) 613.4
-------- ------ ------ ----- ------ --------
Long-term debt, less current
maturities........................ 1,683.9 130.0 -- 94.7 (41.7) 1,866.9
Other noncurrent liabilities........ 1,421.2 -- -- -- -- 1,421.2
-------- ------ ------ ----- ------ --------
Total liabilities......... 3,720.4 130.0 -- 94.7 (43.6) 3,901.5
-------- ------ ------ ----- ------ --------
Minority interests.................. 217.9 -- -- -- -- 217.9
Stockholders' deficit:
Preferred stock................... 0.3 -- -- -- -- 0.3
Common stock...................... 5.0 -- -- -- -- 5.0
Additional capital................ 155.6 -- -- -- -- 155.6
Accumulated deficit............... (180.5) -- -- -- (0.6) (181.1)
Pension liability adjustment...... (16.1) -- -- -- -- (16.1)
Treasury stock.................... (19.5) -- -- -- -- (19.5)
-------- ------ ------ ----- ------ --------
Total stockholders'
deficit................. (55.2) -- -- -- (0.6) (55.8)
-------- ------ ------ ----- ------ --------
$3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6
======== ====== ====== ===== ====== ========
</TABLE>
The Unaudited Pro Forma Consolidated Balance Sheet of MAXXAM
should be read in conjunction with the accompanying notes.
52
<PAGE> 55
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET OF MAXXAM
SEPTEMBER 30, 1996
The Unaudited Pro Forma Consolidated Balance Sheet reflects that the
following each occurred on September 30, 1996: (i) the Transactions, (ii) the
payment of the Consent Fee, (iii) the issuance of the KACC New Notes, and (iv)
the repayment of the Old MAXXAM Notes.
I. MAXXAM will use a portion of the proceeds from the Intercompany Note to
repay the Old MAXXAM Notes together with accrued interest thereon
through the date of redemption; the remaining amounts will be used for
general corporate purposes including the possible repurchases of MAXXAM
Common Stock. The Unaudited Pro Forma Consolidated Balance Sheet of
MAXXAM reflects the following adjustments:
a. The estimated net proceeds from this Offering, of approximately
$125.0 million, will be loaned to MAXXAM pursuant to the Intercompany
Note and the estimated costs associated with the Offering of $5.0
million will be capitalized.
b. The payment by MAXXAM of the Consent Fee to the holders of the MGI
Notes of approximately $1.0 million will be capitalized.
c. The issuance of Kaiser's $225.0 million aggregate principal amount of
the KACC New Notes which reflects the receipt of $219.3 million of
net proceeds, the repayment of borrowings outstanding under the 1994
KACC Credit Agreement, and the capitalization of approximately $6.6
million of estimated costs related to those transactions. MAXXAM did
not receive any of the net proceeds from the sale of the KACC New
Notes.
d. A portion of the net proceeds from the Intercompany Note will be
applied to the redemption of $42.6 million aggregate principal amount
of the Old MAXXAM Notes and the payment of approximately $1.9 million
of accrued interest thereon. The repayment of the Old MAXXAM Notes
will result in the write off of approximately $0.9 million of debt
discount and $0.1 million of unamortized deferred financing costs,
net of estimated income tax benefits of $0.4 million, attributable to
the Old MAXXAM Notes.
53
<PAGE> 56
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
REPAYMENT
ISSUANCE OF OF OLD
KACC NEW MAXXAM AS
ACTUAL TRANSACTIONS NOTES NOTES ADJUSTED
-------- ------------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $1,921.1 $ -- $ -- $ -- $1,921.1
Costs and expenses........................ (1,812.3) -- -- -- (1,812.3)
-------- ------ ------ ----- --------
Operating income.......................... 108.8 -- -- -- 108.8
Other income (expense):
Investment, interest and other.......... 35.1 -- -- -- 35.1
Interest expense........................ (135.5) (12.4) (14.1) 4.4 (157.6)
-------- ------ ------ ----- --------
Income (loss) before income taxes and
minority interests...................... $ 8.4 $(12.4) $(14.1) $ 4.4 $ (13.7)
======== ====== ====== ===== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
REPAYMENT
ISSUANCE OF OF OLD
KACC NEW MAXXAM AS
ACTUAL TRANSACTIONS SENIOR NOTES NOTES ADJUSTED
-------- ------------ ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Net sales................................. $2,565.2 $ -- $ -- $ -- $2,565.2
Costs and expenses........................ (2,307.6) -- -- -- (2,307.6)
-------- ------ ------ ----- --------
Operating income.......................... 257.6 -- -- -- 257.6
Other income (expense):
Investment, interest and other.......... 18.2 -- -- (1.9) 16.3
Interest expense........................ (181.3) (16.5) (19.9) 6.0 (211.7)
-------- ------ ------ ----- --------
Income before income taxes and minority
interests............................... $ 94.5 $(16.5) $(19.9) $ 4.1 $ 62.2
======== ====== ====== ===== ========
</TABLE>
The Unaudited Pro Forma Consolidated Statements of Operations
of MAXXAM should be read in conjunction with the accompanying notes.
54
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996 and Unaudited Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1995 reflects that the following
each occurred on January 1, 1995: (i) the Transactions, (ii) the payment of the
Consent Fee, (iii) the issuance of the KACC New Notes, and (iv) the repayment of
the Old MAXXAM Notes.
I. MAXXAM will use approximately $42.6 million of the proceeds from the
Intercompany Note to repay the Old MAXXAM Notes, together with accrued
interest thereon through the date of redemption; the remaining net
proceeds will be used for general corporate purposes including possible
repurchases of MAXXAM's Common Stock. The Unaudited Pro Forma
Consolidated Statements of Operations of MAXXAM reflect the following
adjustments:
a. The incurrence of $11.7 million and $15.6 million of interest expense
on the Notes and $0.7 million and $0.9 million of amortization
related to deferred financing costs associated with the Notes
(including the Consent Fee paid by MAXXAM to the holders of the MGI
Notes) for the nine months ended September 30, 1996 and for the year
ended December 31, 1995, respectively.
b. The incurrence of $18.4 million and $24.3 million of interest expense
and $0.5 million and $0.7 million of amortization related to deferred
financing costs associated with the KACC New Notes for the nine
months ended September 30, 1996 and for the year ended December 31,
1995, respectively.
c. The elimination of $4.4 million and $6.0 million of interest expense
associated with the Old MAXXAM Notes for the nine months ended
September 30, 1996 and for the year ended December 31, 1995,
respectively.
d. The elimination of $4.8 million and $5.1 million of interest expense
associated with the reduction of outstanding borrowings under the
1994 KACC Credit Agreement for the nine months ended September 30,
1996 and for the year ended December 31, 1995, respectively.
e. The write off of $1.7 million of debt discount and $0.2 million of
unamortized deferred financing costs attributable to the Old MAXXAM
Notes for the year ended December 31, 1995.
55
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this section and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers primarily with respect to the future
operating performance of the Company. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors. This
section and "Risk Factors" identify important factors that could cause such
differences.
BACKGROUND
The Company was formed on November 4, 1996, to facilitate the offering of
the Old Notes. Subsequent to its formation, the Company received, as a capital
contribution, 100% of the capital stock of MGI. Concurrently with the
consummation of the Offering, MAXXAM transferred to the Company as an additional
capital contribution the Kaiser Shares, subject to the lien of the MGI
Indenture. The contribution of MGI's capital stock has been accounted for as a
reorganization of entities under common control, which requires the Company to
record the assets and liabilities of MGI at MAXXAM's historical cost.
Accordingly, the Company is the successor entity to MGI and as such, the
accompanying financial statements of the Company reflect both the historical
operating results of MGI and MAXXAM's purchase accounting adjustments which
principally relate to MGI's timber and depreciable assets. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
contribution of the Kaiser Shares has been reflected in the Consolidated
Financial Statements of the Company as if such contribution occurred as of the
beginning of the earliest period presented at MAXXAM's historical cost using the
equity method of accounting.
The Company engages in forest products operations through MGI and MGI's
principal operating subsidiaries, Pacific Lumber and Britt. MGI's business is
seasonal in that its business generally experiences lower first quarter sales
due largely to the general decline in construction-related activity during the
winter months. The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto which are contained
elsewhere herein.
Old growth trees constitute Pacific Lumber's principal source of upper
grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability
to harvest virgin old growth timber on its property (see "-- Trends"), Pacific
Lumber's supply of upper grade lumber has decreased in some premium product
categories. Pacific Lumber has been able to lessen the impact of these decreases
by augmenting its production facilities to increase its recovery of upper grade
lumber from smaller diameter logs and increasing production capacity for
manufactured upper grade lumber products through its end and edge glue facility
(which was expanded during 1994). However, unless Pacific Lumber is able to
sustain the harvest level of old growth trees, Pacific Lumber expects that its
production of premium upper grade lumber products will decline and that its
manufactured lumber products will constitute a higher percentage of its
shipments of upper grade lumber products. See also "-- Trends," "Risk
Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and
Environmental Factors" and "Business of the Company -- Pacific
Lumber -- Regulatory and Environmental Factors."
Logging costs have increased primarily due to the harvest of smaller
diameter logs and, to a lesser extent, compliance with environmental regulations
relating to the harvesting of timber and litigation costs incurred in connection
with certain timber harvesting plans filed by Pacific Lumber. See " -- Trends."
During the past few years, Pacific Lumber has significantly increased its
production capacity for manufactured lumber products by assembling knot-free
pieces of common grade lumber into wider and longer pieces in Pacific Lumber's
end and edge glue facility. This manufactured lumber results in a significant
increase in lumber recovery and produces a standard size upper grade product
which is sold at a premium price compared to common grade products of similar
dimensions. Pacific Lumber has instituted a number of measures at its
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<PAGE> 59
sawmills during the past several years designed to enhance the efficiency of its
operations such as expansion of its manufactured lumber facilities and other
improvements in lumber recovery, automated lumber handling and the modification
of its production scheduling to maximize cogeneration power revenues, and
installation of a lumber remanufacturing facility at its Fortuna lumber mill.
RESULTS OF OPERATIONS
The following table presents selected operational and financial information
for the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades................................ 36.1 35.0 46.5 52.9 68.3
Redwood common grades............................... 175.2 164.2 216.7 218.4 184.7
Douglas-fir upper grades............................ 7.8 5.0 7.4 8.6 10.7
Douglas-fir common grades........................... 56.7 43.7 64.6 54.2 41.6
Other............................................... 15.8 9.6 11.4 12.1 4.8
------ ------ ------ ------ ------
Total lumber................................... 291.6 257.5 346.6 346.2 310.1
====== ====== ====== ====== ======
Logs(2)............................................. 16.1 6.9 12.6 17.7 18.6
====== ====== ====== ====== ======
Wood chips(3)....................................... 157.2 166.8 214.0 210.3 156.8
====== ====== ====== ====== ======
Average sales price:
Lumber:(4)
Redwood upper grades................................ $1,382 $1,510 $1,495 $1,443 $1,275
Redwood common grades............................... 509 476 477 460 469
Douglas-fir upper grades............................ 1,138 1,308 1,301 1,420 1,218
Douglas-fir common grades........................... 435 395 392 444 447
Logs(4)............................................... 498 462 440 615 704
Wood chips(5)......................................... 76 102 102 83 81
Net sales:
Lumber, net of discount............................... $175.9 $158.0 $211.3 $216.5 $202.6
Logs.................................................. 8.0 3.2 5.6 10.9 13.1
Wood chips............................................ 11.9 17.0 21.7 17.4 12.7
Cogeneration power.................................... 2.4 1.7 2.5 3.5 3.8
Other................................................. 1.4 1.0 1.5 1.3 1.2
------ ------ ------ ------ ------
Total net sales................................ $199.6 $180.9 $242.6 $249.6 $233.4
====== ====== ====== ====== ======
Operating income........................................ $ 53.4 $ 53.7 $ 74.3 $ 79.1 $ 54.2
====== ====== ====== ====== ======
Operating cash flow(6).................................. $ 73.6 $ 72.7 $ 99.6 $103.8 $ 78.7
====== ====== ====== ====== ======
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles................................. $ 3.4 $ 2.3 $ 5.9 $ 16.1 $(17.7)
====== ====== ====== ====== ======
Capital expenditures.................................... $ 9.0 $ 6.6 $ 9.9 $ 11.3 $ 11.1
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400
pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income plus depletion and depreciation, also referred to as
"EBITDA." See Note 5 of the Notes to Summary Historical and Pro Forma
Consolidated Financial Data of the Company.
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<PAGE> 60
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Shipments
Lumber shipments to third parties for the nine months ended September 30,
1996 increased from the nine months ended September 30, 1995 due primarily to
increased shipments of both common and upper grade Douglas-fir and redwood
lumber. Log shipments for the nine months ended September 30, 1996 were 16.1
million feet, an increase of 9.2 million feet from the nine months ended
September 30, 1995.
Net sales
Net sales for the nine months ended September 30, 1996 increased from the
nine months ended September 30, 1995. This increase was principally due to
higher shipments of common and upper grade Douglas-fir and redwood lumber and
increased log shipments and to higher average realized prices for redwood and
Douglas-fir common lumber. These increases were partially offset by lower
average realized prices for upper grade redwood and Douglas-fir lumber,
resulting primarily from manufactured lumber products which constitute a
significant percentage of upper grade lumber shipments, and wood chips.
Shipments of fencing and other value-added common lumber products from the
Company's new remanufacturing facility were a contributing factor in the
improved redwood common lumber realizations. See also "-- Trends".
Operating income
Operating income for the nine month period, excluding a one time gain in
1995 of $1.5 million related to business interruption proceeds for the
settlement of claims related to an April 1992 earthquake, increased in 1996 due
to the increase in net sales discussed above. Costs of goods sold reflect both
the impact of additional manufacturing costs attributable to the increased
shipments of remanufactured lumber and the increasing regulatory compliance for
the Company's timber harvesting operations.
Income before income taxes
Income before income taxes for the nine months ended September 30, 1996
increased from the same period in 1995, primarily as a result of the increase in
investment, interest and other income relating to cash equivalents and other
non-recurring items.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for the nine month period ended
September 30, 1996 includes a benefit of $2.6 million relating to the refund of
taxes previously paid in connection with a settlement of certain federal income
tax matters in June 1996.
THREE YEARS ENDED DECEMBER 31, 1995
Shipments
Lumber shipments to third parties in 1995 were essentially unchanged from
1994. Increased shipments of common grade Douglas-fir lumber were mostly offset
by decreased shipments of both upper and common grades of redwood lumber. Log
shipments in 1995 were 12.6 million feet (net Scribner scale), a decrease of 5.1
million feet from 1994 shipments.
Lumber shipments to third parties in 1994 increased by 12% compared to
1993. Increased shipments of redwood common lumber and common grade Douglas-fir
and other lumber were partially offset by decreased shipments of upper grade
redwood lumber. Log shipments in 1994 were 17.7 million feet, a decrease of .9
million feet from 1993 shipments.
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<PAGE> 61
Net Sales
Net sales for 1995 decreased compared to 1994. Decreased shipments of upper
grade redwood lumber, lower average realized prices for common grade Douglas-fir
lumber and logs, decreased shipments of logs and redwood common lumber and lower
sales of electrical power were largely offset by increased shipments of common
grade Douglas-fir lumber, increased sales of wood chips and higher average
realized prices for both common and upper grades of redwood lumber.
Net sales for 1994 increased compared to 1993. This increase was
principally due to increased shipments of redwood common lumber, an increase in
the average realized price of upper grade redwood lumber, increased shipments of
common grade Douglas-fir and other lumber and increased sales of wood chips,
partially offset by decreased shipments of upper grade redwood lumber, a
decrease in the average realized price of redwood common lumber and a decrease
in the average realized price of log sales. The increase in sales of wood chips
reflects higher demand from pulp mills.
Operating Income
Operating income for 1995 decreased compared to 1994. This decrease was
primarily due to lower sales of lumber, higher cost of lumber sales and lower
sales of logs and electrical power, partially offset by increased sales of wood
chips and higher gross margins on wood chip sales. Cost of lumber sales for 1995
was unfavorably impacted by higher purchases of logs from third parties,
partially offset by improved sawmill productivity. Cost of goods sold for 1995
and 1993 was reduced by $1.5 million and $1.2 million, respectively, of business
interruption insurance proceeds for the settlement of claims related to an
earthquake in April 1992.
Operating income for 1994 increased compared to 1993. This increase was
principally due to higher sales of lumber and wood chips, lower purchases of
lumber and logs from third parties, improved sawmill productivity and reduced
overhead costs. Pacific Lumber arranged for the purchase of a significant number
of logs early in 1993 in response to concerns regarding inclement weather
conditions hindering logging activities on Pacific Lumber's timberlands during
the first five months of 1993. The cost associated with the purchase of logs
from third parties significantly exceeds the Company's cost to harvest its own
timber. As a result of the Company's last-in, first-out ("LIFO") methodology of
accounting for inventories, a substantial portion of the additional cost
associated with the purchased logs was charged to cost of sales in the third
quarter of 1993.
Income before income taxes and extraordinary item
Income before income taxes and extraordinary item decreased for 1995 as
compared to 1994. This decrease was primarily due to lower investment, interest
and other income and the decrease in operating income. Investment, interest and
other income for 1995 includes net gains on marketable securities of $4.2
million. Investment, interest and other income for 1994 includes the receipt of
a franchise tax refund of $7.2 million (as described in Note 12 to the Company's
Audited Consolidated Financial Statements) and net gains on marketable
securities of $1.7 million.
Income before income taxes, extraordinary items and cumulative effect of
changes in accounting principles increased for 1994 as compared to 1993. This
increase resulted from the increase in operating income, higher investment,
interest and other income and decreased interest expense. Investment, interest
and other income for 1994 includes the receipt of a franchise tax refund net
gains on marketable securities as described above. Investment, interest and
other income for 1993 includes net gains on marketable securities of $6.4
million. Interest expense decreased due to lower interest rates resulting from
the refinancing of the long-term debt of Pacific Lumber and MGI in March and
August of 1993, respectively.
Concurrently with the consummation of the Offering, MAXXAM contributed the
Kaiser Shares to the Company. The Kaiser Shares are pledged to secure the MGI
Notes. The Company's consolidated financial statements reflect the contribution
of the Kaiser Shares as if such contribution occurred as of the earliest period
presented at MAXXAM's historical cost. As of the date of this Prospectus, the
contribution of the Kaiser Shares would represent, on a fully diluted basis, an
equity interest in Kaiser of approximately 34.7%. The Company follows the equity
method of accounting for its investment in Kaiser. During the first quarter
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<PAGE> 62
of 1993, losses exhausted Kaiser's equity with respect to its common
stockholders principally due to the implementation of new accounting standards
for postretirement benefits and income taxes (see Note 5 to the Company's
Audited Consolidated Financial Statements). The Company recorded its share of
such loss in January 1993 up to the amount of its investment in Kaiser. Since
January 1993, cumulative losses with respect to the results of operations
attributable to Kaiser's common stockholders have exceeded cumulative earnings.
The Company is under no obligation to provide any economic support to Kaiser,
and accordingly, has not recorded any amounts attributable to its equity in
Kaiser's results of operations for any period subsequent to January 1993. The
Company will not record its equity in Kaiser's results of operations until such
time as cumulative earnings exceed the cumulative losses incurred.
Credit (provision) in lieu of income taxes
The credit in lieu of income taxes for 1994 includes a credit relating to
reserves the Company no longer believed were necessary.
Extraordinary item
The litigation settlement in the second quarter of 1994 (as described in
Note 10 to the Company's Audited Consolidated Financial Statements) resulted in
an extraordinary loss of $14.9 million, net of related income taxes of $6.3
million. The extraordinary loss consists of Pacific Lumber's $14.8 million cash
payment to the settlement fund, a $2.0 million accrual for additional contingent
claims and $4.4 million of related legal fees.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The Company conducts its operations through MGI, its wholly owned
subsidiary. MGI conducts its operations primarily through its subsidiaries,
Pacific Lumber and Britt. Creditors of MGI's subsidiaries have priority with
respect to the assets, cash flows and earnings of such subsidiaries over the
claims of the creditors of MGI, including the holders of the MGI Notes, with
respect to the assets, cash flows and earnings of MGI. Moreover, the creditors
of MGI have priority over the claims of the Company's creditors, including the
holders of the Notes. See "Risk Factors -- Substantial Indebtedness; Structural
Subordination and Asset Encumbrances" and "-- Ability to Service Indebtedness."
As of September 30, 1996, the indebtedness of MGI was $201.0 million and the
indebtedness of MGI's subsidiaries was $571.9 million. The Company is a holding
company, and as such its ability to service its indebtedness will be largely
dependent on cash interest payments received from MAXXAM pursuant to the terms
of the Intercompany Note, and to a considerably lesser extent, dividends
received from MGI and capital contributions from MAXXAM. The MGI Indenture
contains various covenants which, among other things, limit the payment of
dividends and restricts transactions between MGI and its affiliates. Under the
MGI Indenture, MGI was permitted to pay no dividends in respect of the period
from August 31, 1993 to December 31, 1993, $4.9 million of dividends in respect
of the 1994 fiscal year, $1.8 million of dividends in respect of the 1995 fiscal
year, and $2.0 million of dividends in respect of the nine months ended
September 30, 1996. MGI did not pay any dividends from August 1993 to December
31, 1994. MGI paid dividends of $4.8 million during 1995 and $3.9 million during
the nine months ended September 30, 1996. As of September 30, 1996, no
additional dividends could be paid by MGI.
The indentures governing the Pacific Lumber Senior Notes and the Timber
Notes and the Pacific Lumber Credit Agreement contain various covenants which,
among other things, restrict transactions between Pacific Lumber and its
affiliates and the payment of dividends. Pacific Lumber can pay dividends in an
amount that is generally equal to 50% of Pacific Lumber's consolidated net
income plus depletion and cash dividends received from Scotia Pacific, exclusive
of the net income and depletion of Scotia Pacific for as long as any Timber
Notes are outstanding. As of September 30, 1996, under the most restrictive of
these covenants, approximately $15.4 million of dividends could be paid by
Pacific Lumber. Pacific Lumber paid an aggregate of $16.5 million, $22.0 million
and $24.5 million of dividends during the nine months ended September 30, 1996
and for the years ended December 31, 1995 and 1994, respectively.
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<PAGE> 63
Substantially all of MGI's consolidated assets are owned by Pacific Lumber
and a significant portion of Pacific Lumber's consolidated assets are owned by
Scotia Pacific. The Company expects that Pacific Lumber will provide a major
portion of MGI's future operating cash flow. Pacific Lumber is dependent upon
Scotia Pacific for the log requirements from which Pacific Lumber generates a
substantial portion of its operating cash flow. Pacific Lumber harvests and
purchases logs from Scotia Pacific's timberlands at prices established pursuant
to a Master Purchase Agreement (see "Business of the Company -- Pacific Lumber
Operations -- Relationships with Scotia Pacific and Britt"). The holders of the
Timber Notes have priority over the claims of creditors of Pacific Lumber with
respect to the assets and cash flows of Scotia Pacific, and the holders of the
Pacific Lumber Senior Notes have priority over the claims of creditors of MGI
with respect to the assets and cash flows of Pacific Lumber. Under the terms of
the Timber Note Indenture, Scotia Pacific will not have cash available for
distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations
exceeds the amounts required by the Timber Note Indenture to be reserved for the
payment of current debt service (including interest, principal and premiums) on
the Timber Notes, capital expenditures and certain other operating expenses.
Once Scotia Pacific has made appropriate provisions for current debt service on
the Timber Notes and expenditures for operating and capital costs, and in the
absence of certain Trapping Events (as defined in the Timber Note Indenture) or
outstanding judgments, the Timber Note Indenture does not limit monthly
distributions of available cash from Scotia Pacific to Pacific Lumber.
Accordingly, the Company expects that, once Scotia Pacific's debt service and
operating and capital expenditure requirements have been met, substantially all
of Scotia Pacific's available cash will be periodically distributed to Pacific
Lumber. Scotia Pacific paid $59.6 million, $59.0 million, $88.9 million and
$58.3 million of dividends to Pacific Lumber during the nine months ended
September 30, 1996 and during the years ended December 31, 1995 and 1994 and
during the period from March 23, 1993 to December 31, 1993, respectively. In the
event Scotia Pacific's cash flows are not sufficient to generate distributable
funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific
Lumber Senior Notes and to service its other indebtedness would be materially
impaired and MGI's ability to pay interest on the MGI Notes and to make
distributions to the Company would also be materially impaired, which could
impair the Company's ability to make the required interest payments on the
Notes. See Note 6 to the Company's Audited Consolidated Financial Statements for
a description of the principal payment requirements of the Timber Notes.
During the nine months ended September 30, 1996, and during the years ended
December 31, 1995, 1994 and 1993, Pacific Lumber's operating income plus
depletion and depreciation ("operating cash flow") amounted to $67.8 million,
$90.5 million, $95.9 million and $76.6 million, respectively, which exceeded
interest expense in respect of all of its indebtedness in those periods by $26.9
million, $35.0 million, $39.8 million and $17.4 million, respectively. The
Company believes that Pacific Lumber's level of operating cash flow and other
available sources of financing will enable it to meet the debt service
requirements on the Pacific Lumber Senior Notes and the Timber Notes for the
next year. With respect to its long-term liquidity, Pacific Lumber believes that
its ability to generate sufficient levels of cash from operations, and its
ability to obtain both short and long-term financing, should provide sufficient
funds to meet its long-term working capital and capital expenditure
requirements. See also "Risk Factors -- Ability to Service Indebtedness" and
"-- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental
Factors."
As of September 30, 1996, MGI (excluding its subsidiary companies) had cash
and marketable securities of approximately $72.5 million. The Company believes,
although there can be no assurance, that the aggregate dividends which will be
available to MGI from Pacific Lumber and Britt, during the period in which cash
interest will not be payable on the MGI Discount Notes, will exceed the cash
interest payments on the MGI Senior Notes. When cash interest payments on the
MGI Discount Notes commence on February 1, 1999, the Company believes that MGI
should be able to make such cash interest payments out of its then existing cash
resources and from cash expected to be available to it from Pacific Lumber and
Britt. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Risk
Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors."
On August 4, 1993, MGI issued $100.0 million aggregate principal amount of
the MGI Senior Notes and $126.7 million aggregate principal amount
(approximately $70.0 million net of original issue discount) of the MGI Discount
Notes. The MGI Notes are secured by, among other things, the capital stock of
Pacific
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<PAGE> 64
Lumber and Britt and the Kaiser Shares, which MAXXAM transferred to the Company
concurrently with the consummation of the Offering. See "Principal Indebtedness"
and Note 6 to the Company's Audited Consolidated Financial Statements for a
description of the terms of the MGI Notes and the use of proceeds from their
issuance. The MGI Notes are senior indebtedness of MGI and are effectively
senior to the indebtedness of the Company; however, they are effectively
subordinate to the liabilities of MGI's subsidiaries, which include the Timber
Notes and the Pacific Lumber Senior Notes.
On March 23, 1993, Pacific Lumber issued $235.0 million of the Pacific
Lumber Senior Notes and Scotia Pacific issued $385.0 million of the Timber
Notes. See "Principal Indebtedness" and Note 6 to the Company's Audited
Consolidated Financial Statements for a description of the terms of the Pacific
Lumber Senior Notes and the Timber Notes and the use of proceeds from their
issuance.
Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1998, are secured by Pacific Lumber's trade receivables and inventories,
with interest computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for
borrowings of up to $60.0 million, of which $15.0 million may be used for
standby letters of credit and $30.0 million is restricted to timberland
acquisitions. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of September 30, 1996, $45.4 million of borrowings was available
under the Pacific Lumber Credit Agreement, of which $4.7 million was available
for letters of credit and $30.0 million was restricted to timberland
acquisitions. No borrowings were outstanding as of September 30, 1996, and
letters of credit outstanding amounted to $10.3 million. The Pacific Lumber
Credit Agreement contains covenants substantially similar to those contained in
the indenture governing the Pacific Lumber Senior Notes. See "-- Description of
Principal Indebtedness -- Pacific Lumber Senior Notes."
Pacific Lumber's and Britt's capital expenditures were made to improve
production efficiency, reduce operating costs and, to a lesser degree, acquire
additional timberlands. Pacific Lumber's and Britt's capital expenditures were
$9.0 million, $9.9 million, $11.3 million and $11.1 million for the nine months
ended September 30, 1996 and for the years ended December 31, 1995, 1994 and
1993, respectively. Capital expenditures for 1996 are expected to be $12-$15
million and for the 1997-1998 period are estimated to be between $10.0 million
and $15.0 million per year. Pacific Lumber may purchase additional timberlands
from time to time as appropriate opportunities arise. Moreover, such purchases
could exceed historical levels. Capital expenditures attributable to the
reconstruction of Pacific Lumber's commercial facilities destroyed by an
earthquake in April 1992 were approximately $1.9 million for 1993 and $2.6
million for 1994, when construction was completed.
As of September 30, 1996, MGI and its subsidiaries had consolidated working
capital of $124.5 million and long-term debt of $726.2 million (net of current
maturities and restricted cash deposited in a liquidity account for the benefit
of the holders of the Timber Notes). MGI and its subsidiaries anticipate that
cash flow from operations, together with existing cash, marketable securities
and available sources of financing, will be sufficient to fund their working
capital and capital expenditure requirements for the next year. With respect to
their long-term liquidity, MGI and its subsidiaries believe that their existing
cash and cash equivalents, together with their ability to generate sufficient
levels of cash from operations, and their ability to obtain both short and
long-term financing, should provide sufficient funds to meet their working
capital and capital expenditure requirements. However, due to their highly
leveraged condition, MGI and its subsidiaries are more sensitive than less
leveraged companies to factors affecting their operations, including
governmental regulation affecting their timber harvesting practices, increased
competition from other lumber producers or alternative building products and
general economic conditions. See also "-- Trends" and "Risk Factors -- Risk
Factors Relating to Pacific Lumber."
As of September 30, 1996, on a pro forma basis, after giving effect to the
issuance of the Old Notes and the loan of the net proceeds therefrom to MAXXAM,
the Company would have had working capital of $126.6 million and consolidated
indebtedness of $856.2 million (net of current maturities and restricted cash
held for the benefit of the Timber Notes). The Company expects that the cash
interest payments received from MAXXAM pursuant to the Intercompany Note and, to
a considerably lesser extent, dividends received from
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<PAGE> 65
MGI and capital contributions from MAXXAM will be sufficient to fund its debt
service requirements for the next year and for the next several years
thereafter. Cash flows from operations of the Company and its subsidiaries are
unlikely to be sufficient to pay principal on the Notes. The ability of the
Company and its subsidiaries to refinance their respective indebtedness at or
prior to the respective maturities thereof will depend on a number of factors,
including their respective financial condition, results of operations and cash
flows, and then prevailing interest rates and market conditions. There can be no
assurance that such refinancing will be available, or available on reasonable
terms. The failure of any of the Company's subsidiaries to refinance its
indebtedness could materially adversely affect the ability of the Company to
satisfy its obligations under the Notes. See also "Risk Factors -- Ability to
Service Indebtedness" and "-- Litigation."
TRENDS
The Company's forest products operations are primarily conducted by Pacific
Lumber and are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. Compliance with such laws and regulations
together with the cost of litigation incurred in connection with certain timber
harvesting operations of Pacific Lumber have increased the cost of logging
operations. These laws include the Forest Practice Act, which requires that
timber harvesting operations be conducted in accordance with detailed
requirements set forth in the Forest Practice Act and in the regulations
promulgated thereunder by the BOF. The ESA and the CESA provide in general for
the protection and conservation of specifically listed fish, wildlife and plants
which have been declared to be endangered or threatened. CESA provides, in
general, for protection of the environment of the state, including protection of
air and water quality and of fish and wildlife. In addition, the California
Water Quality Act requires, in part, that Pacific Lumber's operations be
conducted so as to reasonably protect the water quality of nearby rivers and
streams. Pacific Lumber is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future governmental regulations, legislation or judicial or
administrative decisions would not materially and adversely affect the Company.
In March 1992, the marbled murrelet was approved for listing as endangered
under the CESA. In October 1992, the USFWS issued its final rule listing the
marbled murrelet as a threatened species under the ESA in the tri-state area of
Washington, Oregon and California. Pacific Lumber has incorporated, and will
continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands. The
BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber. Such surveys can only be conducted during a portion of the murrelet's
nesting and breeding season, which extends from April through mid-September.
Accordingly, such surveys are expected to delay the review and approval process
with respect to certain of the THPs filed by Pacific Lumber. The results of such
surveys to date (based upon current survey protocols) have indicated that
Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet
habitat, the majority of which is located within the Headwaters Timberlands. A
substantial portion of this land contains virgin and residual old growth timber
and the bulk of it falls within the areas designated as critical habitat for the
marbled murrelet (see below). Pacific Lumber is unable to predict when or if it
will be able to harvest this acreage.
In May 1996, the USFWS published the Final Designation of critical habitat
for the marbled murrelet, which designated over four million acres as critical
habitat for the marbled murrelet. Although nearly all of the designated habitat
is public land, approximately 33,000 acres of the Company's timberlands are
included in the Final Designation, the substantial portion of such acreage being
young growth timber. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber over the last few years has attempted to develop the Murrelet
HCP. Due to, among
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other things, the unfavorable response of the USFWS to Pacific Lumber's initial
Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed the Takings
Litigation alleging that certain portions of its timberlands have been "taken"
and seeking just compensation (see "Legal Proceedings -- Pacific Lumber" for a
description of the Takings Litigation). Pursuant to the Headwaters Agreement
described below, the Takings Litigation has been stayed by the court at the
request of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be materially
adverse. If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking. There continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered under
the ESA and/or the CESA and to designate critical habitat for such species. For
example, the NMFS recently announced that by April 25, 1997, it would make a
final determination concerning whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by Pacific Lumber. It
is uncertain what impact, if any, such listings and/or designations of critical
habitat would have on the Company's consolidated financial position, results of
operations or liquidity. See also "Legal Proceedings -- Pacific Lumber
Litigation" for a description of the pending Marbled Murrelet action. See
"-- Headwaters Agreement" below for a description of the Headwaters Agreement
relating to processing and approval of the Multi-Species HCP covering Pacific
Lumber's timberlands.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish an LTSY harvest level that takes into account
environmental and economic considerations. The SYP must demonstrate that the
average annual harvest over any rolling ten-year period will not exceed the LTSY
harvest level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the
CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as
Pacific Lumber's average annual timber harvest over the last five years. The
proposed SYP also indicates that Pacific Lumber's average annual timber harvest
during the first decade of the SYP would approximate the LTSY harvest level.
During the second decade of the proposed SYP, Pacific Lumber's average annual
timber harvest would be approximately 8% less than that proposed for the first
decade. The SYP, when approved, will be valid for ten years. Thereafter, revised
SYPs will be prepared every decade that will address the LTSY harvest level
based upon reassessment of changes in the resource base and protection of public
resources. The proposed SYP assumes that the transactions contemplated by the
Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, the Company is unable to predict the impact that these regulations
will have on its future timber harvesting practices. It is possible that the
results of the review and approval process could require Pacific Lumber to
reduce its timber harvest in future years from the harvest levels set forth in
the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
Accordingly, the Company is unable to predict the ultimate impact the sustained
yield regulations will have on its future financial position, results of
operations or liquidity. See "-- Headwaters Agreement" below for a description
of certain terms of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of the Company's THPs and other timber harvesting
64
<PAGE> 67
operations, and the Company expects that such groups and individuals will
continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent the Company from implementing certain of its
approved THPs or which challenge other operations by the Company. These
challenges have severely restricted Pacific Lumber's ability to harvest old
growth timber on its property. To date, challenges with respect to the Company's
THPs relating to young growth timber have been limited; however, no assurance
can be given as to the extent of such challenges in the future. The Company
believes that environmentally focused challenges to its timber harvesting
operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have delayed or
prevented the Company from conducting a portion of its operations, they have not
had a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to predict
the future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or liquidity of
the Company. See also "Legal Proceedings -- Pacific Lumber Litigation" for a
description of the pending Marbled Murrelet action.
Judicial or regulatory actions adverse to Pacific Lumber, increased
regulatory delays and inclement weather in northern California, independently or
collectively, could impair Pacific Lumber's ability to maintain adequate log
inventories and force Pacific Lumber to temporarily idle or curtail operations
at certain of its lumber mills from time to time. With respect to the foregoing,
see also "Risk Factors -- Risk Factors Relating to Pacific Lumber."
HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement, which provides the framework for the acquisition by the
United States and California of the approximately 5,600 acres of Headwaters
Timberlands. A substantial portion of the Headwaters Timberlands consist of
"virgin old" growth timberlands (those which have never been harvested). The
Headwaters Timberlands would be transferred in exchange for (a) property and
other consideration (possibly including cash) from the United States and
California having an aggregate fair market value of $300 million and (b) the Elk
River Timberlands, consisting of approximately 7,775 acres of adjacent
timberlands to be acquired by the United States and California from a third
party. The Pacific Lumber Parties have agreed not to conduct logging operations
(including salvage logging) on the Headwaters Timberlands while the Headwaters
Agreement is in effect. The continuing effectiveness of the Headwaters Agreement
is predicated on the satisfaction of various conditions, including completion
within ten months of specified closing items.
The Headwaters Agreement requires the United States and/or California to
furnish Pacific Lumber a list of property interests owned or controlled by the
United States and/or California with a good faith estimated fair market value
equal to or in excess of $300 million which are available and acceptable to
Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity Counties in California, and surplus acreage next to a federal office
building in Laguna Niguel, California. The California list contained a variety
of properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available," as legislative action would be required for exchange of certain of
the properties.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including: (a) acquisition by the government of
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<PAGE> 68
the Elk River Timberlands from a third party, (b) approval of an SYP and a
Multi-Species HCP, and issuance of a Permit, each in form and substance
satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service
and the California Franchise Tax Board of closing agreements in form and
substance sought by and satisfactory to the Pacific Lumber Parties, (d) the
absence of a judicial decision in any litigation brought by third parties that
any party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal with
prejudice at closing of the Takings Litigation. The parties to the Headwaters
Agreement are working to satisfy these conditions; however, there can be no
assurance that the Headwaters Agreement will be consummated. See "Business of
the Company -- Pacific Lumber -- Headwaters Agreement" for further information
concerning the Headwaters Agreement.
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<PAGE> 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MAXXAM
This section contains statements which constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this section and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers primarily with respect to the future operating
performance of the Company. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors. This section and
"Risk Factors" identify important factors that could cause such differences.
RESULTS OF OPERATIONS
MAXXAM operates in three principal industries: aluminum, through its
majority owned subsidiary, Kaiser, a fully integrated aluminum producer; forest
products, through the Company and its wholly owned subsidiaries, principally
Pacific Lumber and Britt; real estate investment and development, managed
through MAXXAM Property Company; and other commercial operations through various
other wholly owned subsidiaries. The following should be read in conjunction
with MAXXAM's Consolidated Financial Statements and the Notes thereto which are
contained elsewhere herein.
ALUMINUM OPERATIONS
Aluminum operations account for the substantial portion of MAXXAM's
revenues and operating results. Kaiser's operating results are sensitive to
changes in prices of alumina, primary aluminum and fabricated aluminum products,
and also depend to a significant degree upon the volume and mix of all products
sold and on hedging strategies. Kaiser, through its principal subsidiary, KACC,
operates in two business segments: bauxite and alumina, and aluminum processing.
The following table presents selected operational and financial information for
the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993. The information presented in the table is in
millions of dollars except shipments and prices.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shipments:(1)
Alumina.............................. 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5
Aluminum Products:
Primary aluminum.................. 262.9 184.5 271.7 224.0 242.5
Fabricated aluminum products...... 245.4 284.3 368.2 399.0 373.2
-------- -------- -------- -------- --------
Total aluminum products...... 508.3 468.8 639.9 623.0 615.7
======== ======== ======== ======== ========
Average realized sales price:
Alumina (per ton).................... $ 199 $ 203 $ 208 $ 169 $ 169
Primary aluminum (per pound)......... .69 .82 .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina........................... $ 300.2 $ 303.8 $ 424.8 $ 352.8 $ 338.2
Other (2)(3)...................... 77.2 65.3 89.4 79.7 85.2
-------- -------- -------- -------- --------
Total bauxite and alumina.... 377.4 369.1 514.2 432.5 423.4
-------- -------- -------- -------- --------
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Aluminum processing:
Primary aluminum.................. 402.8 335.0 488.0 292.0 301.7
Fabricated aluminum products...... 861.4 929.0 1,218.6 1,043.0 981.4
Other(3).......................... 10.5 13.6 17.0 14.0 12.6
-------- -------- -------- -------- --------
Total aluminum processing.... 1,274.7 1,277.6 1,723.6 1,349.0 1,295.7
-------- -------- -------- -------- --------
Total net sales.............. $1,652.1 $1,646.7 $2,237.8 $1,781.5 $1,719.1
======== ======== ======== ======== ========
Operating income (loss)................ $ 91.9 $ 153.9 $ 216.5 $ (50.3) $ (117.4)
======== ======== ======== ======== ========
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of changes
in accounting principles............. $ 26.6 $ 73.0 $ 108.7 $ (145.8) $ (201.7)
======== ======== ======== ======== ========
Capital expenditures and investments in
unconsolidated joint ventures(4)..... $ 91.1 $ 53.2 $ 88.4 $ 70.0 $ 67.7
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Shipments are expressed in thousands of metric tons. A metric ton is
equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in
consolidated subsidiaries.
(4) The nine months ended September 30, 1995 and the year ended December 31,
1995 include investments in unconsolidated joint ventures of $9.0 million.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Summary
Kaiser's net sales for the first nine months of 1996 were $1,652.1 million,
compared to $1,646.7 million for the same period in 1995. For the first nine
months of 1996, Kaiser's operating income was $91.9 million, compared to
operating income of $153.9 million in the first nine months of 1995.
Results for the nine months ended September 30, 1996, reflect the
substantial reduction in market prices for primary aluminum more fully discussed
below (see "-- Trends -- Aluminum Operations"). Alumina prices, which are
significantly influenced by changes in primary aluminum prices, also declined
from period to period. The decrease in product prices more than offset the
positive impact of increases in shipments in several segments of Kaiser's
business, as more fully discussed below.
Results for the first nine months of 1995 include approximately $17.0
million of first-quarter 1995 pre-tax expenses associated with an eight-day
strike at five major U.S. locations, a six-day strike at Kaiser's Alumina
Partners of Jamaica ("Alpart") alumina refinery, and a four-day disruption of
alumina production at Alpart caused by a boiler failure.
Bauxite and Alumina
Net sales for the bauxite and alumina segment for the nine months ended
September 30, 1996, were basically unchanged from the same period in 1995 as, on
a year to date basis, nominal alumina price declines were offset by a modest
increase in alumina shipments. The reduction in prices realized reflects the
decline in primary aluminum prices experienced in 1996 discussed above, as well
as the impact of certain short term sales of previously uncommitted alumina
production.
Operating income (loss) for this segment of the Kaiser's business declined
significantly from the prior year period as a result of: (i) reduced gross
margins from alumina sales resulting from the price declines
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<PAGE> 71
referred to above; (ii) high operating costs associated with disruptions in the
power supply at Alpart; and (iii) increased natural gas costs at Kaiser's
Gramercy, Louisiana alumina refinery. Operating income for the nine months ended
September 30, 1996, was also unfavorably impacted by a temporary raw material
quality problem experienced at Kaiser's Gramercy, Louisiana facility during the
second quarter of 1996.
Aluminum Processing
For the first nine months of 1996 increases in shipments of 42.5% more than
offset a 16% decline in product prices from period to period. The increase in
shipments during the nine months ended September 30, 1996, is the result of
increased shipments of primary aluminum to third parties as a result of a
decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the nine months
ended September 30, 1996 as compared to the prior year period as a result of a
decrease in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of consumer inventories. The impact
of reduced product shipments was to a limited degree offset by a 7% increase in
prices realized from the sale of fabricated aluminum products for the nine
months ended September 30, 1996, resulting from a shift in product mix (to
higher-end value added products), due to reduced can sheet shipments.
THREE YEARS ENDED DECEMBER 31, 1995
Net Sales
Bauxite and alumina. Revenue from net sales to third parties for the
bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2% higher in
1994 than in 1993. Revenue from alumina increased 20% in 1995 from 1994 due to
higher average realized prices, partially offset by lower shipments. Revenue
from alumina increased 4% in 1994 compared to 1993 because of increased
shipments. The remainder of the segment's sales revenues was from sales of
bauxite, which remained about the same throughout the three-year period, and the
portion of sales of alumina attributable to the 35% minority interest in Alpart.
Aluminum processing. Revenue from net sales to third parties for the
aluminum processing segment was 28% higher in 1995 than in 1994 and 4% higher in
1994 than in 1993. The bulk of the segment's sales represents Kaiser's primary
aluminum and fabricated aluminum products, with the remainder representing the
portion of sales of primary aluminum attributable to the minority interest in
Valco.
Revenue from primary aluminum increased 67% in 1995 from 1994 due primarily
to higher average realized prices and higher shipments. In 1995, Kaiser's
average realized price from sales of primary aluminum was approximately $.81 per
pound, compared to the AMT price of approximately $.86 per pound. The higher
shipments of primary aluminum were due to increased production at Kaiser's
smelters in the Pacific Northwest and Valco, and reduced intracompany
consumption of primary aluminum at Kaiser's fabricated products units. The
increase in revenue for 1995 was partially offset by decreased shipments caused
by a strike of the United Steelworkers of America (the "USWA") discussed below.
Revenue from primary aluminum decreased 3% in 1994 from 1993 as higher average
realized prices were more than offset by lower shipments. Average realized
prices in 1994 reflected the defensive hedging of primary aluminum prices in
respect to 1994 shipments, which was initiated prior to improvements in metal
prices that had recently occurred. Shipments in 1994 reflected production
curtailments at Kaiser's smelters in the Pacific Northwest and Valco. Shipments
of primary aluminum to third parties were approximately 42% of total aluminum
products shipments in 1995 compared with approximately 36% in 1994 and 39% in
1993. Revenue from fabricated aluminum products increased 17% in 1995 from 1994
due to higher average realized prices partially offset by lower shipments for
most of these products. Revenue from fabricated aluminum products increased 6%
in 1994 from 1993, principally due to increased shipments of most of these
products.
Operating Income (Loss)
Improved operating results for 1995 were partially offset by expenses
related to Kaiser's smelting joint venture in China (see "-- Financial Condition
and Investing and Financing Activities -- Aluminum Opera-
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<PAGE> 72
tions"), accelerated expenses on Kaiser's micromill technology, maintenance
expenses as a result of an electrical lightning strike at Kaiser's Trentwood,
Washington, facility, and a work slowdown at Kaiser's 49%-owned Kaiser Jamaica
Bauxite Company prior to the signing of a new labor contract. The combined
impact of these expenditures on the results for 1995 was approximately $6.0
million (on a pre-tax basis). Operating results for 1995 were further impacted
by (i) an eight-day strike of the USWA at Kaiser's five major domestic
locations, (ii) a six-day strike of the National Workers Union at Kaiser's
65%-owned Alpart alumina refinery, and (iii) a four-day disruption of alumina
production at Alpart caused by a boiler failure. The combined impact of these
events on the results for 1995 was approximately $17.0 million (on a pre-tax
basis), principally from lower production volume and other related costs. In
1993, Kaiser recorded pre-tax charges of $35.8 million relating to the
restructuring of aluminum operations (see "-- Aluminum Processing" below) and
approximately $19.4 million in the fourth quarter of 1993 because of reductions
in the carrying value of its inventories caused principally by prevailing lower
prices for alumina, primary aluminum and fabricated aluminum products.
Kaiser's corporate general and administrative expenses of $82.3 million,
$67.6 million and $72.6 million in 1995, 1994 and 1993, respectively, were
allocated by MAXXAM to the bauxite and alumina and aluminum processing segments
based upon those segments' ratio of sales to unaffiliated customers.
Bauxite and alumina. Operating income for the bauxite and alumina segment
was $37.2 million in 1995, compared to operating income of $5.6 million in 1994
and an operating loss of $20.1 million in 1993. In 1995 compared to 1994,
operating income increased principally due to higher revenue, partially offset
by the effect of the strikes and boiler failure. In 1994 compared to 1993,
operating income was favorably affected by increased shipments and lower
manufacturing cost.
Aluminum processing. Operating income for the aluminum processing segment
was $179.3 million in 1995, compared to an operating loss of $55.9 million in
1994 and an operating loss of $97.3 million in 1993. Operating results improved
in 1995 compared to 1994, principally due to higher revenue, partially offset by
the effect of the USWA strike. The decrease in operating loss in 1994 compared
to 1993 was caused principally by a nonrecurring $35.8 million restructuring
charge recorded in 1993, as described below, increased shipments of fabricated
aluminum products, and higher average realized prices of primary aluminum,
partially offset by lower shipments of primary aluminum. In October 1993, KACC
announced that it was restructuring its flat-rolled products operation at its
Trentwood plant to reduce that facility's annual operating costs by at least
$50.0 million after full implementation. Additionally, KACC implemented a plan
to streamline its casting operations, which included the shutdown of two
facilities located in Ohio. This entire restructuring was successfully completed
by the end of 1995. The pre-tax charge for this restructuring of $35.8 million
included $25.2 million for pension, severance and other termination benefits at
Trentwood; $8.0 million related to casting facilities; and $2.6 million for
various other items. Other contributing factors to the 1993 operating results
were lower production at Kaiser's smelters in the Pacific Northwest as a result
of the removal of three reduction potlines from production in January 1993 in
response to the reduction by the BPA during the first quarter of 1993 of the
amount of power it had normally provided to Kaiser, and the increased cost of
substitute power in such quarter. Additionally, during 1993, Kaiser realized
above-market prices for significant quantities of primary aluminum sold forward
in prior periods under long-term contracts.
Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Changes in Accounting Principles
Income before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles for 1995, as compared to
the loss for 1994, resulted from the improvement in operating income previously
described, partially offset by other charges, principally related to the
establishment of additional litigation reserves. See "-- Financial Condition and
Investing and Financing Activities -- Aluminum Operations." The decrease in the
loss before income taxes, minority interests, extraordinary item and cumulative
effect of changes in accounting principles in 1994 compared to 1993 resulted
from the reduction in operating losses previously described.
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<PAGE> 73
As described in Note 1 to MAXXAM's Audited Consolidated Financial
Statements, Kaiser's cumulative losses in the first and second quarters of 1993,
principally due to the implementation of the new accounting standard for
postretirement benefits other than pensions as described in Note 6 to MAXXAM's
Audited Consolidated Financial Statements, eliminated Kaiser's equity with
respect to its common stock; accordingly, MAXXAM recorded 100% of Kaiser's
losses in the third and fourth quarters of 1993 and all of 1994, without regard
to the minority interests represented by Kaiser's other common stockholders (as
described in Note 7 to MAXXAM's Audited Consolidated Financial Statements).
MAXXAM recorded 100% of Kaiser's earnings in 1995 and will continue to do so
until such time as the cumulative losses recorded by MAXXAM with respect to
Kaiser's minority common stockholders are recovered.
Information concerning net sales, operating income (loss) and assets
attributable to certain geographic areas and industry segments is set forth in
Note 11 to MAXXAM's Audited Consolidated Financial Statements.
FOREST PRODUCTS OPERATIONS
For information concerning the results of MAXXAM's forest products
operations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations." Information
concerning net sales, operating income (loss) and assets attributable to certain
geographic areas and industry segments is set forth in Note 11 to MAXXAM's
Audited Consolidated Financial Statements.
REAL ESTATE AND OTHER OPERATIONS
The following table presents selected operational and financial information
for the nine months ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993. The information presented in the table is in
millions of dollars.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------
1996 1995 1995 1994 1993
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales............................... $69.4 $65.0 $ 84.8 $ 84.6 $ 78.5
Operating loss.......................... (7.3) (6.4) (13.6) (10.0) (13.5)
Income (loss) before income taxes,
minority interests, extraordinary item
and cumulative effect of changes in
accounting principles................. 10.2 (.9) (.8) (1.5) 38.1
</TABLE>
Net sales includes revenues from (i) sales of developed lots, bulk acreage
and real property associated with MAXXAM's real estate developments, (ii) resort
and other commercial operations conducted at certain of MAXXAM's real estate
developments, (iii) rental revenues associated with the real properties
purchased from the Resolution Trust Corporation in June 1991 (the "RTC
Portfolio"), and (iv) beginning in the fourth quarter of 1995, revenues from
SHRP, Ltd., a Texas limited partnership which owns and operates a Class 1 horse
racing facility in Houston, Texas (see "-- Financial Condition and Investing and
Financing Activities -- Real Estate and Other Operations"). Net sales do not
include any amounts from the sale of RTC Portfolio properties and loans, which
are recorded net of costs as investment, interest and other income. As of
September 30, 1996 the RTC Portfolio consisted of two loans and eight properties
which had an aggregate net book value of $18.2 million. For a description of the
holdings of the Real Estate Subsidiaries, see "Business of MAXXAM -- Real Estate
and Other Operations."
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales
Net sales for the nine months ended September 30, 1996 increased over the
same period in 1995 as the inclusion in 1996 results of $15.1 million of
revenues attributable to SHRP, Ltd. more than offset lower real
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<PAGE> 74
estate revenues. Operating results with respect to SHRP, Ltd. were not
consolidated prior to October 6, 1995. Net sales attributable to real estate
operations of $54.3 million for the nine months ended September 30, 1996
decreased from $65.0 million in the same period in 1995 due to lower sales of
real property in the Fountain Hills development in Arizona and lower revenues
from the RTC Portfolio due to the sale of a substantial number of these
properties in 1996 and prior periods.
Operating loss
The operating loss increased for the nine months ended September 30, 1996
from the same period in 1995, principally due to lower margins on sales of real
property and $1.6 million of operating losses attributable to SHRP, Ltd. for the
nine months ended September 30, 1996.
Income (loss) before income taxes and minority interests
Income before income taxes and minority interests for the nine months ended
September 30, 1996 increased compared to the income (loss) for the same period
in 1995. Investment, interest and other income for the nine months ended
September 30, 1996 includes a pre-tax gain of $16.9 million from the sale of
three multi-family properties and the remaining mortgage notes from the RTC
Portfolio for $32.4 million in net proceeds. Additionally, investment income for
the nine months ended September 30, 1996 includes income derived from lot sales
and operations at SunRidge Canyon, the Company's 50%-owned joint venture in
Arizona. Interest expense for the nine months ended September 30, 1996 includes
interest on SHRP Ltd.'s Senior Secured Extendible Notes (See Note 4 to MAXXAM's
Audited Consolidated Financial Statements).
THREE YEARS ENDED DECEMBER 31, 1995
Net Sales
Net sales for 1995 were essentially unchanged from 1994. The inclusion of
revenues in the fourth quarter of 1995 from SHRP, Ltd. and a bulk sale of
acreage in Texas were offset by a decrease in rental revenues from the RTC
Portfolio due to the sale of some of those properties. Net sales for 1994
increased as compared to 1993. This increase was primarily due to bulk acreage
sales in New Mexico and increased lot sales at MAXXAM's Fountain Hills
development in Arizona, partially offset by a decrease in rental revenues
resulting from the sale of sixteen apartment complexes from the RTC Portfolio in
December 1993.
Operating Loss
The operating loss for 1995 increased as compared to 1994, primarily due to
a $4.0 million writedown of certain real property to its estimated net
realizable value, partially offset by a bulk sale of acreage in Texas. The
operating loss for 1994 decreased as compared to 1993. The operating results for
1994 were favorably impacted by the bulk acreage sales and the increased sales
at Fountain Hills, offset by decreased revenues from the RTC Portfolio as a
result of the sale of the sixteen apartment complexes in December 1993. The
operating loss for 1993 also included a $5.9 million writedown of certain of
MAXXAM's nonstrategic real estate holdings to their estimated net realizable
value.
Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item
and Cumulative Effect of Changes in Accounting Principles
The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles for 1995 decreased as
compared to 1994. This decrease was primarily due to higher investment, interest
and other income and lower interest expense, partially offset by the increased
operating loss discussed above. Investment, interest and other income for 1995
includes a pre-tax gain of $10.5 million resulting from the sale of five real
properties and one loan from the RTC Portfolio for $25.5 million. The loss
before income taxes, minority interests, extraordinary item and cumulative
effect of changes in accounting principles for 1994 was $1.5 million, as
compared to income of $38.1 million for 1993. The loss for 1994 reflects a
decrease in investment, interest and other income, offset by a decrease in
interest expense and the decreased operating loss discussed above. Investment,
interest and other income for 1994 includes pre-tax
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<PAGE> 75
gains of $7.3 million resulting from the sale of two real properties and one
loan from the RTC Portfolio for $14.2 million. The decrease in interest expense
for 1994 compared to 1993 resulted primarily from repayments on debt
attributable to the sixteen apartment complexes sold from the RTC Portfolio in
December 1993. Investment, interest and other income for 1993 includes a pre-tax
gain of $47.8 million attributable to the sale of these properties for $113.6
million. Also included in investment, interest and other income for 1993 are the
sales of two other real properties and three loans from the RTC Portfolio
resulting in pre-tax gains of $5.1 million.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Operating loss............................ $(29.3) $(14.3) $(19.6) $(11.5) $(19.5)
Loss before income taxes, minority
interests, extraordinary item and
cumulative effect of changes in
accounting principles................... (32.4) (15.2) (19.8) (19.3) (30.1)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Operating loss
The operating losses represent corporate general and administrative
expenses that are not attributable to MAXXAM's industry segments. The operating
losses for the nine months ended September 30, 1996 increased from the same
period in 1995. This increase was principally due to accruals of $21.9 million
for certain legal contingencies of which a substantial portion relates to legal
fees and expenses that the Company may incur in connection with matters related
to (i) a civil action filed by the FDIC against Mr. Charles E. Hurwitz seeking
damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was
a controlling shareholder, de facto senior officer and director of USAT, and was
involved in certain decisions which contributed to the insolvency of USAT and
(ii) formal administrative proceedings initiated by the OTS against MAXXAM and
others (the "Notice") alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and
the other respondents with respect to the failure of USAT. The OTS seeks, among
other things, unspecified damages in excess of $138.0 million from MAXXAM and
Federated and civil penalties. See "Legal Proceedings -- USAT Matters."
Loss before income taxes and minority interests
The loss before income taxes and minority interests includes operating
losses, investment, interest and other income (expense) and interest expense,
including amortization of deferred financing costs, that are not attributable to
MAXXAM's industry segments. The losses for the nine months ended September 30,
1996 increased from the same period in 1995 principally due to increased
operating losses discussed above.
Credit (Provision) for Income Taxes
MAXXAM's credit for income taxes for the nine months ended September 30,
1996 and the provision for income taxes for the nine months ended September 30,
1995 include the reversal of reserves MAXXAM no longer believed were necessary
(See Note 6 of the Condensed Notes to MAXXAM's Unaudited Consolidated Financial
Statements).
Minority interests
Minority interests represent the minority stockholders' interest in
MAXXAM's aluminum operations and, with respect to periods after October 6, 1995,
the minority partners' interest in SHRP, Ltd.
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THREE YEARS ENDED DECEMBER 31, 1995
Operating Loss
The operating losses represent corporate general and administrative
expenses that are not attributable to MAXXAM's industry segments. The operating
loss for 1995 increased compared to 1994, primarily due to a $2.5 million
increase in costs attributable to phantom share rights granted to certain
employees and a $6.1 million charge for the cost of certain litigation. These
phantom share rights, together with rights granted to certain employees of
MAXXAM's real estate subsidiaries, were exercised in 1995. See Note 8 to
MAXXAM's Audited Consolidated Financial Statements. The operating loss for 1994
decreased compared to 1993, primarily due to a $6.5 million charge related to
litigation contingencies in 1993 and lower overhead costs.
Loss Before Income Taxes, Minority Interests, Extraordinary Item and
Cumulative Effect of Changes in Accounting Principles
The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles includes operating losses,
investment, interest and other income (expense) and interest expense, including
amortization of deferred financing costs, that are not attributable to MAXXAM's
industry segments. The loss for 1995 increased compared to 1994, primarily due
to the increased operating loss, partially offset by higher investment, interest
and other income. The loss before income taxes, minority interests,
extraordinary item and cumulative effect of changes in accounting principles for
1994 was significantly less than the loss for 1993. This decrease was primarily
due to the decreased operating losses discussed above and a decrease in interest
expense. The decrease in interest expense resulted primarily from the redemption
in August 1993 of $20.0 million aggregate principal amount of MAXXAM's Reset
Notes. Investment, interest and other income (expense) for 1994 includes the
equity in losses of affiliates attributable to MAXXAM's equity interest in SHRP,
Ltd., offset by net gains on marketable securities. Affiliates of MAXXAM held an
equity interest in SHRP, Ltd. of approximately 29.7% until October 1994, when,
as a result of an additional capital contribution of $5.6 million, MAXXAM's
interest increased to approximately 45%. MAXXAM obtained a majority interest in
SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy proceedings on October
6, 1995. See "-- Financial Condition and Investing and Financing
Activities -- Real Estate and Other Operations."
Credit (Provision) for Income Taxes
MAXXAM's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) revision of prior years' tax estimates and
other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. MAXXAM's
provision for income taxes as reflected in MAXXAM's Audited Consolidated
Statement of Operations for the year ended December 31, 1995 reflects a benefit
of $24.2 million relating to the revision of prior years' tax estimates and
other changes in valuation allowances. See Note 5 to MAXXAM's Audited
Consolidated Financial Statements.
Minority Interests
Minority interests represent the minority stockholders' interest in
MAXXAM's aluminum operations and, with respect to periods after October 6, 1995,
minority partners' interest in SHRP, Ltd.
Extraordinary Item
The refinancing activities of Kaiser during the first quarter of 1994, as
described in Note 4 to MAXXAM's Audited Consolidated Financial Statements,
resulted in an extraordinary loss of $5.4 million, net of benefits for income
taxes of $2.9 million. The extraordinary loss consists primarily of the
write-off of unamortized deferred financing costs on Kaiser's previous credit
agreement (the "1989 KACC Credit Agreement").
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The refinancing activities of KACC and Pacific Lumber in the first quarter
of 1993 and MGI in the third quarter of 1993, as described in Note 4 to MAXXAM's
Audited Consolidated Financial Statements, resulted in an extraordinary loss of
$50.6 million, net of benefits for minority interests of $2.8 million and income
taxes of $27.5 million. The extraordinary loss consists primarily of the
respective tender and redemption premiums paid and the write-off of unamortized
discount and deferred financing costs on Pacific Lumber's retired 12% Series A
Senior Notes, 12.2% Series B Senior Notes and 12 1/2% Senior Subordinated
Debentures, MGI's retired 12 3/4% Notes and KACC's retired 14 1/4% Senior
Subordinated Notes.
Cumulative Effect of Changes in Accounting Principles
As of January 1, 1993, MAXXAM adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"), Statement of
Financial Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions ("SFAS 106") and Statement of Financial Accounting
Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS
112") as more fully described in Notes 5 and 6 to MAXXAM's Audited Consolidated
Financial Statements. The cumulative effect of the change in accounting
principle for the adoption of SFAS 109 increased 1993 results of operations by
$26.6 million. The cumulative effect of the change in accounting principle for
the adoption of SFAS 106 reduced 1993 results of operations by $437.9 million,
net of related benefits for minority interests of $63.6 million and income taxes
of $236.8 million. The cumulative effect of the change in accounting principle
for the adoption of SFAS 112 reduced 1993 results of operations by $6.4 million,
net of related benefits for minority interests of $1.0 million and income taxes
of $3.4 million. The new accounting methods have no effect on MAXXAM's cash
outlays for postretirement and postemployment benefits, nor does the cumulative
effect of the changes in accounting principles affect MAXXAM's compliance with
its existing debt covenants. Postretirement benefits other than pensions are
generally provided through contracts with various insurance carriers. MAXXAM has
not funded the liability for these benefits, which are expected to be paid out
of cash generated by operations. MAXXAM reserves the right, subject to
applicable collective bargaining agreements and applicable legal requirements,
to amend or terminate these benefits.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
Since 1993, subsidiaries of MAXXAM's aluminum operations and forest
products operations have completed a number of transactions designed to enhance
their liquidity, significantly extend their debt maturities and lower their
interest costs. Collectively, these transactions have included public and
private offerings for approximately $1.6 billion of debt securities,
approximately $220.0 million of additional equity capital and the replacement of
revolving credit facilities. The following should be read in conjunction with
MAXXAM's Consolidated Financial Statements and the Notes thereto.
MAXXAM (PARENT COMPANY)
MAXXAM conducts its operations primarily through its subsidiaries.
Creditors of and holders of minority interests in subsidiaries of MAXXAM have
priority with respect to the assets and earnings of such subsidiaries over the
claims of the creditors of MAXXAM, including the holders of MAXXAM's public
debt. As of September 30, 1996, the indebtedness of the subsidiaries and the
minority interests reflected on MAXXAM's consolidated balance sheet were
$1,668.6 million and $217.9 million, respectively. On a pro forma basis, as of
September 30, 1996, after giving effect to: (a) the issuance of $130.0 million
principal amount of Old Notes, (b) the redemption of $42.6 million aggregate
principal amount of the Old MAXXAM Notes, and (c) the issuance of Kaiser's
$225.0 million aggregate principal amount of KACC New Notes and the application
of the net proceeds therefrom, MAXXAM would have had consolidated indebtedness
of $1,893.3 million. MAXXAM did not receive any of the net proceeds from the
sale of the KACC New Notes. Certain of MAXXAM's subsidiaries, principally Kaiser
and MGI, are restricted by their various debt agreements as to the amount of
funds that can be paid in the form of dividends or loaned to MAXXAM. The 1994
KACC Credit Agreement contains covenants which, among other things, limit
Kaiser's ability to pay cash dividends and restrict transactions between Kaiser
and its affiliates. The indentures governing the KACC Notes contain covenants
which, among other things, limit KACC's ability to pay cash dividends and
restrict
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transactions between KACC and its affiliates. Pursuant to the terms of the 1994
KACC Credit Agreement, Kaiser is precluded from paying any dividends with
respect to its common stock. The Indenture governing the Notes contains various
covenants which, among other things, will limit the payment of dividends and
restrict transactions between the Company and its affiliates. Except for
possible proceeds from the Headwaters Agreement, MAXXAM does not expect to
receive any dividends from the Company during the next several years. Moreover,
MAXXAM expects that the Company will be, to a large measure, dependent upon cash
interest payments in respect of the Intercompany Note to meet the debt service
obligations to the holders of the Notes. The most restrictive covenants
governing debt of MAXXAM's real estate and other subsidiaries would not restrict
payment to MAXXAM of all available cash and unused borrowing availability for
such subsidiaries (aggregating approximately $12.1 million as of September 30,
1996). See also "Risk Factors -- Ability to Service Indebtedness."
Although there are no restrictions on MAXXAM's ability to pay dividends on
its capital stock, MAXXAM has not paid any dividends for a number of years and
has no present intention to do so. MAXXAM has stated that, from time to time, it
may purchase its common stock on national exchanges or in privately negotiated
transactions.
During 1994, MAXXAM sold 1,239,400 of Kaiser's Depositary Shares (as
defined in "-- Aluminum Operations" below) for aggregate net proceeds of $10.3
million. MAXXAM sold its remaining 893,550 of Depositary Shares during the first
six months of 1995 for aggregate net proceeds of $7.6 million. See Note 7 to the
Audited Consolidated Financial Statements of MAXXAM.
On October 6, 1995, wholly owned subsidiaries of MAXXAM made investments in
SHRP, Ltd. of approximately $8.7 million, consisting of land, cash ($5.8
million) and other assets. In an unrelated transaction, on October 20, 1995, a
wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million
aggregate initial principal amount of SHRP, Ltd.'s 11% Senior Secured Extendible
Notes (the "SHRP Notes"). See "-- Real Estate and Other Operations."
On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with
Custodial Trust Company providing for up to $25.0 million in borrowings. Any
amounts drawn would be payable upon demand and be secured by Kaiser Common Stock
owned by MAXXAM (exclusive of the Kaiser Shares which will be contributed to the
Company concurrently with the consummation of the Offering), or such other
marketable securities acceptable to the lender, with an initial market value (as
defined therein) of approximately three times the amount borrowed. Borrowings
under this agreement would bear interest at the prime rate plus 1/2% per annum.
The Custodial Trust Agreement provides for a revolving credit arrangement during
the first year of the agreement. Any borrowings outstanding on the first
anniversary date of the agreement convert into a term loan maturing on the
second anniversary date of the agreement. No borrowings were outstanding as of
the date of this Prospectus.
On April 24, 1996, the SEC declared effective a shelf registration
statement which MAXXAM had filed with respect to up to $200.0 million aggregate
principal amount of debt securities. MAXXAM intends to withdraw this shelf
registration statement. In that regard, Kaiser also filed a shelf registration
statement with the SEC, which was also declared effective on April 24, 1996,
covering 10 million shares of its common stock owned by MAXXAM. MAXXAM would use
the net proceeds (or portions thereof) from the sale of such securities for
working capital and general corporate purposes.
On December 26, 1995, the OTS initiated formal administrative proceedings
against MAXXAM and others by filing the Notice. The Notice alleges misconduct by
MAXXAM, Federated, Mr. Charles Hurwitz and others (the "respondents") with
respect to the failure of USAT, a wholly owned subsidiary of United Financial
Group Inc. ("UFG"). The Notice claims that MAXXAM was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against MAXXAM and the other respondents, including, among other
things, allegations that through USAT it was involved in prohibited transactions
with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks
unspecified damages in excess of $138.0 million from MAXXAM and Federated, civil
money penalties and a removal from, and prohibition against MAXXAM and the other
respondents engaging in, the banking industry. MAXXAM has concluded that it is
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unable to determine a reasonable estimate of the loss (or range of loss), if
any, that could result from this contingency. Accordingly, it is impossible to
assess the ultimate impact, if any, of the outcome this matter may have on
MAXXAM's consolidated financial position, results of operations or liquidity.
On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E.
Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas. The FDIC action did not name MAXXAM as a defendant.
The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on
the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM
maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a
motion to join the OTS to this action. On December 8, 1995, MAXXAM filed a
motion to intervene in this action and conditioned it on the Court joining the
OTS to this action. MAXXAM filed with its motion to intervene a proposed
complaint which alleges that the OTS violated the Administrative Procedures Act
by rejecting MAXXAM's bid for USAT. MAXXAM's bylaws provide for indemnification
of its officers and directors to the fullest extent permitted by Delaware law.
MAXXAM is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is ultimately
determined that the individual was not entitled to indemnification. In addition,
MAXXAM's indemnity obligation can, under certain circumstances, include amounts
other than defense costs, including judgments and settlements. MAXXAM has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from this contingency. Accordingly, it
is impossible to assess the ultimate outcome of the foregoing matter or its
potential impact on MAXXAM's consolidated financial position, results of
operations or liquidity.
As of September 30, 1996, MAXXAM (excluding its subsidiaries) had cash and
marketable securities of approximately $56.6 million. On a pro forma basis, as
of September 30, 1996, after giving effect to: (a) the issuance of $130.0
million aggregate principal amount of the Notes and (b) the redemption of $42.6
million aggregate principal amount of the Old MAXXAM Notes together with accrued
interest thereon, MAXXAM (excluding its subsidiaries) would have had cash and
marketable securities of $136.1 million. The Reset Notes were redeemed on
January 7, 1997 and the Subordinated Debentures are scheduled to be redeemed on
January 22, 1997. Accrued interest on such instruments through these redemption
dates will be approximately $0.7 million. Following the retirement of the Old
MAXXAM Notes, MAXXAM will use the remaining proceeds from the Offering for
general corporate purposes, including possible repurchases of its common stock.
MAXXAM has issued a letter of financial support to Palmas del Mar
Properties Inc., a subsidiary of MAXXAM ("PDMPI"), in each of the years
subsequent to its formation in September 1993 stating that MAXXAM has provided
economic support for PDMPI's past operations and plans to continue such support.
MAXXAM has historically made these representations of financial support on an
annual basis and has not expressed any intention of discontinuing such support.
A subsidiary of PDMPI intends to borrow up to $15 million to construct a new
golf course at Palmas. The principal security for the loan will be the new and
existing golf courses at Palmas. MAXXAM is also required to guaranty $3.5
million of the loan.
MAXXAM expects that its cash outlays for cash interest payments pursuant to
the Intercompany Note will aggregate approximately $10.6 million each year.
During the three years ended December 31, 1995, MAXXAM's corporate general and
administrative expenses, net of cost reimbursements from its subsidiaries, have
ranged between $11.0 million and $19.0 million per year. During the nine months
ended September 30, 1996, MAXXAM's corporate general and administrative expenses
were $28.8 million, of which $21.9 million represented an accrual for certain
legal contingencies, of which a substantial portion relates to legal fees and
expenses that MAXXAM may incur in connection with the legal matters described in
"Legal Proceedings -- USAT Matters." Although MAXXAM cannot predict when or
whether the expenses represented by such accrual will be incurred, there can be
no assurance that such accrual will be adequate or that MAXXAM's recurring cash
corporate general and administrative expenses will not increase.
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MAXXAM has realized a substantial portion of its cash flows during the past
several years from the sale of real property and loans from the RTC Portfolio.
From 1992 to September 30, 1996, an aggregate of approximately $41.7 million in
loans (which represented thirteen loans) were sold or paid off and thirty-four
properties were sold for aggregate consideration of approximately $177.3
million. These transactions resulted in aggregate gains of $94.2 million. As of
September 30, 1996, two loans resulting from property sales and eight properties
(including two acquired via foreclosures) were held, which had an aggregate net
book value of $18.2 million. Two properties within this portfolio have
subsequently been sold for a gain of $3.0 million. Net proceeds consisted of
$3.6 million in cash and a note of $1.3 million. All of the remaining assets are
being managed and marketed for sale. One property in the portfolio is under
contract for sale with closing estimated to occur during the first quarter of
1997. This sale is expected to produce a gain of approximately $2.5 million and
net cash proceeds of approximately $4.3 million. MAXXAM does not expect the Real
Estate Subsidiaries will be able to generate distributable cash flows during the
next several years at or near recent historical levels. See also "Risk
Factors -- Ability to Service Indebtedness" and "-- Litigation."
MAXXAM believes that its existing cash resources, together with the cash
available from subsidiaries and other sources of financing, will be sufficient
to fund its working capital requirements, including the payment of interest on
the Intercompany Note for the next year and for the next several years
thereafter. With respect to its long-term liquidity, MAXXAM believes that its
existing cash and cash resources, together with the cash proceeds from the sale
of assets, distributions from its subsidiaries, and the proceeds from the sale
of debt securities should be sufficient to meet its working capital
requirements, including the payment of interest and principal on the
Intercompany Note. However, there can be no assurance that MAXXAM's cash
resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries and other sources of financing, will be
sufficient for such purposes or that MAXXAM would be able to refinance or pay at
maturity the aggregate principal amount of the Intercompany Note. Any adverse
outcome of the litigation described above could materially adversely affect
MAXXAM's ability to make payments under the Intercompany Note and satisfy its
obligations under its guaranty. See also "Risk Factors -- Ability to Service
Indebtedness" and "-- Litigation."
ALUMINUM OPERATIONS
The 1994 KACC Credit Agreement consists of a $325.0 million five-year
secured revolving line of credit which matures in 1999. KACC is able to borrow
under the facility by means of revolving credit advances and letters of credit
(up to $125.0 million) in an aggregate amount equal to the lesser of $325.0
million or a borrowing base relating to eligible accounts receivable and
inventory. The 1994 KACC Credit Agreement is unconditionally guaranteed by
Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994
KACC Credit Agreement bear interest at a rate per annum, at KACC's election,
equal to a Reference Rate (as defined) plus a margin of 0% to 1 1/2% or LIBO
Rate (Reserve Adjusted) (as defined) plus a margin of 1 3/4% to 3 1/4%. The
interest rate margins applicable to borrowings under the 1994 KACC Credit
Agreement are based on a financial test, quarterly. During the first two
quarters of 1996, Kaiser paid interest at a rate per annum of the Reference Rate
plus 0% or LIBO Rate plus 1 3/4%. During the third quarter of 1996, the per
annum interest rates increased by 1/2% to the Reference Rate plus 1/2% or LIBO
Rate plus 2 1/4%. Effective October 1, 1996, the margin applicable to loans
under the 1994 KACC Credit Agreement increased by an additional 1/2% per annum
based on the financial test.
On October 23, 1996, KACC completed the offering of $175.0 million
principal amount of the KACC New Senior Notes at 99.5% of their principal amount
to yield 10.96% to maturity. The KACC New Senior Notes rank pari passu in right
and priority of payment with outstanding indebtedness under the 1994 KACC Credit
Agreement and the indebtedness represented by the KACC Senior Notes and the KACC
New Series C Senior Notes and are guaranteed on a senior, unsecured basis by
certain of KACC's subsidiaries. Net proceeds from the offering, after estimated
expenses, were approximately $168.9 million, which were utilized to reduce the
outstanding borrowings under the revolving credit facility of the 1994 KACC
Credit Agreement to zero. The remaining net proceeds were invested in short-term
investments pending their application for working capital and general corporate
purposes, including capital projects. On November 12, 1996, pursuant to an
agreement with the initial purchasers of the KACC New Senior Notes, KACC filed a
registration
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statement (the "KACC Registration Statement") with respect to an offer to
exchange the KACC New Senior Notes for new notes with substantially identical
terms (the "First KACC Exchange Offer"). The KACC Registration Statement, as
amended on December 10, 1996, was declared effective on December 11, 1996; the
First KACC Exchange Offer was commenced on December 31, 1996.
On December 23, 1996, KACC completed the offering of $50.0 million
principal amount of the KACC New Series C Senior Notes at 103.5% of their
principal amount to yield 10.3% to maturity. The KACC New Series C Senior Notes
rank pari passu in right and priority of payment with outstanding indebtedness
under the 1994 KACC Credit Agreement and the indebtedness represented by the
KACC Senior Notes and the KACC New Senior Notes and are guaranteed on a senior,
unsecured basis by certain of KACC's subsidiaries. Net proceeds from the
offering, after estimated expenses, were approximately $50.4 million. On January
2, 1997, pursuant to an agreement with the Initial Purchaser of the KACC New
Series C Senior Notes, KACC filed a registration statement with respect to an
offer to exchange the KACC New Series C Senior Notes for new notes with
substantially identical terms.
In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the
"Depositary Shares"), each representing one-tenth of a share of Series A
Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares").
See Note 7 to MAXXAM's Audited Consolidated Financial Statements. On September
19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted
in the simultaneous redemption of all Depositary Shares in exchange for (i)
13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and
unpaid dividends up to and including the day immediately prior to the redemption
date of $2.8 million, and (iii) cash in lieu of any fractional shares of common
stock that would have otherwise been issuable.
As a result of the issuance of the PRIDES and the Depositary Shares, and
the subsequent redemption of the Depositary Shares, MAXXAM's equity interest in
Kaiser has decreased to approximately 62% on a fully diluted basis.
On February 17, 1994, KACC issued $225.0 million of the KACC Senior Notes.
On February 1, 1993, KACC issued $400.0 million of the KACC Senior Subordinated
Notes. The obligations of KACC with respect to the KACC New Senior Notes, the
KACC Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly
and severally, by certain subsidiaries of KACC. See Note 4 to the Consolidated
Financial Statements for a description of the terms of the KACC Notes and the
use of proceeds from their issuance. Pursuant to the terms of the 1994 KACC
Credit Agreement, Kaiser is precluded from paying any dividends with respect to
its common stock. The declaration and payment of dividends by Kaiser with
respect to the PRIDES are expressly permitted by the terms of the 1994 KACC
Credit Agreement.
Kaiser's Board of Directors had approved a proposed recapitalization (the
"Proposed Recapitalization") which would have, among other things: (i) provided
for two classes of common stock: Class A Common Shares with one vote per share
("Class A Common Shares") and a new, lesser-voting class designated as Common
Stock with 1/10 vote per share ("Recap Common Stock"); (ii) redesignated as
Class A Common Shares the 100 million currently authorized shares of Kaiser's
existing common stock and authorized an additional 250 million shares of Recap
Common Stock; and (iii) reclassified each issued share of Kaiser's existing
common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of
Recap Common Stock.
On May 1, 1996, Kaiser's stockholders approved the Proposed
Recapitalization, but it was not implemented at that time due to a preliminary
injunction issued by the Delaware Court of Chancery. The preliminary injunction
was upheld on appeal by the Delaware Supreme Court on August 29, 1996. Kaiser's
Board of Directors subsequently adopted a resolution abandoning the Proposed
Recapitalization. See also "Legal Proceedings -- Kaiser Litigation -- Other
Proceedings."
The decision to abandon the Proposed Recapitalization does not preclude a
recapitalization from being proposed to Kaiser's stockholders in the future,
including a substantially identical recapitalization structure after the
redemption or conversion of the PRIDES. In the event that such a
recapitalization were implemented in the future, MAXXAM could retain a majority
of the voting power of Kaiser even if it
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substantially reduced its total holdings of Kaiser's equity securities by more
than two-thirds. Any securities which may be issued with respect to the Kaiser
Shares pursuant to any future recapitalization of Kaiser, would be subject to
the lien of the MGI Indenture. Further, if and to the extent any Kaiser Shares
are then pledged pursuant to the Indenture governing the Notes, such securities
would be subject to the lien of the Indenture.
Kaiser's expenditures for property, plant and equipment during the first
nine months of 1996 were $90.8 million, which were used primarily to improve
production efficiency, reduce operating costs, expand capacity at existing
facilities, and construct new facilities, including Kaiser's first micromill
which is nearing completion in Nevada as a full-scale demonstration and
production facility.
Kaiser's capital expenditures (of which approximately 6% is expected to be
funded by Kaiser's minority partners in certain foreign joint ventures) are
expected to be between $130.0 and $160.0 million per annum in each of 1996
through 1998. Management continues to evaluate numerous projects all of which
require substantial capital, including Kaiser's micromill project and other
potential opportunities both in the United States and overseas. In response to
lower aluminum and alumina prices, management may consider deferring certain
non-essential capital expenditures and/or raising investment capital (including
through joint ventures), in order to conserve a portion of Kaiser's available
cash resources to meet incremental capital and operating requirements and to
take advantage of new investment opportunities.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
Kaiser, entered into a Joint Venture Agreement and related agreements (the
"Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the
China National Nonferrous Metals Industry Corporation relating to the formation
and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign
joint equity enterprise (the "Joint Venture") organized under the laws of the
PRC. KYRIL contributed $9.0 million to the capital of the Joint Venture in July
1995. The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing, and other conditions relating to KYRIL's
additional contributions to the Joint Venture. Governmental approval in the PRC
will be necessary in order to implement certain arrangements agreed to by the
parties, and there can be no assurance such approvals will be obtained. At a
recent meeting of the directors of the Joint Venture, KYRIL, LAS and the Joint
Venture reached an agreement (i) that extended until early 1997 the time for
KYRIL to make a second capital contribution to the Joint Venture, and (ii) that
KYRIL would continue to explore various methods of financing any future capital
contributions to the Joint Venture, including financing that could be obtained
from third-party investors. See "Business of MAXXAM -- International Business
Development."
As described in Note 7 to MAXXAM's Unaudited Consolidated Financial
Statements, Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon such
laws. KACC is currently subject to a number of lawsuits under CERCLA and, along
with certain other entities, has been named as a potentially responsible party
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA. Based on Kaiser's evaluation of these and other
environmental matters, Kaiser has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater remediation
matters. At September 30, 1996, the balance of such accruals, which are
primarily included in other noncurrent liabilities, was $32.9 million. These
environmental accruals represent Kaiser's estimate of costs reasonably expected
to be incurred based on presently enacted laws and regulations, currently
available facts, existing technology and Kaiser's assessment of the likely
remediation to be performed. Kaiser expects these remediation actions to occur
over the next several years and estimates that annual expenditures to be charged
to these environmental accruals will be approximately $2.0 million to $10.0
million for the years 1996 through 2000 and an aggregate of approximately $7.0
million thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. While uncertainties are
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inherent in the final outcome of these environmental matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, Kaiser currently believes that the resolution of such uncertainties
should not have a material adverse effect on MAXXAM's consolidated financial
position, results of operations or liquidity. See also "Risk Factors -- Risk
Factors Relating to Kaiser -- Environmental Matters and Litigation."
Additionally, KACC is a defendant in a substantial number of lawsuits, some
of which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at least 15
years. At September 30, 1996, the number of claims pending was approximately
75,900, compared to 59,700 at December 31, 1995. During 1995, approximately
41,700 claims were received and approximately 7,200 were settled or dismissed
and, during the first nine months of 1996, approximately 20,000 of such claims
were received and 3,800 claims were settled or dismissed.
Based on past experience and reasonably anticipated future activity, Kaiser
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and Kaiser's actual
costs could exceed these estimates. Kaiser's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an estimated asbestos-related cost
accrual of $160.0 million, before consideration of insurance recoveries, is
included primarily in other noncurrent liabilities at September 30, 1996. Kaiser
estimates that annual future cash payments in connection with such litigation
will be approximately $13.0 million to $20.0 million for each of the years 1996
through 2000, and an aggregate of approximately $78.0 million thereafter through
2008. While Kaiser does not believe there is a reasonable basis for estimating
such costs beyond 2008, and, accordingly, did not accrue such costs, there is a
reasonable possibility that such costs may continue beyond 2008, and that such
costs may be substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and the first nine months of 1996 were filed in
Texas. KACC has been advised by its counsel that, although there can be no
assurance, the increase in pending claims may have been attributable in part to
tort reform legislation in Texas. Although asbestos-related claims are currently
exempt from certain aspects of the Texas tort reform legislation, Kaiser has
been advised that efforts to remove the asbestos-related exemption in the tort
reform legislation relating to the doctrine of forum non conveniens, as well as
other developments in the legislative and legal environment in Texas, may be
responsible for the accelerated pace of new claims experienced in late 1995 and
its continuance through the first nine months of 1996, albeit at a somewhat
reduced rate.
Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. KACC believes, based on prior insurance-related recoveries with
respect to asbestos-related claims, existing insurance policies, and the advice
of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of those policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3 million, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at September 30, 1996.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on MAXXAM's consolidated financial position,
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results of operations or liquidity. See also "Risk Factors -- Risk Factors
Relating to Kaiser -- Environmental Matters and Litigation."
Kaiser and KACC are involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on MAXXAM's consolidated financial
position, results of operations or liquidity.
Kaiser believes that its existing cash resources, together with cash flows
from operations and borrowings under the 1994 KACC Credit Agreement, will be
sufficient to meet its working capital and capital expenditure requirements for
the next year. Additionally, with respect to long-term liquidity, Kaiser
believes that operating cash flows, together with the ability to obtain both
short and long-term financing, should provide sufficient funds to meet its
working capital and capital expenditure requirements. See "Risk
Factors -- Ability to Service Indebtedness."
FOREST PRODUCTS OPERATIONS
For information concerning the Company's financial condition and investing
and financing activities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Financial Condition and
Investing and Financing Activities."
REAL ESTATE AND OTHER OPERATIONS
As of September 30, 1996, approximately $3.8 million was outstanding
pursuant to a loan agreement secured by the RTC portfolio (the "RTC Portfolio
Loan"). The RTC Portfolio Loan matures on December 31, 1999 and bears interest
at prime plus 3%. Upon the sale of any secured property or loan, principal
payments are required based on the release price (as defined) of such property
or loan.
On July 15, 1995, a real estate subsidiary of MAXXAM, MCO Properties Inc.
("MCOP"), amended and restated its revolving credit agreement with a bank which
will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings under the
MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables
and real estate held for investment or development and sale, (ii) MCOP's pledge
of the common stock of certain of its subsidiaries, and (iii) the guarantee of
certain of MCOP's subsidiaries and MAXXAM. Further, MAXXAM has pledged MCOP's
common stock as additional security. Interest is computed at the bank's prime
rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit
Agreement contains various covenants including a minimum net worth requirement
and limitations on the payment of dividends (neither of which MAXXAM believes is
material), investments and the incurrence of indebtedness. The MCOP Credit
Agreement provides for borrowings of up to $14.0 million, of which $8.5 million
may be used for standby letters of credit. The available credit is subject to
borrowing base limitation calculations. As of September 30, 1996, $11.0 million
of borrowings was available under the MCOP Credit Agreement; there were no
outstanding borrowings, and letters of credit outstanding amounted to $1.4
million.
In July 1993, MAXXAM, through various subsidiaries, acquired various
interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million.
MAXXAM increased its equity interest in SHRP, Ltd. to 45.0%, as a result of a
$5.6 million capital contribution in October 1994. On January 15, 1995, SHRP,
Ltd. defaulted on the $4.4 million semi-annual interest payment due on $75.0
million aggregate principal amount of its 11 3/4% Senior Secured Notes. On April
17, 1995, SHRP, Ltd. and its wholly owned subsidiary, SHRP Capital Corp.,
together with SHRP Acquisition, Inc., a wholly owned subsidiary of MAXXAM and
SHRP, Ltd.'s largest limited partner (collectively, the "Debtors"), filed
voluntary petitions seeking to reorganize under the provisions of Chapter 11 of
the United States Bankruptcy Code. The bankruptcy cases were consolidated and
transferred to the United States Bankruptcy Court for the Southern District of
Texas, Houston Division, Case No. 95-43739-H3-11. On September 22, 1995, the
bankruptcy plan of the Debtors (the "Plan") was confirmed and on October 6,
1995, the transactions called for by the Plan were completed.
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A new investor group (the "New SHRP Investor Group") made a capital
contribution of cash in the aggregate amount of $5.9 million (wholly owned
subsidiaries of MAXXAM contributed $5.8 million) to SHRP, Ltd. Additionally, a
wholly owned subsidiary of MAXXAM contributed an adjoining approximately 87-acre
tract of land (with a fair market value of $2.3 million). The new managing
general partner of the reorganized SHRP, Ltd. (the "SHRP Managing General
Partner") is SHRP General Partner, Inc., a wholly owned subsidiary of MAXXAM.
SHRP Managing General Partner was issued a 1% interest in the reorganized SHRP,
Ltd. in exchange for contributing its pro rata share of the investment made by
the New SHRP Investor Group. In an unrelated transaction, on October 20, 1995, a
wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million
aggregate initial principal amount of the SHRP Notes and the corresponding
shares of common stock of SHRP Equity, Inc. (a Delaware corporation and an
additional general partner of the reorganized SHRP, Ltd.) to which the selling
noteholder was entitled. Such shares of common stock represent 39.0% of the
shares of common stock of SHRP Equity, Inc. After giving effect to these
transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly,
approximately 78.8% of the equity in the reorganized SHRP, Ltd.
SHRP, Ltd. has sustained substantial operating losses since it began
operations in April 1994. At September 30, 1996, SHRP, Ltd. had cash and cash
equivalents of $2.9 million and a line of credit from its partners of $1.7
million, of which MAXXAM's portion is $1.6 million. SHRP, Ltd. projects a loss
from operations for the next two years. In the event that the existing cash
resources of SHRP, Ltd. and the line of credit are inadequate to support the
cash flow requirements of SHRP, Ltd., alternative sources of funding will be
necessary. MAXXAM is not obligated to provide any further economic support to
SHRP, Ltd., beyond the $1.6 million line of credit commitment.
As of September 30, 1996, MAXXAM's real estate and other subsidiaries had
approximately $11.0 million available for use under the MCOP Credit Agreement
(all of which could be borrowed and distributed to MAXXAM). MAXXAM believes that
the existing cash and credit facilities of its real estate and other
subsidiaries are sufficient to fund the working capital and capital expenditure
requirements of such subsidiaries for the next year. With respect to the
long-term liquidity of such subsidiaries, MAXXAM believes that their ability to
generate cash from the sale of their existing real estate, together with their
ability to obtain financing, should provide sufficient funds to meet their
working capital and capital expenditure requirements. See also "Risk
Factors -- Ability to Service Indebtedness."
TRENDS
ALUMINUM OPERATIONS
Sensitivity to Prices
Kaiser's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. KACC enters
into primary aluminum hedging transactions from time to time in the normal
course of business. Primary aluminum hedging transactions are designed to
mitigate Kaiser's exposure to declines in the market price of primary aluminum,
while retaining the ability to participate in favorable environments that may
materialize. KACC has employed strategies which include forward sales and
purchases of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. As of November 30, 1996, KACC had sold forward, at
fixed prices, approximately 70,000 and 93,600 tons of primary aluminum in excess
of its projected internal fabrication requirements for 1997 and 1998,
respectively, and had purchased put options to establish a minimum price for
196,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. As of
November 30, 1996, Kaiser had also entered into option contracts that
established a price range for an additional 160,000 tons of Kaiser's 1998
surplus primary aluminum. The weighted average price of Kaiser's 1997 and 1998
fixed price contracts, and the weighted average price for Kaiser's 1998
purchased put options, exceed the AMT Price for primary aluminum for the week
ended January 3, 1997. The weighted average price for Kaiser's purchased put
options with respect to 1997 and the weighted average price of the minimum of
the range established with respect to Kaiser's other 1998 option contracts are
below the AMT Price for the week ended January 3, 1997.
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In addition, as of November 30, 1996, KACC had sold forward approximately
89% and 90% of the alumina available to it in excess of its projected internal
smelting requirements for 1997 and 1998, respectively. Virtually all of such
1997 and 1998 sales were made at prices indexed to the future prices of primary
aluminum.
KACC has established margin accounts with its counterparties related to
forward aluminum sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized losses
related to these contracts. At December 31, 1995, Kaiser was not required to
maintain any such margin deposits. At December 31, 1994, KACC had $50.5 million
on deposit with various counterparties with respect to such deposit
requirements. These amounts were recorded in prepaid expenses and other current
assets.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per metric ton ($.67 per pound) of primary aluminum, natural gas and fuel oil
forward purchase and option contracts, and forward foreign exchange contracts
was $46.4 million.
Recent Trends and Developments
During 1995, the average Midwest U.S. transaction price (the "AMT Price")
for primary aluminum was approximately $.86 per pound compared to $.72 and $.54
per pound in 1994 and 1993, respectively. The significant improvement in prices
during 1994 and 1995 resulted from strong growth in Western world consumption of
aluminum and the curtailment of production in response to lower prices in prior
periods by many producers worldwide. In 1995, production of primary aluminum
increased and consumption of aluminum continued to grow, but at a much lower
rate than in 1994. In general, the overall aluminum market was strongest in the
first half of 1995. By the second half of 1995, orders and shipments for certain
products had softened and the rate of decline in London Metal Exchange ("LME")
inventories had leveled off. By the end of 1995, some small increases in LME
inventories occurred, and prices of aluminum weakened from first-half levels.
This trend continued throughout 1996 as the supply of primary aluminum exceeded
demand during this period. Net reported primary aluminum inventories have
increased by approximately 62,000 tons in 1996 based upon recent reports of the
LME (through January 3, 1997) and the International Primary Aluminium Institute
("IPAI") (through October 31, 1996), following substantial declines of 764,000
and 1,153,000 tons in 1994 and 1995, respectively. The AMT Price for primary
aluminum for the week ended January 3, 1997, was approximately $.74 per pound.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, management believes
that the reduction of aluminum inventories by consumers, as prices have
continued to decline, has suppressed the growth in primary aluminum demand that
normally accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, management believes the recent decline in primary
aluminum prices may have been influenced by a recent major decline in copper
prices on the LME.
Fourth Quarter Results
Kaiser incurred net losses of $4.8 million in the third quarter of 1996 and
expects to continue to sustain net losses in the fourth quarter of 1996, due
principally to lower average realized prices for alumina and primary aluminum,
as compared to prices realized in the comparable periods of 1995, and due to
increased raw material, energy, and operational costs associated with the
production of alumina at Kaiser's Gramercy alumina refinery and 65%-owned Alpart
alumina refinery in Jamaica, as compared to amounts incurred in the comparable
periods of 1995. Such losses could substantially exceed the loss for the third
quarter of 1996.
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Profit Enhancement and Cost Cutting Initiative
Kaiser has set a goal of achieving significant cost reductions and other
profit improvements during 1997, with the full effect planned to be realized in
1998. The initiative is based on Kaiser's conclusion that the current level of
performance of its existing facilities and businesses will not achieve the level
of profits Kaiser considers satisfactory based upon historic long-term average
prices for primary aluminum and alumina. To achieve this goal, Kaiser plans
reductions in production costs, improvements in operating efficiencies,
decreases in corporate selling, general and administrative expenses and
enhancements to product mix. There can be no assurance that the initiative will
result in the desired cost reductions and other profit improvements.
FOREST PRODUCTS OPERATIONS
For information concerning trends with respect to the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Financial Condition and Investing and Financing
Activities."
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans, and provides for alternative methods for an
employer to recognize stock-based compensation costs. Under the first method, an
employer may continue to account for compensation costs for stock, stock
options, and other equity instruments issued to employees as it has
historically, using the "intrinsic value based method" (as described in SFAS
123), and such compensation costs would be the excess, if any, of the quoted
market price of the stock subject to an option at the grant date or other
measurement date over the amount an employee must pay to acquire the stock. The
intrinsic value based method generally would not result in the recognition of
compensation costs upon the grant of stock options. Under the second method, an
employer may adopt the "fair value based method" (as described in SFAS 123).
Under the fair value based method, such compensation costs would be valued using
an option-pricing model, and such amount would be charged to expense over the
option's vesting period. Employers which elect to continue to account for
stock-based compensation under the intrinsic value based method will be required
by SFAS 123 to disclose in the notes to their financial statements the amount of
net income and the earnings per share which would have been reported had the
employer elected to use the fair value based method. MAXXAM has elected to
continue to account for stock-based compensation under the intrinsic value based
method, and will comply with the disclosure requirement of SFAS 123 for fiscal
years beginning January 1, 1996.
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BUSINESS OF THE COMPANY
GENERAL
The Company engages in forest products operations through MGI and its
wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's
subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber, which has been in
continuous operation for over 125 years, engages in several principal aspects of
the lumber industry -- the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber products and the manufacturing of lumber
into a variety of value-added finished products. Britt manufactures redwood and
cedar fencing and decking products from small diameter logs, a substantial
portion of which Britt acquires from Pacific Lumber (which cannot efficiently
process them in its own mills).
PACIFIC LUMBER OPERATIONS
TIMBERLANDS
Pacific Lumber owns and manages approximately 192,000 acres of commercial
timberlands. These timberlands are located in Humboldt County along the northern
California coast which has very favorable soil and climate conditions. These
timberlands contain approximately three-quarters redwood and one-quarter
Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located
in close proximity to its sawmills and contains an extensive network of roads.
These factors greatly facilitate Pacific Lumber's operations and forest
management techniques. The extensive roads throughout Pacific Lumber's
timberlands facilitate log hauling, serve as fire breaks and allow Pacific
Lumber's foresters access to employ forest stewardship techniques which protect
the trees from forest fires, erosion, insects and other damage.
Approximately 179,000 acres of Pacific Lumber's timberlands are owned by
Scotia Pacific (the "Scotia Pacific Timberlands"), a special purpose Delaware
corporation and wholly owned subsidiary of Pacific Lumber. Pacific Lumber has
the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands
consisting substantially of virgin old growth redwood and virgin old growth
Douglas-fir timber located on numerous small parcels throughout the Scotia
Pacific Timberlands. Substantially all of Scotia Pacific's assets, including the
Scotia Pacific Timberlands and the GIS (defined below), are pledged as security
for the Timber Notes. Pacific Lumber harvests and purchases from Scotia Pacific
all of the logs harvested from the Scotia Pacific Timberlands. See
" -- Relationships With Scotia Pacific and Britt" for a description of this and
other relationships among Pacific Lumber, Scotia Pacific and Britt.
Approximately 6,000 acres of Pacific Lumber's timberlands are owned by Salmon
Creek.
The forest products industry grades lumber in various classifications
according to quality. The two broad categories within which all grades fall,
based on the absence or presence of knots, are called "upper" and "common"
grades, respectively. "Old growth" trees, often defined as trees which have been
growing for approximately 200 years or longer, have a higher percentage of upper
grade lumber than "young growth" trees (those which have been growing for less
than 200 years). "Virgin" old growth trees are located in timber stands that
have not previously been harvested. "Residual" old growth trees are located in
timber stands which have been partially harvested in the past.
Pacific Lumber has engaged in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pacific Lumber also
actively engages in efforts to establish timberlands from open areas such as
pasture land. During 1995, Pacific Lumber planted approximately 676,000 redwood
and Douglas-fir seedlings. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost
entirely by planting seedlings.
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HARVESTING PRACTICES
The ability of Pacific Lumber to sell logs or lumber products will depend,
in part, upon its ability to obtain regulatory approval of THPs. THPs are
required to be developed by registered professional foresters and must be filed
with, and approved by, the CDF prior to the harvesting of timber. Each THP is
designed to comply with applicable environmental laws and regulations. The CDF's
evaluation of proposed THPs incorporates review and analysis of such THPs by
several California and federal agencies and public comments received with
respect to such THPs. An approved THP is applicable to specific acreage and
specifies the harvesting method and other conditions relating to the harvesting
of the timber covered by such THP. See "-- Regulatory and Environmental Factors"
for information regarding a critical habitat designation, sustained yield
regulations and related matters. Pacific Lumber maintains a detailed
geographical information system covering its timberlands (the "GIS"). The GIS
covers numerous aspects of Pacific Lumber's properties, including timber type,
tree class, wildlife data, roads, rivers and streams. By carefully monitoring
and updating this data base and conducting field studies, Pacific Lumber's
foresters are better able to develop detailed THPs addressing the various
regulatory requirements. Pacific Lumber also utilizes a Global Positioning
System ("GPS") which allows precise location of geographic features through
satellite positioning. Use of the GPS greatly enhances the quality and
efficiency of GIS data.
Pacific Lumber employs a variety of well-accepted methods of selecting
trees for harvest. These methods, which are designed to achieve optimal
regeneration and growth, are referred to as "silvicultural systems" in the
forestry profession. Silvicultural systems range from very light thinnings aimed
at enhancing the growth rate of retained trees to clear cutting which results in
the harvest of all trees in an area and regeneration of a new forest stand. In
between are a number of varying levels of partial harvests which can be
employed. Pacific Lumber's foresters select the appropriate silvicultural system
for any given site based upon the specific conditions of that site. Pacific
Lumber frequently employs silvicultural systems that involve thinnings followed
by a variety of partial cuttings to achieve a high degree of natural
regeneration. Partial harvesting allows the remaining trees to obtain more
light, nutrients and water, thereby promoting faster growth rates. Pacific
Lumber uses a variety of factors, including the size and density of the
remaining trees, to determine when to again submit a THP with respect to a given
area. Clear cutting is only used when it is prudent due to specific site
conditions (such as the inadvisability of repetitive partial harvestings,
undesirable tree species composition for natural regeneration, topographic
difficulties which preclude partial cuttings or the need to create more diverse
wildlife habitats within watersheds as recommended by Pacific Lumber's wildlife
biologists). Due to the magnitude of its timberlands and conservative
application of silvicultural systems, Pacific Lumber has historically conducted
harvesting operations on approximately 5% of its timberlands in any given year.
PRODUCTION FACILITIES
Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands. Since 1986, Pacific Lumber has implemented numerous technological
advances which have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Over the past
three years, Pacific Lumber's annual lumber production has averaged
approximately 268 million board feet, with approximately 290, 286, and 228
million board feet produced in 1995, 1994 and 1993, respectively. Lumber
production volume was 221 million board feet during the first nine months of
1996. The Fortuna sawmill, built by Pacific Lumber in 1972, produces primarily
common grade lumber. During 1995 and the first nine months of 1996, the Fortuna
mill produced approximately 94 million and 75 million board feet of lumber,
respectively. The Carlotta sawmill was acquired in 1986 and produces both common
and upper grade redwood lumber. During 1995 and the first nine months of 1996,
the Carlotta mill produced approximately 67 million and 47 million board feet of
lumber, respectively. Sawmill "A," located in Scotia, was remodeled in 1983 and
processes Douglas-fir logs while Sawmill "B," also located in Scotia, primarily
processes large diameter redwood logs. During 1995 and the first nine months of
1996, Sawmill "A" produced 79 million and 67 million board feet of lumber,
respectively. During 1995 and the first nine months of 1996, Sawmill "B"
produced 51 million and 31 million board feet of lumber, respectively.
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Pacific Lumber operates a finishing plant which processes rough lumber into
a variety of finished products such as trim, fascia, siding and paneling. These
finished products include the industry's largest variety of customized trim and
fascia patterns. Pacific Lumber also enhances the value of some grades of common
grade lumber by assembling knot-free pieces of narrower and shorter lumber into
wider or longer pieces in its state-of-the-art end and edge glue plants. The
result is a standard sized upper grade product which can be sold at a
significant premium over common grade products. Pacific Lumber has also
installed a lumber remanufacturing facility at its mill in Fortuna.
Pacific Lumber dries the majority of its upper grade lumber before it is
sold. Upper grades of redwood lumber are generally air-dried for six to eighteen
months and then kiln-dried for seven to twenty-four days to produce a
dimensionally stable and high quality product which generally commands higher
prices than "green" lumber (which is lumber sold before it has been dried).
Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is
cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of
approximately 95 million board feet, to dry its upper grades of lumber
efficiently in order to produce a quality, premium product. Pacific Lumber also
maintains several large enclosed storage sheds which hold approximately 27
million board feet of lumber.
In addition, Pacific Lumber owns and operates a modern 25-megawatt
cogeneration power plant which is fueled almost entirely by the wood residue
from its milling and finishing operations. This power plant generates
substantially all of the energy requirements of Scotia, California, the town
adjacent to Pacific Lumber's timberlands where several of its manufacturing
facilities are located. Pacific Lumber sells surplus power to Pacific Gas and
Electric Company. In 1995, the sale of surplus power accounted for approximately
1% of Pacific Lumber's total revenues.
PRODUCTS
The following table sets forth the distribution of Pacific Lumber's lumber
production (on a net board foot basis) and revenues by product line:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------ ------------------------------------
% OF TOTAL % OF TOTAL
LUMBER % OF TOTAL LUMBER % OF TOTAL
PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL
PRODUCT VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
- ----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood lumber......... 12% 33% 27% 17% 38% 31%
Common grade redwood lumber........ 52% 41% 34% 54% 40% 32%
--- --- -- --- --- --
Total redwood lumber..... 64% 74% 61% 71% 78% 63%
--- --- -- --- --- --
Upper grade Douglas-fir lumber..... 4% 6% 5% 3% 5% 4%
Common grade Douglas-fir lumber.... 26% 16% 13% 23% 14% 11%
--- --- -- --- --- --
Total Douglas-fir
lumber................. 30% 22% 18% 26% 19% 15%
--- --- -- --- --- --
Other grades of lumber............. 6% 4% 3% 3% 3% 4%
--- --- -- --- --- --
Total lumber............. 100% 100% 82% 100% 100% 82%
=== === == === === ==
Logs............................... 10% 7%
== ==
Hardwood chips..................... 2% 4%
Softwood chips..................... 4% 5%
-- --
Total wood chips......... 6% 9%
== ==
</TABLE>
Lumber
Pacific Lumber primarily produces and markets lumber. In 1995 and during
the first nine months of 1996, Pacific Lumber sold approximately 277 million and
233 million board feet of lumber, respectively, which accounted for
approximately 82% of Pacific Lumber's total revenues for each period. Lumber
products
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vary greatly by the species and quality of the timber from which it is produced.
Lumber is sold not only by grade (such as "upper" grade versus "common" grade),
but also by board size and the drying process associated with the lumber.
Redwood lumber is Pacific Lumber's largest product category. Redwood is
commercially grown only along the northern coast of California and possesses
certain unique characteristics which permit it to be sold at a premium to many
other wood products. Such characteristics include its natural beauty, superior
ability to retain paint and other finishes, dimensional stability and innate
resistance to decay, insects and chemicals. Typical applications include
exterior siding, trim and fascia for both residential and commercial
construction, outdoor furniture, decks, planters, retaining walls and other
specialty applications. Redwood also has a variety of industrial applications
because of its chemical resistance and because it does not impart any taste or
odor to liquids or solids.
Upper grade redwood lumber, which is derived primarily from old growth
trees and is characterized by an absence of knots and other defects and a very
fine grain, is used primarily in more costly and distinctive interior and
exterior applications. The overall supply of upper grade lumber has been
diminishing due to increasing environmental and regulatory restrictions and
other factors. While Pacific Lumber's competitive position with respect to upper
grade lumber has been improving due to the quality of its timberlands, Pacific
Lumber's supply of upper grade lumber has decreased in some premium product
categories. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations." Common grade
redwood lumber, Pacific Lumber's largest volume product, has many of the same
aesthetic and structural qualities of redwood uppers, but has some knots,
sapwood and a coarser grain. Such lumber is commonly used for construction
purposes, including outdoor structures such as decks, hot tubs and fencing.
Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.
Logs
Pacific Lumber currently sells certain logs that, due to their size or
quality, cannot be efficiently processed by its mills into lumber. The
purchasers of these logs are largely Britt, and surrounding mills which do not
own sufficient timberlands to support their mill operations. See
" -- Relationships With Scotia Pacific and Britt" below. Except for the
agreement with Britt described below, Pacific Lumber does not have any
significant contractual relationships with any third parties relating to the
purchase of logs. Pacific Lumber has historically not purchased significant
quantities of logs from third parties; however, Pacific Lumber may from time to
time purchase logs from third parties for processing in its mills or for resale
to third parties if, in the opinion of management, economic factors are
advantageous to Pacific Lumber.
Wood Chips
Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood
trees which would otherwise be left as waste. These chips are sold to third
parties primarily for the production of facsimile and other specialty papers.
Pacific Lumber also produces softwood chips from the wood residue and waste from
its milling and finishing operations. These chips are sold to third parties for
the production of wood pulp and paper products.
BACKLOG AND SEASONALITY
Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was
approximately $11.5 million and approximately $11.9 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. Pacific Lumber's backlog of sales orders at September 30, 1996 was
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approximately $20.4 million. Pacific Lumber has historically experienced lower
first quarter sales due largely to the general decline in construction-related
activity during the winter months. As a result, Pacific Lumber's results in any
one quarter are not necessarily indicative of results to be expected for the
full year.
MARKETING
The housing, construction and remodeling markets are the primary markets
for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a
wide distribution of its products both geographically and in terms of the number
of customers. Pacific Lumber sells its lumber products throughout the country to
a variety of accounts, the large majority of which are wholesalers, followed by
retailers, industrial users, exporters and manufacturers. Upper grades of
redwood and Douglas-fir lumber are sold throughout the entire United States, as
well as to export markets. Common grades of redwood lumber are sold principally
west of the Mississippi River, with California accounting for approximately 63%
and 67% of these sales in 1995 and during the first nine months of 1996,
respectively. Common grades of Douglas-fir lumber are sold primarily in
California. In 1995, no single customer accounted for more than 4% of Pacific
Lumber's total revenues. Exports of lumber accounted for approximately 4% of
Pacific Lumber's total revenues during each of 1995 and the first nine months of
1996. Pacific Lumber markets its products through its own sales staff which
focuses primarily on domestic sales.
Pacific Lumber actively follows trends in the housing, construction and
remodeling markets in order to maintain an appropriate level of inventory and
assortment of product. Due to its high quality products, large inventory,
competitive prices and long history, Pacific Lumber believes that it has a
strong degree of customer loyalty.
COMPETITION
Pacific Lumber's lumber is sold in highly competitive markets. Competition
is generally based upon a combination of price, service, product availability
and product quality. Pacific Lumber's products compete not only with other wood
products but with metals, masonry, plastic and other construction materials made
from non-renewable resources. The level of demand for Pacific Lumber's products
is dependent on such broad factors as overall economic conditions, interest
rates and demographic trends. In addition, competitive considerations, such as
total industry production and competitors' pricing, as well as the price of
other construction products, affect the sales prices for Pacific Lumber's lumber
products. Pacific Lumber currently enjoys a competitive advantage in the upper
grade redwood lumber market due to the quality of its timber holdings and
relatively low cost production operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company -- Results of Operations." Competition in the common grade redwood and
Douglas-fir lumber market is more intense, and Pacific Lumber competes with
numerous large and small lumber producers.
EMPLOYEES
As of September 30, 1996, Pacific Lumber had approximately 1,600 employees,
none of whom are covered by a collective bargaining agreement.
RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT
In March 1993, Pacific Lumber consummated its offering of $235.0 million of
its Senior Notes and Scotia Pacific consummated its offering of $385.0 million
of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements. Pacific Lumber and
Scotia Pacific entered into a Services Agreement (the "Services Agreement") and
an Additional Services Agreement (the "Additional Services Agreement"). Pursuant
to the Services Agreement, Pacific Lumber provides operational, management and
related services with respect to the Scotia Pacific Timberlands containing
timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia
Pacific's own employees. Such services include the furnishing of all equipment,
personnel and expertise not within Scotia Pacific's possession and reasonably
necessary for the operation and maintenance of the Scotia Pacific
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Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia
Pacific Timber by fires, maintain a system of roads throughout the Scotia
Pacific Timberlands, take measures to control the spread of disease and insect
infestation affecting Scotia Pacific Timber and comply with environmental laws
and regulations, including measures with respect to waterways, habitat,
hatcheries and endangered species. Pacific Lumber is also required (to the
extent necessary) to assist Scotia Pacific personnel in updating the GIS and to
prepare and file, on Scotia Pacific's behalf, all pleadings and motions and
otherwise diligently pursue appeals of any denial of any THP and related
matters. As compensation for these and the other services to be provided by
Pacific Lumber, Scotia Pacific pays a fee which is adjusted on January 1 of each
year based on a specified government index relating to wood products. The fee
was approximately $115,000 per month in 1995 and has been approximately $112,000
per month in 1996. Pursuant to the Additional Services Agreement, Scotia Pacific
provides Pacific Lumber with a variety of services, including (a) assisting
Pacific Lumber to operate, maintain and harvest its own timber properties, (b)
updating and providing access to the GIS with respect to information concerning
Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with
its statutory and regulatory compliance. Pacific Lumber pays Scotia Pacific a
fee for such services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles.
Pacific Lumber and Scotia Pacific also entered into a Master Purchase
Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement
governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each
purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a
separate log purchase agreement (which incorporates the terms of the Master
Purchase Agreement) for the Scotia Pacific Timber covered by an approved THP.
Each log purchase agreement generally constitutes an exclusive agreement with
respect to the timber covered thereby, subject to certain limited exceptions.
The purchase price must be at least equal to the SBE Price (as defined below).
The Master Purchase Agreement provides that if the purchase price equals or
exceeds (i) the price for such species and category thereof set forth on the
structuring schedule applicable to the Timber Notes and (ii) the SBE Price, then
such price shall be deemed to be the fair market value of such logs. The Master
Purchase Agreement defines the "SBE Price," for any species and category of
timber, as the stumpage price for such species and category as set forth in the
most recent "Harvest Value Schedule" published by the California State Board of
Equalization ("SBE") applicable to the timber sold during the period covered by
such Harvest Value Schedule. Such Harvest Value Schedules are published for
purposes of computing yield taxes and generally are released every six months.
As Pacific Lumber purchases logs from Scotia Pacific pursuant to the Master
Purchase Agreement, Pacific Lumber is responsible, at its own expense, for
harvesting and removing the standing Scotia Pacific Timber covered by approved
THPs and, thus, the purchase price thereof is based upon "stumpage prices."
Title to the harvested logs does not pass to Pacific Lumber until the logs are
transported to Pacific Lumber's log decks and measured. Substantially all of
Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber
under the Master Purchase Agreement.
Pacific Lumber, Scotia Pacific and Salmon Creek also entered into a
Reciprocal Rights Agreement granting to each other certain reciprocal rights of
egress and ingress through their respective properties in connection with the
operation and maintenance of such properties and their respective businesses. In
addition, Pacific Lumber entered into an Environmental Indemnification Agreement
with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia
Pacific from and against certain present and future liabilities arising with
respect to hazardous materials, hazardous materials contamination or disposal
sites, or under environmental laws with respect to the Scotia Pacific
Timberlands.
Pacific Lumber entered into an agreement with Britt (the "Britt Agreement")
which governs the sale of logs by Pacific Lumber and Britt to each other, the
sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific
Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to
each other, and the provision by Pacific Lumber of certain administrative
services to Britt (including accounting, purchasing, data processing, safety and
human resources services). The logs which Pacific Lumber sells to Britt and
which are used in Britt's manufacturing operations are sold at approximately 75%
of applicable SBE prices (to reflect the lower quality of these logs). Logs
which either Pacific Lumber or Britt purchases from
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third parties and which are then sold to each other are transferred at the
actual cost of such logs. Hog fuel is sold at applicable market prices, and
administrative services are provided by Pacific Lumber based on Pacific Lumber's
actual costs and an allocable share of Pacific Lumber's overhead expenses
consistent with past practice.
REGULATORY AND ENVIRONMENTAL FACTORS
Regulatory and environmental issues play a significant role in Pacific
Lumber's forest products operations. Pacific Lumber's forest products operations
are subject to a variety of California and federal laws and regulations dealing
with timber harvesting, endangered species and critical habitat, and air and
water quality. These laws include the Forest Practice Act, which requires that
timber harvesting operations be conducted in accordance with detailed
requirements set forth in the Forest Practice Act and in the regulations
promulgated thereunder by the BOF. The ESA and CESA provide in general for the
protection and conservation of specifically listed fish, wildlife and plants
which have been declared to be endangered or threatened. CEQA provides, in
general, for protection of the environment of the state, including protection of
air and water quality and of fish and wildlife. In addition, the California
Water Quality Act requires, in part, that Pacific Lumber's operations be
conducted so as to reasonably protect the water quality of nearby rivers and
streams. Pacific Lumber is subject to certain pending matters described below,
including the resolution of issues relating to the final designation of critical
habitat for the marbled murrelet, which could have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. Moreover, the laws and regulations relating to the Company's forest
products operations are modified from time to time and are subject to judicial
and administrative interpretation. There can be no assurance that certain
pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect the Company.
In March 1992, the marbled murrelet was approved for listing as endangered
under the CESA. In October 1992, the USFWS issued its final rule listing the
marbled murrelet as a threatened species under the ESA in the tri-state area of
Washington, Oregon and California. Pacific Lumber has incorporated, and will
continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands. The
BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber. Such surveys can only be conducted during a portion of the murrelet's
nesting and breeding season, which extends from April through mid-September.
Accordingly, such surveys are expected to delay the review and approval process
with respect to certain of the THPs filed by Pacific Lumber. The results of such
surveys to date (based upon current survey protocols) have indicated that
Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet
habitat. A substantial portion of this land contains virgin and residual old
growth timber and the bulk of it falls within the areas designated as critical
habitat for the marbled murrelet (see below). Pacific Lumber is unable to
predict when or if it will be able to harvest this acreage.
In May 1996, the USFWS published the Final Designation of critical habitat
for the marbled murrelet, designating over four million acres as critical
habitat for the marbled murrelet. Although nearly all of the designated habitat
is public land, approximately 33,000 acres of the Company's timberlands are
included in the Final Designation, the substantial portion of such acreage being
young growth timber. In order to mitigate the impact of the Final Designation,
particularly with respect to timberlands occupied by the marbled murrelet,
Pacific Lumber over the last few years has attempted to develop the Murrelet
HCP. Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed the Takings Litigation alleging that certain portions of its
timberlands have been "taken" and seeking just compensation. See "Legal
Proceedings -- Pacific Lumber Litigation" for a description of the Takings
Litigation. Pursuant to the Headwaters Agreement described below under
"-- Headwaters Agreement," the Takings Litigation has been stayed by the Court
at the request of the parties.
It is impossible to determine the potential adverse effect of the Final
Designation on the Company's consolidated financial position, results of
operations or liquidity until such time as the material regulatory and
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legal issues are resolved; however, if Pacific Lumber is unable to harvest, or
is severely limited in harvesting, on timberlands designated as critical habitat
for the marbled murrelet, such effect could be materially adverse. If Pacific
Lumber is unable to harvest or is severely limited in harvesting, it intends to
seek just compensation from the appropriate governmental agencies on the grounds
that such restrictions constitute a governmental taking. There continue to be
other regulatory actions and lawsuits seeking to have various other species
listed as threatened or endangered under the ESA and/or the CESA and to
designate critical habitat for such species. For example, the NMFS recently
announced that by April 25, 1997, it would make a final determination whether to
list the coho salmon under the ESA in northern California, including,
potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any,
such listings and/or designations of critical habitat would have on the
Company's consolidated financial position, results of operations or liquidity.
See "-- Headwaters Agreement" below for a description of certain terms of the
Headwaters Agreement relating to processing and approval of the Multi-Species
HCP covering Pacific Lumber's timberlands. See also "Legal
Proceedings -- Pacific Lumber Litigation" for a description of the pending
Marbled Murrelet action. See "-- Headwaters Agreement" below for a description
of certain terms of the Headwaters Agreement relating to processing and approval
of the Multi-Species HCP.
In 1994, the BOF adopted certain regulations regarding compliance with
long-term sustained yield objectives. These regulations require that timber
companies project timber growth and harvest on their timberlands over a 100-year
planning period and establish an LTSY harvest level that takes into account
environmental and economic considerations. The SYP must demonstrate that the
average annual harvest over any rolling ten-year period will not exceed the LTSY
harvest level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year planning
period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the
CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as
Pacific Lumber's average annual timber harvest over the last five years. The
proposed SYP also indicates that Pacific Lumber's average annual timber harvest
during the first decade of the SYP would approximate the LTSY harvest level.
During the second decade of the proposed SYP, Pacific Lumber's average annual
timber harvest would be approximately 8% less than that proposed for the first
decade. The SYP, when approved, will be valid for ten years. Thereafter, revised
SYPs will be prepared every decade that will address the LTSY harvest level
based upon reassessment of changes in the resource base and protection of public
resources. The proposed SYP assumes that the transactions contemplated by the
Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, Pacific Lumber is unable to predict the impact that these
regulations will have on its future timber harvesting practices. It is possible
that the results of the review and approval process could require Pacific Lumber
to reduce its timber harvest in future years from the harvest levels set forth
in the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
The Company is unable to predict the ultimate impact the sustained yield
regulations will have on its future financial position, results of operations or
liquidity. See "-- Headwaters Agreement" below for a description of certain
terms of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of Pacific Lumber's THPs and other timber harvesting operations, and
Pacific Lumber expects that such groups and individuals will continue to file
such objections. In addition, lawsuits are pending or threatened which seek to
prevent Pacific Lumber from implementing certain of its approved THPs or which
challenge other operations by Pacific Lumber. These challenges have severely
restricted Pacific Lumber's ability to harvest old growth timber on its
property. To date, challenges with respect to Pacific Lumber's THPs relating to
young growth timber have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its timber harvesting operations are
likely to occur in the future,
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particularly with respect to virgin and residual old growth timber. Although
such challenges have delayed or prevented Pacific Lumber from conducting a
portion of its operations, they have not had a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the consolidated operating results,
financial position or liquidity of the Company. See also "Legal Proceedings --
Pacific Lumber Litigation" for a description of the pending Marbled Murrelet
action.
In June 1990, the USFWS designated the northern spotted owl as threatened
under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The
ESA and its implementing regulations (and related California regulations)
generally prohibit harvesting operations in which individual owls might be
killed, displaced or injured or which result in significant habitat modification
that could impair the survival of individual owls or the species as a whole.
Since 1988, biologists have conducted inventory and habitat utilization studies
of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has
developed and the USFWS has given its full concurrence to a northern spotted owl
management plan (the "Owl Plan"). The Owl Plan was recently updated through 1999
and the USFWS expressed its agreement that operations consistent with the Owl
Plan would not result in the taking of any owls. By incorporating the Owl Plan
into each THP filed with the CDF, Pacific Lumber is able to expedite the
approval time with respect to its THPs. The plaintiffs in the Marbled Murrelet
action have requested and received injunctive relief with respect to certain
THPs involving the Owl Plan. See "Legal Proceedings -- Pacific Lumber
Litigation." Both federal and state agencies continue to review and consider
possible additional regulations regarding the northern spotted owl. It is
uncertain if such additional regulations will become effective or their ultimate
content or impact on the Company.
Laws and regulations dealing with Pacific Lumber's operations are subject
to change and new laws and regulations are frequently introduced concerning the
California timber industry. From time to time, bills are introduced in the
California legislature and the U.S. Congress which relate to the business of
Pacific Lumber, including the protection and acquisition of old growth and other
timberlands, endangered species, environmental protection, air and water
quality, and the restriction, regulation and administration of timber harvesting
practices. It is impossible to predict the content of any such bills, the
likelihood of any of the bills passing or the impact of any of these bills on
the future liquidity, consolidated financial position or operating results of
the Company. Furthermore, any bills which are passed are subject to executive
veto and court challenge. In addition to existing and possible new or modified
statutory enactments, regulatory requirements and administrative and legal
actions, the California timber industry remains subject to potential California
or local ballot initiatives and evolving federal and California case law which
could affect timber harvesting practices. It is impossible, however, to assess
the effect of such matters on the Company's consolidated financial position,
operating results or liquidity.
HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement, which provides the framework for the acquisition by the
United States and California of certain timberlands of Pacific Lumber.
The Headwaters Agreement requires the parties to use their respective best,
good faith efforts to achieve certain items (the "Specified Items"). The
Specified Items include the transfer to the United States and California of the
Headwaters Timberlands, such timberlands consisting of 5,600 acres of Pacific
Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk
Head Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest"). Approximately 4,900 of these acres are owned
by Salmon Creek and are part of the area commonly referred to as the "Headwaters
Forest." The remaining acreage is owned by Scotia Pacific (Pacific Lumber having
harvesting rights on a portion of the acreage).
These timberlands would be transferred in exchange for (a) property and
other consideration (possibly including cash) from both the United States and
California having an aggregate fair market value of $300 million and (b) the Elk
River Timberlands, consisting of 7,775 acres of adjacent timberlands to be
acquired by
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the United States and California from a third party. The Specified Items also
include acquisition by the United States and California of the Elk River
Property, consisting of approximately 9,600 acres of timberlands, including the
Elk River Timberlands, which would be transferred to Pacific Lumber (the
"Exchanged Elk River Property"). An additional Specified Item is the expedited
development and submission by Pacific Lumber and processing (a) by the United
States of a Permit to be based upon a Multi-Species HCP covering Pacific
Lumber's remaining timberlands and the timberlands and timber harvesting rights
which Pacific Lumber will own as a result of the various transactions (the
"Resulting Pacific Lumber Timber Property") as well as the Headwaters Forest and
the Elk Head Forest (both as conserved habitat) and (b) by California of an SYP
covering the Resulting Pacific Lumber Timber Property. The Headwaters Agreement
contains various provisions regarding the processing of the HCP, the Permit and
the SYP. Pacific Lumber expects that receipt of the Permit would expedite the
approval time and reduce the costs associated with its THPs.
The Specified Items also require, among other things, dismissal with
prejudice at closing of the Takings Litigation pending against the United States
and California. See "Legal Proceedings -- Pacific Lumber Litigation." The
Headwaters Agreement provides that the parties will file appropriate joint
motions to stay the Takings Litigation, subject to certain rights of the parties
to terminate the stay.
The Headwaters Agreement provides that the Pacific Lumber Parties will not
enter the Headwaters Forest or the Elk Head Forest to conduct logging
operations, including salvage logging (the "Moratorium"). The Moratorium will,
however, terminate if within ten months from the date of the Agreement the
parties have not achieved the Specified Items to their respective satisfaction.
In addition, as a condition to the continued effectiveness of the Moratorium,
the United States and/or California must provide to Pacific Lumber, within 60
days of the date of the Agreement, a list of property interests owned or
controlled by the United States and/or California meeting certain conditions,
including that they have a good faith estimated fair market value equal to or in
excess of $300 million and are available for exchange (the "Presented
Properties"). Should California and/or the United States fail to perform this
obligation within 120 days from the date of the Agreement, the Moratorium
terminates. If the Presented Properties list is furnished, the parties have a
ten-day period of time in which to agree upon the procedures to be used for
determining the fair market value of the Presented Properties. Pacific Lumber
has an additional 30-day period of time (the "Evaluation Period") in which to
evaluate the Presented Properties. The Moratorium terminates if the parties fail
to agree upon such appraisal procedures by the end of the ten-day period or if
at the end of the Evaluation Period Pacific Lumber has failed to identify $300
million in fair market value of Presented Properties that it finds acceptable.
The Headwaters Agreement requires the lists of Presented Properties to be
accompanied by sufficient background information (including valuation
information) to enable Pacific Lumber to determine the commercial viability and
the ability to monetize such property interests. On December 5, 1996, the United
States and California each furnished a list of properties. Neither list was
accompanied by the requisite background information, although both lists did
indicate that additional information would be made available. The list of United
States properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and
Trinity Counties in California, and surplus acreage next to a federal office
building in Laguna Niguel, California. The California list contained a variety
of properties located throughout the state. On December 10, 1996, Pacific Lumber
wrote to the United States and California, stating, among other things, that the
requisite background information had not been furnished, requesting the missing
information and indicating that certain of the properties did not appear to be
"available," as legislative action would be required for exchange of certain of
the properties.
Closing of the Headwaters Agreement is subject to various conditions,
including (a) completion of the Specified Items, (b) approval of an HCP and SYP
and issuance of the Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) approval by the boards of directors of the
applicable Pacific Lumber Parties. The Headwaters
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Agreement also provides that the parties will cooperate and act in good faith to
preserve diligently the Headwaters Agreement, the HCP, the Permit and the SYP
against third party challenge.
BRITT LUMBER OPERATIONS
BUSINESS
Britt is located in Arcata, California, approximately 45 miles north of
Pacific Lumber's headquarters. Britt's primary business is the processing of
small diameter redwood logs into wood fencing products for sale to retail and
wholesale customers. Britt was incorporated in 1965 and operated as an
independent manufacturer of fence products until July 1990, when it was
purchased by a subsidiary of the Company. Britt purchases small diameter (6 to
11 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a
variety of different diameter and different length logs from various timberland
owners. Britt processes logs at its mill into a variety of different fencing
products, including "dog-eared" 1" x 6" fence stock in six and eight foot
lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing
products in 6 through 12 foot lengths. Britt's purchases of logs from third
parties are generally consummated pursuant to short-term contracts of twelve
months or less. See "-- Pacific Lumber Operations -- Relationships With Scotia
Pacific and Britt" for a description of Britt's log purchases from Pacific
Lumber.
MARKETING
In 1995, Britt sold approximately 78 million board feet of lumber products
to approximately 100 different customers. During the first nine months of 1996,
Britt sold approximately 62 million board feet of lumber products to over 100
customers. Over one-half of Britt's 1995 lumber sales were in northern
California. The remainder of its 1995 sales were in southern California and ten
other western states. The largest and top five of such customers accounted for
approximately 33% and 72%, respectively, of such 1995 sales. Britt markets its
products through its own salesmen to a variety of customers, including
distribution centers, industrial remanufacturers, wholesalers and retailers and
is expanding its market eastward.
Britt's backlog of sales orders at December 31, 1995 and 1994 was
approximately $3.2 million and $3.6 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal year.
Britt's backlog of sales orders at September 30, 1996 was $2.2 million.
FACILITIES AND EMPLOYEES
Britt's manufacturing operations are conducted on 12 acres of land, 10
acres of which are leased on a long-term fixed-price basis from an unrelated
third party. Fence production is conducted in a 46,000 square foot mill. An 18
acre log sorting and storage yard is located one quarter of a mile away. The
mill was constructed in 1980, and capital expenditures to enhance its output and
efficiency are made periodically. Britt's (single shift) mill capacity, assuming
40 production hours per week, is estimated at 35.5 million board feet of fencing
products per year. As of September 30, 1996, Britt employed approximately 110
people, none of whom are covered by a collective bargaining agreement.
COMPETITION
Management estimates that Britt accounted for approximately one-third of
the redwood fence market in 1995. Britt competes primarily with the northern
California mills of Louisiana Pacific, Georgia Pacific and Eel River.
LEGAL PROCEEDINGS
See "Legal Proceedings -- Pacific Lumber Litigation" for a description of
certain legal proceedings in which Pacific Lumber is involved and "Legal
Proceedings -- USAT Matters" for a description of the Martel action in which MGI
is involved.
96
<PAGE> 99
BUSINESS OF MAXXAM
ALUMINUM OPERATIONS
GENERAL
MAXXAM engages in aluminum operations through Kaiser. Kaiser is a fully
integrated aluminum producer operating in all principal aspects of the aluminum
industry -- the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum and the manufacture of fabricated (including semi-fabricated) aluminum
products. Kaiser is one of the largest domestic aluminum producers in terms of
primary aluminum smelting capacity and is the Western world's second largest
producer/seller of alumina, accounting for approximately 7% of the Western
world's alumina capacity in 1995. Kaiser's production levels of alumina and
primary aluminum exceed its internal processing needs which allows it to be a
major seller of alumina (approximately 2.0 million tons in 1995 or 72% of 1995
production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of
1995 production) to third parties. Kaiser is also a major domestic supplier of
fabricated aluminum products. In 1995, Kaiser shipped approximately 368,200 tons
of fabricated aluminum products to third parties, which accounted for
approximately 6% of the total tonnage of United States domestic shipments. A
majority of Kaiser's fabricated products are sold to distributors or used by
customers as components in the manufacture and assembly of finished end-use
products.
INDUSTRY OVERVIEW
Primary aluminum is produced by the refining of bauxite into alumina and
the reduction of alumina into primary aluminum. Approximately two pounds of
bauxite are required to produce one pound of alumina, and approximately two
pounds of alumina are required to produce one pound of primary aluminum.
Aluminum's valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity and high tensile strength.
Demand
The packaging, transportation and construction industries are the principal
consumers of aluminum in the United States, Japan and Western Europe. In the
packaging industry, which accounted for approximately 22% of consumption in 1995
in the United States, Japan and Western Europe, aluminum's recyclability and
weight advantages have enabled it to gain market share from steel and glass,
primarily in the beverage container area. Nearly all beer cans and soft drink
cans manufactured for the United States market are made of aluminum. Kaiser
believes that growth in the packaging area is likely to continue through the
1990s due to general population increase and to further penetration of the
beverage container market in emerging markets. Kaiser believes that growth in
demand for can sheet in the United States will follow the growth in population,
offset, in part, by the effects of the use of lighter gauge aluminum for can
sheet and of plastic container production from newly installed capacity.
In the transportation industry, which accounted for approximately 28% of
aluminum consumption in the United States, Japan and Western Europe in 1995,
automotive manufacturers use aluminum instead of steel, ductile iron, or copper
for an increasing number of components, including radiators, wheels, suspension
components, and engines, in order to meet more stringent environmental, safety,
and fuel efficiency standards. Kaiser believes that sales of aluminum to the
transportation industry have considerable growth potential due to projected
increases in the use of aluminum in automobiles. In addition, Kaiser believes
that consumption of aluminum in the construction industry will follow the
cyclical growth pattern of that industry, and will benefit from higher growth in
Asian and Latin American economies.
Supply
As of year-end 1995, Western world aluminum capacity from 107 smelting
facilities was approximately 16.6 million tons per year. Western world
production of primary aluminum for 1995 increased approximately 1.8% compared to
1994. Net exports of aluminum from the former Sino Soviet bloc increased
approximately
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<PAGE> 100
240% from 1990 levels during the period from 1991 through 1995 to approximately
2.1 million tons per year. These exports contributed to a significant increase
in LME stocks of primary aluminum which peaked in June 1994 at 2.7 million tons.
By the end of 1995, LME stocks of primary aluminum had declined 2.1 million tons
from this peak level and 1.1 million tons from the beginning of 1995. As of
January 3, 1997, LME stocks of primary aluminum were approximately 955,850 tons.
See "-- Recent Industry Trends."
Based upon information currently available, Kaiser believes that moderate
additions will be made during 1996-1998 to Western world alumina and primary
aluminum production capacity. The increases in alumina capacity during 1996-1998
are expected to come from one new refinery which began operations in 1995 and
incremental expansions of existing refineries. In addition, Kaiser believes that
there is currently approximately 1.1 million tons of unutilized smelting
capacity that is available for production. The increases in primary aluminum
capacity during 1996-1998 are expected to come from a major new smelter in South
Africa which began operations in 1995, two new smelters which may begin
operations in 1996 or 1997, and the remainder principally from incremental
expansions of existing smelters.
RECENT INDUSTRY TRENDS
Primary Aluminum
During 1995, the AMT Price for primary aluminum was approximately $.86 per
pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The
significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in LME inventories had leveled off. By the end of 1995, some
small increases in LME inventories occurred, and prices of aluminum weakened
from first-half levels. This trend continued throughout 1996 as the supply of
primary aluminum exceeded demand during this period. Net reported primary
aluminum inventories have increased by approximately 62,000 tons in 1996 based
upon recent reports of the LME (through January 3, 1997) and the IPAI (through
October 31, 1996), following substantial declines of 764,000 and 1,153,000 tons
in 1994 and 1995, respectively. The AMT Price for primary aluminum for the week
ended January 3, 1997 was approximately $.74 per pound.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, Kaiser believes that
the reduction of aluminum inventories by consumers, as prices have continued to
decline, has suppressed the growth in primary aluminum demand that normally
accompanies growth in economic and industrial activity. In addition to these
supply/demand dynamics, Kaiser believes that the recent decline in primary
aluminum prices may have been influenced by a recent major decline in copper
prices on the LME.
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<PAGE> 101
The following table indicates the monthly average AMT Price for each of the
months from January 1993 through November 1996 as reported by Metals Week. The
AMT Price for the week ended January 3, 1997, as reported by Metals Week, was
73.5693 cents per pound.
<TABLE>
<CAPTION>
AVERAGE TRANSACTION PRICES (CENTS/POUND)
----------------------------------------
1996 1995 1994 1993
------ ------- ------ ------
<S> <C> <C> <C> <C>
January................................ 75.514 100.377 57.019 56.479
February............................... 75.100 93.847 61.641 55.993
March.................................. 76.414 88.745 62.343 53.794
April.................................. 75.517 90.388 61.890 52.345
May.................................... 75.314 85.338 64.007 52.694
June................................... 70.450 85.305 67.807 54.673
July................................... 69.767 87.788 72.656 56.829
August................................. 70.023 87.828 71.249 55.516
September.............................. 67.567 82.010 77.764 52.095
October................................ 65.112 78.384 83.839 51.660
November............................... 70.019 78.000 91.926 50.365
December............................... 72.667 78.823 91.484 53.902
------ ------- ------ ------
Average.............................. 71.955 86.403 71.969 53.862
====== ======= ====== ======
</TABLE>
Alumina
Western world demand for alumina, and the price of alumina, declined in
1994 in response to the curtailment of Western world smelter production of
primary aluminum, partially offset by increased usage of Western world alumina
by smelters in the Commonwealth of Independent States ("CIS") and in the PRC.
Increased Western world production of primary aluminum, as well as continued
imports of Western world alumina by the CIS and the PRC, during 1995 resulted in
higher demand for Western world alumina and significantly stronger alumina
pricing. In the first nine months of 1996, however, the alumina market softened,
primarily as a result of increased alumina production and decreased alumina
exports to the CIS and the PRC, resulting in lower alumina prices.
Fabricated Products
United States shipments of domestic fabricated aluminum products in 1995
were approximately at 1994 levels, although in 1995 demand for can sheet in the
United States softened relative to 1994. Shipments of domestic mill products
during the first nine months of 1996 declined approximately 4% compared to the
first nine months of 1995, principally due to an approximate 10% decline in the
shipment of can sheet and a reduction of consumer inventories of other
fabricated aluminum products. This trend has continued through the fourth
quarter of 1996.
See "Risk Factors -- Risk Factors Relating to Kaiser" for a discussion of
certain factors that could cause actual results to differ from those that could
otherwise result from the industry trends discussed above.
STRATEGY
Kaiser's objectives are to maintain leading market positions in its core
businesses, while developing new opportunities both domestically and
internationally which will enhance, and reduce the cyclicality of, Kaiser's
earnings. The primary elements of Kaiser's strategies to achieve these
objectives are:
Increasing the competitiveness of its existing facilities. Kaiser is
continuing to increase the competitiveness of its existing facilities. In 1995,
Kaiser successfully restructured electric power purchase agreements for its
smelting facilities in the Pacific Northwest, which has resulted in
significantly lower electric power costs in 1996 for the Mead and Tacoma,
Washington, smelters compared with 1995 electric power costs. Kaiser
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<PAGE> 102
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. See "Risk Factors -- Risk Factors Relating
to Kaiser -- Power Supply."
Kaiser has also commenced the modernization and expansion of the carbon
baking furnace at its Mead smelter at an estimated cost of approximately $52.0
million. This project will lower costs, enhance safety and improve the
environmental performance of the facility. This modernization is expected to be
completed in late 1998.
Kaiser continues to implement changes to the process and product mix of its
Trentwood rolling mill in an effort to maximize its profitability and maintain
full utilization of the facility. Recently, Kaiser has approved an expansion of
its heat treat capacity by approximately one-third. Sales of Kaiser's heat treat
products have increased significantly over the last several years and are made
primarily to the aerospace and general engineering markets, which are
experiencing growth in demand. The project is estimated to cost approximately
$45.0 million and to take approximately two years to complete. See
"-- Production Operations."
Developing proprietary technologies. Kaiser has developed proprietary
technologies which present growth opportunities in the future and have enabled
it to substantially improve its operating efficiencies.
Kaiser has developed a unique micromill for the production of can sheet
from molten metal using a continuous cast process. The capital and conversion
costs of these micromills are expected to be significantly lower than
conventional rolling mills. Micromills are also expected to result in lower
transportation costs due to the ability to strategically locate a micromill in
close proximity to a manufacturing facility. Micromills are expected to be
particularly well suited to take advantage of the rapid growth in demand for can
sheet expected in emerging markets in Asia and Latin America where there is
limited indigenous supply. Kaiser believes that micromills should also be
capable of manufacturing other sheet products at relatively low capital and
operating costs. The micromill technology is based on a proprietary thin-strip,
high-speed, continuous-belt casting technique linked directly to hot and cold
rolling mills. The major advantage of the process is that the sheet is
continuously manufactured from molten metal, unlike the conventional process in
which the metal is first cast into large, solid ingots and subsequently rolled
into sheet through a series of highly capital-intensive steps. The first
micromill is nearing completion in Nevada as a full-scale demonstration and
production facility. Kaiser expects operational start-up of the facility by the
end of 1996. If Kaiser is successful in proving and commercializing its
micromill technology, micromills could represent an important source of future
growth. There can be no assurance that Kaiser will be able to successfully
develop and commercialize the technology for use at full-scale facilities. See
"-- Research and Development."
Kaiser has developed and installed proprietary retrofit technology in all
of its smelters over the last decade, which has significantly contributed to
increased and more efficient production of primary aluminum. Through continuing
technological improvements, Kaiser's smelters have achieved improved energy
efficiency and longer average life of reduction cells. Kaiser is actively
engaged in licensing its smelting and other process and product technology and
selling technical and managerial assistance to other producers worldwide. See
"-- Production Operations -- Primary Aluminum Products."
Increasing participation in emerging markets. Kaiser is actively pursuing
opportunities to increase its participation in emerging markets by using its
technical expertise and capital to form joint ventures or acquire equity in
aluminum-related facilities in foreign countries where it can apply its
proprietary technology. Kaiser has created Kaiser Aluminum International to
identify growth opportunities in targeted emerging markets and develop the
needed country competence to complement Kaiser's product and process competence
in capitalizing on such opportunities. Kaiser has focused its efforts on
countries that are expected to be important suppliers of aluminum and/or large
customers for aluminum and alumina, including the PRC, Russia and other members
of the CIS, India, and Venezuela. Kaiser's proprietary retrofit technology has
been installed by Kaiser at various third party locations throughout the world
and is an integral part of Kaiser's initiatives for participating in new and
existing smelting facilities. See "Risk Factors -- Risk Factors Relating to
Kaiser -- Foreign Activities" above and "-- International Business Development"
below.
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<PAGE> 103
SENSITIVITY TO PRICES AND HEDGING PROGRAMS
Kaiser's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical price
fluctuations. During the period January 1, 1993 through January 3, 1997, the AMT
Price for primary aluminum has ranged from approximately $.50 to $1.00 per
pound. For the week ended January 3, 1997, the AMT Price of primary aluminum was
approximately $.74 per pound. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag behind
primary aluminum price changes by up to three months. See "-- Industry Overview"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Trends -- Aluminum Operations."
Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina
(approximately 2.0 million tons in 1995 or 72% of production) and primary
aluminum (approximately 271,700 tons in 1995 or 66% of production) to third
parties.
As of November 30, 1996, Kaiser had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for the balance of 1996, and 89% and 90% of such excess alumina for
1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made
at prices indexed to future prices of primary aluminum.
As of November 30, 1996, Kaiser had sold forward, at fixed prices,
approximately 70,000 and 93,600 tons of primary aluminum in excess of its
projected internal fabrication requirements for 1997 and 1998, respectively, and
had purchased put options to establish a minimum price for 196,000 tons and
45,000 tons of such 1997 and 1998 surplus, respectively. As of November 30,
1996, Kaiser had also entered into option contracts that established a price
range for an additional 160,000 tons of Kaiser's 1998 surplus primary aluminum.
The weighted average price of Kaiser's 1997 and 1998 fixed price contracts, and
the weighted average price for Kaiser's 1998 purchase put options, exceed the
AMT Price for primary aluminum for the week ended January 3, 1997. The weighted
average price for Kaiser's purchased put options with respect to 1997 and the
weighted average price of the minimum of the range established with respect to
Kaiser's other 1998 option contracts are below the AMT Price for the week ended
January 3, 1997.
PRODUCTION OPERATIONS
The following table sets forth total shipments and intracompany transfers
of Kaiser's alumina, primary aluminum, and fabricated aluminum operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
ALUMINA:
Shipments to Third Parties........ 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5
Intracompany Transfers............ 662.2 546.3 800.6 820.9 807.5
PRIMARY ALUMINUM:
Shipments to Third Parties........ 262.9 184.5 271.7 224.0 242.5
Intracompany Transfers............ 97.0 171.3 217.4 225.1 233.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties........ 245.4 284.3 368.2 399.0 373.2
</TABLE>
Kaiser's operations are conducted through KACC's decentralized business
units which compete throughout the aluminum industry.
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<PAGE> 104
- - The alumina business unit, which mines bauxite and obtains additional bauxite
tonnage under long-term contracts, produced approximately 8% of Western world
alumina in 1995. During 1995, Kaiser's shipments of bauxite to third parties
represented approximately 21% of bauxite mined. In addition, Kaiser's third
party shipments of alumina represented approximately 72% of alumina produced.
Kaiser's share of total Western world alumina capacity was approximately 7% in
1995.
- - The primary aluminum products business unit operates two domestic smelters
wholly owned by Kaiser and two foreign smelters in which Kaiser holds
significant ownership interests. During 1995, Kaiser's shipments of primary
aluminum to third parties represented approximately 66% of primary aluminum
production. Kaiser's share of total Western world primary aluminum capacity
was approximately 3% in 1995.
- - Fabricated aluminum products are manufactured by three business
units -- flat-rolled products, extruded products and engineered components.
The products include body, lid, and tab stock for beverage containers, sheet
and plate products, heat-treated products, screw machine stock, redraw rod,
forging stock, truck wheels and hubs, air bag canisters, engine manifolds, and
other castings, forgings and extruded products, which are manufactured at
plants located in principal marketing areas of the United States and Canada.
The aluminum utilized in Kaiser's fabricated products operations is comprised
of primary aluminum, obtained both internally and from third parties, and
scrap metal purchased from third parties.
Alumina
The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 1995:
<TABLE>
<CAPTION>
ANNUAL TOTAL
PRODUCTION ANNUAL
CAPACITY PRODUCTION
COMPANY AVAILABLE TO CAPACITY
ACTIVITY FACILITY LOCATION OWNERSHIP KAISER ---------
-------------------------- -------- --------- --------- ------------ (TONS)
(TONS)
<S> <C> <C> <C> <C> <C>
Bauxite Mining............ KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining.......... Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------- ---------
2,877,000 5,750,000
========= =========
</TABLE>
- ---------------
(1) Although Kaiser owns 49% of KJBC, it has the right to receive all of such
entity's output.
(2) Alpart bauxite is refined into alumina at the Alpart refinery.
Bauxite mined in Jamaica by KJBC is refined into alumina at Kaiser's plant
at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of
Jamaica granted Kaiser a mining lease for the mining of bauxite sufficient to
supply Kaiser's then-existing Louisiana alumina refineries at their annual
capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the
Gramercy plant is sold to third parties.
Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina
plant located in Jamaica. Kaiser owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. Kaiser has management
responsibility for the facility on a fee basis. Kaiser and Hydro have agreed to
be responsible for their proportionate shares of Alpart's costs and expenses.
The Government of Jamaica has granted Alpart a mining lease and has entered into
other agreements with Alpart designed to assure that sufficient reserves of
bauxite will be available to Alpart to operate its refinery as it may be
expanded to a capacity of 2,000,000 tons per year through the year 2024.
Kaiser owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which
owns the largest and one of the most efficient alumina refineries in the world,
located in Queensland, Australia. QAL refines bauxite into alumina, essentially
on a cost basis, for the account of its stockholders pursuant to long-term
tolling
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<PAGE> 105
contracts. The stockholders, including Kaiser, purchase bauxite from another QAL
stockholder under long-term supply contracts. Kaiser has contracted with QAL to
take approximately 792,000 tons per year of capacity or pay standby charges.
Kaiser is unconditionally obligated to pay amounts calculated to service its
share ($93.3 million in principal amount at September 30, 1996) of certain debt
of QAL, as well as other QAL costs and expenses, including bauxite shipping
costs. QAL's annual production capacity is approximately 3,300,000 tons, of
which approximately 934,000 tons are available to Kaiser.
Kaiser's principal customers for bauxite and alumina consist of large and
small domestic and international aluminum producers that purchase bauxite and
reduction-grade alumina for use in their internal refining and smelting
operations, trading intermediaries who resell raw materials to end-users, and
users of chemical-grade alumina. In 1995, Kaiser sold all of its bauxite to two
customers, the largest of which accounted for approximately 74% of such sales.
Kaiser also sold alumina to nine customers, the largest and top five of which
accounted for approximately 23% and 90% of such sales, respectively. See
"-- Competition." Kaiser believes that among alumina producers it is now the
Western world's second largest seller of alumina to third parties. Kaiser's
strategy is to sell a substantial portion of the bauxite and alumina available
to it in excess of its internal refining and smelting requirements under
multi-year sales contracts. See "-- Sensitivity to Prices and Hedging Programs."
Primary Aluminum Products
The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 1995:
<TABLE>
<CAPTION>
ANNUAL TOTAL
RATED ANNUAL
CAPACITY RATED 1995
COMPANY AVAILABLE TO CAPACITY OPERATING
LOCATION FACILITY OWNERSHIP KAISER ------- RATE
------------------------------ --------- --------- ------------ (TONS) ---------
(TONS)
<S> <C> <C> <C> <C> <C>
Domestic
Washington.................. Mead 100% 200,000 200,000 82%
Washington.................. Tacoma 100% 73,000 73,000 82%
------- -------
Subtotal................. 273,000 273,000
------- -------
International
Ghana....................... Valco 90% 180,000 200,000 68%
Wales, United Kingdom....... Anglesey 49% 55,000 112,000 119%
------- -------
Subtotal................. 235,000 312,000
------- -------
TOTAL............... 508,000 585,000
======= =======
</TABLE>
Kaiser owns two smelters located at Mead and Tacoma, Washington, where
alumina is processed into primary aluminum. The Mead facility uses pre-bake
technology and produces primary aluminum. Approximately 71% of Mead's 1995
production was used at Kaiser's Trentwood fabricating facility and the balance
was sold to third parties. The Tacoma plant uses Soderberg technology and
produces primary aluminum and high-grade, continuous-cast, redraw rod, which
currently commands a premium price in excess of the price of primary aluminum.
Both smelters have achieved significant production efficiencies in recent years
through retrofit technology, cost controls, and semi-variable wage and power
contracts, leading to increases in production volume and enhancing their ability
to compete with newer smelters. At the Mead plant, Kaiser has converted to
welded anode assemblies to increase energy efficiency, extended the anode
life-cycle in the smelting process, changed from pencil to liquid pitch to
produce carbon anodes which achieve environmental and operating savings, and
engaged in efforts to increase production through the use of improved, higher-
efficiency reduction cells. Kaiser has also commenced the modernization and
expansion of the carbon baking furnace at its Mead smelter at an estimated cost
of approximately $52.0 million. This project will lower costs, enhance safety
and improve the environmental performance of the facility. This modernization is
expected to be completed in late 1998. See "-- Strategy."
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<PAGE> 106
Electric power supply represents an important production cost for Kaiser at
its aluminum smelters. In 1995, Kaiser successfully restructured electric power
purchase agreements for its smelting facilities in the Pacific Northwest, which
has resulted in significantly lower electric power costs for the Mead and
Tacoma, Washington, smelters compared with 1995 electric power costs. Kaiser
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. From 1981 until 1995, electric power for
Kaiser's Mead and Tacoma smelters was purchased exclusively from the Bonneville
Power Administration ("BPA") by Kaiser under a contract which expires in 2001.
In April 1995, the BPA agreed to allow each of the direct service industrial
customers (the "DSIs"), which include Kaiser, to purchase a portion of its
electric power requirement from sources other than the BPA beginning October 1,
1995. In June 1995, Kaiser entered into an agreement with The Washington Water
Power Company ("WWP") to purchase up to 50 megawatts of electric power for its
Northwest facilities for a five-year term beginning October 1, 1995. Kaiser is
receiving power under that contract, which power displaces a portion of Kaiser's
interruptible power from the BPA. In addition, in 1995 Kaiser entered into a new
power purchase contract with the BPA, which amends the existing BPA power
contract and which contemplates reductions during 1996 in the amount of power
which Kaiser is obligated to purchase from the BPA and which the BPA is
obligated to sell to Kaiser, and the replacement of such power with power to be
purchased from other suppliers. Kaiser is negotiating power purchase agreements
for such power with suppliers other than the BPA. Contracts for the purchase of
all power required by Kaiser's Mead and Tacoma smelters and Trentwood rolling
mill for 1996, and for approximately 75% of such power for the period 1997-2001,
have been finalized. Two parties filed lawsuits in December 1995 against the BPA
petitioning the court to review and set aside the BPA's offers of the new power
purchase contracts to the DSIs, including the offer that Kaiser accepted. These
lawsuits have been consolidated. In addition, the BPA's Business Plan
Environmental Impact Statement that is under review in connection with the
lawsuits challenging the BPA's transmission agreements with the DSIs, including
Kaiser, as described in the following paragraph, is part of the record
supporting the BPA's new power purchase contracts with the DSIs, and an adverse
decision in those lawsuits may affect Kaiser's new power purchase contract with
the BPA. The effect of such lawsuits, if any, on Kaiser's new power purchase
contract with the BPA is not known. Certain of the DSIs, including Kaiser, have
intervened in the lawsuits.
In 1995, Kaiser also entered into agreements with the BPA and with the WWP,
with terms ending in 2001, under which the BPA and the WWP would provide to
Kaiser transmission services for power purchased from sources other than the
BPA. The term of the transmission services agreement with the BPA was
subsequently extended for an additional fifteen years, which extension has been
challenged. Four lawsuits have been filed against the BPA by various parties,
which lawsuits either challenge the BPA's record of decision offering such an
extension agreement to the DSIs or challenge the BPA's Business Plan
Environmental Impact Statement record of decision in connection therewith.
Certain of the DSIs, including Kaiser, have intervened in the four lawsuits. See
"-- Strategy."
Kaiser reduced operations at its Mead and Tacoma smelters in Washington to
approximately 75% of their full capacity in January 1993, when three reduction
potlines were removed from production (two at Mead and one at Tacoma) in
response to a power reduction imposed by the BPA. In March 1995, the BPA offered
to its industrial customers, including Kaiser, surplus firm power at a
discounted rate for the period April 1, 1995, through July 31, 1995, to enable
such customers to restart idle industrial loads. In April 1995, Kaiser and the
BPA entered into a contract for an amount of such power, and thereafter Kaiser
restarted one-half of an idle potline (approximately 9,000 tons of annual
capacity) at its Tacoma, Washington, smelter. The Tacoma smelter was returned to
full production in October 1995. In 1995, Kaiser entered into a one-year power
supply contract with the BPA, for a term ended September 30, 1996, in connection
with the restart of idled capacity at its Mead smelter. The Mead smelter
returned to full production in December 1995.
Kaiser manages, and owns a 90% interest in, the Valco aluminum smelter in
Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied
by Kaiser and the other participant into primary aluminum under long-term
tolling contracts which provide for proportionate payments by the participants
in amounts intended to pay not less than all of Valco's operating and financing
costs. Kaiser's share of the primary aluminum is sold to third parties. Power
for the Valco smelter is supplied under an agreement which expires in 2017. The
agreement indexes two-thirds of the price of the contract quantity of power to
the market
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price of primary aluminum. The agreement also provides for a review and
adjustment of the base power rate and the price index every five years. The most
recent review was completed in April 1994 for the 1994-1998 period. Valco has
entered into an agreement with the government of Ghana under which Valco has
been assured (except in cases of force majeure) that it will receive sufficient
electric power to operate at its current level of three and one-half potlines
through December 31, 1996. Kaiser believes that Valco should have available
sufficient electric power to operate at least at its current level through 1997.
See "Risk Factors -- Risk Factors Relating to Kaiser -- Power Supply."
Kaiser owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey")
aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses
pre-bake technology. Kaiser supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. Kaiser sells its share of
Anglesey's output to third parties. Power for the Anglesey alumina smelter is
supplied under an agreement which expires in 2001.
Kaiser has developed and installed proprietary retrofit technology in all
of its smelters, as well as at third party locations. This technology -- which
includes the redesign of the cathodes and anodes that conduct electricity
through reduction cells, improved "feed" systems that add alumina to the cells,
and a computerized system that controls energy flow in the cells -- has
significantly contributed to increased and more efficient production of primary
aluminum and enhances Kaiser's ability to compete more effectively with the
industry's newer smelters. Kaiser is actively engaged in efforts to license this
technology and sell technical and managerial assistance to other producers
worldwide, and may participate in joint ventures or similar business
partnerships which employ Kaiser's technical and managerial knowledge. See
"-- Strategy" and "-- Research and Development."
Kaiser's principal primary aluminum customers consist of large trading
intermediaries and metal brokers, who resell primary aluminum to fabricated
product manufacturers, and large and small international aluminum fabricators.
In 1995, Kaiser sold its primary aluminum production not utilized for internal
purposes to approximately 35 customers, the largest and top five of which
accounted for approximately 25% and 62% of such sales, respectively. See
"-- Competition." Marketing and sales efforts are conducted by a small staff
located at the business unit's headquarters in Pleasanton, California, and by
senior executives of Kaiser who often participate in the structuring of major
sales transactions. A majority of the business unit's sales are based upon
long-term relationships with metal merchants and end-users.
Fabricated Aluminum Products
Kaiser manufactures and markets fabricated aluminum products for the
packaging, transportation, construction, and consumer durables markets in the
United States and abroad. Sales in these markets are made directly and through
distributors to a large number of customers. In 1995, four domestic beverage
container manufacturers were among the leading customers for Kaiser's fabricated
products and accounted for approximately 12% of Kaiser's sales revenue.
Kaiser's fabricated products compete with those of numerous domestic and
foreign producers and with products made of steel, copper, glass, plastic, and
other materials. Product quality, price, and availability are the principal
competitive factors in the market for fabricated aluminum products. Kaiser has
focused its fabricated products operations on selected products in which Kaiser
has production expertise, high-quality capability, and geographic and other
competitive advantages.
Flat-Rolled Products. The flat-rolled product business unit, the largest
of Kaiser's fabricated products businesses, operates the Trentwood sheet and
plate mill at Spokane, Washington. The Trentwood facility is Kaiser's largest
fabricating plant and accounted for approximately 64% of Kaiser's 1995
fabricated aluminum products shipments. The business unit supplies the beverage
container market (producing body, lid, and tab stock), the aerospace and general
engineering markets (producing heat treat products), and the specialty coil
markets (producing automotive brazing sheet, wheel, and tread products), both
directly and through distributors. During 1995, Kaiser successfully completed a
two year restructuring of its flat-rolled products operation at its Trentwood
plant to reduce that facility's annual operating costs by at least $50.0
million.
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Kaiser's flat-rolled products are sold primarily to beverage container
manufacturers located in the western United States and in the Asian Pacific Rim
countries where the Trentwood plant's location provides Kaiser with a
transportation advantage. Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which Kaiser
competes. Kaiser has made significant capital expenditures at Trentwood during
the past several years in rolling technology and process control to improve the
metal integrity, shape and gauge control of its products. Kaiser believes that
such improvements have enhanced the quality of its products for the beverage
container industry and the capacity and efficiency of its manufacturing
operations. Kaiser believes that it is one of the highest quality producers of
aluminum beverage can sheet in the world.
Kaiser continues to implement changes to the process and product mix of its
Trentwood rolling mill in an effort to maximize its profitability and maintain
full utilization of the facility. Recently, Kaiser has approved an expansion of
its heat treat capacity by approximately one-third, which will enable Kaiser to
increase the range of its heat treat products and improve Trentwood's operating
efficiency. Sales of Kaiser's heat treat products have increased significantly
over the last several years and are made primarily to the aerospace and general
engineering markets, which are experiencing growth in demand. The project is
estimated to cost approximately $45.0 million and to take approximately two
years to complete.
In 1995, the flat-rolled products business unit had 31 domestic and foreign
can sheet customers. The largest and top five of such customers accounted for
approximately 14% and 41%, respectively, of the business unit's revenue. See
"-- Competition." In 1995, the business unit shipped products to approximately
150 customers in the aerospace, transportation, and industrial ("ATI") markets,
most of which were distributors who sell to a variety of industrial end-users.
The top five customers in the ATI markets for flat-rolled products accounted for
approximately 13% of the business unit's revenue. The marketing staff for the
flat-rolled products business unit is located at the Trentwood facility and in
Pleasanton, California. Sales are made directly to customers (including
distributors) from eight sales offices located throughout the United States.
International customers are served by sales offices in the Netherlands and Japan
and by independent sales agents in Asia and Latin America.
Extruded Products. The extruded products business unit is headquartered in
Dallas, Texas, and operates soft-alloy extrusion facilities in Los Angeles,
California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario,
Canada; a cathodic protection business located in Tulsa, Oklahoma, that also
extrudes both aluminum and magnesium; rod and bar facilities in Newark, Ohio,
and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging
stock, and billet; and a facility in Richland, Washington, which produces
seamless tubing in both hard and soft alloys for the automotive, other
transportation, export, recreation, agriculture, and other industrial markets.
Each of the soft-alloy extrusion facilities has fabricating capabilities and
provides finishing services.
The extruded products business unit's major markets are in the
transportation industry, to which it provides extruded shapes for automobiles,
trucks, trailers, cabs, and shipping containers, and in the distribution,
durable goods, defense, building and construction, ordnance and electrical
markets. In 1995, the extruded products business unit had approximately 825
customers for its products, the largest and top five of which accounted for
approximately 6% and 20%, respectively, of its revenue. See "-- Competition."
Sales are made directly from plants as well as marketing locations across the
United States.
Engineered Components. The engineered components business unit operates
forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood,
South Carolina; a machine shop at Greenwood, South Carolina; and a casting
facility in Canton, Ohio. The engineered components business unit is one of the
largest producers of aluminum forgings in the United States and is a major
supplier of high-quality forged parts to customers in the automotive, commercial
vehicle and ordnance markets. The high strength-to-weight properties of forged
and cast aluminum make it particularly well-suited for automotive applications.
The business unit's casting facility manufactures aluminum engine manifolds for
the automobile, truck and marine markets.
In 1995, the engineered components business unit had approximately 250
customers, the largest and top five of which accounted for approximately 34% and
77%, respectively, of the business unit's revenue. See
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"-- Competition." The engineered components business unit's headquarters and a
sales and engineering office are located in Detroit, Michigan. The sales and
engineering office works with car makers and other customers, the Center for
Technology (see "-- Research and Development"), and plant personnel to create
new automotive component designs and improve existing products.
Kaiser entered into a letter of intent with Accuride Corporation
("Accuride") in September 1996 to form a global joint-venture company to design,
manufacture and market aluminum wheels for the commercial transportation
industry. Kaiser and Accuride will each own 50% of the new company. Kaiser will
receive a cash payment in exchange for certain wheel manufacturing assets
located primarily at its Erie, Pennsylvania facility, which currently forges
wheels and other fabricated aluminum products. The transaction is expected to be
consummated during the first quarter of 1997 and is subject to various
conditions, including the negotiation of definitive agreements, third party
consents, and board approvals. Negotiations are continuing.
COMPETITION
Aluminum competes in many markets with steel, copper, glass, plastic and
numerous other materials. In recent years, plastic containers have increased and
glass containers have decreased their respective shares of the soft drink sector
of the beverage container market. In the United States, beverage container
materials, including aluminum, face increased competition from plastics as
increased polyethylene terephthalate ("PET") container capacity is brought on
line by plastics manufacturers. Within the aluminum business, Kaiser competes
with both domestic and foreign producers of bauxite, alumina and primary
aluminum, and with domestic and foreign fabricators. Many of Kaiser's
competitors have greater financial resources than Kaiser. Kaiser's principal
competitors in the sale of alumina include Alcoa Alumina and Chemicals LLC,
Billiton Marketing and Trading BV, and Alcan Aluminium Limited. Kaiser competes
with most aluminum producers in the sale of primary aluminum. See "Risk
Factors -- Risk Factors Relating to Kaiser -- Leverage."
Primary aluminum and, to some degree, alumina are commodities with
generally standard qualities, and competition in the sale of these commodities
is based primarily upon price, quality and availability. Kaiser also competes
with a wide range of domestic and international fabricators in the sale of
fabricated aluminum products. Competition in the sale of fabricated products is
based upon quality, availability, price and service, including delivery
performance. Kaiser concentrates its fabricating operations on selected products
in which it has production expertise, high-quality capability, and geographic
and other competitive advantages. Kaiser believes that, assuming the current
relationship between worldwide supply and demand for alumina and primary
aluminum does not change materially, the loss of any one of its customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations.
RESEARCH AND DEVELOPMENT
Kaiser conducts research and development activities principally at three
facilities -- the Center for Technology ("CFT") in Pleasanton, California; the
Primary Aluminum Products Division Technology Center ("ATC") adjacent to the
Mead smelter in Spokane, Washington; and the Alumina Development Laboratory
("ADL") at the Gramercy, Louisiana, refinery, which supports Kaiser Alumina
Technical Services ("KATS") and the facilities of the alumina business unit. Net
expenditures for company-sponsored research and development activities were
$18.5 million in 1995, $16.7 million in 1994, and $18.5 million in 1993.
Kaiser's research staff totaled 157 at December 31, 1995. Kaiser estimates that
research and development net expenditures will be approximately $22.5 million in
1996.
CFT performs research and development across a range of aluminum process
and product technologies to support Kaiser's business units and new business
opportunities. It also selectively offers technical services to third parties.
Significant efforts are directed at product and process technology for the can
sheet, aircraft and automotive markets, and aluminum reduction cell models which
are applied to improving cell designs and operating conditions. The largest and
most notable single project being developed at CFT is a unique micromill for the
production of can sheet from molten metal using a continuous cast process. The
capital and conversion costs of these micromills are expected to be
significantly lower than conventional rolling mills.
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Micromills are also expected to result in lower transportation costs due to the
ability to strategically locate a micromill in close proximity to a
manufacturing facility. Micromills are expected to be particularly well suited
to take advantage of the rapid growth in demand for can sheet expected in
emerging markets in Asia and Latin America where there is limited indigenous
supply. Kaiser believes that micromills should also be capable of manufacturing
other sheet products at relatively low capital and operating costs. The
micromill technology is based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot and cold rolling mills.
The major advantage of the process is that the sheet is continuously
manufactured from molten metal, unlike the conventional process in which the
metal is first cast into large, solid ingots and subsequently rolled into sheet
through a series of highly capital-intensive steps. The first micromill is
nearing completion in Nevada as a full-scale demonstration and production
facility. Kaiser expects operational start-up of the facility by the end of
1996. If Kaiser is successful in proving and commercializing its micromill
technology, micromills could represent an important source of future growth.
There can be no assurance that Kaiser will be able to successfully develop and
commercialize the technology for use at full-scale facilities. Kaiser is
currently financing the cost of the construction of the Nevada micromill,
estimated to be approximately $70 million, from general corporate funds,
including borrowings under the 1994 KACC Credit Agreement.
ATC maintains specialized laboratories and a miniature carbon plant where
experiments with new anode and cathode technology are performed. ATC supports
Kaiser's primary aluminum smelters, and concentrates on the development of
cost-effective technical innovations such as equipment and process improvements.
KATS provides improved alumina process technology to Kaiser's facilities and
technical support to new business ventures in cooperation with Kaiser's
international business development group. See "-- Strategy."
Kaiser is actively engaged in efforts to license its technology and sell
technical and managerial assistance to other producers worldwide. Kaiser's
technology has been installed in alumina refineries, aluminum smelters and
rolling mills located in the United States, Jamaica, Sweden, Germany, Russia,
India, Australia, Korea, New Zealand, Ghana, the United Arab Emirates, and the
United Kingdom. Kaiser's revenue from technology sales and technical assistance
to third parties was $5.7 million in 1995, $10.0 million in 1994, and $12.8
million in 1993. See "-- Strategy."
Kaiser has entered into agreements with respect to the Krasnoyarsk smelter
in Russia under which Kaiser has licensed certain of its technology for use in
such facility and agreed to provide purchasing services in obtaining
Western-sourced technology and equipment to be used in such facility. These
agreements were entered into in November 1990, and the services under them are
expected to be completed in 1996. In addition, in 1993, Kaiser entered into
agreements with respect to the Nadvoitsy smelter in Russia and the Korba smelter
of the Bharat Aluminium Co. Ltd., in India, under which Kaiser has licensed
certain of its technology for use in such facilities. Services under the
Nadvoitsy agreements were completed in 1995, and services under the Korba
agreements are essentially completed although final contract closure will not
occur until mid-1997.
INTERNATIONAL BUSINESS DEVELOPMENT
Kaiser is actively pursuing opportunities to increase its participation in
emerging markets by using its technical expertise and capital to form joint
ventures or acquire equity in aluminum-related facilities in foreign countries
where it can apply its proprietary technology. Kaiser has created Kaiser
Aluminum International to identify growth opportunities in targeted emerging
markets and develop the needed country competence to complement Kaiser's product
and process competence in capitalizing on such opportunities. Kaiser has focused
its efforts on countries that are expected to be important suppliers of aluminum
and/or large customers for aluminum and alumina, including the PRC, Russia and
other members of the CIS, India, and Venezuela. Kaiser's proprietary retrofit
technology has been installed by Kaiser at various third party locations
throughout the world and is an integral part of Kaiser's initiatives for
participating in new and existing smelting facilities.
In 1995, KYRIL entered into the Joint Venture Agreements with LAS relating
to the formation and operation of the Joint Venture. The Joint Venture's assets
and operations are located primarily in the industrial city of Lanzhou, the
capital of Gansu Province in northwestern China, and in nearby Lianhai, a
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special economic zone also in Gansu Province. The smelter at Lanzhou is the
fifth largest aluminum smelter in the PRC and has a capacity of approximately
55,000 tons of primary aluminum per year. The smelter at Lianhai has a capacity
of approximately 30,000 tons of primary aluminum per year. In 1995, the two
smelters produced an aggregate of approximately 71,000 tons of primary aluminum,
which amount was less than the aggregate capacity of the plants principally
because of a shortage of electric power available to the plants in 1995 due to a
drought which impacted the hydroelectric system. The shortage of electric power
available to the plants continued during the first part of 1996; however, normal
power supply has been restored since July.
KYRIL contributed $9.0 million to the capital of the Joint Venture in July
1995. The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing and other conditions relating to KYRIL's
additional contributions to the Joint Venture and the use thereof by the Joint
Venture. Governmental approval in the PRC will be necessary in order to
implement any arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained. At a recent meeting of the directors
of the Joint Venture, KYRIL, LAS, and the Joint Venture reached an agreement (i)
that extended until early 1997 the deadline for KYRIL to make a second capital
contribution to the Joint Venture, and (ii) that KYRIL would continue to explore
various methods of financing any future capital contributions to the Joint
Venture, including possible financing from third-party investors.
Kaiser, through its extruded products business unit, has entered into
contracts to form two small joint venture companies in the PRC. Kaiser
indirectly acquired equity interests of approximately 45% and 49%, respectively,
in these two companies which will manufacture aluminum extrusions, in exchange
for the contribution to those companies of certain used equipment, technology,
services and cash. The majority equity interests in the two companies are owned
by affiliates of Guizhou Guang Da Construction Company.
See "Risk Factors -- Risk Factors Relating to Kaiser -- Foreign
Activities."
EMPLOYEES
During 1995, Kaiser employed an average of approximately 9,500 persons,
compared with an average of approximately 9,700 employees in 1994, and 10,200
employees in 1993. At December 31, 1995, Kaiser's work force was approximately
9,600, including a domestic work force of approximately 5,900, of whom 4,000
were paid at an hourly rate. Most hourly paid domestic employees are covered by
collective bargaining agreements with various labor unions. Approximately 74% of
such employees are covered by a master agreement (the "Labor Contract") with the
USWA which expires September 30, 1998. The Labor Contract covers Kaiser's plants
in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and
Newark, Ohio. The Labor Contract replaced a contract that expired October 31,
1994, and was reached after an eight-day work stoppage by the USWA at these
plants in February 1995.
The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly bonus
payments based on various indices of profitability, productivity, efficiency,
and other aspects of specific plant performance, as well as, in certain cases,
the price of alumina or primary aluminum. Pursuant to the Labor Contract, base
wage rates were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective November 3,
1997, and an amount in respect of the cost of living adjustment under the
previous master agreement will be phased into base wages during the term of the
Labor Contract. In the second quarter of 1995, Kaiser acquired up to $2,000 of
preference stock held in a stock plan for the benefit of each of approximately
82% of the employees covered by the Labor Contract and in the first half of 1998
will acquire up to an additional $4,000 of such preference stock held in such
plan for the benefit of substantially the same employees. In addition, a
profitability test was satisfied and, therefore, Kaiser acquired during 1996 up
to an additional $1,000 of such preference stock held in such plan for the
benefit of substantially the same employees. Kaiser made comparable acquisitions
of preference stock held for the benefit of each of certain salaried employees.
In February 1995, Alpart's employees engaged in a six-day work stoppage by
its National Workers Union, which was settled by a new contract which expired in
April 1996. Contract negotiations are ongoing.
Management considers Kaiser's employee relations to be satisfactory.
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ENVIRONMENTAL MATTERS
Kaiser is subject to the Environmental Laws. From time to time the
Environmental Laws are amended and new ones are adopted. The Environmental Laws
regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; the release of hazardous or toxic substances, pollutants and
contaminants into the environment; and, in certain instances, the environmental
condition of industrial property prior to transfer or sale. In addition, Kaiser
is subject to various federal, state and local workplace health and safety laws
and regulations ("Health Laws").
From time to time, Kaiser is subject, with respect to its current and
former operations, to fines or penalties assessed for alleged breaches of the
Environmental and Health Laws and to claims and litigation brought by federal,
state or local agencies and by private parties seeking remedial or other
enforcement action under the Environmental and Health Laws or damages related to
alleged injuries to health or to the environment, including claims with respect
to certain waste disposal sites and the remediation of sites presently or
formerly operated by Kaiser. See "Legal Proceedings." Kaiser currently is
subject to a number of lawsuits under CERCLA. Kaiser, along with several other
entities, has also been named as a PRP for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA and, in certain
instances, may be exposed to joint and several liability for those costs or
damages to natural resources. Kaiser's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. By letter dated June 18,
1996, the Washington State Department of Ecology advised Kaiser that there are
several options for remediation at the Mead facility that would be acceptable to
the Department. Kaiser expects that one of these remedial options will be agreed
upon and incorporated into a Consent Decree in early 1997. In addition, in
connection with certain of its asset sales, Kaiser has indemnified the
purchasers of assets with respect to certain liabilities (and associated
expenses) resulting from acts or omissions arising prior to such dispositions,
including environmental liabilities.
Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals, primarily related to potential
solid waste disposal and soil and ground-water remediation matters. At September
30, 1996, the balance of such accruals, which are primarily included in other
non-current liabilities, was $32.9 million. These environmental accruals
represent Kaiser's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts, existing
technology, and Kaiser's assessment of the likely remediation to be performed.
Kaiser expects remediation to occur over the next several years and estimates
that annual expenditures to be charged to these environmental accruals will be
approximately $2.0 to $10.0 million for the years 1996 through 2000 and an
aggregate of approximately $7.0 million thereafter. Cash expenditures of $4.5
million in 1995, $3.6 million in 1994, and $7.2 million in 1993 were charged to
previously established accruals relating to environmental costs. Approximately
$8.4 million is expected to be charged to such accruals in 1996.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, Kaiser currently believes that the
resolution of such uncertainties should not have a material adverse effect on
Kaiser's consolidated financial position, results of operations, or liquidity.
In addition to cash expenditures charged to environmental accruals,
environmental capital spending was $9.2 million in 1995, $11.9 million in 1994,
and $12.6 million in 1993. Annual operating costs for pollution control, not
including corporate overhead or depreciation, were approximately $26.0 million
in 1995, $23.1 million in 1994, and $22.4 million in 1993. Legislative,
regulatory and economic uncertainties make it difficult to project future
spending for these purposes. However, Kaiser currently anticipates that in the
1996-1997 period, environmental capital spending will be within the range of
approximately $27.0-$33.0 million per year, and operating costs for pollution
control will be within the range of $28.0-$29.0 million per year.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of MAXXAM -- Financial Condition and Investing and
Financing Activities -- Aluminum Operations," Note 9 of the Notes to
Consolidated Financial Statements under the heading "Environmental
Contingencies," and "Risk Factors -- Risk Factors Relating to
Kaiser -- Environmental Matters and Litigation."
PROPERTIES
The locations and general character of the principal plants, mines, and
other materially important physical properties relating to Kaiser's operations
are described in "-- Production Operations." Kaiser owns in fee or leases all
the real estate and facilities used in connection with its business. Plants and
equipment and other facilities are generally in good condition and suitable for
their intended uses, subject to changing environmental requirements. Although
Kaiser's domestic aluminum smelters and alumina facility were initially designed
early in Kaiser's history, they have been modified frequently over the years to
incorporate technological advances in order to improve efficiency, increase
capacity, and achieve energy savings. Kaiser believes that its domestic plants
are cost competitive on an international basis. Due to Kaiser's variable cost
structure, the plants' operating costs are relatively lower in periods of low
primary aluminum prices and relatively higher in periods of high primary
aluminum prices.
Kaiser's obligations under the 1994 KACC Credit Agreement are secured by,
among other things, mortgages on its major domestic plants (other than the
Gramercy alumina refinery and Nevada micromill). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations."
LEGAL PROCEEDINGS
See "Legal Proceedings -- Kaiser Litigation" for a description of certain
legal proceedings in which Kaiser is involved.
FOREST PRODUCTS OPERATIONS
See "Business of the Company" for a description of MAXXAM's forest products
operations.
REAL ESTATE AND OTHER OPERATIONS
REAL ESTATE AND RESORT OPERATIONS
General
MAXXAM, principally through its wholly owned subsidiaries, is also engaged
in the business of residential and commercial real estate investment and
development, primarily in Arizona, California, Texas and Puerto Rico. At
September 30, 1996, MAXXAM had approximately $19.5 million of outstanding
receivables derived from the financing of real estate sales in its developments
and may continue to finance such real estate sales in the future. As of
September 30, 1996, these receivables had a weighted average interest rate of
approximately 9.6%, a weighted average maturity of less than four years and
average borrower equity of approximately 52%. As of September 30, 1996, MAXXAM
also held $2.5 million of other receivables as a portion of the RTC Portfolio.
Principal Properties
Texas. In June 1991, a wholly owned subsidiary of MAXXAM purchased from
the RTC at an auction, for approximately $122.3 million, the RTC Portfolio,
which consisted of 27 parcels of income producing real property and 28 loans
secured by real property, fifteen of which have subsequently been converted to
income-producing real property through either foreclosure or contractual
agreement with the borrower. Substantially all of the real property was located
in Texas, with the largest concentration in the vicinities of San Antonio,
Houston, Austin and Dallas. From 1992 to September 30, 1996, an aggregate of
approximately $41.7 million in loans (which represented thirteen loans) were
sold or paid off and thirty-four properties were sold for aggregate
consideration of approximately $177.3 million. These transactions resulted in
aggregate gains of
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$94.2 million. As of September 30, 1996, two loans resulting from property sales
and eight properties (including two acquired via foreclosures) were held, which
had an aggregate net book value of $18.2 million. Two properties within this
portfolio have subsequently been sold for a total gain of $3.0 million. Net
proceeds consisted of $3.6 million in cash and a note of $1.3 million. All of
the remaining assets are being managed (and marketed for sale or disposition as
appropriate) by MAXXAM. One other property in the portfolio is under contract
for sale with closing estimated to occur during the first quarter of 1997. This
sale is expected to produce a gain of approximately $2.5 million and net cash
proceeds of approximately $4.3 million.
Palmas del Mar. Palmas del Mar, a time-sharing and land development and
sales business with resort amenities, located on the southeastern coast of
Puerto Rico near Humacao ("Palmas"), was acquired in 1984. Palmas consists of
approximately 1,919 acres of undeveloped land, 104 condominiums utilized in its
time-sharing program (comprising 5,300 time-share intervals of which
approximately 841 remain to be sold), a 102-room hotel and adjacent executive
convention center known as the Candelero Hotel, a 23-room luxury hotel known as
the Palmas Inn, a casino, a Gary Player-designed 18-hole golf course, 20 tennis
courts, golf and tennis pro shops, restaurants, beach and pool facilities, an
equestrian center and a marina. Certain stores and restaurants and the
equestrian center are operated by third parties. Approximately 1,300 private
residences and a marina are owned by third parties. A number of these private
residences are made available to Palmas del Mar by their owners throughout the
year for rental to vacationers. Since 1985, MAXXAM has been actively engaged in
the development and sale of condominiums, estate lots and villas. For the nine
months ended September 30, 1996, Palmas sold 20 condominiums, 177 time-share
intervals, one residential lot and 490 time-share conversions for an aggregate
of $8.5 million. During 1995, Palmas sold 31 condominium units and 65 time-share
intervals. Additionally, Palmas completed a sale and leaseback transaction on
July 14, 1995 of 33 furnished condominium units for approximately $8.4 million.
As of September 30, 1996, the net book value of Palmas' assets was approximately
$10.3 million.
PDMPI has entered into a Purchase Agreement with BlueWater Palmas Ltd.
("BlueWater"), an affiliate of Talon Group, Inc., for the sale of the Candelero
Hotel and certain other assets of Palmas for a purchase price of approximately
$7.6 million. The Candelero Hotel and certain other Palmas' assets would be
managed by BlueWater and Wyndham Hotels. PDMPI will continue to receive royalty
payments from BlueWater, for a period of 49 years, equal to 3% of the gross
revenues from the Candelero Hotel and a percentage of gross revenues from
certain other assets. The sale is scheduled to close on December 18, 1996,
subject to a right to extend the closing for 30 days and subject to certain
other conditions. The Company may reinvest all or a portion of the proceeds of
this sale in Palmas.
Fountain Hills. In 1968, a subsidiary of MAXXAM purchased and began
developing approximately 12,100 acres of real property at Fountain Hills,
Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As
of September 30, 1996, Fountain Hills had approximately 3,873 acres of
undeveloped residential land, 83 developed commercial and industrial lots, 119
acres of undeveloped commercial and industrial land and 67 developed residential
lots available for sale. The population of Fountain Hills is approximately
14,000. MAXXAM is planning the development of certain of the remaining acreage
at Fountain Hills. Future sales are expected to consist mainly of undeveloped
acreage, semi-developed parcels and fully-developed lots, although MAXXAM may
engage in limited construction and direct sale of residential units. During
1995, approximately 115 residential lots, 22 commercial parcels and 103 acres
were sold for an aggregate of $14.5 million. During the first nine months of
1996, approximately 51 residential lots, 18 commercial parcels and 2 acres were
sold for an aggregate of $5.5 million.
Additionally, in 1994 a subsidiary of MAXXAM entered into a venture to
develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The
development of SunRidge Canyon contemplates a residential golf-oriented, upscale
master-planned community. The project includes 950 acres, of which 185 have been
developed into a championship-quality, public golf course which opened for play
in November 1995. The remaining 765 acres are being developed into approximately
860 single family lots. Sales of the individual lots began in November 1995. The
project consists of both custom lots, marketed on an individual basis, and
production lots, marketed to home builders. There are currently four
homebuilders actively involved in the construction and sale of new homes within
SunRidge Canyon. During the nine months ended September 30, 1996, 30 custom lots
and 39 production lots were sold for an aggregate of $6.0 million. Nine
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custom lots and three production lots were sold during 1995 for an aggregate of
$1.4 million. The development is being undertaken by SunRidge Canyon L.L.C., an
Arizona limited liability company organized by a subsidiary of MAXXAM and SunCor
Development Company. A subsidiary of MAXXAM holds a 50% equity interest in the
venture.
MAXXAM intends to continue development of its remaining acreage at Fountain
Hills in a manner that will allow it to maintain recent sales levels, although
there can be no assurance that it will be able to do so.
Lake Havasu City. In 1963, a subsidiary of MAXXAM purchased and began
developing approximately 16,700 acres of real property at Lake Havasu City,
Arizona, which were offered for sale in the form of subdivided single and
multiple family residential, commercial and industrial sites. MAXXAM has sold
substantially all of its lot inventory in Lake Havasu City and is currently
planning the marketing of the remaining 129 acres.
Rancho Mirage. In 1991, a subsidiary of MAXXAM acquired Mirada, a 195-acre
luxury resort-residential project located in Rancho Mirage, California. Mirada
is a master planned community built into the Santa Rosa Mountains, 650 feet
above the Coachella Valley floor. Two of the five parcels have been developed,
one of which is a custom lot subdivision of 46 estate lots with home prices
ranging from $1.5 million to $3.0 million. The other parcel was developed by
Ritz-Carlton hotels and an affiliate of MAXXAM as the Ritz-Carlton Rancho
Mirage, a hotel with views of the Palm Springs area. The three remaining parcels
encompass nearly 150 acres with entitlements allowing a variety of residential
options. MAXXAM is currently marketing the project's 23 fully-developed lots.
Other. MAXXAM, through its subsidiaries, owns a number of other properties
in Arizona, New Mexico, Texas and Colorado. Efforts are underway to sell most of
these properties. Most notably, in June 1995 MAXXAM sold approximately 6,000
acres at its Waterwood National Resort and Country Club project in Texas, for an
aggregate of $4.1 million.
Marketing
MAXXAM is engaged in marketing and sales programs of varying magnitudes at
its real estate developments. In recent years, MAXXAM has constructed
residential units and sold time-share intervals at certain of its real estate
developments. MAXXAM intends to continue selling land to builders and developers
and lots to individuals and expects to continue to construct and sell completed
residential units at certain of its developments. It also expects to sell
certain of its commercial real estate assets. All sales are made directly to
purchasers through MAXXAM's marketing personnel, independent contractors or
through independent real estate brokers who are compensated through the payment
of customary real estate brokerage commissions.
Competition and Regulation and Other Industry Factors
There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and disposable income and, therefore,
are affected by changes in general economic conditions and other factors. The
real estate development business and commercial real estate business are subject
to other risks such as shifts in population, fluctuations in the real estate
market, and unpredictable changes in the desirability of residential, commercial
and industrial areas. The resort and time-sharing business of Palmas competes
with similar businesses in the Caribbean, Florida and other locations.
MAXXAM's real estate operations are subject to comprehensive federal, state
and local regulation. Applicable statutes and regulations may require disclosure
of certain information concerning real estate developments and credit policies
of MAXXAM and its subsidiaries. Periodic approval is required from various
agencies in connection with the design of developments, the nature and extent of
improvements, construction activity, land use, zoning, and numerous other
matters. Failure to obtain such approval, or periodic renewal thereof, could
adversely affect the real estate development and marketing operations of MAXXAM
and its subsidiaries. Various jurisdictions also require inspection of
properties by appropriate authorities, approval of
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sales literature, disclosure to purchasers of specific information, bonding for
property improvements, approval of real estate contract forms and delivery to
purchasers of a report describing the property.
Employees
As of September 30, 1996, MAXXAM's real estate operations had approximately
600 employees, of which approximately 500 were employed by Palmas. On July 20,
1995, a majority of the employees of Palmas voted to have a local union
represent them for collective bargaining purposes. MAXXAM and the union are
engaged in collective bargaining negotiations. Until the collective bargaining
process is completed,
MAXXAM is unable to estimate the impact, if any, the union representation of its
employees may have on its resort operations at Palmas. If the sale of the
Candelero Hotel closes (see "-- Principal Properties -- Palmas Del Mar"), a
large number of these employees would transfer to the new owner.
SAM HOUSTON RACE PARK
General
In July 1993, MAXXAM, through subsidiaries, acquired various interests in
SHRP, Ltd., a Texas limited partnership which owns and operates Sam Houston Race
Park (the "Race Park"), a Texas Class 1 horse racing facility located within the
greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd. defaulted on
the $4.4 million semi-annual interest payment due on its 11 3/4% Senior Secured
Notes. On April 17, 1995, the Debtors, consisting of SHRP, Ltd. and two
affiliated entities, filed voluntary petitions, each seeking to reorganize under
the provisions of Chapter 11 of the United States Bankruptcy Code. The
bankruptcy cases were consolidated and transferred to the United States
Bankruptcy Court (the "Bankruptcy Court") for the Southern District of Texas,
Houston Division (Case No. 95-43739-H3-11). On September 22, 1995, the
Bankruptcy Court confirmed the Plan (the Debtors' plan of reorganization) and on
October 6, 1995, the transactions called for by the Plan were completed.
The Plan provided for, among other things, a significant modification of
SHRP, Ltd.'s 11 3/4% Senior Secured Notes (the "Original Notes" and, as
modified, the "Extendible Notes"), an additional capital infusion and a
reorganization of SHRP, Ltd. The Extendible Notes have an aggregate initial
principal amount of $37.5 million, mature on September 1, 2001 and bear interest
at the rate 11% per annum. The maturity date of the Extendible Notes may be
extended to September 1, 2003 (with an increase in the rate of interest to 13%
per annum) if the Texas legislature passes significant gaming legislation (as
defined) during the 2001 legislative session. Interest on the Extendible Notes
will accrue in-kind and will not be payable in cash until a certain level of
cash flow from operations has been achieved. Once cash interest payments
commence, interest payments may not thereafter be paid in-kind. The indenture
governing the Extendible Notes provides additional latitude for SHRP, Ltd. to
incur indebtedness and make investments in gaming, entertainment and other
ventures.
The New SHRP Investor Group made a capital contribution of cash in the
aggregate amount of $5.9 million (wholly owned subsidiaries of MAXXAM
contributed $5.8 million). Additionally, a wholly owned subsidiary of MAXXAM
contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of land
(having a fair market value of $2.3 million). A wholly owned subsidiary of
MAXXAM is the new managing general partner of SHRP, Ltd. Each member of the New
SHRP Investor Group provided its pro rata share of a $1.7 million line of
credit, should the initial cash contributed to SHRP, Ltd. prove insufficient to
fund the future operating and working capital requirements of SHRP, Ltd. MAXXAM
has guaranteed its subsidiaries' share of the line of credit, which totaled $1.6
million. On October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for
$7.3 million, $14.6 million of the Extendible Notes and the corresponding shares
of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional
general partner of the reorganized SHRP, Ltd.) to which one noteholder was
entitled. Such shares of common stock represent approximately 39.0% of the
shares of common stock of SHRP Equity, Inc. After giving effect to these
transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly,
approximately 78.8% of the equity in the reorganized SHRP, Ltd.
Although the Race Park has sustained substantial operating losses since it
began operations in April 1994, the reorganization of principal indebtedness of
SHRP, Ltd. resulting in the issuance of the 11% Senior
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Secured Extendible Notes (the "Extendible Notes") in exchange for the 11 3/4%
Senior Secured Notes (the "Original Notes"), significantly improved the
liquidity of SHRP, Ltd. by providing for the deferral of cash interest payments
until certain conditions are met. SHRP, Ltd. projects a loss from operations for
the next two years. Management believes the proceeds contributed on the date
closing of the bankruptcy reorganization of SHRP, Ltd. (together with a $1.7
million line of credit) will be adequate to fund the operating activities of
SHRP, Ltd. for that period of time.
Racing Operations and Race Park Facilities
The Race Park offers pari-mutuel wagering on live thoroughbred or quarter
horse racing or simulcast racing generally seven days a week throughout the
year. Simulcasting is the process by which live races held at one facility are
broadcast simultaneously to other locations at which additional wagers are
placed on the race being broadcast. The Race Park's principal sources of revenue
are its statutory and contractual share of total wagering on live and simulcast
racing. The Race Park also derives revenues from admission fees, food services,
club memberships, luxury suites, advertising sales and other sources. The Race
Park is located on approximately 300 acres of land in northwest Harris County
approximately 18 miles from the Houston central business district and
approximately 15 miles from Houston Intercontinental Airport.
Regulation of Racing Operations
The ownership and operation of horse racetracks in Texas are subject to
significant regulation by the Texas Racing Commission (the "Racing Commission")
under the Texas Racing Act and related regulations (collectively, the "Racing
Act"). The Racing Act provides, among other things, for the allocation of
wagering proceeds among betting participants, horsemen's purses, racetracks, the
State of Texas and for other purposes, and empowers the Racing Commission to
license and regulate substantially all aspects of horse racing in the state. The
Racing Commission must approve the number of live race days that may be offered
at the Race Park each year, as well as all simulcast agreements. Class 1
racetracks in Texas are entitled to conduct at least seventeen weeks of live
racing for each breed of horses (thoroughbreds and quarter horses).
Marketing and Competition
The Race Park believes that the majority of the patrons for the Race Park
reside within a 50-mile radius of the Race Park, which includes the greater
Houston metropolitan area, and that a secondary market of occasional patrons can
be developed outside the 50-mile radius but within a 100-mile radius of the Race
Park. The Race Park uses a number of marketing strategies in an attempt to reach
these people and make them more frequent visitors to the Race Park. The Race
Park competes with other forms of entertainment, including casinos located
approximately 125 to 150 miles from Houston, a greyhound racetrack located 60
miles from the Race Park and a wide range of sporting events and other
entertainment activities in the Houston area. The Race Park could in the future
also compete with other forms of gambling in Texas, including casino gambling on
Indian reservations or otherwise. While the Race Park believes that the location
of the Race Park is a competitive advantage over the other more distant gaming
ventures mentioned above, the most significant challenge for the Race Park is to
develop and educate new racing fans in a market where pari-mutuel wagering has
been absent since the 1930's. Other competitive factors faced by the Race Park
include the allocation of sufficient live race days by the Racing Commission and
attraction of sufficient race horses to run at the Race Park. The Race Park will
have 142 days of live racing during 1996. The Race Park currently has 109 days
of live racing scheduled for 1997.
EMPLOYEES
At September 30, 1996, MAXXAM and its subsidiaries employed approximately
2,400 persons, exclusive of those involved in Aluminum Operations.
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LEGAL PROCEEDINGS
GENERAL
The following describes certain legal proceedings in which MAXXAM or its
subsidiaries are involved. MAXXAM and certain of its subsidiaries are also
involved in various claims, lawsuits and other proceedings not discussed herein
which relate to a wide variety of matters. Uncertainties are inherent in the
final outcome of those and the below-described matters and it is presently
impossible to determine the actual costs that ultimately may be incurred.
Nevertheless, MAXXAM believes (unless otherwise indicated herein) that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on MAXXAM's liquidity, consolidated financial
position or results of operations. See also "Risk Factors -- Litigation."
However, there can be no assurance that there will not be adverse determinations
or settlements in one or more of the matters identified below or other
proceedings that could have a material adverse effect on MAXXAM's financial
condition, results of operations and liquidity.
Certain present and former directors and officers of MAXXAM are defendants
in certain of the actions described below. MAXXAM's bylaws provide for
indemnification of its officers and directors to the fullest extent permitted by
Delaware law. MAXXAM is obligated to advance defense costs to its officers and
directors, subject to the individual's obligation to repay such amount if it is
ultimately determined that the individual was not entitled to indemnification.
In addition, MAXXAM's indemnity obligation can under certain circumstances
include amounts other than defense costs, including judgments and settlements.
USAT MATTERS
In October 1994, MAXXAM learned that the OTS had commenced an investigation
into UFG and the insolvency of USAT, UFG's wholly owned subsidiary. In December
1988, the Federal Home Loan Bank Board ("FHLBB") placed USAT into receivership
and appointed the Federal Savings & Loan Insurance Corp. ("FSLIC") as receiver.
At the time of the receivership, MAXXAM owned approximately 13% of the voting
stock of UFG.
On December 26, 1995, the OTS initiated formal administrative proceedings
(the "OTS action") against MAXXAM and others by filing the Notice. The Notice
alleges misconduct by MAXXAM, Federated, Mr. Charles Hurwitz and the other
respondents with respect to the failure of USAT. Mr. Hurwitz is the Chairman of
the Board, Chief Executive Officer and President of MAXXAM. Mr. Hurwitz is also
the Chairman of the Board and Chief Executive Officer of Federated, a New York
business trust wholly owned by Mr. Hurwitz, members of his immediate family and
trusts for the benefit thereof. Mr. Hurwitz and a wholly owned subsidiary of
Federated collectively own approximately 61.1% of the aggregate voting power of
MAXXAM. The Notice claims that MAXXAM was a savings and loan holding company,
that with others it controlled USAT, and that, as a result of such status and
agreements with the Federal Home Loan Bank Board, it was therefore obligated to
maintain the net worth of USAT. The Notice makes numerous other allegations
against MAXXAM and the other respondents, including, among others, allegations
that through USAT it was involved in prohibited transactions with Drexel,
Burnham, Lambert Inc. ("Drexel"). The OTS, among other things, seeks unspecified
damages in excess of $138.0 million from MAXXAM and Federated, civil money
penalties and a removal from, and prohibition against MAXXAM and the other
respondents engaging in, the banking industry. On February 20, 1996, the
respondents filed their responses to the Notice. The date for the hearing on the
merits has been scheduled for May 28, 1997. See also the description of the FDIC
action and the Martel action below. It is impossible to predict the ultimate
outcome of the foregoing matter or its potential impact on MAXXAM's consolidated
financial position, results of operations or liquidity, although there can be no
assurance that such impact will not be material.
In a separate but related matter, on December 7, 1995, MAXXAM filed a
petition for review in the U.S. Fifth Circuit Court of Appeals alleging various
statutory violations by certain predecessor agencies to the OTS and seeking to
modify, terminate or set aside the December 30, 1988 order awarding the bid to
acquire USAT to a bidder other than MAXXAM, whose bid was lower than MAXXAM's
bid (i.e. more costly to the government and taxpayers). The action is entitled
MAXXAM Inc. v. Office of Thrift Supervision, Department
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of the Treasury (No. 95-60753) (the "MAXXAM v. OTS action"). By order dated
December 10, 1996, the U.S. Fifth Circuit Court of Appeals denied MAXXAM's
petition for review and denied any relief to MAXXAM.
On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E.
Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas. This action did not name MAXXAM as a defendant. The
suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the
allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM
maintained the net worth of USAT. On October 24, 1995, Mr. Hurwitz filed a
motion to dismiss this action. On November 14, 1995, Mr. Hurwitz filed a motion
to join the OTS to this action. MAXXAM and certain other respondents in the OTS
action subsequently filed motions to intervene in this action; MAXXAM
conditioned its motion on the Court joining the OTS to this action. MAXXAM filed
with its motion to intervene a proposed complaint which alleges that the OTS
violated the Administrative Procedures Act by rejecting MAXXAM's bid for USAT.
The FDIC is opposing the motion to join the OTS and the intervention motions and
is seeking to stay this action pending the outcome of the OTS action or proceed
in this case only against Mr. Hurwitz. On August 6, 1996, the court entered an
order denying the FDIC's motion to stay this case pending the outcome of the OTS
action. At the November 19, 1996 pre-trial conference, the Court granted the
motions to intervene of MAXXAM and others, and added the OTS as a party to this
action. The Court instructed the plaintiffs to file an amended complaint by
January 15, 1997, and the defendants to answer by February 5, 1997. It is
impossible to predict the ultimate outcome of the foregoing matter or its
potential impact on MAXXAM's liquidity, consolidated financial position or
results of operations, although there can be no assurance that such impact will
not be material.
In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et
al. (the "Martel action") was filed in the U.S. District Court for the Northern
District of California (No. C950322) and names as defendants MAXXAM, Mr.
Hurwitz, MGI, Federated, UFG and a former director of MAXXAM. This action is
purportedly brought by plaintiff on behalf of the U.S. government; however, the
U.S. government has declined to participate in the suit. The suit alleges that
defendants made false statements and claims in violation of the Federal False
Claims Act in connection with USAT. Plaintiff alleges, among other things, that
defendants used the federally insured assets of USAT to acquire junk bonds from
Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel arranged
financing for defendants' various business ventures, including the acquisition
of Pacific Lumber. Plaintiff alleges that USAT became insolvent in 1988 and that
defendants should be required to pay $1.6 billion (subject to trebling) to cover
USAT's losses. MAXXAM's alleged portion of such damages has not been specified.
Plaintiff seeks, among other things, that the Court impose a constructive trust
upon the fruits of the alleged improper use of USAT funds. On March 22, 1996,
the Court granted defendants' motion to have this case transferred to the U.S.
District Court for the Southern District of Texas. On June 11, 1996, defendants
filed their motion to dismiss this case. On August 6, 1996, the Court
transferred this case to the judge handling the FDIC action.
ZERO COUPON NOTE LITIGATION
In April 1989, an action was filed against MAXXAM, MGI, MAXXAM Properties
Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of MAXXAM's
directors in the Court of Chancery of the State of Delaware, entitled
Progressive United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785.
Plaintiff purports to bring this action as a stockholder of MAXXAM derivatively
on behalf of MAXXAM and MPI. In May 1989, a second action containing
substantially similar allegations was filed in the Court of Chancery of the
State of Delaware, entitled Wolf v. Hurwitz, et al. (No. 10846) and the two
cases were consolidated (collectively, the "Zero Coupon Note actions"). The Zero
Coupon Note actions relate to a Put and Call Agreement entered into between MPI
and Mr. Hurwitz, as well as a predecessor agreement (the "Prior Agreement").
Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the
option (the "Call") to purchase from MPI certain notes (or MAXXAM's common stock
into which they
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were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call
and acquired 990,400 shares of MAXXAM's common stock. The Zero Coupon Note
actions generally allege that in entering into the Prior Agreement Mr. Hurwitz
usurped a corporate opportunity belonging to MAXXAM, that the Put and Call
Agreement constituted a waste of corporate assets of MAXXAM and MPI, and that
the defendant directors breached their fiduciary duties in connection with these
matters. Plaintiffs seek to have the Put and Call Agreement declared null and
void, among other remedies.
RANCHO MIRAGE LITIGATION
In May 1991, a derivative action entitled Progressive United Corporation v.
MAXXAM Inc., et al. (No. 12111) (the "Progressive United action") was filed in
the Court of Chancery, State of Delaware against MAXXAM, Federated, MAXXAM's
Board of Directors and MCOP. The action alleges abuse of control and breaches of
fiduciary obligations based on, and unfair consideration for, MAXXAM's Agreement
in Principle with Federated to (a) forgive payments of principal and interest of
approximately $32.2 million due from Federated under two loan agreements entered
into between MCOP and Federated in 1987 (and later assigned by MCOP to MAXXAM),
and (b) grant an additional $11.0 million of consideration to Federated, in
exchange for certain real estate assets valued at approximately $42.9 million in
Rancho Mirage, California, held by Federated (the "Mirada transactions").
Plaintiff seeks, among other things, an accounting under the loan agreements,
repayment of any losses or damages suffered by MAXXAM or MCOP, costs and
attorneys fees.
The following six additional lawsuits, similar to the Progressive United
action, were filed in 1991 and 1992 in Delaware Chancery Court challenging the
Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al. (No. 12353)
(the "NL Industries action"); Kahn, et al. v. Federated Development Company, et
al. (No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377) (the
"Thistlethwaite action"); Glinert, et al. v. Hurwitz, et al. (No. 12383);
Friscia, et al. v. MAXXAM Inc., et al. (No. 12390); and Kassoway, et al. v.
MAXXAM Inc., et al. (No. 12404). The Kahn, Glinert, Friscia and Kassoway actions
have been consolidated with the Progressive United action into In re MAXXAM
Inc./Federated Development Shareholders Litigation (No. 12111); the NL
Industries action has been "coordinated" with the consolidated actions; and the
Thistlethwaite action has been stayed pending the outcome of the consolidated
actions. In January 1994, a derivative action entitled NL Industries, Inc., et
al. v. Federated Development Company, et al. (No. 94-00630) was filed in the
District Court of Dallas County, Texas, against MAXXAM (as nominal defendant)
and Federated. This action contains allegations and seeks relief similar to that
contained in the In re MAXXAM Inc./Federated Development Shareholders
Litigation. The parties have agreed to stay this action in light of the In re
MAXXAM Inc./Federated Development Shareholders Litigation. With respect to the
In re MAXXAM Inc./Federated Development Shareholders Litigation, on February 10,
1995, the Court issued its decision disapproving a previously announced proposed
settlement and on June 23, 1995, the Court denied defendants' motion to dismiss
certain of plaintiffs' claims. This matter was tried before the Court commencing
January 29, 1996. The Court held a hearing on April 2, 1996 on various
trial-related matters, including defendants' motion to dismiss the claims
relating to the 1987 loan transactions. On August 14, 1996, the Court heard
final oral argument on the merits of the case, but has not issued its decision.
By order dated September 6, 1996, the Court denied defendants' motion to dismiss
the 1987 loan claims and granted plaintiffs' motion to intervene and substitute
a new plaintiff to cure standing problems concerning plaintiffs' 1987 loan
claims.
KAISER LITIGATION
ENVIRONMENTAL LITIGATION
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund National
Priorities List, is composed of five separate sites around the town of Aberdeen,
North Carolina (collectively, the "Sites"). The Sites are of concern to the
United States Environmental Protection Agency (the "EPA") because of their past
use as either pesticide formulation facilities or pesticide disposal areas from
approximately the mid-1930's through the late 1980's. The United States
originally filed a cost recovery complaint (as amended, the "Complaint")
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in the United States District Court for the Middle District of North Carolina,
Rockingham Division,
No. C-89-231-R, which, as amended, includes KACC and a number of other
defendants. The Complaint seeks reimbursement for past and future response costs
and a determination of liability of the defendants under Section 107 of CERCLA.
The EPA has performed a Remedial Investigation/Feasibility Study and issued a
Record of Decision ("ROD") for the Sites in September 1991. The estimated cost
of the major soil remediation selected for the Sites is approximately $32
million. Other possible remedies described in the ROD included on-site
incineration and on-site ash disposal at an estimated cost of approximately $53
million and $222 million, respectively. The EPA has stated that it has incurred
past costs at the Sites in the range of $7.5-$8 million as of February 9, 1993,
and alleges that response costs will continue to be incurred in the future.
On May 20, 1993, the EPA issued three unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the Respondents, including KACC, to
perform the remedial design and remedial action described in the ROD for three
of the Sites. The estimated cost as set forth in the ROD for the remedial action
at the three Sites is approximately $27 million. In addition to KACC, a number
of other companies are also named as respondents. KACC has entered into a PRP
Participation Agreement with certain of the respondents (the "Aberdeen Site PRP
Group" or the "Group") to participate jointly in responding to the
Administrative Orders dated May 20, 1993, regarding soil remediation, to share
costs incurred on an interim basis, and to seek to reach a final allocation of
costs through agreement or to allow such final allocation and determination of
liability to be made by the United States District Court. By letter dated July
6, 1993, KACC has notified the EPA of its ongoing participation with the Group
which, as a group, are intending to comply with the Administrative Orders to the
extent consistent with applicable law. By letters dated December 30, 1993, the
EPA notified KACC of its potential liability for, and requested that KACC, along
with a number of other companies, undertake or agree to finance, groundwater
remediation at certain of the Sites. The ROD-selected remedy for the groundwater
remediation selected by EPA includes a variety of techniques. The EPA has
estimated the total present worth cost, including thirty years of operation and
maintenance, at approximately $11.8 million. On June 22, 1994, the EPA issued
two unilateral Administrative Orders under Section 106(a) of CERCLA ordering the
respondents, including KACC, to undertake the groundwater remediation at three
of the Sites. A PRP Participation Agreement with respect to groundwater
remediation has been entered into by certain of the respondents, including KACC.
By letter dated March 6, 1996, KACC gave notice of withdrawal from the
Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation
Agreement. KACC advised the Group and the EPA that even if it were liable for
cleanup at the Sites, which it expressly denies, it had already contributed far
more than its allocable potential share of response costs. KACC has advised the
Group and the EPA that it has fully complied with the unilateral Administrative
Orders.
In May 1996, the EPA urged KACC to rejoin the Group and indicated that it
would consider seeking penalties against KACC if it did not. On October 10,
1996, the EPA notified KACC that it deems KACC to be in violation of the
Administrative Orders. KACC and certain members of the Group have entered into
an agreement with the United States Department of Justice (the "DOJ") to enter
into a mediation process regarding an appropriate allocation of responsibility
for response costs at the Sites. KACC has also agreed to fund a portion of the
costs associated with certain work at the Sites during the mediation process.
United States of America v. Kaiser Aluminum & Chemical Corporation
In February 1989, a civil action was filed by the DOJ at the request of the
EPA against KACC in the United States District Court for the Eastern District of
Washington, Case Number C-89-106-CLQ. The complaint alleged that emissions from
certain stacks at KACC's Trentwood facility in Spokane, Washington,
intermittently violated the opacity standard contained in the Washington State
Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air
Act. The complaint sought injunctive relief, including an order that KACC take
all necessary action to achieve compliance with the Washington SIP opacity limit
and the assessment of civil penalties of not more than $25,000 per day.
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KACC and the EPA, without adjudication of any issue of fact or law, and
without any admission of the violations alleged in the underlying complaint,
have entered into a Consent Decree, which was approved by a Consent Order
entered by the United States District Court for the Eastern District of
Washington in January 1996. As approved, the Consent Decree settles the
underlying disputes and requires KACC to (i) pay a $.5 million civil penalty
(which penalty has been paid), (ii) complete a program of plant improvements and
operational changes that began in 1990 at its Trentwood facility, including the
installation of an emission control system to capture particulate emissions from
certain furnaces, and (iii) achieve and maintain furnace compliance with the
opacity standard in the SIP by no later than February 28, 1997. KACC anticipates
that capital expenditures for the environmental upgrade of the furnace operation
at its Trentwood facility, including the improvements and changes required by
the Consent Decree, will be approximately $20.0 million.
Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation
and James L. Ferry & Son, Inc.
In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a
Second Amended Complaint for Damages and Declaratory Relief against the United
States, Catellus Development Corporation ("Catellus") and other defendants
(collectively, the "Defendants") alleging, among other things, that the
Defendants caused or allowed hazardous substances, pollutants, contaminants,
debris and other solid wastes to be discharged, deposited, disposed of or
released on certain property located in Richmond, California (the "Property")
formerly owned by Catellus and leased to KACC for the purpose of shipbuilding
activities conducted by KACC on behalf of the United States during World War II.
The Plaintiffs sought recovery of response costs and natural resource damages
under CERCLA. Certain of the Plaintiffs alleged that they had incurred or expect
to incur costs and damages of approximately $49.0 million. Catellus subsequently
filed a third party complaint (the "Third Party Complaint") against KACC in the
United States District Court for the Northern District of California, Case No.
C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate complaint against
KACC, Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims
against the United States for $3.5 million plus thirty-five percent (35%) of
future response costs.
The trial involving this case commenced in March 1995. During the trial,
Plaintiffs settled their claims against Catellus in exchange for payment of
approximately $3.3 million. Subsequently, on June 2, 1995, the United States
District Court for the Northern District of California issued an order on the
remaining claims in that action. On December 7, 1995, the District Court issued
a final judgment on those claims concluding that KACC is liable for various
costs and interest, aggregating approximately $2.2 million, fifty percent (50%)
of future costs of cleaning up certain parts of the Property and certain fees
and costs associated specifically with the claim by Catellus against KACC. KACC
paid the City of Richmond $1.8 million in partial satisfaction of this judgment.
In January 1996, Catellus filed a notice of appeal with respect to its indemnity
judgment against KACC. KACC has since filed a notice of cross appeal as to the
Court's decision adjudicating that KACC is obligated to indemnify Catellus. In
February 1996, the Plaintiffs filed motions seeking reimbursement of fees and
costs from KACC in the aggregate amount of $2.8 million. On July 8, 1996 the
Court issued an order awarding Plaintiffs nominal costs, which amount has been
paid. The order also awarded Catellus de minimis costs. Catellus has filed a
notice of appeal. On August 12, 1996, the Court issued an order granting the
Catellus motion for attorneys' fees in the amount of approximately $.9 million.
KACC and Catellus have filed notices of appeal with respect to the attorneys'
fees award. Based on KACC's estimate of future costs of cleanup, resolution of
the Catellus matter is not expected to have a material adverse effect on KACC's
consolidated financial condition, results of operations, or liquidity.
Waste Inc. Superfund Site
On December 8, 1995, the EPA issued a unilateral Administrative Order for
Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other
respondents for remedial design and action at the Waste Inc. Superfund Site at
Michigan City, Indiana. This site was operated as a landfill from 1965 to 1982.
KACC is alleged to have arranged for the disposal of waste from its formerly
owned plant at Wanatah, Indiana, during the period from 1964 to 1972. In its
Record of Decision, the EPA estimated the cost of the work to be performed to
have a present value of $15.7 million. KACC's share of the total waste sent to
the site is unknown. A consultant retained by a group of PRPs estimated that
KACC contributed 2.0% of the waste
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sent to the site by the forty-one largest contributors. KACC's ultimate exposure
will depend on the number of PRPs that participate and the volume of waste
properly allocable to KACC. Based on the EPA's cost estimate, KACC believes that
its financial exposure for remedial design and remedial action at this site is
less than $500,000. KACC has entered into a Participation Agreement with
thirteen of the respondents to perform the work required under the
Administrative Order.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years. For a discussion of
asbestos-related litigation, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of MAXXAM -- Financial Condition
and Investing and Financing Activities -- Aluminum Operations."
DOJ Proceedings
On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356
("CID No. 11356") requesting information from Kaiser regarding (i) its
production, capacity to produce, and sales of primary aluminum from January 1,
1991, to the date of the response; (ii) any actual or contemplated reduction in
its production of primary aluminum during that period; and (iii) any
communications with others regarding any actual, contemplated, possible or
desired reductions in primary aluminum production by KAC or any of its
competitors during that period. KAC's management believes that KAC's actions
have at all times been appropriate, and KAC has submitted documents and
interrogatory answers to the DOJ responding to CID No. 11356.
On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503
("CID No. 12503"), as part of an industry-wide investigation, requesting
information from KACC regarding (i) any actual or contemplated changes in its
method of pricing can sheet from January 1, 1994, through March 31, 1995, (ii)
the percentage of aluminum scrap and primary aluminum ingot used by KACC to
produce can sheet and the manner in which KACC's cost of acquiring aluminum
scrap is factored into its can sheet prices, and (iii) any communications with
others regarding any actual or contemplated changes in its method of pricing can
sheet from January 1, 1994, through March 31, 1995. Management believes that
KACC's actions have at all times been appropriate, and KACC has submitted
documents and interrogatory answers to the DOJ responding to CID No. 12503. KACC
was recently informed that the DOJ has officially closed its investigation and
is returning the documents submitted by KACC.
OTHER PROCEEDINGS
Matheson et al. v. Kaiser Aluminum Corporation et al.
On March 19, 1996, a lawsuit was filed against MAXXAM, Kaiser and Kaiser's
directors challenging and seeking to enjoin the Proposed Recapitalization of
Kaiser and the April 10, 1996 special stockholders meeting at which the Proposed
Recapitalization was to be considered. The suit, which is entitled Matheson et
al. v. Kaiser Aluminum Corporation et al.(No. 14900) and was filed in the
Delaware Court of Chancery, alleges, among other things, breaches of fiduciary
duties by certain defendants and that the Proposed Recapitalization violates
Delaware law and the certificate of designations for the PRIDES. On April 8,
1996, the Delaware Court of Chancery issued a ruling which preliminarily
enjoined Kaiser from implementing the Proposed Recapitalization. On May 1, 1996,
Kaiser's stockholders approved the Proposed Recapitalization which was not
implemented at that time due to a pending appeal of the trial court's ruling. On
August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction
and remanded the case to the Court of Chancery. On September 24, 1996, the
plaintiffs filed a motion to make permanent the temporary injunction issued on
April 8, 1996. On September 27, 1996, KACC's Board of Directors adopted a
resolution abandoning the Proposed Recapitalization. On October 2, 1996, KACC
filed a motion in the Delaware Court of Chancery to
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dismiss the shareholder litigation relating to the Proposed Recapitalization on
the ground of mootness and filed a response to plaintiffs' motion for entry of a
permanent injunction. The Court has scheduled briefing for both motions, along
with plaintiffs' petition for attorneys' fees and expenses. The Court will
schedule oral argument after briefing is concluded on these issues on February
11, 1997. The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization from being proposed to the stockholders of Kaiser in
the future, including a substantially identical recapitalization structure after
the redemption or conversion of the PRIDES. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations of
MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum
Operations."
Hammons v. Alcan Aluminum Corp., et al.
On March 5, 1996, a class action complaint was filed against KACC, Alcan
Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds Metals
Company and the Aluminum Association in the Superior Court of California for the
County of Los Angeles, Case No. BC145612. The complaint claims that the
defendants conspired, in violation of the California Cartwright Act (Bus. &
Prof. Code sec.16720 & 16750), in conjunction with a Memorandum of Understanding
("MOU") entered into by representatives of Australia, Canada, the European
Union, Norway, the Russian Federation and the United States in 1994, to restrict
the production of primary aluminum resulting in rises in prices for primary
aluminum and aluminum products. The complaint seeks certification of a class
consisting of persons who at any time between January 1, 1994, and the date of
the complaint purchased aluminum or aluminum products manufactured by one or
more of the defendants and estimates damages sustained by the class to be $4.4
billion during the year 1994, before trebling. Plaintiff's counsel has estimated
damages to be $4.4 billion per year for each of the two years the MOU was
active, which when trebled equals $26.4 billion.
On April 2, 1996 the case was removed to the United States District Court
for the Central District of California. On July 1, 1996, the Court granted
summary judgment in favor of KACC and other defendants and dismissed the
complaint as to all defendants. On July 18, 1996, the plaintiff filed a notice
of appeal to the United States Court of Appeals for the Ninth Circuit appealing
the summary judgment granted by the United States District Court for the Central
District of California in favor of KACC and other defendants and the Court's
dismissal of the complaint as to all defendants.
Other Matters
Various other lawsuits and claims are pending against KACC. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on KACC's
consolidated financial position, results of operations, or liquidity.
There can be no assurance that adverse determinations and/or unfavorable
settlements with respect to KACC's legal proceedings will not have a material
adverse effect on KACC's consolidated financial position, results of operations,
or liquidity. See "Risk Factors -- Litigation."
PACIFIC LUMBER LITIGATION
On September 15, 1995, an action entitled Marbled Murrelet, et al. v. Bruce
Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") was filed in the
U.S. District Court for the Northern District of California. This action relates
to, among other things, exemptions for forest health which Pacific Lumber and
its subsidiaries had previously filed covering their entire timberlands. These
exemptions allow Pacific Lumber to harvest dead, dying or diseased trees
("exempt harvesting operations"). As amended, the complaint alleges, among other
things, violations of the ESA, the National Environmental Protection Act
("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted owl.
Following a hearing on September 28, 1995, the Court issued a preliminary
injunction
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enjoining Pacific Lumber and its subsidiaries from conducting a portion of the
exempt operations until a trial on the merits of the case. The majority of the
timberlands which were subject to the injunction are timberlands which have been
proposed as critical habitat for the marbled murrelet. Pacific Lumber appealed
the issuance of the preliminary injunction to the U.S. Ninth Circuit Court of
Appeals. On May 7, 1996, the U.S. Ninth Circuit Court of Appeals reversed the
preliminary injunction order concerning the exempt harvesting operations.
On March 6, 1996, the plaintiffs asked for leave to amend their pleadings
and on April 3, 1996, the Court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on the
Owl Plan. In addition to appealing the preliminary injunction issued on April 3,
1996 preventing harvesting on eight of its THPs, Pacific Lumber has obtained
regulatory reapproval of seven of the eight enjoined THPs without reliance on
the Owl Plan and has, to date, confirmed with the Court that six of those THPs
are not subject to the preliminary injunction. On November 4, 1996, the U.S.
Ninth Circuit Court of Appeals heard oral arguments concerning Pacific Lumber's
appeal of the April 3, 1996 preliminary injunction; the court has not yet
rendered a decision on this matter.
On August 23, 1996, plaintiffs filed a renewed motion for preliminary
injunction to prevent the exempt harvesting operations in Pacific Lumber's old
growth timberlands. In addition, on September 12, 1996, plaintiffs requested an
emergency temporary restraining order ("TRO") with respect to such harvesting
operations. The court denied both of these motions. On October 9, 1996, Pacific
Lumber was cited for accidentally downing a hemlock tree and ordered to stop
exempt harvesting operations in its old growth timberlands for 24 hours.
Plaintiffs sought a TRO and preliminary injunction based on this citation and
related events. After hearing plaintiffs' motions, the court denied the
plaintiffs' requests. The CDF has withdrawn the citation and asked that it be
dismissed.
In related matters, in August 1996, the Sierra Club, the Environmental
Protection Information Center ("EPIC") and others petitioned the BOF to adopt
emergency regulations preventing Pacific Lumber from undertaking exempt
harvesting operations in its old growth timberlands. On September 9, 1996, the
BOF rejected such proposals and petitions. In September and October, the BOF was
formally asked to reconsider its September 9, 1996 decision. The BOF
reconsidered this matter and, ultimately, enacted no emergency regulation to
prevent or further restrict Pacific Lumber's exempt harvesting operations in its
old growth timberlands.
The EPIC, et al. v. California State Board of Forestry, et al. (No.
91CP244) action in the Superior Court of Humboldt County, filed by the Sierra
Club and EPIC in 1991, relates to a THP for approximately 237 acres of virgin
old growth timber. After the Superior Court reversed the BOF's approval of this
THP, certain modifications were made to the THP, which was then unanimously
approved by the BOF. The Superior Court later issued judgment in favor of
Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the
trial court's judgment approving harvesting under this THP. In April 1993, EPIC
filed another action with respect to this THP entitled EPIC, Marbled Murrelet,
et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No.
C93-1400) (the "EPIC action") in the U.S. District Court for the Northern
District of California, alleging an unlawful "taking" of the marbled murrelet
under the ESA. The Court dismissed the federal and state agency defendants and
limited plaintiffs' claims against Pacific Lumber. Harvesting was stayed pending
outcome of a trial which commenced in August 1994 and concluded in September
1994. On February 24, 1995, the judge ruled that the area covered by the THP is
occupied by the marbled murrelet and permanently enjoined implementation of the
THP in order to protect the marbled murrelet. The U.S. Ninth Circuit Court of
Appeals affirmed the District Court's decision. On September 24, 1996, Pacific
Lumber filed its petition for writ of certiorari requesting that the U.S.
Supreme Court consider its appeal of the Ninth Circuit Court's decision.
In view of the recent developments in the Marbled Murrelet action, the
Company is uncertain whether or not the matters described above will have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operations. See "Business of the Company -- Pacific
Lumber Operations -- Regulatory and Environmental Factors" above for a
description of regulatory and similar matters which could affect Pacific
Lumber's timber harvesting practices and future operating results.
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On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon Creek
Corporation v. California State Board of Forestry, et al. (No. 96CS01057) in the
Superior Court of Sacramento County. This action seeks to overturn the BOF's
decision denying approval of a THP for approximately 8 acres of virgin old
growth timber in the area commonly known as the Headwaters Forest. Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial and
previous actions of governmental authorities. In addition, on May 7, 1996,
Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit entitled The
Pacific Lumber Company, et al. v. The United States of America in the United
States Court of Federal Claims. The suit alleges that the federal government has
"taken" over 3,800 acres of Pacific Lumber's old growth timberlands through its
application of the ESA (including the Headwaters Forest). Pacific Lumber, Scotia
Pacific and Salmon Creek seek constitutional "just compensation" damages for the
taking of these timberlands by the federal government's actions. The Court in
each of these actions has granted the parties' agreed motions to stay the
actions pursuant to the Headwaters Agreement. These actions would be dismissed
if the Headwaters Agreement is consummated. See "Business of the
Company -- Pacific Lumber Operations -- Headwaters Agreement" for a description
of the Headwaters Agreement.
OTHER MATTERS
Groundwater contamination has been found on property sold to a subsidiary
of MAXXAM by a subsidiary of Rockwell International Corporation ("Rockwell"). In
March 1992, an enforcement action was filed against Rockwell and the current
property owners by the Nevada Division of Environmental Protection seeking an
order that would require defendants to investigate and report on the nature and
extent of the pollution and contamination on the property. This action has been
stayed, pending continued environmental investigation and remediation by
Rockwell. MAXXAM was named as a defendant in three related damage actions filed
by certain persons. Two of these cases have settled to date and in each case
MAXXAM's share of the settlement was 21%. In September 1996, Rockwell submitted
a global settlement package to MAXXAM. An Environmental Cleanup Liability
report, which accompanied Rockwell's settlement package and which was prepared
by Rockwell's experts, estimates total liability to be $26.08 million (which
MAXXAM is disputing). No further settlement discussions have taken place between
Rockwell and MAXXAM concerning the indemnification issue since the settlement
package was presented.
MAXXAM is involved in various other claims, lawsuits and other proceedings
relating to a wide variety of matters. While uncertainties are inherent in the
final outcome of such matters and it is presently impossible to determine the
actual costs that ultimately may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on MAXXAM's consolidated financial position or
results of operations, or liquidity.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information, as of November 15,
1996, with respect to the executive officers and directors of the Company. All
officers and directors hold office until their respective successors are elected
and qualified or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH THE COMPANY
---- --------------------------------------
<S> <C>
Chairman of the Board, President and Chief Executive
Charles E. Hurwitz.......... Officer
Paul N. Schwartz............ Vice President, Chief Financial Officer and Director
John A. Campbell............ Vice President and Director
Gary L. Clark............... Vice President
John T. La Duc.............. Vice President and Director
Anthony R. Pierno........... Vice President, General Counsel and Director
William S. Riegel........... Vice President and Director
Ronald L. Reman............. Vice President -- Taxes
Byron L. Wade............... Vice President, Secretary and Deputy General Counsel
</TABLE>
Charles E. Hurwitz. Mr. Hurwitz, age 56, has served as Chairman of the
Board, Chief Executive Officer and President of the Company since its formation
in November 1996. He has also served as a member of the Board of Directors and
the Executive Committee of MAXXAM since August 1978 and was elected as Chairman
of the Board and Chief Executive Officer of MAXXAM in March 1980. Mr. Hurwitz
has also served MAXXAM as President since January 1993. Mr. Hurwitz has been,
since January 1974, Chairman of the Board and Chief Executive Officer of
Federated, a New York business trust primarily engaged in the management of real
estate investments. In December 1994, Mr. Hurwitz was appointed Vice Chairman of
the Board of KACC. He has served as a director of Kaiser since October 1988 and
of KACC since November 1988. Since May 1982, Mr. Hurwitz has been Chairman of
the Board and Chief Executive Officer, and since January 1, 1993, President, of
MGI, a wholly owned subsidiary of MAXXAM. From May 1986 until February 1993, Mr.
Hurwitz served as a director of Pacific Lumber. Mr. Hurwitz has also served SHRP
as a director since May 1993, Chairman of the Board since October 1995, and
President from May 1993 until April 1996.
Paul N. Schwartz. Mr. Schwartz, age 50, has served as Vice President and
Chief Financial Officer of the Company since its formation in November 1996. He
was named Executive Vice President and Chief Financial Officer of MAXXAM,
positions he has held since January 1, 1995. He previously served as Senior Vice
President -- Corporate Development of MAXXAM from June 1987 until December 31,
1994, and Vice President -- Corporate Development of MAXXAM from July 1985 to
June 1987. Mr. Schwartz has served as a Vice President of MGI and Pacific Lumber
since May 1987 and January 1987, respectively, and has served as Chief Financial
Officer of Pacific Lumber and Scotia Pacific, since February 1995. He also
serves as Chairman of the Board and sole executive officer of United Financial
Group, Inc., a Delaware public corporation, and has served as a director of
Pacific Lumber and Scotia Pacific since February 1993, and as a director of MGI
since January 1994. Since May 1993, Mr. Schwartz has also served as a director
and a Vice President of SHRP. Mr. Schwartz is also a director of SLM Funding
Corporation, which is a subsidiary of the Student Loan Marketing Association.
John A. Campbell. Mr. Campbell, age 54, has served as a director and Vice
President of the Company since its formation in November 1996. He also serves as
a director and Vice President of MGI, positions he assumed in December 1994. Mr.
Campbell has served Pacific Lumber and Scotia Pacific as a director and
President since January 1989 and November 1992, respectively. Mr. Campbell was
also elected as Chief Executive Officer of Pacific Lumber and Scotia Pacific in
February and June 1993, respectively; Mr. Campbell served as Pacific Lumber's
Executive Vice President -- Forest Products Operations from January 1985 to
January 1989. He also served as Pacific Lumber's Vice President -- Wood Products
from April 1982 to January 1985. Commencing shortly after he joined Pacific
Lumber in 1969 until April 1982, Mr. Campbell served Pacific Lumber in a variety
of managerial positions.
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Gary L. Clark. Mr. Clark, age 54, has served as Vice President of the
Company since its formation in November 1996. He also serves as Vice President
of MGI, a position he assumed in December 1994. Mr. Clark has also served as
Vice President -- Finance and Administration of Pacific Lumber and of Scotia
Pacific since January 1, 1993. Prior to assuming these positions, he had served
Pacific Lumber as Vice President and Treasurer since October 1990. Mr. Clark
also served as Vice President and Treasurer of MAXXAM and MGI from September
1990 and October 1990, respectively, to December 31, 1992. Mr. Clark also served
as the Treasurer of Kaiser and of KACC from May 1990 and January 1990,
respectively, to December 31, 1992. From September 1987 until January 1990, Mr.
Clark was the Director of Financial Planning and Analysis of KACC, and from
April 1985 until September 1987, Mr. Clark served as the Business Manager and
Controller of KACC's Primary Products Division.
John T. La Duc. Mr. La Duc, age 53, has served as a director and Vice
President of the Company since its formation in November 1996. He has also
served as Senior Vice President of MAXXAM since September 1990, and as Vice
President and as a director of MGI since October 1990 and January 1994,
respectively. He also served MAXXAM and MGI as Chief Financial Officer from
September 1990 until December 31, 1994 and February 28, 1995, respectively. Mr.
La Duc has also served Kaiser as Chief Financial Officer since May 1990 and as a
Vice President since June 1989. He has also served KACC as a Vice President
since June 1989 and Chief Financial Officer since January 1990. Mr. La Duc
served as Kaiser's Treasurer from August 1995 until February 1996 and from
January 1993 until April 1993, and as KACC's Treasurer from June 1995 until
February 1996 and from January 1993 until April 1993. Mr. La Duc also currently
serves as a director and Vice President of Pacific Lumber and Scotia Pacific. He
previously served as Chief Financial Officer of Pacific Lumber and of Scotia
Pacific from October 1990 and November 1992, respectively, until February 28,
1995.
Anthony R. Pierno. Mr. Pierno, age 64, has served as Vice President and
General Counsel of the Company since its formation in November 1996. He also
serves as Senior Vice President and General Counsel of MAXXAM, positions he has
held since February 1989. He has also served as Vice President and General
Counsel of MGI and Pacific Lumber since May 1989, and of Scotia Pacific since
November 1992, and has served as a director of Pacific Lumber and MGI since
November 1993 and January 1994, respectively. Additionally, Mr. Pierno has
served as Vice President and General Counsel of Kaiser and KACC since January
1992. Immediately prior to joining MAXXAM, Mr. Pierno served as partner in
charge of the business practice group in the Los Angeles office of the law firm
of Pillsbury, Madison & Sutro. He has served as the Commissioner of Corporations
of the State of California and as Chair of several committees of the State Bar
of California. Mr. Pierno is Chairman of the Board of Trustees of Whittier
College, and a former member and past Chairman of the Board of Trustees of
Marymount College.
William S. Riegel. Mr. Riegel, age 50, has served as a director and Vice
President of the Company since its formation in November 1996. He has also
served MGI as a director and Vice President since December 1994. He has also
served Pacific Lumber as a director since January 1992, and as Vice President --
Sales since January 1990. From the time he joined Pacific Lumber in 1971 until
January 1990, Mr. Riegel served in various sales management positions.
Ronald L. Reman. Mr. Reman, age 38, has served as Vice President -- Taxes
of the Company since its formation in November 1996. He was named Vice
President -- Taxes of MAXXAM in September 1992. Prior to September 1992, he had
served MAXXAM as Director of Taxes since joining MAXXAM in October 1986. From
July 1984 until October 1986, Mr. Reman was a Senior Manager in the Tax
Department of the New York office of Price Waterhouse after having served seven
years with the New York office of Coopers & Lybrand, both of which are
accounting firms. Mr. Reman also serves as Vice President -- Taxes of MGI and
certain other subsidiaries of MAXXAM, and as Assistant Treasurer of Kaiser and
KACC.
Byron L. Wade. Mr. Wade, age 49, has served as Vice President and Deputy
General Counsel of the Company since its formation in November 1996. He has also
served as Vice President and Deputy General Counsel of MAXXAM since May 1990,
and Secretary of MAXXAM since October 1988. Mr. Wade has also served as Vice
President and Secretary of Kaiser and KACC since January 1992, and Deputy
General Counsel of Kaiser and KACC since May and June 1992, respectively. He has
been Vice President, Secretary and Deputy General Counsel of Pacific Lumber and
Scotia Pacific since June 1990 and November 1992,
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respectively. In addition, Mr. Wade has served since May 1993 as a Vice
President and Secretary of SHRP. Mr. Wade has also served as a Vice President,
Secretary and Deputy General Counsel of MGI since July 1990. He was Assistant
Secretary of MAXXAM from November 1987 to October 1988 and Assistant General
Counsel from November 1987 until May 1990. He had previously served as Vice
President, Secretary and General Counsel of MCO Resources, Inc., a publicly
traded oil and gas company, which was majority owned by MAXXAM.
EXECUTIVE OFFICERS AND DIRECTORS OF MAXXAM
The following table sets forth certain information, as of November 15,
1996, with respect to the executive officers and directors of MAXXAM. All
officers and directors hold office until their respective successors are elected
and qualified or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH MAXXAM
---- ---------------------------------
<S> <C>
Charles E. Hurwitz........... Chairman of the Board, President and Chief Executive Officer
Paul N. Schwartz............. Executive Vice President and Chief Financial Officer
John T. La Duc............... Senior Vice President
Anthony R. Pierno............ Senior Vice President and General Counsel
Robert E. Cole............... Vice President -- Federal Government Affairs
Diane M. Dudley.............. Vice President -- Chief Personnel Officer
Robert W. Irelan............. Vice President -- Public Relations
Ronald L. Reman.............. Vice President -- Taxes
Byron L. Wade................ Vice President, Secretary and Deputy General Counsel
Robert J. Cruikshank......... Director
Ezra G. Levin................ Director
Stanley D. Rosenberg......... Director
</TABLE>
See " -- Executive Officers and Directors of the Company" for biographical
information relating to Messrs. Hurwitz, Schwartz, La Duc, Pierno, Reman and
Wade.
Diane M. Dudley. Ms. Dudley, age 55, was named Vice President -- Chief
Personnel Officer of MAXXAM in May 1990. Since November 9, 1995, Ms. Dudley has
also served as a Vice President of Pacific Lumber. From June 1987 until May
1990, she was Vice President -- Personnel and Administration of MAXXAM. From
December 1983 until June 1987, Ms. Dudley served as Assistant Vice President --
Personnel of MAXXAM.
Robert E. Cole. Mr. Cole, age 49, has served MAXXAM as Vice
President -- Federal Government Affairs since September 1990. Since March 1981,
Mr. Cole has also served as a Vice President of KACC. In addition, Mr. Cole has
served as Vice President -- Federal Government Affairs for MGI and Pacific
Lumber since September 1990. Mr. Cole is currently Chairman of the United States
Auto Parts Advisory Committee to the United States Congress.
Robert J. Cruikshank. Mr. Cruikshank, age 66, has served as a director of
MAXXAM since May 1993. In addition, he has served as a director of Kaiser and
KACC since January 1994. Mr. Cruikshank was a Senior Partner in the
international public accounting firm of Deloitte & Touche from December 1989
until his retirement from that firm in March 1993. Prior to its merger with
Touche Ross & Co. in December 1989, Mr. Cruikshank served as Managing Partner of
Deloitte Haskins & Sells from June 1974 until the merger and served on such
firm's board of directors from 1981 to 1985. Mr. Cruikshank also serves as a
director and on the Compensation Committee of Houston Industries Incorporated, a
public utility holding company with interests in electric utilities, coal and
transportation businesses; as a director of Texas Biotechnology Incorporated as
a director of American Residential Services; and as Advisory Director of Compass
Bank -- Houston.
Robert W. Irelan. Mr. Irelan, age 59, has served MAXXAM as Vice
President -- Public Relations since September 1990. He has also been Vice
President -- Public Relations of MGI and Pacific Lumber since September 1990,
and Vice President -- Public Relations of KACC since February 1988. From June
1985 to
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<PAGE> 130
February 1988, Mr. Irelan served as Divisional Vice President -- Corporate
Public Relations of KACC, and from 1968 to June 1985 he served KACC and certain
affiliated companies in a variety of positions.
Ezra G. Levin. Mr. Levin, age 62, was first elected a director of MAXXAM
in May 1978. He has served as a director of Kaiser and KACC since July 1991 and
November 1988, respectively. From May 1982 through December 1993, he also served
as a director of MGI. He is a partner in the law firm of Kramer, Levin, Naftalis
& Frankel. Mr. Levin also serves as a director of Pacific Lumber, Scotia Pacific
and United Mizrahi Bank and Trust Company.
Stanley D. Rosenberg. Mr. Rosenberg, age 65, was first elected to the
Board of Directors of MAXXAM in June 1981. Mr. Rosenberg is a partner in the law
firm of Rosenberg, Tuggey, Agather & Rosenthal. Mr. Rosenberg was a partner in
the law firm of Oppenheimer, Rosenberg & Kelleher, Inc. from its inception in
1971 until February 1990, at which time he served as Of Counsel to that firm
through June 30, 1993.
SECURITY OWNERSHIP OF MAXXAM BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE
COMPANY
The Company is a wholly owned subsidiary of MAXXAM. The following table
sets forth, as of December 20, 1996, unless otherwise indicated, the beneficial
ownership of MAXXAM's Common Stock and the Preferred Stock by (i) those persons
known by MAXXAM to own beneficially more than 5% of the shares of each class
then outstanding, (ii) each of the executive officers and directors of the
Company, and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
COMBINED
% OF
VOTING
NAME OF BENEFICIAL OWNER TITLE OF CLASS # OF SHARES(1) % OF CLASS POWER(2)
------------------------ ----------------- -------------- ---------- --------
<S> <C> <C> <C> <C>
Federated Development Inc.(3).......... Common Stock 1,740,626(4) 19.9 54.2
Preferred Stock 661,377 98.9
The Stockholder Group(3)............... Common Stock 2,735,219(4)(5)(6) 31.3 61.3
Preferred Stock 685,074(7) 99.1
Harold C. Simmons, Kronos, Inc.,....... Common Stock 1,278,150(8) 14.8 8.3
The Combined Master Retirement Trust,
NL Industries, Inc. and related
entities
Robertson, Stephens & Company, Inc.,... Common Stock 710,100(9) 8.2 4.6
The Robertson, Stephens Orphan Fund,
The Contrarian Fund and related
entities
John A. Campbell....................... Common Stock 3,000 * *
Gary L. Clark.......................... -- -- -- --
Charles E. Hurwitz(10)................. Common Stock 2,733,542(4)(5)(11) 31.3 61.2
Preferred Stock 684,941(7)(12) 99.1
John T. La Duc......................... -- -- -- --
Anthony R. Pierno...................... Common Stock 4,983(13) * *
Ronald L. Reman........................ Common Stock 39(14) * *
William S. Riegel...................... -- -- -- --
Paul N. Schwartz....................... Common Stock 30,975(15) * *
Byron L. Wade.......................... Common Stock 5,526(16) * *
All directors and executive officers of
the.................................. Common Stock 2,778,065(4)(5) 31.7 61.4
Company as a group (9 persons)....... Preferred Stock 684,941(7) 99.1
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the beneficial owners have sole voting and
investment power with respect to the shares listed in the table. Includes
the number of shares such persons would have received on December 20, 1996,
if any, for their exercisable stock appreciation rights ("SARs") (excluding
SARs
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<PAGE> 131
payable in cash only) if such rights had been paid solely in shares of
Common Stock. Also includes the number of shares of Common Stock credited
to such person's stock fund account under MAXXAM's 401(k) savings plan as
of September 30, 1996.
(2) MAXXAM's Preferred Stock is generally entitled to ten votes per share on
matters presented to a vote of MAXXAM's stockholders.
(3) FDI, Federated, Messrs. Hurwitz and Levin, and Mr. James H. Paulin, Jr.,
Secretary and Treasurer of Federated, may be deemed a "group" (the
"Stockholder Group") within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended. The address of FDI is 5847 San Felipe,
Suite 2600, Houston, Texas 77057. The address of the Stockholder Group is
c/o Ezra G. Levin, Esq., Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York 10022.
(4) Includes 71,175 shares of Common Stock which FDI may acquire in exchange
for 7% Cumulative Exchangeable Preferred Stock of MCOP, whose issued and
outstanding common stock is wholly owned by MAXXAM.
(5) Includes (a) 1,669,451 shares of Common Stock owned by FDI as to which Mr.
Hurwitz indirectly possesses voting and investment power, (b) 20,892 shares
of Common Stock separately owned by Mr. Hurwitz's spouse and as to which
Mr. Hurwitz disclaims beneficial ownership, (c) 46,500 shares of Common
Stock owned by a limited partnership controlled by Mr. Hurwitz and his
spouse, 23,250 of which shares were separately owned by Mr. Hurwitz's
spouse prior to their transfer to such limited partnership and as to which
Mr. Hurwitz disclaims beneficial ownership, (d) 119,832 shares of Common
Stock owned by the 1992 Hurwitz Investment Partnership, L.P., of which
59,916 shares are owned by Mr. Hurwitz's spouse as separate property and as
to which Mr. Hurwitz disclaims beneficial ownership, and (e) 805,692 shares
of Common Stock held directly by Mr. Hurwitz.
(6) Includes options exercisable within 60 days of December 20, 1996 to
purchase 325 shares of Common Stock.
(7) Includes options exercisable within 60 days of December 20, 1996 to
purchase 22,500 shares of Preferred Stock.
(8) Information is based solely on the Schedule 13D filed with the Commission
dated June 30, 1989, as amended through November 13, 1991 (the "Simmons
13D"). The Simmons 13D was filed by Harold C. Simmons, Kronos, Inc.
("Kronos"), NL Industries, Inc. ("NL"), The Combined Master Retirement
Trust (the "Trust") and certain related entities. The Simmons 13D states
that Kronos and the Trust are the direct beneficial owners of 250,900 and
1,027,250 shares of MAXXAM's Common Stock, respectively. The Simmons 13D
also states that Mr. Simmons may be deemed to have the direct power to vote
and direct the disposition of the shares of MAXXAM's Common Stock held by
the Trust and that Mr. Simmons and the entities other than Kronos who filed
the Simmons 13D may be deemed to share the indirect power to vote and
direct the disposition of the shares of MAXXAM's Common Stock held by
Kronos. Mr. Simmons disclaims beneficial ownership of all of such shares of
MAXXAM's Common Stock. The address of Mr. Simmons and the Trust is Three
Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240. The
address of Kronos and NL is 3000 North Sam Houston Parkway East, Houston,
Texas 77032.
(9) Information is based solely on the Schedule 13D filed with the SEC dated
April 14, 1994, as amended through October 13, 1995 (the "Robertson 13D").
The Robertson 13D was filed by The Robertson Stephens Contrarian Fund (the
"Contrarian Fund"), Robertson, Stephens & Company, Incorporated ("RS &
Co.") and RS & Co.'s five shareholders (Messrs. Sanford R. Robertson, Paul
H. Stephens, Michael G. McCaffery, G. Randy Hecht and Kenneth R.
Fitzsimmons). The purchase of MAXXAM's Common Stock giving rise to the
Robertson 13D was made by the Contrarian Fund, the Robertson Stephens
Orphans Fund, the Robertson Stephens Partners Fund and the Robertson
Stephens Growth & Income Fund (collectively, the "Funds"). Pursuant to the
Robertson 13D, the Funds are the direct beneficial owners of 705,000 shares
of MAXXAM's Common Stock and in addition, Paul H. Stephens directly holds
5,100 shares. The Robertson 13D also states that Mr. Stephens is the Chief
Investment Officer of RS & Co., and as such may be deemed to have shared
voting power over the 705,000 shares of
129
<PAGE> 132
MAXXAM's Common Stock held by the Funds. The five shareholders of RS & Co.
disclaim any beneficial ownership of all of such shares of MAXXAM's Common
Stock, except for Mr. Stephens as to the 5,100 shares owned by him
personally. The address of Mr. Stephens, RS & Co. and the Funds is 555
California Street, Suite 2600, San Francisco, CA 94104.
(10) Mr. Hurwitz serves as a trustee of Federated, and together with members of
his immediate family and trusts for the benefit thereof, owns all of the
voting shares of Federated, and his positions include Chairman of the
Board, President and Chief Executive Officer of MAXXAM and Federated and
membership on MAXXAM's Executive Committee. By reason of the foregoing and
his relationship with the members of the Stockholder Group, Mr. Hurwitz may
be deemed to possess shared voting and investment power with respect to the
shares held by the Stockholder Group.
(11) Does not include shares owned by other members of the Stockholder Group.
(12) Includes 661,377 shares of Preferred Stock owned by FDI as to which Mr.
Hurwitz possesses voting and investment power, and 1,064 shares of
Preferred Stock held directly by Mr. Hurwitz.
(13) Includes 4,827 shares of Common Stock, which is the number of shares Mr.
Pierno would have received on December 20, 1996 for SARs exercisable within
60 days of such date on 26,000 shares of Common Stock, if such SARs had
been paid solely in shares of Common Stock.
(14) Includes 39 shares of Common Stock, which is the number of shares Mr. Reman
would have received on December 20, 1996 for SARs exercisable within 60
days of such date on 1,000 shares of Common Stock, if such SARs had been
paid solely in shares of Common Stock.
(15) Includes 6,547 shares of Common Stock, which is the number of shares Mr.
Schwartz would have received on December 20, 1996 for SARs exercisable
within 60 days of such date on 18,000 shares of Common Stock, if such SARs
had been paid solely in shares of Common Stock. Also includes options to
purchase 10,000 shares of Common Stock exercisable within 60 days of
December 20, 1996, and 10,749 shares of Common Stock owned by a trust of
which Mr. Schwartz and his spouse are trustees.
(16) Includes 4,890 shares of Common Stock, which is the number of shares Mr.
Wade would have received on December 20, 1996 for SARs exercisable within
60 days of such date on 13,000 shares of Common Stock, if such SARs had
been paid solely in shares of Common Stock.
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<PAGE> 133
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Company is a newly formed holding company and wholly owned subsidiary
of MAXXAM and does not separately compensate its executive officers. However,
each of the Company's executive officers are executive officers of one or more
of MAXXAM, MGI, Kaiser, and Pacific Lumber and receive compensation from one of
these companies. The following table sets forth the information with respect to
the total compensation, cash and non-cash, rather than any allocated part of
such compensation, for each of the last three completed fiscal years of MAXXAM
with respect to the Chief Executive Officer and the four most highly compensated
executive officers of MAXXAM who are also executive officers of the Company
(collectively referred to as the "named executive officers") for the fiscal year
ended December 31, 1995:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL COMPENSATION --------------------- PAYOUTS
---------------------------------- -------
(E) (F)
(A) OTHER RESTRICTED (G) (H) (I)
NAME AND (C) (D) ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION (B) SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
WITH THE COMPANY YEAR ($) ($) ($)(1) ($) (#) ($) ($)
- -------------------------- ---- ------- ------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles E. Hurwitz, Chief 1995 633,235 450,000 -- -0- 22,500 -0- 100,985(3)
Executive Officer,
President 1994 614,880 450,000 -- -0- 295,000 (2) -0- 97,332(3)
and Chairman of the Board 1993 598,994 500,000 -- -0- -0- -0- 97,494(3)
Anthony R. Pierno, 1995 344,771 263,633(4) -- -0- 5,000 -0- 55,928(3)
Senior Vice President and 1994 337,298 263,633(4) -- -0- -0- -0- 55,514(3)
General Counsel 1993 330,226 290,000(4) -- -0- -0- -0- 57,179(3)
Paul N. Schwartz,(5) 1995 290,850 218,307(4) -- -0- 10,000 -0- 48,476(3)
Executive Vice President
and 1994 270,138 218,307(4) -- -0- 25,000 -0- 45,390(3)
Chief Financial Officer 1993 265,204 293,000(4) -- -0- -0- -0- 47,426(3)
John T. La Duc,(6) 1995 248,333 130,000(7) -- -0-(8) -0- -0- 12,417(10)
Senior Vice President 1994 240,000 103,000(7) -- -0- 9,200 (9) -0- 4,800(10)
1993 240,000 100,000(7) -- -0- -0- -0- 4,872(10)
Byron L. Wade, 1995 196,660 128,355 -- -0- 5,000 -0- 37,500(3)
Vice President, Secretary 1994 177,140 128,355 -- -0- -0- -0- 31,671(3)
and Deputy General Counsel 1993 171,913 124,412 -- -0- -0- -0- 30,955(3)
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits because the aggregate
amount of such compensation is the lesser of either $50,000 or 10% of the
total of annual salary and bonus reported for the named executive officer.
(2) A 1994 option for 45,000 shares of MAXXAM Preferred Stock was granted in
exchange for Mr. Hurwitz relinquishing the SARs for 50,000 shares of MAXXAM
Common Stock granted in 1993. Additionally, an option for 250,000 shares of
Kaiser Common Stock was granted by Kaiser.
(3) Reflects the following aggregate amounts accrued in respect of MAXXAM's
Revised Capital Accumulation Plan for 1995, 1994 and 1993, respectively,
pursuant to which, in general, benefits vesting 10% annually are payable
upon termination of employment with the Company: Mr. Hurwitz -- $94,985,
$91,332 and $88,500; Mr. Pierno -- $51,716, $49,727 and $48,185; Mr.
Schwartz -- $43,628, $39,661 and $38,432; and Mr. Wade -- $31,500, $25,671
and $24,875. Additionally, these amounts reflect matching contributions by
MAXXAM under its 401(k) savings plan for 1995, 1994 and 1993, respectively,
as follows: Mr. Hurwitz -- $6,000, $6,000 and $8,994; Mr. Pierno -- $4,212,
$5,787 and $8,994; Mr. Schwartz -- $4,848, $5,729 and $8,994; and Mr.
Wade -- $6,000, $6,000 and $6,080.
(4) Pursuant to the employment agreements of Messrs. Pierno and Schwartz, their
personal loans from MAXXAM outstanding on the date of such agreements were
forgiven in the amount of $15,000 and $20,000, respectively, per year.
These amounts are included here as additional bonus compensation. See
"Certain Transactions" for discussion on such personal loans.
(5) Mr. Schwartz served as Senior Vice President -- Corporate Development of
MAXXAM for fiscal years 1994 and 1993.
(footnotes continued on the following page)
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<PAGE> 134
(6) Mr. La Duc also served as Chief Financial Officer of MAXXAM for fiscal
years 1994 and 1993. Mr. La Duc received his compensation for all three
years principally from Kaiser; however, MAXXAM reimbursed Kaiser for
certain allocable costs associated with the performance of services for
MAXXAM by such executive officer. The table reflects such officer's total
compensation, rather than any allocated part of such compensation.
(7) Includes $50,000 (to be paid over a two-year period), $75,000 (to be paid
over a three-year period) and $100,000 (to be paid over a four-year
period), awarded for 1995, 1994 and 1993, respectively, for which MAXXAM
will reimburse Kaiser.
(8) As of December 29, 1995, Mr. La Duc held 47,437 shares of restricted Kaiser
Common Stock valued at approximately $622,611 based on the closing price on
such date of $13.125 per share. Restrictions on all such shares were lifted
on December 2, 1996. No dividends will be paid to Mr. La Duc in respect of
any restricted shares held. No other named executive officer held
restricted stock of Kaiser or MAXXAM at fiscal year end 1995.
(9) Represents option for shares of Kaiser Common Stock.
(10) Amount represents contributions under Kaiser's 401(k) savings plan by
Kaiser.
OPTION/SAR GRANTS TABLE
The following table sets forth certain information concerning stock options
or SARs granted by MAXXAM in fiscal year 1995 to any of the named executive
officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------- GRANT
(C) DATE VALUE
(B) % OF TOTAL -------------
# OF OPTIONS/
SECURITIES SARS (D) (F)
UNDERLYING GRANTED TO EXERCISE OR (E) GRANT DATE
(A) OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTS 1995 ($/SHARE) DATE ($)(1)
- ----------------------------- ------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Charles E. Hurwitz........... 22,500(2) 38.5 46.80 01/24/06 398,302
Anthony R. Pierno............ 5,000(3) 8.5 45.15 11/29/05 86,158
Paul N. Schwartz............. 10,000(3) 17.1 45.15 11/29/05 172,316
Byron L. Wade................ 5,000(3) 8.5 45.15 11/29/05 86,158
</TABLE>
- ---------------
(1) Valuation utilizing Black-Scholes Option Price Model using the following
assumptions: 5-year daily volatility for MAXXAM Common Stock, 5.8% risk-free
rate (10-year Government Bond as of the grant date) (5.6% for Mr. Hurwitz),
no dividend yield and 10-year exercise or expiration date. No adjustments
were made for non-transferability or risk of forfeiture.
(2) Represents underlying shares of MAXXAM Preferred Stock. These options were
actually granted after 1995 fiscal year end but were for services Mr.
Hurwitz provided during such year.
(3) Represents underlying shares of MAXXAM Common Stock.
The SARs set forth in the above table cover shares of MAXXAM Preferred
Stock which were granted to Mr. Hurwitz on January 24, 1996 and shares of MAXXAM
Common Stock granted to Messrs. Pierno, Schwartz and Wade on November 29, 1995
under MAXXAM's 1994 Omnibus Employee Incentive Plan (the "Omnibus Plan") at an
exercise price of 20% above the closing price of MAXXAM Common Stock on the date
of grant. SARs under the MAXXAM Omnibus Plan are exercisable for cash, MAXXAM
Common Stock or a combination thereof at the discretion of MAXXAM's Board, and
vest with respect to 20% on the first anniversary date of the grant and an
additional 20% on each anniversary date thereafter until fully vested.
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<PAGE> 135
OPTION/SAR EXERCISES AND FISCAL YEAR END VALUE TABLE
The table below provides information on an aggregated basis concerning each
exercise of stock options (or tandem SARs) and freestanding SARs during the
fiscal year ended December 31, 1995 by each of the named executive officers, and
the 1995 fiscal year-end value of unexercised options and SARs, including SARs
exercisable for cash only.
<TABLE>
<CAPTION>
(D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
(B) OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES (C) AT YEAR END(#) AT FISCAL YEAR-END($)
(A) ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ -------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Hurwitz............ 21,300 928,200 22,500 36,000 334,125(3) 175,500(3)
-- -- 62,500 187,500 23,438(4) 70,313(4)
John T. La Duc................ -- -- 6,000 4,000 43,500(3) 29,000(3)
-- -- 2,300 6,900 863(4) 2,588(4)
Paul N. Schwartz.............. 10,000 349,000 16,000 40,000 104,125(3) 170,000(3)
Anthony R. Pierno............. 2,000 50,000 25,000 5,000 --(3) --(3)
Byron L. Wade................. 19,000 922,625 9,000 11,000 65,250(3) 43,500(3)
</TABLE>
- ---------------
(1) If no shares received, the number reflected, if any, represents the number
of securities with respect to which options/SARs were exercised.
(2) Valued at the closing price of MAXXAM's Common Stock on the date of
exercise, less exercise price.
(3) Valued at $35.25 per share, the closing price of MAXXAM's Common Stock on
December 29, 1995, less exercise price. If exercise price is equal to or
higher than the closing price, no value is shown.
(4) Valued at $13.125 per share, the closing price of Kaiser Common Stock on
December 29, 1995, less exercise price. If exercise price is equal to or
higher than closing price, no value is shown.
DEFINED BENEFIT PLANS
MAXXAM Pension Plan
All officers who are also employees and other regular employees of MAXXAM
who work at least 1,000 hours in the plan year automatically participate in
MAXXAM's Pension Plan (the "MAXXAM Pension Plan"), a qualified, noncontributory,
funded plan. Benefits equal the sum of an employee's "past service benefit" and
"future service benefit" as set forth in the following two paragraphs. Benefits
are based on an employee's base salary or wages, plus overtime (excluding
bonuses, commissions, incentive compensation and all other extra compensation),
the age of such employee at retirement and years of service.
Under the MAXXAM Pension Plan, the annual past service benefit is the
greatest of:
(i) benefits accrued under the plan through December 31, 1986,
(ii) the product of (a) the sum of 0.8% of the participant's Past
Service Compensation Base (as defined), plus 0.8% of the participant's Past
Service Compensation Base in excess of $15,000 multiplied by (b) the
participant's credited years of service prior to January 1, 1987, or
(iii) the product of 1.2% of the participant's Past Service
Compensation Base multiplied by the participant's credited years of service
prior to January 1, 1987.
For 1987 and 1988, the annual future service benefit equaled 1.6% of an
employee's plan compensation up to two-thirds of the Social Security wage base,
plus 2.4% of any remaining compensation. Effective January 1, 1989, the annual
future service benefit equaled 1.75% of an employee's compensation for each year
of participation, plus 0.6% of the employee's compensation in excess of $10,000.
Effective January 1, 1995, the annual future service benefit equals 2.35% of an
employee's compensation for each year of participation.
The amount of an employee's aggregate plan compensation that may be
included in benefit computations under the MAXXAM Pension Plan is limited to
$150,000 for 1995. Benefits are generally payable as a straight life annuity or,
with respect to married employees, as a 50% joint and survivor annuity, or, if
the
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<PAGE> 136
employee elects (with spousal consent), in certain alternative annuity forms.
Benefits under the MAXXAM Pension Plan are not subject to any deductions for
Social Security or other offsets. The covered compensation for 1995 and credited
years of service as of December 31, 1995 for the MAXXAM Pension Plan and
estimated annual benefits payable upon retirement at normal retirement age (age
65) for the named executive officers (other than those compensated by Kaiser who
do not participate in the MAXXAM Pension Plan) were as follows: Mr. Hurwitz:
$150,000 -- 15 years -- $112,000; Mr. Pierno: $150,000 -- 6 years -- $36,118;
Mr. Schwartz: $150,000 -- 15 years -- $111,257; and Mr. Wade: $150,000 -- 15
years -- $93,143.
The projected benefits shown above were computed as single life annuity
amounts, payable beginning at age 65. The benefit amounts reflect a covered
compensation limit of $150,000 for 1996 and subsequent years under Section
401(a)(17) of the Internal Revenue Code (the "Code"). In addition, the amounts
reflect a maximum benefit limit of $120,000 for 1996 and subsequent years (with
early retirement reductions where applicable) that is placed upon annual
benefits that may be paid to a participant in the MAXXAM Pension Plan at
retirement under Section 415 of the Code. Combined plan limits applicable to
employees participating in both defined contribution and defined benefit plans
have not been reflected.
Kaiser Retirement Plan
Kaiser maintains a qualified, defined-benefit Retirement Plan (the "Kaiser
Retirement Plan") for salaried employees of Kaiser and co-sponsoring
subsidiaries who meet certain eligibility requirements. The table below shows
estimated annual retirement benefits payable under the terms of the Kaiser
Retirement Plan to participants with the indicated years of credited service.
These benefits are reflected without reduction for the limitations imposed by
the Code on qualified plans and before adjustment for the Social Security
offset, thereby reflecting aggregate benefits to be received, subject to Social
Security offsets, under the Kaiser Retirement Plan and the Kaiser Supplemental
Benefit Plan (as defined below).
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL ------------------------------------------------------------
REMUNERATION 15 20 25 30 35
---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$150,000.................. $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750
175,000.................. 39,375 52,500 65,625 78,750 91,875
200,000.................. 45,000 60,000 75,000 90,000 105,000
225,000.................. 50,625 67,500 84,375 101,250 118,125
250,000.................. 56,250 75,000 93,750 112,500 131,250
300,000.................. 67,500 90,000 112,500 135,000 157,500
350,000.................. 78,750 105,000 131,250 157,500 183,750
400,000.................. 90,000 120,000 150,000 180,000 210,000
450,000.................. 101,250 135,000 168,750 202,500 236,250
500,000.................. 112,500 150,000 187,500 225,000 262,500
</TABLE>
The estimated annual retirement benefits shown are based upon the
assumptions that current Kaiser Retirement Plan and Kaiser Supplemental Benefit
Plan provisions remain in effect, that the participant retires at age 65, and
that the retiree receives payments based on a straight life annuity for his
lifetime. Mr. La Duc had 26.3 years of credited service on December 31, 1995.
Monthly retirement benefits, except for certain minimum benefits, are determined
by multiplying years of credited service (not in excess of 40) by the difference
between 1.50% of average monthly compensation for the highest base period (of
36, 48 or 60 consecutive months, depending upon compensation level) in the last
10 years of employment and 1.25% of monthly primary Social Security benefits.
Pension compensation covered by the Kaiser Retirement Plan and the Kaiser
Supplemental Benefits Plan consists of salary and bonus amounts set forth in the
Summary Compensation Table (column (c) plus column (d) thereof).
Participants are entitled to retire and receive pension benefits, unreduced
for age, upon reaching age 62 or after 30 years of credited service. Full early
pension benefits (without adjustment for Social Security offset prior to age 62)
are payable to participants who are at least 55 years of age and have completed
10 or more years of pension service (or whose age and years of pension service
total 70) and who have been terminated by
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Kaiser or an affiliate for reasons of job elimination or partial disability.
Participants electing to retire prior to age 62 who are at least 55 years of age
and have completed 10 or more years of pension service (or whose age and years
of pension service total at least 70) may receive pension benefits, unreduced
for age, payable at age 62 or reduced benefits payable earlier. Participants who
terminate their employment after five years or more of pension service, or after
age 55 but prior to age 62, are entitled to pension benefits, unreduced for age,
commencing at age 62 or, if they have completed 10 or more years of pension
service, actuarially reduced benefits payable earlier. For participants with
five or more years of pension service or who have reached age 55 and who die,
the Kaiser Retirement Plan provides a pension to their eligible surviving
spouses. Upon retirement, participants may elect among several payment
alternatives including, for most types of retirement, a lump-sum payment.
MAXXAM Supplemental Executive Retirement Plan
Effective March 8, 1991, MAXXAM adopted an unfunded non-qualified
Supplemental Executive Retirement Plan (the "MAXXAM SERP"). The MAXXAM SERP
provides that participants are entitled to receive benefits which would have
been payable to such participants under the MAXXAM Pension Plan except for the
limitations imposed by the Code. Participants in such plan are selected by the
Company's Board of Directors or are entitled to participate by virtue of
provisions in their employment agreements. Four named executive officers,
Messrs. Hurwitz, Pierno, Schwartz and Wade, were entitled to receive benefits
under the MAXXAM SERP during 1995.
The following projections are based on the same assumptions as utilized in
connection with the MAXXAM Pension Plan projections above. The 1996 qualified
plan pay limit ($150,000) and benefit limit ($120,000) are reflected for all
years in the future. In addition, no future increases in the participants'
covered compensation amounts from the 1995 levels are assumed.
<TABLE>
<CAPTION>
HURWITZ PIERNO SCHWARTZ WADE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COVERED COMPENSATION FOR 1995:
Qualified Plan........................... $150,000 $150,000 $150,000 $150,000
Nonqualified Plan........................ 46,660 194,771 140,850 46,660
-------- -------- -------- --------
Total............................ $196,660 $344,771 $290,850 $196,660
======== ======== ======== ========
CREDITED YEARS OF SERVICE AS OF DECEMBER
31, 1995................................. 15 6 15 15
======== ======== ======== ========
PROJECTED NORMAL RETIREMENT BENEFIT:
Qualified Plan........................... $ 93,143 $ 36,118 $111,257 $ 93,143
Nonqualified Plan........................ 19,138 20,126 56,598 19,138
-------- -------- -------- --------
Total............................ $112,281 $ 56,244 $167,855 $112,281
======== ======== ======== ========
</TABLE>
Kaiser Supplemental Benefits Plan
Kaiser maintains an unfunded, non-qualified Supplemental Benefits Plan (the
"Kaiser Supplemental Benefits Plan"), the purpose of which is to restore
benefits which would otherwise be paid from the Kaiser Retirement Plan or the
Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the
"Kaiser Savings Plan"), were it not for the Section 401(a)(17) and Section 415
limitations imposed by the Code. Participation in the Kaiser Supplemental
Benefits Plan includes all employees of Kaiser and its subsidiaries whose
benefits under the Kaiser Retirement Plan and Kaiser Savings Plan are likely to
be affected by such limitations imposed by the Code. Eligible participants,
including Mr. La Duc, are entitled to receive the equivalent of the Kaiser
Retirement Plan and Kaiser Savings Plan benefits which they may be prevented
from receiving under those plans because of such Code limitations.
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MAXXAM Severance or Termination Policy
Severance or termination pay is generally granted to regular full-time
employees who are involuntarily terminated, subject to a number of exclusions,
pursuant to an unfunded policy. After such termination, the policy provides for
payment in an amount ranging from two weeks salary for at least one year of
service graduating to a maximum of 104 weeks salary. The amounts payable under
the policy if the named executive officers had been involuntarily terminated on
December 31, 1995 would have been as follows: Mr. Hurwitz: $1,266,470; Mr.
Pierno: $79,563; Mr. Schwartz: $581,700; and Mr. Wade: $420,000.
Kaiser Termination Payment Policy
Most full-time salaried employees of Kaiser are eligible for benefits under
an unfunded termination policy if their employment is involuntarily terminated,
subject to a number of exclusions. The policy provides for lump sum payments
after termination ranging from one-half month's salary for less than one year of
service graduating to eight months' salary for 30 or more years of service. The
amount payable to Mr. La Duc under the policy if he had been involuntarily
terminated on December 31, 1995 would have been $145,833.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
All executive officers of MAXXAM are eligible to participate in a deferred
compensation program. An executive officer may defer up to 20% of gross salary
and up to 20% of any bonus otherwise payable to such executive officer for any
calendar year. The designated percentage of deferred compensation is credited to
a book account as of the date such compensation would have been paid and is
deemed "invested" in an account bearing interest calculated using one-twelfth of
the sum of the prime rate plus 2% on the first day of each month. Deferred
compensation, including all earnings credited to the book account, will be paid
in cash to the executive or beneficiary as soon as practicable following the
date the executive ceases for any reason to be an employee of MAXXAM either in a
lump sum or in a specified number of annual installments, not to exceed ten, at
the executive's election. No compensation was deferred under this program for
1995.
DIRECTOR COMPENSATION
Directors who were not employees of or consultants to MAXXAM receive an
annual fee of $30,000 and no additional compensation for attending Committee
meetings. Directors are also reimbursed for travel and other disbursements
relating to Board and Committee meetings. Fees to directors who are also
employees of MAXXAM are deemed to be included in their salary. Non-employee
directors of MAXXAM who also serve as directors of certain of MAXXAM's
majority-owned subsidiaries (Kaiser) also receive additional director or
committee fees and are reimbursed for expenses pertaining to their services in
such capacities from those subsidiaries.
All non-employee directors of MAXXAM are eligible to participate in a
deferred compensation program. By executing a deferred fee agreement, a
non-employee director may defer all or part, in 25% increments, of the
director's fees received from the Company for service in such capacity. Deferred
fees are credited to a book account as of the date such fees would have been
paid to the director and are deemed "invested" in two investment choices, again
in 25% increments, of phantom shares of MAXXAM's Common Stock and/or in an
account bearing interest at a rate established from time to time by the
Compensation Committee. Deferred director's fees, including all earnings
credited to the book account, will be paid in cash to the director or
beneficiary as soon as practicable following the date the director ceases for
any reason to be a member of the Board of Directors, at the director's election,
either in a lump sum or in a specified number of annual installments not to
exceed ten.
Non-employee directors are also eligible to participate in MAXXAM's 1994
Non-Employee Director Stock Plan. Pursuant to such plan, each eligible director
receives an initial grant of an option to purchase 500 shares of MAXXAM Common
Stock the day following the later of the 1994 Annual Meeting or the first Annual
Meeting after such eligible director is first elected or appointed by the Board
to be a director. Thereafter, each eligible director is granted an option to
purchase 300 shares of MAXXAM Common Stock each year the day following the
Annual Meeting. The exercise price of the options per share is the closing
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<PAGE> 139
price of the MAXXAM Common Stock as reported by the American Stock Exchange on
the date the option is granted. Each option granted under such plan becomes
exercisable as to 25% of the shares on the first, second, third and fourth
anniversaries of the date of the grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors of MAXXAM
was, during the 1995 fiscal year, an officer or employee of MAXXAM or any of its
subsidiaries, or was formerly an officer of MAXXAM or any of its subsidiaries;
however, one member had a relationship requiring disclosure by MAXXAM under Item
404 of Regulation S-K. Mr. Levin served on MAXXAM's Compensation Committee and
Board of Directors during 1995. Mr. Levin is also a partner in the law firm of
Kramer, Levin, Naftalis & Frankel, which provided legal services for MAXXAM and
its subsidiaries during 1995.
During MAXXAM's 1995 fiscal year, no executive officer of MAXXAM served as
(i) a member of the Compensation Committee (or other board committee performing
equivalent functions) of another entity, one of whose executive officers served
on the Compensation Committee of the Board of Directors of MAXXAM, (ii) a
director of another entity, one of whose executive officers served on the
Compensation Committee of MAXXAM, or (iii) a member of the Compensation
Committee (or other board committee performing equivalent functions) of another
entity, one of whose executive officers served as a director of MAXXAM.
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CERTAIN TRANSACTIONS
THE COMPANY
MAXXAM, Pacific Lumber, Salmon Creek and Scotia Pacific entered into a tax
allocation agreement effective March 23, 1993, which in part modified MAXXAM's
existing tax allocation agreement with MGI and certain of its subsidiaries,
including Pacific Lumber (collectively, the "Tax Allocation Agreements").
Pursuant to the terms of the Tax Allocation Agreements, MAXXAM pays any
consolidated federal income tax liability for its affiliated group of
corporations (the "Group") within the meaning of Section 1504 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Company and its subsidiaries,
including MGI, Pacific Lumber, Salmon Creek and Scotia Pacific, are each members
of the Group.
Under the Tax Allocation Agreements, Pacific Lumber is liable to MAXXAM for
the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific
and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively the "PL Subgroup") computed as if the PL Subgroup were a separate
affiliated group of corporations which was never affiliated with the Group
(taking into account all limitations under the Code and regulations applicable
to the PL Subgroup). To the extent such calculation results in a net operating
loss or a net capital loss or credit which the PL Subgroup could have carried
back to a prior taxable period under the principles of Sections 172 and 1502 of
the Code, MAXXAM will pay to Pacific Lumber an amount equal to the tax refund to
which the PL Subgroup would have been entitled (but not in excess of the
aggregate net amount previously paid by Pacific Lumber to MAXXAM for the current
year and the three preceding taxable years). If such separately calculated net
operating loss or net capital loss or credit of the PL Subgroup cannot be
carried back to a prior taxable year of the PL Subgroup for which Pacific Lumber
paid its consolidated tax liability to MAXXAM, the net operating loss or net
capital loss or credit becomes a loss or credit carryover of the PL Subgroup to
be used in computing the PL Subgroup's consolidated income tax liability for
future taxable years. Although, under Treasury regulations, all members of the
Group, including the members of the PL Subgroup, are severally liable for the
Group's federal tax liability, under the Tax Allocation Agreements, MAXXAM
indemnifies each PL Subgroup member for all federal tax liabilities relating to
taxable years during which such PL Subgroup member is a member of the Group,
except for payments required of Pacific Lumber or Salmon Creek under the Tax
Allocation Agreements. The same principles are applied to any consolidated or
combined state or local income tax returns filed by the Group with respect to
the PL Subgroup. Under the Tax Allocation Agreements, Pacific Lumber will
indemnify Scotia Pacific for all federal and state tax liabilities relating to
any taxable years during which Scotia Pacific is not a member of the Group. The
Tax Allocation Agreements further provide that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed as if Salmon Creek was a separate
corporation which was never affiliated with the Group (taking into account all
limitations under the Code and regulations applicable to Salmon Creek).
Under the Tax Allocation Agreements, MGI's subsidiary, MPI, is liable to
MAXXAM for its federal income tax liability computed as if it filed separate
returns and was never a member of the Group. Under a separate tax allocation
agreement, Britt is liable to MAXXAM for its federal income tax liability
computed as if it filed separate returns and was never a member of the Group
(the "Britt Tax Allocation Agreement").
Effective August 4, 1993, MAXXAM and MGI modified the Tax Allocation
Agreements with respect to MGI (the "Revised MGI Tax Allocation Agreement").
Under the terms of the Revised MGI Tax Allocation Agreement, MAXXAM computes a
tentative federal income tax liability for MGI as if MGI, members of the PL
Subgroup, Britt, MPI and MGI's other subsidiaries, but excluding Salmon Creek,
were a separate affiliated group of corporations which was never connected with
MAXXAM (the "MGI Subgroup"). The federal income tax liability of MGI is the
difference between (i) the tentative federal income tax liability of the MGI
Subgroup and (ii) the sum of the separate tax liabilities (net of any refunds
due to tax loss or credit carrybacks) for Pacific Lumber, Britt, MPI and MGI's
other subsidiaries, but excluding Salmon Creek. To the extent that the tentative
federal income tax liability is less than the aggregate amounts in (ii), MAXXAM
is obligated to pay the amount of such difference to MGI. If the calculation of
the tentative federal income tax liability results in a net operating loss or a
net capital loss or credit which the MGI Subgroup could have carried back to a
prior taxable period under the principles of Sections 172 and 1502 of the Code,
MAXXAM
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will pay to MGI an amount equal to the tax refund to which the MGI Subgroup
would have been entitled (but not in excess of the aggregate net amount
previously paid by MGI Subgroup members to MAXXAM for the current year and the
three preceding taxable years). While MGI is severally liable for MAXXAM's
federal income tax liability for all taxable periods during which it is a member
of the Group, pursuant to the Tax Allocation Agreements, the Britt Tax
Allocation Agreement and the Revised MGI Tax Allocation Agreement, MAXXAM will
indemnify MGI and its subsidiaries, except for payments required under such
agreements.
Contemporaneously with the consummation of this Offering, MAXXAM and the
Company entered into a tax allocation agreement (the "MGHI Tax Allocation
Agreement"). Under the terms of the MGHI Tax Allocation Agreement, MAXXAM will
compute a tentative federal income tax liability for the Company as if the
Company, members of the MGI Subgroup, and any other subsidiaries of the Company,
but excluding Salmon Creek, were a separate affiliated group of corporations
which was never connected with MAXXAM (the "MGHI Subgroup"). The federal income
tax liability of the Company is the difference between (i) the tentative federal
income tax liability of the MGHI Subgroup, and (ii) the tentative federal income
tax liability of the MGI Subgroup computed pursuant to the Revised MGI Tax
Allocation Agreement. To the extent that the tentative federal income tax
liability of the MGHI Subgroup is less than the tentative federal income tax
liability of the MGI Subgroup, MAXXAM will be obligated to pay the amount of
such difference to the Company. If the calculation of the tentative federal
income tax liability results in a net operating loss or a net capital loss or
credit which the MGHI Subgroup could have carried back to a prior taxable period
under the principles of Sections 172 and 1502 of the Code, MAXXAM will be
obligated to pay to the Company an amount equal to the tax refund to which the
MGHI Subgroup would have been entitled, under principles similar to the Revised
MGI Tax Allocation Agreement. While the Company is severally liable for MAXXAM's
federal income tax liability for all taxable periods during which it is a member
of the Group, pursuant to the MGHI Tax Allocation Agreement, MAXXAM will
indemnify the Company, except for payments required under such agreement.
The net proceeds of the Offering were loaned by the Company to MAXXAM
pursuant to the Intercompany Note, which is pledged to secure the Notes. The
Intercompany Note bears interest at the rate of 11% per annum (payable
semiannually on the interest payment dates applicable to the Notes) and matures
on August 1, 2003. MAXXAM is entitled to defer the payment of interest on the
Intercompany Note on any interest payment date to the extent that the Company
has sufficient available funds to satisfy its obligations on the Notes on such
date. Any such deferred interest will be added to the principal amount of the
Intercompany Note and be payable at the maturity thereof. The principal amount
of the Intercompany Note will be reduced in an amount equal to any payments made
by MAXXAM in respect of its guaranty of the Notes. The Intercompany Note may be
amended to the extent such amendments do not materially adversely affect the
Company's ability to pay its obligations on the Notes. MAXXAM will use a portion
of the proceeds of the loan to redeem all of the outstanding public indebtedness
of MAXXAM, consisting of the approximately $17.6 million aggregate principal
amount of its Subordinated Debentures and the approximately $25.0 million
aggregate principal amount of its Reset Notes. The Reset Notes were redeemed on
January 7, 1997 and the Subordinated Debentures are scheduled to be redeemed on
January 22, 1997. Accrued interest on such instruments through these redemption
dates will be approximately $0.7 million. MAXXAM will use the remaining proceeds
of the loan for general corporate purposes, including possible repurchases of
its common stock through open market purchases, in privately negotiated
transactions or otherwise.
MAXXAM and its subsidiaries have an arrangement pursuant to which they
reimburse each other for certain allocable costs associated with the performance
of services by their respective employees. These reimbursements are computed and
allocated by and among the several entities at cost. The resulting costs of such
services are no less favorable than what could be obtained from unrelated
parties.
MAXXAM
See "Legal Proceedings -- USAT Matters," "-- Zero Coupon Note Litigation"
and "-- Rancho Mirage Litigation" with respect to certain actions in which
certain directors and officers of MAXXAM are defendants and in which MAXXAM is
advancing expenses pursuant to indemnification obligations.
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In May 1995, MCOP granted Olympus Rancho Mirage, L.P. ("Olympus"), an
unaffiliated third party, a non-exclusive easement on certain property in Rancho
Mirage, California. Such easement is to allow access to a proposed golf course.
At the same time, a partnership owned by Federated which operated the business
of the Ritz-Carlton Hotel (the "Hotel"), which is also located in Rancho Mirage,
California, transferred the Hotel to Olympus. In consideration for such
easement, Olympus agreed to provide MCOP with Hotel amenity benefits which will
be available to area lot owners for a fee. Such amenities include, among other
things, room service, maid service and use of the tennis center, health club,
meeting rooms and swimming pool. MCOP also agreed not to develop a contemplated
hotel-type facility on other real property it owns in the vicinity. Olympus
received a revocable parking license on certain other adjacent property of MCOP.
MAXXAM and certain of its subsidiaries shared certain administrative and
general expenses with Federated. Under these arrangements, Federated's
obligation to MAXXAM and its subsidiaries was approximately $201,000 for 1995
and $124,000 for the nine months ended September 30, 1996. Federated and MAXXAM
also share office space leased by MAXXAM. The obligations of Federated relating
to 1995 under such office space sharing arrangement amounted to approximately
$9,000. At September 30, 1996, Federated owed MAXXAM $100,000 for shared office
space and certain general and administrative expenses.
MAXXAM's wholly owned subsidiary, Bering Holdings, Inc. ("Bering
Holdings"), is a Texas registered investment adviser which has an agreement with
Federated whereby Bering Holdings manages an investment portfolio for Federated
on substantially the same terms as provided to other persons. The agreement
provides for an annual management fee equal to 1% of the average value of the
portfolio, except for certain short-term investments for which the management
fee is 1/2 of 1% per annum. The agreement also provides for an annual
performance fee equal to 10% of the net gain in certain portfolios. Bering
Holdings has accrued management and performance fees for the year ended December
31, 1995 of approximately $84,000 and $215,000, respectively. At September 30,
1996, Federated owed Bering Holdings $113,000 in respect of such fees.
Mr. Levin, a director of MAXXAM, Pacific Lumber, Scotia and Kaiser, is a
partner in the law firm of Kramer, Levin, Naftalis & Frankel, which provides
legal services for MAXXAM, the Company and its subsidiaries, and for KAC and its
subsidiaries.
On April 17, 1995, SHRP, Ltd., SHRP Acquisition, Inc. and SHRP Capital
Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code. Their bankruptcy reorganization plan has since been confirmed and the
transactions contemplated by the bankruptcy plan were consummated on October 6,
1995. Since July 1993, Mr. Wade has served as a director, Vice President and
Secretary of SHRP Inc., SHRP, Ltd.'s sole general partner prior to SHRP, Ltd.'s
bankruptcy reorganization, and of SHRP Capital Corp., a subsidiary of SHRP,
Ltd.; Mr. Schwartz has served as a director and Executive Vice President of both
SHRP, Inc. and SHRP Capital Corp.; and Mr. Hurwitz has served as director and
Chairman of the Board of SHRP, Inc., and as a director, Chairman of the Board
and President of SHRP Capital Corp.
In January 1995, Mr. Pierno repaid a $150,000 bank loan which had been
guaranteed by MAXXAM. Pursuant to the terms of Mr. Pierno's employment agreement
with MAXXAM (which expired in March 1995), his personal loans from MAXXAM, which
aggregated $150,000 at 6% interest, were forgiven at the rate of $15,000 per
year. Such loans were, and continue to be, secured by real estate owned by Mr.
Pierno. As of February 28, 1995, MAXXAM entered into an amendment of Mr.
Pierno's promissory note evidencing such loans which provides that (i)
installments of $18,750 be paid on each of December 31, 1995, 1996 and 1997,
with the balance to be paid in full on December 31, 1998; and (ii) the loans
also be secured by any amounts to which Mr. Pierno may be entitled pursuant to
MAXXAM's Revised Capital Accumulation Plan. Mr. Pierno's principal balance on
such loans is currently $56,250. Pursuant to the terms of Mr. Pierno's
employment agreement, he borrowed an additional $200,000 bearing interest at 6%
per annum, with interest being payable monthly and principal being due December
15, 1998 (with prepayments due upon the exercise by Mr. Pierno of any stock
appreciation rights granted pursuant to the agreement or employee benefit plan).
Such promissory note was also amended, extending the due date to December 15,
1998, and securing such loan with any amounts to which Mr. Pierno may be
entitled pursuant to MAXXAM's Revised Capital Accumulation Plan.
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<PAGE> 143
Mr. Schwartz repaid his $100,000 outstanding loan from MAXXAM, together
with accrued interest thereon, in August 1995.
Mr. Wade repaid his $20,000 loan from MAXXAM, together with accrued
interest thereon, in August 1995.
Ms. Dudley repaid her $100,000 loan from MAXXAM, together with accrued
interest thereon, in September 1995.
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<PAGE> 144
DESCRIPTION OF PRINCIPAL INDEBTEDNESS
THE COMPANY
The following sets forth a summary of certain terms of the principal
indebtedness of the Company and its subsidiaries outstanding as of September 30,
1996. This summary is qualified in its entirety by reference to the applicable
instruments, which have been filed as exhibits to the SEC Reports of the
applicable companies. The term "as defined," as used below, refers to the
definition of such term in the applicable instrument. The Company will furnish a
copy of any such instrument, upon oral or written request to the Company, at
5847 San Felipe, Suite 2600, Houston, Texas 77057, attention: Investor Relations
Coordinator (telephone number (713) 267-3675).
MGI NOTES
General
The $100.0 million of MGI Senior Notes and $101.0 million (accreted amount
as of September 30, 1996) of MGI Discount Notes mature on August 1, 2003. The
MGI Senior Notes bear interest at the rate per annum of 11 1/4%, payable
semiannually in arrears on February 1 and August 1 of each year. The MGI
Discount Notes bear interest at the rate per annum of 12 1/4%, payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1999. Interest on the MGI Notes is computed on the basis of a
360-day year of twelve 30-day months.
Optional Redemption
Except for partial redemptions prior to August 1, 1997 with the proceeds of
a public equity offering by Pacific Lumber or certain other subsidiaries of MGI,
the MGI Notes may not be redeemed prior to August 1, 1998. Thereafter, the MGI
Notes may be redeemed at the option of MGI, at any time as a whole, or from time
to time in part, at a redemption price equal to the principal amount thereof
plus (until August 1, 2002) a redemption premium ranging from 6.125% during the
12 months commencing August 1, 1998 to 1.531% during the 12 months commencing
August 1, 2001, in the case of the MGI Discount Notes, and ranging from 5.50% to
1.375% during the same periods, in the case of the MGI Senior Notes, plus
accrued and unpaid interest (if any) to the date of redemption.
Sinking Fund
There are no mandatory sinking fund payments for the MGI Notes.
Ranking
The indebtedness represented by the MGI Notes is senior indebtedness of MGI
and ranks pari passu in right and priority of payment with any existing or
future senior indebtedness of MGI.
Security
The MGI Notes are secured by a first priority pledge of (i) all of the
outstanding shares of stock owned or from time to time acquired by MGI or its
Subsidiaries (as defined), of Pacific Lumber, Britt and MPI, and (ii) the
27,938,250 shares of common stock of Kaiser which, upon the consummation of the
Offering, will be owned by the Company. The MGI Notes are not secured by any
Salmon Creek Distributions (as defined) and, in addition, except during the
continuance of an Event of Default, Interest Payment Default or Collateral
Default (each as defined), the pledgors, including in the case of the pledged
Kaiser shares the Company, will be entitled to receive and retain all Exempt
Distributions (as defined) in respect of the shares so pledged. The pledgors
will be entitled to vote all of such shares except under certain circumstances.
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<PAGE> 145
Release for Pledged Share Sales
The MGI Indenture permits a Pledgor (as defined) to obtain a release of
Pledged Shares (as defined) in order to effect a Pledged Share Sale (as
defined); provided that (i) no Event of Default, Collateral Default or Interest
Payment Default (each as defined) has occurred and is continuing or would result
from such release, (ii) an officers' certificate is delivered to the trustee
under the MGI Indenture (the "MGI Trustee") by MGI so stating and stating that
such release is otherwise permitted under the relevant MGI Indenture provision
and (iii) MGI agrees to subject money in an amount equal to the amount of Net
Proceeds (as defined) of such Pledged Share Sale received by MGI and its
Subsidiaries (as defined) that are Pledgors (and, with respect to the Pledged
Kaiser Shares (as defined), MAXXAM or, following the consummation of the
Offering, the Company), including all money and Cash Equivalents (as defined)
required to constitute collateral under the MGI Indenture ("Trust Moneys") in
the Accounts (as defined) to the extent required under Article 10 of the MGI
Indenture, to an offer to purchase MGI Notes in accordance with the provisions
described below under "-- Offers to Purchase MGI Notes with Certain Proceeds of
Collateral."
Release of Non-Cash Net Proceeds and Extraordinary Distributions
The MGI Indenture entitles the Pledgors to obtain a release from the lien
of the MGI Indenture of nonmoney and non-Cash Equivalent (i) Net Proceeds of (A)
a Primary Share Sale (as defined) that were distributed on Pledged Shares or (B)
a Pledged Share Sale and (ii) Extraordinary Distributions (as defined) on any
Pledged Shares as follows: (x) if all or any portion of such Net Proceeds or
Extraordinary Distributions are disposed of in one or more transactions (a
"Monetization") for consideration consisting of money or Cash Equivalents (but
which may also include indemnities) and MGI delivers or causes to be delivered
to the MGI Trustee, for deposit into a cash collateral offer account, all of the
money or Cash Equivalents received in such Monetization, then all or such
portion of such Net Proceeds or Extraordinary Distributions will be released
(simultaneously with such Monetization) from the lien of the MGI Indenture; and
(y) if, in connection with an offer to purchase MGI Notes, as described below
under "-- Offers to Purchase MGI Notes with Certain Proceeds of Collateral," MGI
delivers to the MGI Trustee for deposit into the cash collateral offer account
money in the amount, if any, to be deposited into such Account, as described in
the first sentence of the second paragraph under such caption, then (1) if the
purchase price at which such offer to purchase MGI Notes is made equals or
exceeds 110% of the principal amount or the Accreted Value (as defined), as the
case may be (the "respective Call Prices"), for the MGI Notes, plus accrued and
unpaid interest, all of such Net Proceeds or Extraordinary Distributions will be
released, simultaneously with such deposit, from the lien of the MGI Indenture,
and (2) if the preceding clause (1) is not applicable, a portion of such Net
Proceeds or Extraordinary Distributions, designated by MGI, not greater in value
(at the time such Net Proceeds or Extraordinary Distributions became collateral)
than the amount of money so delivered by MGI, will be released, simultaneously
with such deposit, from the lien of the MGI Indenture.
Offers to Purchase MGI Notes with Certain Proceeds of Collateral
If at any time the sum of (i) Trust Moneys deposited in the cash collateral
offer account, plus (ii) the value (as reasonably determined by the Board of
Directors) when it became collateral of nonmoney and non-Cash Equivalent Net
Proceeds, Extraordinary Distributions and Exempt Distributions then required to
constitute collateral, in each case that have not previously been (and are not
being) subjected to an offer to purchase MGI Notes pursuant to the provisions
described under this caption or (in the case of Net Proceeds of a public equity
offering by Pacific Lumber or certain other Subsidiaries of MGI) applied to an
optional redemption of MGI Notes, exceed $10,000,000, MGI will be required to
apply such sum to make an offer to purchase MGI Notes (provided that MGI may in
its discretion make such an offer before such $10,000,000 threshold is met), for
a purchase price of not less than 101% of the principal amount or Accreted Value
thereof, as the case may be, plus accrued and unpaid interest, if any, to the
date of purchase, and having an aggregate purchase price equal to the sum of the
amounts included in items (i) and (ii) above (to the extent not subjected or
applied (or being subjected or applied) as aforesaid), as of the close of
business on the second business day preceding the mailing of written notice, to
the MGI Trustee and the holders of MGI Notes, as provided in the MGI Indenture,
of the terms of such offer (the "Offer Amount"); provided that, among other
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things, no Net Proceeds of a public equity offering by Pacific Lumber or certain
other Subsidiaries of MGI that have been applied to an optional redemption (or
that are being so applied or that may be so applied by an election by MGI
pursuant to the provisions of the MGI Indenture the time for which has not
expired) shall be required to be subjected to such an offer.
The MGI Indenture provides that MGI will, prior to the scheduled time of
purchase pursuant to any such offer, deliver to the MGI Trustee, for deposit
into the cash collateral offer account, an amount of money equal to the amount,
if any, by which the aggregate purchase price of all MGI Notes (or portions
thereof) to be purchased pursuant to such offer (i.e., the lesser of (A) the
aggregate purchase price of all MGI Notes duly tendered and not withdrawn and
(B) the Offer Amount) exceeds the amount of money on deposit in the cash
collateral offer account. Following such delivery, but in any event prior to the
time of purchase, the MGI Trustee will release from the lien of the MGI
Indenture and deliver to the paying agent for such offer money from such Account
in an amount equal to the aggregate purchase price of the MGI Notes to be
purchased pursuant to such offer. If the price at which such offer to purchase
MGI Notes is made is less than the respective Call Prices of the MGI Notes plus
accrued and unpaid interest, if any, thereon, any Trust Moneys in the cash
collateral offer account, to the extent not actually utilized in such offer,
will remain collateral subject to the lien of the MGI Indenture. If, however,
such purchase price is equal to at least the respective Call Prices of the MGI
Notes as of the purchase date for such offer plus accrued and unpaid interest,
if any, thereon, any such Trust Moneys not actually utilized to purchase MGI
Notes in such offer will be released from the lien of the MGI Indenture. Any
moneys included in the Offer Amount that remain subject to the Lien of the MGI
Indenture following completion of an offer will be deposited into the cash
collateral account and may be applied, as directed by MGI, to redeem the MGI
Notes or to repurchase MGI Notes on the open market or otherwise.
Release and Substitution of Kaiser Shares
The MGI Indenture permits a release of Pledged Kaiser Shares from the lien
of the MGI Indenture at any time, from time to time, if: (i) no Event of
Default, Collateral Default or Interest Payment Default is continuing or would
result from such release, (ii) an officers' certificate is delivered to the MGI
Trustee so stating and stating that such release is otherwise permitted under
such provision of the MGI Indenture and (iii) there remains as collateral,
immediately subsequent to any such release, Pledged Kaiser Shares bearing the
same proportion (taking account of any subdivision, combination or
reclassification of such shares) to 28 million as (A) the sum of (x) the
aggregate principal amount at maturity of MGI Notes outstanding on the date of
such release, plus (y) one-half of the difference obtained by subtracting the
aggregate principal amount at maturity of MGI Notes outstanding on the date of
such release from $226,720,000 bears to (B) $226,720,000. In effect, so long as
any MGI Notes remain outstanding, this provision permits the release of
approximately 61,750 Kaiser Shares for each $1 million reduction in the
outstanding principal amount of the MGI Notes.
The MGI Indenture permits a release of Pledged Kaiser Shares from the lien
of the MGI Indenture at any time and from time to time in connection with a
merger or consolidation of Kaiser (or successor thereto pursuant to this
provision) into, or a sale or transfer of all or substantially all of the assets
of Kaiser in any transaction or series of related transactions to, another
person, or in connection with any other corporate reorganization of Kaiser
(other than a spinoff or other similar distribution of shares of Kaiser Stock to
stockholders of MAXXAM or the Company (a "Kaiser Transaction")) if: (i) no Event
of Default, Collateral Default or Interest Payment Default has occurred and is
continuing or would result from such release, (ii) the MGI Trustee receives, as
collateral subject to the lien of the MGI Indenture, in substitution for such
Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the
consideration received in respect of such Pledged Kaiser Shares pursuant to such
Kaiser Transaction, (iii) all holders of common stock of Kaiser (or such
successor) shall (subject to proration, customary treatment of fractional
amounts and other similar adjustments) be entitled to receive substantially the
same consideration in respect of their shares of Kaiser common stock pursuant to
the terms of such Kaiser Transaction, and (iv) any nonmoney or non-Cash
Equivalent consideration received in respect of such Pledged Kaiser Shares
pursuant to such Kaiser
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Transaction shall have been registered under the Securities Act to the extent
required under the federal securities law.
Change of Control
Upon the first Change of Control (as defined) to occur after the date of
the MGI Indenture (but not upon any subsequent Change of Control), each holder
of the MGI Notes has the right, at the holder's option, subject to the terms and
conditions of the MGI Indenture, to require MGI to purchase any or all of such
holder's MGI Notes at a cash purchase price equal to 101% of the principal
amount of the MGI Notes to be purchased plus accrued and unpaid interest.
Certain Covenants
The MGI Indenture contains certain covenants including, among others,
limitations on indebtedness, restricted payments, sales of capital stock of
subsidiaries, dividends and other payment restrictions affecting subsidiaries,
asset sales, transactions with affiliates, limitations on liens, amendments of
the Timber Note Indenture and certain other agreements of Scotia Pacific, and
mergers, consolidations and sales of all or substantially all of the assets of
MGI. The MGI Indenture limits the amount of dividends MGI can pay to an amount
that is generally equal to 50% of aggregate Consolidated Net Income (as defined)
of MGI accrued on a cumulative basis subsequent to June 30, 1993.
Consolidated Net Income (as defined) includes the fair market value in
excess of $62 million of Salmon Creek Distributions (as defined) received by MGI
or any of its Restricted Subsidiaries (as defined) from Pacific Lumber. There
are no restrictions in the Pacific Lumber Indenture on the ability of Pacific
Lumber to make Salmon Creek Distributions. The definition of the term Salmon
Creek Distributions is the same in the MGI Indenture as in the Indenture
governing the Notes. See "Description of New Notes -- Certain Definitions."
PACIFIC LUMBER SENIOR NOTES
General
The $235.0 million of Pacific Lumber Senior Notes mature on March 1, 2003,
and bear interest at the rate per annum of 10 1/2%, payable semiannually in
arrears on March 1 and September 1 of each year. Interest on the Pacific Lumber
Senior Notes is computed on the basis of a 360-day year of twelve 30-day months.
Optional Redemption
The Pacific Lumber Senior Notes may not be redeemed prior to March 1, 1998.
Thereafter, the Pacific Lumber Senior Notes may be redeemed at the option of
Pacific Lumber, at any time as a whole, or from time to time in part, at a
redemption price equal to the principal amount thereof plus (until March 1,
2000) a redemption premium plus accrued and unpaid interest (if any) to the date
of redemption.
Sinking Fund
There are no mandatory sinking fund payments for the Pacific Lumber Senior
Notes.
Ranking
The indebtedness evidenced by the Pacific Lumber Senior Notes ranks pari
passu in right and priority of payment with indebtedness of Pacific Lumber under
the Pacific Lumber Credit Agreement, and any future senior indebtedness of
Pacific Lumber. The Pacific Lumber Senior Notes are unsecured obligations.
Change of Control
Upon the first Change of Control (as defined) to occur after the date of
the Pacific Lumber Indenture (but not upon any subsequent Change of Control),
each holder of the Pacific Lumber Senior Notes will have
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the right, at the holder's option, subject to the terms and conditions of the
Pacific Lumber Indenture, to require Pacific Lumber to purchase any or all of
such holder's Pacific Lumber Senior Notes at a cash purchase price equal to 100%
of the principal amount of the Pacific Lumber Senior Notes to be purchased plus
accrued and unpaid interest.
Certain Covenants
The Pacific Lumber Indenture contains certain covenants including, among
others, limitations on indebtedness, restricted payments, sales of capital stock
of subsidiaries, dividends and other payment restrictions affecting
subsidiaries, asset sales, transactions with affiliates, limitations on liens,
amendments of the Timber Note Indenture and certain other agreements of Scotia
Pacific, and mergers, consolidations and sales of all or substantially all of
the assets of Pacific Lumber. The Pacific Lumber Indenture limits the amount of
dividends Pacific Lumber can pay, exclusive of Salmon Creek Distributions, to an
amount that is generally equal to 50% of Pacific Lumber's consolidated net
income plus depletion and cash dividends received from Scotia Pacific (for
periods subsequent to March 1, 1993), exclusive of net income and depletion of
Scotia Pacific so long as any Timber Notes are outstanding.
TIMBER NOTES
Interest
Interest is payable on the $336.1 million outstanding principal amount of
the Timber Notes (as of September 30, 1996) at the rate of 7.95% per annum
(computed on the basis of a 360-day year of twelve 30-day months; the "Timber
Note Rate") on January 20 and July 20 of each year (a "Timber Note Payment
Date"). Interest on overdue principal and, to the extent permitted by law,
overdue interest and premium, is payable at the Timber Note Rate plus 200 basis
points (the "Timber Note Default Rate") on each Timber Note Payment Date.
Principal
The Timber Notes have Scheduled Amortization, which represents the amount
of principal which Scotia Pacific must have paid (on a cumulative basis) through
each Timber Note Payment Date in order to avoid payment of prepayment or
deficiency premiums. The Timber Notes also have Rated Amortization, which
represents the minimum amount of principal which Scotia Pacific must pay (on a
cumulative basis) on or prior to each Timber Note Payment Date.
The amount of principal payable on any Timber Note Payment Date is an
amount which is intended to link, to the extent of cash available, the deemed
depletion of the Scotia Pacific Timber (through the harvest and sale of logs) to
the required amortization of the Timber Notes. The amount payable on any Timber
Note Payment Date is based on various formulas in the Timber Note Indenture
which generally compare the present value of the "fixed liabilities" associated
with the Scotia Pacific Timber (i.e., the balance of the Timber Notes plus the
discounted value of certain future operating expenses) to a hypothetical deemed
valuation of the collateral supporting the Timber Notes. The deemed valuation is
a theoretical construct which does not represent, and is not intended to
reflect, the actual value of the Scotia Pacific Timber.
The Timber Note Indenture provides that if, on any Timber Note Payment
Date, the principal paid on such date exceeds the Scheduled Amortization Amount,
as defined below (such excess, an "Excess Payment"), a premium (a "Prepayment
Premium") will be payable on such date with respect to such Excess Payment. The
Timber Note Indenture also provides that if, on any Timber Note Payment Date,
the principal paid on such date is less than the Scheduled Amortization Amount
(such deficiency, a "Payment Deficiency"), a premium (a "Deficiency Premium")
will be payable on the next Timber Note Payment Date with respect to such
Payment Deficiency. The Timber Note Indenture defines "Scheduled Amortization
Amount," for any Timber Note Payment Date, as an amount equal to the excess, if
any, of (i) the cumulative amount of all Scheduled Amortization, through and
including such Note Payment Date over (ii) the cumulative amount of all
principal paid on the Timber Notes, to and excluding such Timber Note Payment
Date.
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Premiums
The Prepayment Premium payable on any Timber Note Payment Date with respect
to the Excess Payment on such Timber Note Payment Date is a make whole premium,
calculated based upon the yield of like term Treasury securities plus 50 basis
points. The Deficiency Premium payable on any Timber Note Payment Date with
respect to the Payment Deficiency on the previous Timber Note Payment Date
equals an amount of interest (computed on the basis of a 360-day year of twelve
30-day months) on the Payment Deficiency, for the period from and including the
Timber Note Payment Date immediately preceding such Timber Note Payment Date, to
but excluding such Timber Note Payment Date, at a rate per annum equal to 1.50%.
Optional Redemption
Scotia Pacific may redeem the Timber Notes, in whole, but not in part, at
any time, at a redemption price equal to all unpaid principal amounts, all
accrued and unpaid premium thereon, all accrued and unpaid interest thereon, and
a redemption premium. Scotia Pacific also has the right to cause additional
prepayments of principal to be made on any Timber Note Payment Date by making
additional deposits to the Payment Account (as defined below) from other funds
available to Scotia Pacific. To the extent that any such additional deposit
causes an Excess Payment on any Timber Note Payment Date, a Prepayment Premium
will be payable in respect of such Excess Payment.
Accounts; Payment on the Timber Notes
The Timber Note Indenture provides that the trustee under the Timber Note
Indenture (the "Timber Note Trustee") must maintain, subject to a lien for the
benefit of holders of Timber Notes, the Liquidity Account, which provides
liquidity for the Timber Notes and an account into which funds will be
transferred on each Monthly Deposit Date (as defined in the Timber Note
Indenture), for disbursement on each Timber Note Payment Date (the "Payment
Account"). The balance in the Liquidity Account is to be maintained at the
Required Liquidity Balance (as defined). The balance in the Liquidity Account at
September 30, 1996 was $30.5 million.
The Timber Note Indenture provides that all payments received by Scotia
Pacific in connection with the harvesting, severing, cutting or sale of timber
and all other cash proceeds of or from the Mortgaged Property will be deposited
into a segregated trust account (the "Collection Account") maintained with the
Timber Note Trustee, subject to a lien for the benefit of the holders of Timber
Notes. Amounts to be utilized for payments on the Timber Notes generally are
withdrawn from the Collection Account on each Monthly Deposit Date, deposited
into the Payment Account, and (if the Monthly Deposit Date is not also a Timber
Note Payment Date) invested in Eligible Investments (as defined) until the next
Timber Note Payment Date. The amount so transferred from the Collection Account
to the Payment Account on each Monthly Deposit Date (the Targeted Monthly
Deposit Amount) is (to the extent of available cash) calculated so that the
amount in the Payment Account will be sufficient to pay all accrued interest and
Deficiency Premiums on the Timber Notes to the Monthly Deposit Date and the
appropriate portion of principal amortization and Prepayment Premiums, if any,
expected to be payable on the next Timber Note Payment Date (or, if such Monthly
Deposit Date is also a Timber Note Payment Date, on such Timber Note Payment
Date). Amounts remaining in the Collection Account on a Monthly Deposit Date
after the required transfer of funds into the Payment Account, unless a Trapping
Event (as described below) has occurred and is continuing, may be released to
Scotia Pacific free and clear of the lien and security interest of the Deed of
Trust securing the Timber Notes (the "Deed of Trust Lien").
On each Timber Note Payment Date, the amounts on deposit in the Payment
Account are utilized to make required payments on the Timber Notes (or to make
any required deposits to the Liquidity Account). Required principal payments in
excess of Rated Amortization on the Timber Notes will be due and payable only to
the extent of available cash in the Payment Account. However, if, for 24
consecutive months, the amount transferred from the Collection Account to the
Payment Account is less than the Targeted Monthly Deposit Amount (as defined),
Scotia Pacific will be required to make a payment into the Payment Account in
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an amount equal to the difference between the Targeted Monthly Deposit Amount in
the last such month and the actual amount transferred from the Collection
Account to the Payment Account in such month. To the extent funds on deposit in
the Payment Account are inadequate to make payments of interest (excluding
interest on Premiums) and Rated Amortization when due, additional amounts will
be drawn from the Liquidity Account to the extent of the balance thereof. To the
extent that amounts on deposit in the Payment Account on a Timber Note Payment
Date exceed the required payments on the Timber Notes (and any required deposits
to the Liquidity Account) on such Timber Note Payment Date, such excess amounts,
unless a Trapping Event has occurred and is continuing, may be released to
Scotia Pacific free and clear of the Deed of Trust Lien.
Consistent with Scotia Pacific's purpose and its needs to fund operating
and capital expenses, substantially all of the cash released to Scotia Pacific
free of the Deed of Trust Lien is periodically distributed to Pacific Lumber.
Once appropriate provision for current debt service on the Timber Notes has been
made, in the absence of certain Trapping Events or certain outstanding
judgments, the Timber Note Indenture does not limit monthly distributions of
available cash from Scotia Pacific to Pacific Lumber.
Trapping Events
During the continuance of a Trapping Event, amounts that otherwise may be
released to Scotia Pacific free and clear of the Deed of Trust Lien will be
retained by the Timber Note Trustee subject to the Deed of Trust Lien and, if a
Trapping Event is continuing on the next Timber Note Payment Date, applied to
the payment of principal on the Timber Notes. The Timber Note Indenture defines
a "Trapping Event" as any of the following: (i) Events of Default (as defined)
consisting of payment defaults on the Timber Notes, the bankruptcy or insolvency
of Scotia Pacific or the sale or other disposition by Pacific Lumber of any
capital stock of Scotia Pacific (other than in connection with a merger or
similar transaction permitted by the Services Agreement), (ii) Events of Default
other than payment defaults in respect of certain covenants, including, among
others, those relating to title to the Mortgaged Property, the Deed of Trust
Lien, the incurrence of indebtedness and the maintenance of a separate corporate
identity by Scotia Pacific, provided that such Event of Default has, or, with
the passage of time, would have, a Material Adverse Effect (as defined in the
Timber Note Indenture), (iii) an acceleration of the Timber Notes which has not
been rescinded, or (iv) an Event of Default arising from the failure of Scotia
Pacific to comply with a variety of covenants, representations or warranties
shall have occurred and be continuing, and the Trustee, within the previous 60
days, has commenced a consent solicitation for an election to accelerate the
Timber Notes by reason of such Event of Default.
Description of Mortgaged Property
The Timber Notes are secured by a lien on, and security interest in, the
Scotia Pacific Timberlands (subject to the Pacific Lumber Harvest Rights). The
Timber Notes are also secured by (i) an assignment of the rights of Scotia
Pacific under the Master Purchase Agreement, the Services Agreement, and certain
other contracts, (ii) a lien on all amounts on deposit in the Collection
Account, the Payment Account and the Liquidity Account, and (iii) a lien on
certain data processing hardware and software utilized in the preparation of
THPs (subject to certain rights of concurrent use with Pacific Lumber) and
certain other assets.
Certain Covenants
The Timber Note Indenture contains certain covenants including, among
others, limitations on the incurrence of liens by Scotia Pacific, a prohibition
on the incurrence of additional indebtedness for borrowed money by Scotia
Pacific, limitations on transactions with Affiliates (as defined in the Timber
Note Indenture) and a limit on Scotia Pacific's business activities to the
management, sale or maintenance of the Scotia Pacific Timberlands and Scotia
Pacific's timber, the issuance and sale of the Timber Notes and actions
reasonably incidental to the foregoing.
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MAXXAM
PARENT COMPANY
MAXXAM's outstanding public indebtedness, consisting of the Subordinated
Debentures and the Reset Notes, will be redeemed with the proceeds of the
Offering.
On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with
Custodial Trust Company providing for up to $25.0 million in borrowings by
MAXXAM. No borrowings were outstanding under the Custodial Trust Agreement as of
September 30, 1996. Any amounts borrowed would be secured by Kaiser Common Stock
owned by MAXXAM (or such other marketable securities acceptable to the lender)
with an initial market value (as defined therein) of approximately three times
the amount borrowed. Borrowings under the Custodial Trust Agreement would bear
interest at the prime rate plus 1/2% per annum. The Custodial Trust Agreement
provides for a revolving credit arrangement during the first year of the
agreement. Any borrowings outstanding on the first anniversary date of the
agreement convert into a term loan maturing on the second anniversary date of
the agreement. MAXXAM is entitled to dividends and to exercise voting rights in
respect of pledged shares so long as no Event of Default (as defined) has
occurred. Other than for certain specified liens, the Custodial Trust Agreement
prohibits Liens (as defined) on Kaiser Common Stock owned by MAXXAM except with
the consent of Custodial Trust Company. Any borrowings under the Custodial Trust
Agreement would rank pari passu in right and priority of payment with the MAXXAM
Guaranty.
ALUMINUM OPERATIONS
As of September 30, 1996, Kaiser's principal indebtedness consisted of the
$225.0 million principal amount of KACC's 9 7/8% Senior Notes due 2002, the
$400.0 million principal amount of KACC's 12 3/4% Senior Subordinated Notes due
2003, and KACC's borrowings under the 1994 KACC Credit Agreement. On October 23,
1996, KACC completed an offering of $175.0 million principal amount of 10 7/8%
Senior Notes due 2006. For information regarding this indebtedness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MAXXAM -- Financial Condition and Investing and Financing
Activities -- Aluminum Operations," Note 4 to the Audited Consolidated Financial
Statements of Kaiser and Note 6 to the Unaudited Consolidated Financial
Statements of Kaiser. On December 23, 1996, KACC completed an offering of $50.0
million principal amount of 10 7/8% Series C Senior Notes due 2006. For
information regarding this indebtedness, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial
Condition and Investing and Financing Activities -- Aluminum Operations."
FOREST PRODUCTS OPERATIONS
See "-- The Company" for a description of the principal indebtedness of
MAXXAM's forest products operations.
REAL ESTATE AND OTHER OPERATIONS
The principal indebtedness of MAXXAM's real estate and other operations
consists of the 11% Senior Secured Extendible Notes of SHRP, Ltd., the RTC
Portfolio Loan and the MCOP Credit Agreement. For information regarding this
indebtedness, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations of MAXXAM -- Financial Condition and Investing and
Financing Activities -- Real Estate and Other Operations" and Note 4 to the
Audited Consolidated Financial Statements of MAXXAM.
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DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued under the Indenture, among the Company, as
issuer, MAXXAM, as Guarantor, and First Bank National Association, as Trustee
(the "Trustee"). Except as otherwise indicated below, the following summary
applies to both the Old Notes and the New Notes. As used herein, the term
"Notes" shall mean the Old Notes and the New Notes unless otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of Additional
Interest, which, except in certain limited circumstances, terminates upon
consummation of the Exchange Offer, and (iii) will not bear any legends
restricting transfer thereof. The New Notes will be issued solely in exchange
for an equal principal amount of Old Notes. As of the date hereof, $130.0
million aggregate principal amount of Old Notes is outstanding. See "The
Exchange Offer."
The following statements relating to the Notes, the Indenture and the
Registration Rights Agreement are summaries of certain provisions thereof and
are subject to the detailed provisions of the Indenture and the Registration
Rights Agreement, which documents have been filed as exhibits to this
Registration Statement, to which reference is hereby made for a complete
statement of such provisions. Wherever particular provisions of the Indenture or
terms defined therein are referred to herein, such provisions or definitions are
incorporated by reference and the summaries are qualified in their entirety by
such reference. Capitalized terms used without definition have the respective
meanings ascribed to them in the Indenture, certain of which are described below
under "Certain Definitions." All parenthetical section references are to
sections of the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on August 1, 2003. Interest on the Notes will be
payable semiannually in arrears on February 1 and August 1 of each year,
commencing on February 1, 1997, at the rate per annum stated on the cover page
of this Prospectus. Interest will be payable to the persons who are registered
holders of the Notes at the close of business on the January 15 or July 15
immediately preceding such interest payment date. The Trustee will authenticate
and deliver Notes for original issuance in an aggregate principal amount of
$130,000,000. The Company will pay interest on overdue principal and, to the
extent permitted by applicable law, interest at the rate borne by the Notes.
Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months. Principal, premium and interest will be payable at the
office of the Trustee but, at the option of the Company, interest may be paid by
check mailed to the registered holders at their registered addresses. The Notes
will be transferable and exchangeable at the office of the Trustee and will be
issued in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple thereof.
OPTIONAL REDEMPTION
On and after August 1, 2000, the Notes may be redeemed at the option of the
Company, in whole or in part, on not less than 15 days (or 30 days if legally
required by The Depository Trust Company) but not more than 60 days notice to
each holder of the Notes to be redeemed, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid interest
to (but not including) the date of redemption, if redeemed during the 12-month
period commencing August 1 of the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------------- ----------
<S> <C>
2000....................... 106.00%
2001....................... 103.00%
2002....................... 100.00%
</TABLE>
In the case of a partial redemption, the Trustee will allocate the Notes to
be redeemed on a pro rata basis.
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Notwithstanding the foregoing, at any time prior to August 1, 2000, the
Company may, at its option, redeem all or any portion of the Notes at the
Make-Whole Price plus accrued and unpaid interest to (but not including) the
date of redemption. In addition, until August 1, 2000, upon any Public Equity
Offering with respect to the Company or MGI (or any successor to MGI pursuant to
the Indenture provision described below under "-- Security -- Merger by MGI")
the Notes may be redeemed at the option of the Company in part, on not less than
15 days (or 30 days if legally required by The Depository Trust Company) but not
more than 60 days notice to each holder of the Notes to be redeemed, with cash
in the amount of the proceeds of such Public Equity Offering, at the Call Price,
plus accrued and unpaid interest to (but not including) the date of redemption;
provided, however, that after any such redemption the aggregate principal amount
of Notes outstanding must equal at least 65% of such principal amount upon
consummation of the Offering.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
RANKING
The Indebtedness evidenced by the Notes will not be expressly subordinated
to any other Indebtedness of the Company and will rank pari passu in right and
priority of payment with any future senior indebtedness of the Company. The
Notes will be general obligations of the Company secured by the Pledged MGI
Shares and the Intercompany Note. In addition, under certain circumstances, the
Company will be obligated to further secure payment of the Notes by pledging up
to 16,055,000 Kaiser Shares that may be released from the Lien of the MGI
Indenture pursuant to release provisions thereof by reason of payment in full of
the MGI Notes, defeasance of the MGI Notes pursuant to Article 8 of the MGI
Indenture, or early retirement of a portion of the MGI Notes resulting in a
release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant
to the provision of the MGI Indenture described in the first paragraph under
"Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser
Shares." However, collateral released from the Lien of the MGI Indenture need
not be pledged to secure the Notes if it is pledged to secure indebtedness that
refinances the MGI Notes.
Substantially all of the Company's consolidated assets will be owned
directly by its Subsidiaries, including MGI, Pacific Lumber, Britt and Scotia
Pacific. As of September 30, 1996, MGI, Pacific Lumber, Britt and Scotia Pacific
had approximately $772.9 million aggregate principal amount of outstanding
indebtedness which effectively will be senior in right of payment to the Notes,
although no such indebtedness is guaranteed by MAXXAM.
GUARANTY
Payment of principal and interest and premium, if any, on the Notes will be
guaranteed on a senior unsecured basis by MAXXAM. The Indenture will provide
that MAXXAM shall not consolidate with or merge with or into (whether or not
MAXXAM is the surviving person), or sell all or substantially all of its assets
to, another corporation, person or entity whether or not affiliated with MAXXAM
unless (i) the person formed by or surviving any such consolidation or merger
(if other than MAXXAM) or that acquires such assets assumes all the obligations
of MAXXAM pursuant to a supplemental indenture, in form reasonably satisfactory
to the Trustee, under the Notes and the Indenture and (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists.
SECURITY
Collateral
The Notes will be secured by a first priority pledge of: (i) all
outstanding shares of Stock of MGI now owned or from time to time acquired by
the Company, (ii) all dividends distributed with respect to and property
received in exchange for any of the Pledged MGI Shares other than any Salmon
Creek Distributions, (iii) the Intercompany Note and (iv) all payments of
interest on and principal of the Intercompany Note. If and only if any Released
Kaiser Shares are released from the Lien of the MGI Indenture, the Company shall
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pledge, and thereupon the Notes will be further secured by a first priority Lien
on, certain of such Released Kaiser Shares as follows: (a) one hundred percent
(100%) of the first 8,027,500 Released Kaiser Shares shall be pledged by the
Company as additional Collateral securing the Notes; and (b) a number of
additional Released Kaiser Shares in excess of those required to be pledged
pursuant to clause (a) shall be pledged by the Company as additional Collateral
securing the Notes in an amount equal to (1) 8,027,500 times (2) a fraction, the
numerator of which is the aggregate principal amount of Notes outstanding on the
date such Released Kaiser Shares are released from the Lien of the MGI
Indenture, and the denominator of which is the aggregate principal amount of
Notes outstanding on the Issue Date. To the extent that Released Kaiser Shares
are comprised of securities or other property substituted or adjusted for Kaiser
Shares (as contemplated by clause (i) or clause (ii) of the definition of
Released Kaiser Shares), the kind and amount of Released Kaiser Shares to be
pledged will be appropriately adjusted to take account of the kind and amount of
such securities or other property so substituted for each Kaiser Share. All
Kaiser Shares released from the Lien of the MGI Indenture that are not required
to be so pledged shall be released to the Company.
All dividends distributed with respect to, and property received in
exchange for, any of the Released Kaiser Shares pledged to secure the Notes
shall also be pledged as additional Collateral. In addition, if any cash
proceeds of Kaiser Shares referred to in clause (i) of the definition of Kaiser
Share Cash Equivalents are released from the Lien of the MGI Indenture as a
result of such cash proceeds not having been used to purchase MGI Notes at a
price at least equal to the respective Call Prices (as defined in the MGI
Indenture) of the MGI Notes (see "Principal Indebtedness -- MGI Notes -- Offers
to Purchase MGI Notes with Certain Proceeds of Collateral") or as a result of
the payment in full or defeasance of the MGI Notes, such cash proceeds are
required to be pledged as Collateral under the Indenture. The Pledged MGI Shares
and other Collateral (including Released Kaiser Shares, if any, that become
Collateral) will be subject to release from the Lien of the Indenture from time
to time on the basis described below. Notwithstanding the foregoing, in no event
will the aggregate of the number of Released Kaiser Shares required to be
pledged as Collateral and the number of Kaiser Share Cash Equivalents resulting
from the pledge of cash proceeds of Kaiser Shares referred to in the second
sentence of this paragraph exceed the number of Released Kaiser Shares that
would be required to be pledged if no such cash proceeds were pledged as
Collateral under the Indenture. To the extent that collateral released from the
Lien of the MGI Indenture is required to be pledged to secure the Notes, the
Company has covenanted to seek the release of such collateral from the Lien of
the MGI Indenture promptly after it becomes eligible for such release pursuant
to the terms of the MGI Indenture.
The Indenture will permit MGI to refinance, in whole or in part, the MGI
Notes in an aggregate principal amount up to the then outstanding principal
amount thereof, not to exceed $225.7 million, plus related expenses and
redemption premiums, if any, and pledge the Kaiser Shares and other collateral
under the MGI Indenture to secure such refinancing Indebtedness, provided that
such refinancing Indebtedness contains provisions for release of collateral from
the Lien thereunder that (except for the maturity date of such refinancing
Indebtedness) are no less favorable in any material respect (taken as a whole)
to the Holders than the release provisions of the MGI Indenture. Kaiser Shares
and other collateral released from the Lien of the MGI Indenture pledged to
secure such refinancing Indebtedness will not be deemed to be Released Kaiser
Shares for any purpose of the Indenture.
There can be no assurance that any Kaiser Shares will become Collateral
securing the Notes at any time. Released Kaiser Shares will be pledged under the
Indenture only in certain limited circumstances involving early retirement of
MGI Notes, and then only on satisfaction of certain conditions specified in the
MGI Indenture. The MGI Notes mature in 2003 concurrently with the maturity of
the Notes, and there can be no assurance that any of the MGI Notes will be
repurchased or redeemed prior to maturity. Moreover, if the MGI Notes are
refinanced and the refinancing Indebtedness matures after the maturity of the
Notes, it is less likely that any substantial number of Kaiser Shares will be
pledged to secure the Notes. Any early retirement of the MGI Notes will be at
the option of MGI or, with limited exceptions, as a result of transactions which
neither the Company nor any of its Subsidiaries is required to enter into or
consummate.
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Voting and Foreclosure
The Indenture provides that, unless a Notice of Acceleration has been
delivered and is in effect, the Company may exercise all voting and other
corporate rights pertaining to the Pledged Shares for any purpose. If at the
time a Notice of Acceleration is in effect the Trustee delivers written notice
to the Company of its intention to exercise such voting and other corporate
rights, all such rights of the Company will cease and all such rights will
become vested in the Trustee until such Notice of Acceleration has been
rescinded.
The Indenture provides that, if a Notice of Acceleration has been delivered
and remains in effect, the Trustee may, subject to the terms of the Indenture,
foreclose upon and sell the Collateral and seek any other available remedy with
respect thereto. The Indenture provides that, upon such foreclosure, the Trustee
may require the Company to use its best efforts to cause such Pledged Shares to
be registered pursuant to an effective registration statement filed in
accordance with the Securities Act.
If voting rights with respect to the Pledged Shares were to become vested
in the Trustee, or if the Trustee were to foreclose on the Collateral, such
vesting or foreclosure, as the case may be, could constitute a change of control
under instruments governing certain indebtedness of MGI and of Pacific Lumber
and could constitute a change of control under instruments governing certain
indebtedness of Kaiser. Such occurrence would enable the holders of such
indebtedness to require the issuer to repurchase such indebtedness. See "Risk
Factors -- Security for the Notes."
Deposit of Trust Moneys into Accounts
The Indenture requires all money and Cash Equivalents required to
constitute Collateral and to be delivered to the Trustee or received by the
Trustee, whether pursuant to the Indenture, the Uniform Commercial Code, other
applicable law or otherwise ("Trust Moneys"), to be deposited in one of four
accounts: the Cash Collateral Offer Account, the Cash Collateral Public Equity
Offering Account, the Cash Collateral Default Account and the Cash Collateral
Account (collectively, the "Accounts"). The Trustee will invest, apply, deposit
into another Account or release, as the case may be, Trust Moneys in accordance
with the terms of the Indenture, as described below. All right, title and
interest in and to the Accounts will vest in the Trustee, who will have sole
dominion and control over the Accounts, and only the Trustee will have any right
of withdrawal therefrom.
Pursuant to the Indenture, the Company may direct the Trustee in writing
to, and the Trustee will, except as otherwise required under the Indenture,
invest any Trust Moneys held in the Accounts in Cash Equivalents and liquidate
Cash Equivalents held in the Accounts into money. Interest and other amounts
earned on an Account will be held as part of the Collateral, will be credited to
the Account in which the principal on which they are earned is deposited, and
will be transferred between Accounts together with and in the same manner as the
principal on which they are earned.
Net Proceeds of Pledged Share Sales. The Indenture provides that, upon the
release of any Pledged Shares and the receipt of any Net Proceeds of a Pledged
Share Sale in respect of such Pledged Shares, the Company will deliver or cause
to be delivered to the Trustee, for deposit into the Cash Collateral Offer
Account (for application as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral"), all such Net Proceeds so received that
are money or Cash Equivalents; provided that if such Pledged Share Sale is also
a Public Equity Offering and such receipt occurs prior to August 1, 2000, all
such Net Proceeds so received that are money or Cash Equivalents will instead be
deposited into the Cash Collateral Public Equity Offering Account. See "-- Net
Proceeds of Certain Public Equity Offerings." In addition, the Indenture
provides that, if money is released from the Lien of the MGI Indenture that is
required to be pledged to secure the Company's obligations under the Indenture,
the Company will deliver or cause to be delivered such money to the Trustee for
deposit into the Cash Collateral Offer Account for application as described
below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral."
Net Proceeds of Primary Share Sales. Primary Share Sales by MGI will
constitute Asset Sales under the Indenture and the cash portion of the proceeds
thereof will qualify as Net Cash Proceeds of an Asset Sale under the Indenture,
except to the extent Net Proceeds of a Primary Share Sale by MGI are distributed
on
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the Pledged MGI Shares. The Indenture provides that, upon the receipt of any Net
Proceeds of a Primary Share Sale by MGI or by Kaiser, that were dividended or
distributed on Pledged MGI Shares or on Pledged Kaiser Shares, as the case may
be, the Company will deliver or cause to be delivered to the Trustee, for
deposit into the Cash Collateral Offer Account (for application as described
below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"),
all such Net Proceeds so received that are money or Cash Equivalents; provided
that if such Primary Share Sale is also a Public Equity Offering and such
receipt occurs prior to August 1, 2000, all such Net Proceeds so received that
are money or Cash Equivalents will instead be deposited into the Cash Collateral
Public Equity Offering Account. See "-- Net Proceeds of Certain Public Equity
Offerings."
Certain Non-Cash Amounts. If, following receipt by the Company of (i) Net
Proceeds, other than money or Cash Equivalents, of either (A) a Primary Share
Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI
Shares or on Pledged Kaiser Shares, as the case may be, or (B) a Pledged Share
Sale in respect of any Pledged Shares or (ii) Extraordinary Distributions on any
Pledged Shares in a form other than money or Cash Equivalents, all or any
portion of such Net Proceeds or Extraordinary Distributions at the time subject
to the Lien of the Indenture are disposed of for money or Cash Equivalents,
pursuant to the provisions described below in clause (x) under "-- Release of
Non-Cash Net Proceeds and Extraordinary Distributions," the Company will deliver
or cause to be delivered to the Trustee, for deposit into the Cash Collateral
Offer Account (for application as described below under "-- Offers to Purchase
Notes with Certain Proceeds of Collateral"), all money and Cash Equivalents
received in consideration of such disposition; provided that if any such Primary
Share Sale or Pledged Share Sale is also a Public Equity Offering and such
receipt occurs prior to August 1, 2000, all such money and Cash Equivalents will
instead be deposited into the Cash Collateral Public Equity Offering Account.
See "-- Net Proceeds of Certain Public Equity Offerings."
Extraordinary Distributions. The Indenture provides that, upon receipt by
the Company of an Extraordinary Distribution on any Pledged Shares, the Company
will deliver or cause to be delivered to the Trustee, for deposit into the Cash
Collateral Offer Account (for application as described below under "-- Offers to
Purchase Notes with Certain Proceeds of Collateral"), all amounts so received
that are money or Cash Equivalents.
Certain Exempt Distributions. The Company will deliver or cause to be
delivered to the Trustee all Exempt Distributions made on any Pledged Shares the
right to receive and retain which are vested in the Trustee under the provisions
described below under "-- Dividends," for deposit into the Cash Collateral
Default Account. Any Trust Moneys held in the Cash Collateral Default Account
will be released from the Lien of the Indenture and, as the Company directs in
writing, applied by the Trustee to cure any outstanding Interest Payment
Defaults in respect of the Notes and to pay the principal due on the Notes at
the final maturity thereof. If at any time following the deposit of Trust Moneys
into the Cash Collateral Default Account, no Event of Default, Collateral
Default or Interest Payment Default is continuing, any amounts in the Cash
Collateral Default Account will be deposited in the Cash Collateral Offer
Account, for application as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral."
Net Proceeds of Certain Public Equity Offerings. The Company will deliver
or cause to be delivered to the Trustee, for deposit into the Cash Collateral
Public Equity Offering Account, all Net Proceeds of a Public Equity Offering
that constitute Collateral, are money or Cash Equivalents and are received prior
to August 1, 2000. Following such receipt, the Company may elect, within 30 days
after such receipt, optionally to redeem Notes with all or any portion of such
Net Proceeds. If the Company so elects, such Net Proceeds (or such portion
thereof) will remain in the Cash Collateral Public Equity Offering Account for
application in accordance with the redemption provisions of the Indenture and
the Notes. If no such election is made by the Company within such election
period, all of such Net Proceeds will be deposited into the Cash Collateral
Offer Account for application as described below under "-- Offers to Purchase
Notes with Certain Proceeds of Collateral."
Cash Collateral Account. The Indenture provides that the Trustee will
deposit into the Cash Collateral Account any money or Cash Equivalents (i)
eligible for transfer out of the Cash Collateral Offer Account pursuant to the
provisions described below under "-- Offers to Purchase Notes with Certain
Proceeds of
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Collateral" or (ii) constituting Trust Moneys whose disposition by the Trustee
upon receipt thereof is not otherwise provided for.
Intercompany Note
The Indenture provides that, upon receipt by the Company of payments of
interest on the Intercompany Note, the Company will deliver or cause to be
delivered to the Trustee, for deposit in the Cash Collateral Account (for
application as discussed below under "-- Release of Trust Moneys in the Cash
Collateral Account," including to pay interest on the Notes) all amounts so
received. Upon receipt by the Company of any payment or prepayments of principal
of the Intercompany Note, the Company will deliver or cause to be delivered to
the Trustee, for deposit in the Cash Collateral Offer Account (for application
as described below under "-- Offers to Purchase Notes With Certain Proceeds of
Collateral") all amounts so received. Notwithstanding the foregoing, prepayments
of principal of the Intercompany Note that do not result in the principal amount
of the Intercompany Note being reduced below the outstanding principal amount of
the Notes shall be released from the Lien of the Indenture and paid over to the
Company.
Dividends
The Indenture provides that, except during the continuance of an Event of
Default, Interest Payment Default or Collateral Default, the Company may receive
and retain any and all Exempt Distributions made on the Pledged Shares. Upon the
occurrence and during the continuance of an Event of Default, Interest Payment
Default or Collateral Default, all rights to receive and retain Exempt
Distributions made on the Pledged Shares during such continuance will become
vested in the Trustee, and the money and/or Cash Equivalent portion, if any, of
any such Exempt Distributions so received and retained will be deposited into
the Cash Collateral Default Account. If any such Event of Default, Interest
Payment Default or Collateral Default, as the case may be, is cured or waived
and no other Event of Default, Interest Payment Default or Collateral Default is
continuing, all such rights to receive and retain Exempt Distributions will
revert to the Company. Any Trust Moneys in the Cash Collateral Default Account
that the Trustee receives during the continuance of an Event of Default,
Interest Payment Default or Collateral Default may be released from the Lien of
the Indenture and applied, at the direction of the Company, to cure any
outstanding Interest Payment Defaults and to the payment of principal due on the
Notes at the final maturity thereof. If, at the time at which all Events of
Default, Interest Payment Defaults and Collateral Defaults have been cured or
waived and no Events of Default, Interest Payment Defaults or Collateral
Defaults are continuing, there remain Trust Moneys in the Cash Collateral
Default Account, the Trustee will transfer such remaining Trust Moneys into the
Cash Collateral Offer Account, and such Trust Moneys (together with additional
amounts in respect of the non-money, non-Cash Equivalent portion, if any, of any
Exempt Distribution received and retained by the Trustee) will, subject to the
terms of the Indenture, be subjected to the requirement that the Company make an
offer to purchase Notes for at least 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to (but not including) the date of
purchase. See "-- Offers to Purchase Notes with Certain Proceeds of Collateral."
The Indenture provides that the Trustee will at all times receive and
retain as Collateral any Extraordinary Distributions on any of the Pledged
Shares. The money and/or Cash Equivalent portion, if any, of any Extraordinary
Distribution will be deposited into the Cash Collateral Offer Account, and such
Trust Moneys (together with additional amounts in respect of the non-money or
non-Cash Equivalent portion, if any, of any Extraordinary Distribution) will,
subject to the terms of the Indenture, be subjected to the requirement that the
Company make an offer to purchase Notes for at least 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to (but not including)
the date of purchase. See "-- Offers to Purchase Notes with Certain Proceeds of
Collateral."
Release for Pledged Share Sales
The Indenture permits the Company to obtain a release of Pledged Shares in
order to effect a Pledged Share Sale; provided that (i) no Event of Default,
Collateral Default or Interest Payment Default has occurred and is continuing or
would result from such release, (ii) an Officers' Certificate is delivered to
the
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Trustee by the Company so stating and stating that such release is otherwise
permitted under the relevant Indenture provision and (iii) the Company agrees to
subject money in an amount equal to the amount of Net Proceeds of such Pledged
Share Sale received by the Company, including all Trust Moneys in the Accounts
to the extent required under Article 10 of the Indenture, to an offer to
purchase Notes in accordance with the provisions described below under
"-- Offers to Purchase Notes with Certain Proceeds of Collateral" (or, if the
Pledged Share Sale is a Public Equity Offering and the Company so elects as
described above under "-- Deposit of Trust Moneys into Accounts -- Net Proceeds
of Certain Public Equity Offerings" optionally to redeem Notes in accordance
with the redemption provisions of the Indenture and the Notes).
Release of Non-Cash Net Proceeds and Extraordinary Distributions
The Indenture entitles the Company to obtain a release from the Lien of the
Indenture of non-money and non-Cash Equivalent (i) Net Proceeds of (A) a Primary
Share Sale that were distributed on Pledged Shares or (B) a Pledged Share Sale
and (ii) Extraordinary Distributions on any Pledged Shares as follows: (w) if
all or any portion of such Net Proceeds or Extraordinary Distributions are
disposed of in one or more transactions (a "Monetization") for consideration
consisting of money or Cash Equivalents (but which may also include indemnities)
and the Company delivers or causes to be delivered to the Trustee, for deposit
into the Cash Collateral Offer Account or the Cash Collateral Public Equity
Offering Account, as applicable, all of the money or Cash Equivalents received
in such Monetization, then all or such portion of such Net Proceeds or
Extraordinary Distributions will be released (simultaneously with such
Monetization) from the Lien of the Indenture; (x) if, in connection with an
offer to purchase Notes as described below under "-- Offers to Purchase Notes
with Certain Proceeds of Collateral," the Company delivers to the Trustee for
deposit into the Cash Collateral Offer Account money in the amount, if any, to
be deposited into such Account as described in the first sentence of the second
paragraph under such caption, then (1) if the purchase price at which such offer
to purchase Notes is made equals or exceeds the Call Price for the Notes, plus
accrued and unpaid interest, if any, to (but not including) the purchase date
for such offer, all of such Net Proceeds or Extraordinary Distributions will be
released, simultaneously with such deposit, from the Lien of the Indenture, and
(2) if the preceding clause (1) is not applicable, a portion of such Net
Proceeds or Extraordinary Distributions, designated by the Company, not greater
in value (at the time such Net Proceeds or Extraordinary Distributions became
Collateral) than the amount of money so delivered by the Company, will be
released, simultaneously with such deposit, from the Lien of the Indenture; (y)
if, in connection with an optional redemption following the receipt of Net
Proceeds of a Public Equity Offering that constitute Collateral, the Company
delivers to the Trustee, for deposit into the Cash Collateral Public Equity
Offering Account, money in the amount specified below in the second sentence
under the caption "-- Release of Trust Moneys to Fund Optional Redemptions,"
then a portion of such Net Proceeds, designated by the Company, not greater in
value (at the time it became Collateral) than the amount of money so delivered
by the Company will be released, simultaneously with such deposit, from the Lien
of the Indenture; and (z) if, in connection with an optional redemption referred
to in the fourth paragraph under "-- Offers to Purchase Notes with Certain
Proceeds of Collateral," the Company delivers to the Trustee for deposit into
the Cash Collateral Offer Account money in the amount, if any, to be deposited
in such Account as described in such paragraph, then a portion of such Net
Proceeds or Extraordinary Distributions, designated by the Company, not greater
in value (at the time such Net Proceeds or Extraordinary Distributions became
Collateral) than the amount of money so delivered by the Company will be
released, simultaneously with such deposit, from the Lien of the Indenture.
Offers to Purchase Notes with Certain Proceeds of Collateral
If at any time the sum of (i) Trust Moneys deposited in the Cash Collateral
Offer Account, plus (ii) the value (as reasonably determined by the Board of
Directors) when it became Collateral of non-money and non-Cash Equivalent Net
Proceeds, Extraordinary Distributions and Exempt Distributions then required to
constitute Collateral, in each case that have not previously been (and are not
being) subjected to an offer to purchase Notes pursuant to the provisions
described under this caption or (in the case of Net Proceeds of a Public Equity
Offering) applied to an optional redemption of Notes, exceed $10,000,000, the
Company will be required to apply U.S. Legal Tender to make an irrevocable and
unconditional (subject to applicable law)
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offer to purchase Notes (provided that the Company may in its discretion make
such an offer before such $10,000,000 threshold is met), for a purchase price of
not less than 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to (but not including) the date of purchase, and having an
aggregate purchase price equal to the sum of the amounts included in items (i)
and (ii) above (to the extent not subjected or applied (or being subjected or
applied) as aforesaid), as of the close of business on the second Business Day
preceding the mailing of written notice, to the Trustee and Holders, as provided
in the Indenture, of the terms of such offer (the "Offer Amount"); provided that
no Net Proceeds, Exempt Distributions, Extraordinary Distributions or other
Trust Moneys will be subjected to more than one such offer (or will be subjected
to any such offer to the extent they have been applied to an optional redemption
(or are being so applied) in accordance with the provision described in the
fourth paragraph under this description of Offers to Purchase Notes with Certain
Proceeds of Collateral), and no Net Proceeds of a Public Equity Offering that
have been applied to an optional redemption (or that are being so applied or
that may be so applied by an election by the Company pursuant to the provision
described below under "Release of Trust Moneys to Fund Optional Redemptions" the
time for which has not expired) shall be required to be subjected to such an
offer. Any such offer will be made under procedures substantially the same as
those described below under "Change of Control"; provided that, if the Offer
Amount is insufficient to fund an offer to purchase all of the outstanding Notes
tendered into such offer, such offer may be an offer to purchase Notes on a pro
rata basis.
The Indenture provides that the Company will, prior to the scheduled time
of purchase pursuant to any such offer, deliver to the Trustee, for deposit into
the Cash Collateral Offer Account, an amount of money equal to the amount, if
any, by which the aggregate purchase price of all Notes (or portions thereof) to
be purchased pursuant to such offer (i.e., the lesser of (A) the aggregate
purchase price of all Notes duly tendered and not withdrawn and (B) the Offer
Amount) exceeds the amount of money on deposit in the Cash Collateral Offer
Account. Following such delivery, but in any event prior to the time of
purchase, the Trustee will release from the Lien of the Indenture and deliver to
the paying agent for such offer money from such Account in an amount equal to
the aggregate purchase price of the Notes to be purchased pursuant to such
offer. If the price at which such offer to purchase Notes is made is less than
the Call Price of the Notes plus accrued and unpaid interest, if any, thereon to
(but not including) such purchase date, any Trust Moneys in the Cash Collateral
Offer Account, to the extent not actually utilized in such offer, will remain
Collateral subject to the Lien of the Indenture. If, however, such purchase
price is equal to at least the Call Price of the Notes as of the purchase date
for such offer plus accrued and unpaid interest, if any, thereon to (but not
including) such purchase date, any such Trust Moneys not actually utilized to
purchase Notes in such offer will be released from the Lien of the Indenture.
Any moneys included in the Offer Amount that remain subject to the Lien of the
Indenture following completion of an offer will be deposited into the Cash
Collateral Account and may be applied, as directed by the Company, to redeem the
Notes (if the Company is otherwise permitted to do so under the Indenture) or to
repurchase Notes on the open market or otherwise. See "-- Release of Trust
Moneys in the Cash Collateral Account."
The Company will comply with all applicable tender offer rules (including,
without limitation, Sections 13(e) and 14(e) of the Exchange Act and the rules
and regulations promulgated pursuant thereto) in connection with any offers to
purchase Notes pursuant to the foregoing provisions.
Notwithstanding the foregoing provisions, the Company shall not be required
to make an offer to purchase Notes pursuant to the foregoing provisions if and
to the extent that, prior to the time when the Company would have been required
to make such offer, the Company shall have, by written notice to the Trustee,
(1) elected to apply all or any portion of the Offer Amount (such Offer Amount
to be computed as if the date of delivery of such written notice to the Trustee
were the date of mailing of a notice of such an offer) to a then permitted
optional redemption of the Notes, in whole or in part, at a redemption price
equal to not less than 101% of the principal amount thereof plus accrued and
unpaid interest, if any, thereon to (but not including) the redemption date and
(2) notified the Trustee of the redemption date and the aggregate principal
amount of Notes to be redeemed. Following the giving of such written notice, the
Company shall, prior to the scheduled time for redemption, deliver to the
Trustee, for deposit into the Cash Collateral Offer Account, an amount of money
equal to the amount, if any, by which the aggregate redemption price of all
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Notes called for redemption, including accrued and unpaid interest, if any,
thereon to (but not including) the date of redemption, exceeds the amount of
money on deposit in the Cash Collateral Offer Account. Following such delivery,
but in any event on or prior to the scheduled time for redemption, the Trustee
will release from the Lien of the Indenture and deliver to the paying agent for
such redemption an amount of money from the Cash Collateral Offer Account equal
to the aggregate redemption price of all Notes called for redemption, including
accrued and unpaid interest, if any, thereon to (but not including) the date of
redemption.
Release of Trust Moneys to Fund Optional Redemptions
If the Company receives Net Proceeds from a sale of Pledged Shares or from
a Primary Share Sale that become subject to the Lien of the Indenture, and if
such sale constitutes a Public Equity Offering and the Company is entitled at
such time to effect an optional redemption in part of Notes pursuant to the
Indenture and the Notes with such Net Proceeds, then the Company may elect, by
written notice to the Trustee delivered within 30 days after it receives such
Net Proceeds, to apply all or any portion of such Net Proceeds to such an
optional redemption. The Indenture provides that the Company will, prior to the
scheduled time for redemption established by the Company, deposit into the Cash
Collateral Public Equity Account an amount of money equal to the amount, if any,
by which the aggregate redemption price of all Notes called for redemption,
including accrued and unpaid interest, if any, thereon to (but not including)
the date of redemption, exceeds the amount of money on deposit in the Cash
Collateral Public Equity Offering Account. Following such delivery, but in any
event prior to the time of redemption, the Trustee will release from the Lien of
the Indenture and deliver to the paying agent for such redemption an amount of
money from the Account equal to such aggregate redemption price.
Release and Substitution of Pledged Kaiser Shares
The provisions described under this caption will be applicable only at such
time, if any, as any Kaiser Shares or proceeds thereof are included in the
Collateral.
The Indenture contains a provision entitling the Company to a release of
any Pledged Kaiser Shares from the Lien of the Indenture at any time and from
time to time if: (i) no Event of Default, Collateral Default or Interest Payment
Default is continuing or would result from such release, (ii) an Officers'
Certificate is delivered to the Trustee by the Company so stating and stating
that such release is otherwise permitted under such provision of the Indenture
and (iii) there remains as Collateral, immediately subsequent to any such
release, a number of Pledged Kaiser Shares equal to 16,055,000 multiplied by a
fraction, the numerator of which is equal to the sum of (x) the aggregate
principal amount of Notes outstanding on the date of such release, plus (y)
one-half of the difference obtained by subtracting the aggregate principal
amount of Notes outstanding on the date of such release from the aggregate
principal amount of Notes outstanding on the Issue Date, and the denominator of
which is the aggregate principal amount of Notes outstanding on the Issue Date.
To the extent that Pledged Kaiser Shares are comprised of securities or other
property substituted for Kaiser Shares (as contemplated by the definition of
Pledged Kaiser Shares), the kind and amount of Pledged Kaiser Shares to be
released will be appropriately adjusted to take account of the kind and amount
of such securities or other property so substituted for each Kaiser Share.
The Indenture contains a provision entitling the Company to a release of
any Trust Moneys from the Lien of the Indenture at any time or from time to time
if: (i) the conditions set forth in clauses (i) and (ii) of the preceding
paragraph are satisfied and (ii) there remains as Collateral immediately
subsequent to any such release, an amount of Trust Moneys equal to the greater
of (x) the Make-Whole Price with respect to the then outstanding principal
amount of the Notes (if such release occurs prior to August 1, 2000) and (y)
110% of the then outstanding principal amount of the Notes.
The Indenture entitles the Company to obtain a release of any Pledged
Kaiser Shares from the Lien of the Indenture at any time and from time to time
in connection with, and MAXXAM and the Company may permit Kaiser to effect, a
merger or consolidation of Kaiser (or a successor thereto pursuant to this
provision) into, or a sale or transfer of all or substantially all of the assets
of Kaiser in any transaction or series of related transactions to, another
person, or in connection with any other corporate reorganization of Kaiser
(other than
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a spin-off or other similar distribution of shares of Kaiser Stock to
stockholders of MAXXAM or the Company) (a "Kaiser Transaction") if: (i) no Event
of Default, Collateral Default or Interest Payment Default has occurred and is
continuing or would result from such release; (ii) the Trustee receives, as
Collateral subject to the Lien of the Indenture, in substitution for such
Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the
consideration received in respect of such Pledged Kaiser Shares pursuant to such
Kaiser Transaction; (iii) all holders of the common stock of Kaiser (or such
successor) shall (subject to proration, customary treatment of fractional
amounts and other similar adjustments) be entitled to receive substantially the
same consideration in respect of their shares of Kaiser common stock pursuant to
the terms of such Kaiser Transaction; and (iv) any non-money or non-Cash
Equivalent consideration received in respect of such Pledged Kaiser Shares
pursuant to such Kaiser Transaction shall have been registered under the
Securities Act to the extent required under federal securities law.
Merger by MGI
Notwithstanding any other provision of the Indenture, the Company may, at
any time and from time to time, permit MGI to merge or consolidate into, or sell
or transfer all or substantially all its assets in any transaction or series of
transactions to, any Restricted Subsidiary if: (i) the Trustee receives, as
Collateral subject to the Lien of the Indenture, the consideration distributed
to the Company on the Pledged MGI Shares in such transaction or transactions;
(ii) after giving effect to such transaction or transactions, the Collateral
includes at least a majority of the Voting Stock and outstanding equity
interests (on a fully diluted basis) of the person surviving such merger or
consolidation or to whom such transfer is made, in a proportion at least equal
to that in which the Voting Stock and outstanding equity interests of MGI were
included in the Collateral immediately prior to such transaction or
transactions; (iii) no Default exists or would exist immediately following such
transaction or transactions after giving effect thereto on a pro forma basis;
and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate stating that clause (iii) above is satisfied and stating that such
transaction or transactions are otherwise permitted under this provision of the
Indenture. Upon satisfaction of these requirements the Trustee will, if
requested, release the Pledged MGI Shares from the Lien of the Indenture to the
extent necessary to effect any transaction or transactions permitted under this
provision; provided that any person surviving such merger or consolidation, or
to whom such sale or transfer is made, will be deemed to be MGI for all purposes
of the Indenture and will be a Restricted Subsidiary, and any owner of shares of
Stock of such person that is either the Company or a Subsidiary of the Company
will grant a security interest (of like tenor to the security interest granted
on the Issue Date by the Company) in such shares of Stock and will expressly
assume, by supplemental indenture to the Indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations with
respect to such shares applicable to the Company with respect thereto under
Article 10 of the Indenture.
Notwithstanding any other provision of the Indenture, MGI may, at any time
and from time to time, merge or consolidate into, or transfer all or
substantially all its assets in any transaction or series of transactions to,
the Company.
Release of Trust Moneys in the Cash Collateral Account
The Indenture provides that the Company may obtain a release, at any time
or from time to time, of any Trust Moneys held in the Cash Collateral Account to
be applied, as the Company directs the Trustee in writing, to pay interest on
the Notes (but only to the extent that the Trust Moneys so applied were derived
from payments of interest on the Intercompany Note), to redeem Notes or to
purchase Notes, in the open market or otherwise.
Release upon Defeasance
Upon satisfaction by the Company of the conditions to termination of
certain of its obligations under the Indenture, as described below under
"Discharge of the Indenture," the Lien of the Indenture on all Collateral will
terminate and all of the Collateral will be released without any further action
on part of the Trustee or any other person.
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Application of Collateral upon a Notice of Acceleration and to Pay Certain
Trustee Fees
Notwithstanding any of the foregoing provisions, while a Notice of
Acceleration is in effect, the Trustee shall apply any Trust Moneys deposited in
the Accounts, first, to satisfy certain payment obligations to the Trustee under
the Indenture, second, to make payments to holders of outstanding Notes,
ratably, in respect of unpaid principal of and interest on the Notes and, third,
to the Company. In addition, the Trustee may at any time satisfy certain payment
obligations to it under the Indenture out of (i) Trust Moneys in the Cash
Collateral Account or (ii) if at such time no Trust Moneys are in the Cash
Collateral Account, Trust Moneys in the Cash Collateral Default Account.
CHANGE OF CONTROL
The Indenture provides that, upon the first Change of Control to occur
after the date of the Indenture (but not upon any subsequent Change of Control),
each holder of the Notes will have the right, at the holder's option, subject to
the terms and conditions of the Indenture, to require the Company to purchase
any or all of such holder's Notes, as described below, at a cash purchase price
equal to 101% of the principal amount of the Notes to be purchased, plus accrued
and unpaid interest, if any, to (but not including) the scheduled date of
purchase. For the definition of "Change of Control," see "-- Certain
Definitions" below.
A Change of Control under the Indenture could also constitute a change of
control under instruments governing $235.0 million principal amount of
indebtedness of Pacific Lumber (plus any indebtedness outstanding under the
$60.0 million Pacific Lumber Credit Agreement), approximately $225.7 million
principal amount ($201.0 million accreted value as of September 30, 1996) of
indebtedness of MGI represented by the MGI Notes and approximately $859.0
million principal amount of indebtedness of Kaiser (plus any outstanding
borrowings under the KACC 1994 Credit Agreement). A change of control under such
instruments would enable the holders of such indebtedness to require repurchase
of such indebtedness by Pacific Lumber, MGI and Kaiser. There can be no
assurance that the assets of Pacific Lumber, MGI and Kaiser would be sufficient
to enable them to effect such repurchases. In such event, there is a substantial
risk that the value of the Collateral represented by the Pledged MGI Shares and
any Pledged Kaiser Shares will have been substantially diminished or eliminated.
In addition, these provisions could have limited applicability in the event of a
leveraged buyout transaction initiated or supported by the Company, its
management or an affiliate of the Company or its management.
Within 30 days following the first occurrence of a Change of Control after
the date of the Indenture, the Company is obligated to mail a notice to the
Trustee, the Paying Agent and each holder of the Notes (and to beneficial owners
as required by applicable law, including, without limitation, the rules and
regulations of the Exchange Act) stating, among other things: (i) a brief
description of the Change of Control and the date thereof; (ii) the date on
which the Company is offering to purchase the Notes (the "Change of Control
Purchase Date"), which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed; (iii) the applicable purchase price offered
by the Company; (iv) the procedures that a holder must follow in order to have
its Notes purchased by the Company and a brief description of those rights; and
(v) the procedures for withdrawing a Change of Control Purchase Notice (as
defined below).
To accept the offer to purchase, each holder of Notes must deliver written
notice of the acceptance of such offer (a "Change of Control Purchase Notice")
to the Paying Agent prior to the close of business on the third Business Day
immediately preceding the Change of Control Purchase Date. The Change of Control
Purchase Notice shall state: (i) the name of the holder of the Notes and the
certificate numbers of the Notes to be delivered by the holder thereof for
purchase by the Company; (ii) the portion of the principal amount of Notes to be
purchased (which must be $1,000 or an integral multiple thereof) and (iii) that
such Notes are to be purchased by the Company pursuant to the applicable
provisions of the Notes and the Indenture.
Any Change of Control Purchase Notice may be withdrawn by a holder of Notes
by a written notice of withdrawal delivered to the Paying Agent on or prior to
the close of business on the Business Day next preceding the Change of Control
Purchase Date. The notice of withdrawal shall state the principal amount and the
certificate number(s) of the Note(s) as to which the withdrawal notice relates
and the principal amount, if any, which remains subject to a Change of Control
Purchase Notice.
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Payment by the Company for a holder's Notes for which a Change of Control
Purchase Notice has been delivered and not withdrawn, or a portion thereof, is
conditional upon delivery to the Paying Agent of the Notes described by the
holder in its Change of Control Purchase Notice.
The Company will comply with all applicable laws governing tender offers
(including, without limitation, the Exchange Act and the applicable rules and
regulations thereof) if a holder elects to exercise its option to have the
Company purchase any or all of its Notes under the circumstances described
herein.
CERTAIN DEFINITIONS
"Affiliate" of any person means (i) any person who, directly or indirectly,
is in control of, is controlled by or is under common control with such person
and (ii) any person who is a director or officer (A) of such person, (B) of any
subsidiary of such person or (C) of any person described in clause (i) above,
and shall be deemed to include any joint venture, partnership or other person
(other than a Subsidiary of the Company) in which the Company and/or its
Subsidiaries have an equity ownership interest equal to or greater than 5% and
in which one or more Affiliates of the Company has a direct or an indirect
equity ownership interest in excess of 5% therein other than by virtue of the
direct or indirect equity ownership in such joint venture, partnership or other
person held (in the aggregate) by the Company and/or one or more of its
Subsidiaries; provided, however, that the term "Affiliate" shall not include (i)
the Company or (ii) any Subsidiary of the Company so long as no Affiliate of the
Company has a direct or indirect equity ownership interest equal to or greater
than 5% in such Subsidiary other than by virtue of the direct or indirect equity
ownership in such Subsidiary held (in the aggregate) by the Company and/or one
or more of its Subsidiaries. For purposes of this definition, control of a
person means the power, direct or indirect, to direct or cause the direction of
the management and policies of such person whether by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing. The fact that an Affiliate of a person is a partner of a law firm
that renders services to such person or its Affiliates does not mean that the
law firm is an Affiliate of such person.
"Asset Sale" means any sale, transfer or other disposition (including,
without limitation, dispositions pursuant to any Taking, merger, consolidation
or sale and leaseback transactions), after the Issue Date, by the Company or any
of its Restricted Subsidiaries (other than Scotia Pacific so long as there are
any Timber Notes outstanding) to any person other than to the Company or any of
its Restricted Subsidiaries of (i) any Capital Stock or other ownership interest
of any of the Company's Restricted Subsidiaries (including sales, transfers or
other dispositions by such Restricted Subsidiary of its Capital Stock or other
ownership interest) or (ii) any other assets (other than any Capital Stock or
ownership interests in any Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries, other than sales, transfers or other dispositions of
assets in the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; provided, however, that the term Asset Sale
shall not include (A) the sale, transfer or other disposition of any assets or
Capital Stock or other ownership interest by the Company or its Restricted
Subsidiaries if such transaction would have been an Asset Sale in the absence of
this clause (A) to the extent the gross proceeds thereof (exclusive of
indemnities) do not exceed, in aggregate amount with all other such sales,
transfers or other dispositions after the Issue Date, $25,000,000 from and after
the Issue Date (such proceeds, to the extent non-cash, to be determined in good
faith by the Board of Directors), (B) the creation, incurrence, assumption or
existence of any Lien to the extent not prohibited by the provision described
below under "-- Certain Covenants -- Limitation on Liens," (C) any of the
transactions governed by the provision described below under "-- Successor
Company," (D) an exchange of assets, provided the assets received are to be used
in the lines of business of the Company or any of its Restricted Subsidiaries on
the Issue Date or reasonably related extensions of such lines and only to the
extent such exchange qualifies for non-recognition treatment under the Code, (E)
any transaction to the extent governed by the provisions described below under
"-- Certain Covenants -- Limitation on Restricted Payments" or "-- Ownership of
Capital Stock of Subsidiaries and Kaiser Shares," (F) the sale, transfer or
disposition of Collateral under the Indenture, collateral under the MGI
Indenture or any assets referred to in clause (vi) of the third paragraph under
"-- Certain Covenants -- Limitation on Restricted Payments" or the proceeds of
such assets or (G) any Primary Share Sale by MGI to the extent the Net Proceeds
of such Primary Share Sale are distributed on the Pledged MGI Shares.
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal payments.
"Bering Agreement" means the investment management agreement, effective as
of December 1, 1991, between Bering Holdings Inc. and each of MAXXAM, the
Company, MGI, MPI and Pacific Lumber, as the same has been or may be amended,
supplemented or otherwise modified from time to time in a manner that is not
materially adverse to the Holders.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Britt" means Britt Lumber Co., Inc., a California corporation, and any
successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"Business Day" means each day that is not a Legal Holiday.
"Call Price" means, expressed as a percentage of principal amount, 110%.
"Capital Lease Obligations" of any person means, as of any date of
determination, any obligation that is required to be classified and accounted
for as a capital lease on the face of a balance sheet of such person prepared in
accordance with GAAP as of such determination date (it being understood that the
Capital Lease Obligations of the Company shall not include any such obligations
attributable to any Unrestricted Subsidiary as of any determination date); the
amount of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock of such person, including any
Preferred Stock of such person but excluding any Redeemable Stock of such
person.
"Cash Equivalents" means (x) when used in respect of any Trust Moneys (i)
any evidence of any obligation issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand or time deposits with, and certificates
of deposit or acceptances issued by, any bank or trust company organized under
the laws of the United States of America or any State thereof (including the
Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A"
by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service,
Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii)
repurchase agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher,
or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by
S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect
to any obligation described in subclauses (i), (ii) or (iv) of this clause (x);
(iv) commercial paper (including both noninterest-bearing discount obligations
and interest-bearing obligations payable on demand or on a specified date not
later than 180 days from the date of acquisition thereof) and having a rating of
"A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money
market fund or other similar investment company all of whose investments consist
primarily of obligations described in the foregoing clauses of this definition
and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable
rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii)
taxable or non-taxable auction rate securities which have interest rates reset
on periodic short-term intervals (typically each 7, 14, 21, 28 or 49 days via a
Dutch auction process) and which at the time of purchase have been rated and the
ratings for which (A) for direct issues, must not be less than "P2" if rated by
Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues
which follow the asset coverage tests set forth in the Investment Company Act of
1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P
and "Aaa" if rated by Moody's; or (viii) any investments hereafter developed
which are substantially
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comparable to those described above in this clause (x); and (y) otherwise (i)
any evidence of any obligation issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) demand or time deposits with, and certificates
of deposit or acceptances issued by, any bank or trust company organized under
the laws of the United States of America or any state thereof (including the
Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A"
by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service,
Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper
obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii)
repurchase agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher,
or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by
S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect
to any obligation described in subclauses (i), (ii) or (iv) of this clause (y);
(iv) commercial paper (including both noninterest-bearing discount obligations
and interest-bearing obligations payable on demand or on a specified date not
later than 180 days from the date of acquisition thereof) and having a rating of
"A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money
market fund or other similar investment company all of whose investments consist
primarily of obligations described in the foregoing clauses of this definition
and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable
auction rate securities commonly known as "money market rate notes" that at the
time of purchase have been rated and the ratings for which (A) for direct
issues, must not be less than "P2" if rated by Moody's and not less than "A2" if
rated by S&P and (B) for collateralized issues which follow the asset coverage
tests set forth in the Investment Company Act of 1940, as amended, must have
long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by
Moody's; or (vii) any investments hereafter developed which are substantially
comparable to those described above in this clause (y).
"Change of Control" means the occurrence of any of the following events:
(i) MAXXAM, directly or indirectly, not having (other than by reason of the
existence of a Lien, but including by reason of the foreclosure of or other
realization upon a Lien) direct or indirect sole beneficial ownership (as
defined under Regulation 13d-3 of the Exchange Act as in effect on the date of
the Indenture) of at least 40% of the total common equity, on a fully diluted
basis, of the Company; provided, however, that such ownership by MAXXAM,
directly or indirectly, of 30% or greater, but less than 40% of the total common
equity, on a fully diluted basis, of the Company shall not be a Change of
Control if MAXXAM, through direct representation or through persons nominated by
it, controls a majority of the Board of Directors necessary to effectuate any
actions by the Board of Directors; and provided, further, that the foregoing
minimum percentages shall be deemed not satisfied if any person or group shall,
directly or indirectly, own more of the total voting power entitled to vote
generally in the election of directors of the Company than MAXXAM; (ii) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than to a person that is a Subsidiary of MAXXAM both
immediately before and immediately after giving effect to such transaction or to
any of the Principals (as defined below) or to a group of which one or more of
the Principals is a member (provided that one or more of the Principals
beneficially owns Voting Stock representing at least 80% of the voting power in
the election of a majority of the directors of MAXXAM of the Voting Stock
beneficially owned by such group); (iii) the approval by the stockholders of the
Company of a plan for the liquidation or dissolution of the Company other than
into MAXXAM or a Subsidiary of MAXXAM; (iv) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than any of the Principals or a
group of which one or more of the Principals is a member (provided that one or
more of the Principals beneficially owns Voting Stock representing at least 80%
of the voting power in the election of a majority of the directors of MAXXAM of
the Voting Stock beneficially owned by such group), becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, of Voting Stock representing more than 35% of the
voting power in the election of a majority of the directors of MAXXAM
represented by all outstanding Voting Stock of MAXXAM; (v) the consummation of
the first transaction (including, without limitation, any merger or
consolidation) the result of which is that any
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"person" (as defined above) other than a group of which one or more of the
Principals is a member (provided that one or more of the Principals beneficially
owns Voting Stock representing at least 80% of the voting power in the election
of a majority of the directors of MAXXAM of the Voting Stock beneficially owned
by such group) becomes the "beneficial owner" (as defined above), directly or
indirectly, of Voting Stock representing more of the voting power in the
election of a majority of the directors of MAXXAM represented by all outstanding
Voting Stock of MAXXAM than is at the time represented by Voting Stock
"beneficially owned" (as defined above) by the Principals; or (vi) the first day
on which a majority of the members of the Board of Directors of MAXXAM are not
Continuing Directors. For purposes of this definition, any transfer of an equity
interest of an entity that was formed for the purpose of acquiring Voting Stock
of MAXXAM will be deemed to be a transfer of such portion of such Voting Stock
as corresponds to the portion of the equity of such entity that has been so
transferred. "Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of MAXXAM who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election. "Principals" means Charles Hurwitz, his wife and lineal
descendants, any trust for the benefit thereof, and/or any entity in which any
one or more of such persons hold a 0% or more controlling interest.
"Code" means the Internal Revenue Code of 1986, as amended (or any
successor statute thereto), and the regulations promulgated thereunder, all as
in effect from time to time.
"Collateral" means, at any time of determination, all property upon which a
Lien exists at such time in favor of the Trustee for the benefit of the Holders
pursuant to Articles 5 and 10 of the Indenture, including pursuant to
instruments executed and delivered in compliance with the provisions described
above under "-- Security -- Merger by MGI," in the second sentence under
"-- Security -- Collateral" and below under "-- Successor Company."
"Collateral Default" means a Default consisting of the Company's failure to
comply with any provision contained in Article 10 of the Indenture which (i)
either (A) results in an impairment of the validity, perfection, or priority of
the Lien of the Indenture with respect to any portion of the Collateral having a
fair market value in excess of $1 million in the aggregate or (B) would be
materially adverse in any way to the Holders (any Default consisting of the
failure to make any offer required to be made pursuant to the provisions
described above under "-- Security -- Offers to Purchase Notes with Certain
Proceeds of Collateral" being deemed, without limitation, material for this
purpose) and (ii) would constitute an Event of Default unless cured within the
applicable cure or grace period set forth in the Indenture.
"Consolidated Cash Flow Coverage Ratio" of the Company means, as of the
date of the transaction giving rise to the need to calculate the Consolidated
Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of (i) the
aggregate amount of EBITDA for the immediately preceding four fiscal quarters
for which financial information in respect thereof is available immediately
prior to the Transaction Date to (ii) the aggregate Consolidated Interest
Expense for the fiscal quarter in which the Transaction Date occurs and to be
accrued during the three fiscal quarters immediately subsequent thereto (based
upon the pro forma amount of Indebtedness of the Company and its Restricted
Subsidiaries reasonably expected by the Company to be outstanding on the
Transaction Date and thereafter other than the Timber Notes), assuming for the
purposes of this measurement the continuation of market interest rates
prevailing on the Transaction Date and base interest rates in respect of
floating interest rate obligations equal to the base interest rates on such
obligations in effect as of the Transaction Date; provided that if the Company
or any of its Restricted Subsidiaries is a party to any Interest Rate Protection
Agreements which would have the effect of changing the interest rate on any
Indebtedness of the Company or any of its Restricted Subsidiaries for such four
quarter period (or a portion thereof), the resulting rate shall be used for such
four quarter period or portion thereof; and provided, further, that any
Consolidated Interest Expense with respect to Indebtedness Incurred or retired
by the Company or any of its Restricted Subsidiaries during the fiscal quarter
in which the Transaction Date occurs shall be calculated as if such Indebtedness
was so Incurred or retired on the first day of the fiscal quarter in which the
Transaction Date occurs; and provided, further, that if, during the four fiscal
quarters referred to in clause (i) of this definition, (A) the Company or any of
its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for
such period shall be reduced by an amount equal to the EBITDA (if positive), or
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increased by an amount equal to the EBITDA (if negative), directly attributable
to the assets which are the subject of such Asset Sale calculated on a pro forma
basis as if such Asset Sale and any related retirement of Indebtedness had
occurred on the first day of such period or (B) the Company or any of its
Restricted Subsidiaries shall have acquired any material assets out of the
ordinary course of business, EBITDA shall be calculated on a pro forma basis as
if such asset acquisition and any related financing had occurred on the first
day of such period.
"Consolidated Income Tax Expense" of the Company means (without
duplication), for any period, the aggregate of the income tax expense (net of
applicable credits) of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP other than income
taxes (including credits) with respect to items of net income excluded from the
definition of Consolidated Net Income.
"Consolidated Interest Expense" of the Company means, for any period
(without duplication), (i) the sum of (A) the interest expense of the Company
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP, (B) all fees, commissions, discounts and other charges of
the Company and its Subsidiaries with respect to letters of credit and bankers'
acceptances and the costs (net of benefits) associated with Interest Rate
Protection Agreements for such period, determined on a consolidated basis in
accordance with GAAP, and (C) dividends declared on Redeemable Stock of the
Company or any Restricted Subsidiary held by persons other than the Company or a
Wholly Owned Restricted Subsidiary (other than dividends payable in Capital
Stock of the Company or pro rata dividends payable to all stockholders of such
class or series of Stock payable in Capital Stock of any such Restricted
Subsidiary), less (ii) the amortization or write-off of deferred financing costs
by the Company and its Subsidiaries during such period, determined on a
consolidated basis in accordance with GAAP (including, without limitation, the
amortization of any unamortized deferred financing costs in connection with any
refinancing of the Credit Agreement); in the case of clauses (i) and (ii) of
this definition, without giving effect to any such items and amounts
attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as any
Timber Notes are outstanding, during such period.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or net loss, as the case may be) of the Company and its
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP ("GAAP Net Income"); provided that (without duplication) there shall
be excluded from GAAP Net Income (to the extent otherwise included therein) (i)
gains and losses (net of applicable taxes) from (A) Asset Sales or reserves
relating thereto, (B) any sale, transfer or other disposition of any Capital
Stock or ownership interests in (x) Salmon Creek or (y) any Unrestricted
Subsidiary to which non-cash proceeds received by the Company in respect of a
Salmon Creek Distribution have been contributed by the Company as contemplated
by the provision described in the fourth paragraph under "-- Certain
Covenants -- Limitations on Restricted Payments," (C) the sale by the Company of
any assets received by the Company in respect of a Salmon Creek Distribution or
(D) any sale, transfer or other disposition of Kaiser Shares; (ii) items
classified as extraordinary and gains and losses from discontinued operations;
(iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any
person that is not a Subsidiary of the Company or that is accounted for on the
equity method of accounting, provided that in each case the amount of dividends
or other distributions actually paid to the Company (other than Salmon Creek
Distributions) during such period shall be added to Consolidated Net Income (to
the extent, in the case of clause (A), that the Company elects to include such
distributions in the computation of Consolidated Net Income at the time of the
computation thereof) and the amount of dividends or other distributions actually
paid to a Restricted Subsidiary of the Company (other than Salmon Creek
Distributions) during such period shall be included in computing the net income
(or net loss, as the case may be) of such Restricted Subsidiary, subject to
clause (v) below (to the extent, in the case of clause (A), that the Company
elects to include such distributions in the computation of Consolidated Net
Income at the time of the computation thereof); (iv) except to the extent
includable pursuant to clause (iii) of this definition, the net income (or loss)
of any other person accrued or attributable to any period prior to the date it
becomes a Subsidiary of the Company or is merged into or consolidated with the
Company or any of its Subsidiaries or such other person's property (or a portion
thereof) is acquired by the Company or any of its Subsidiaries; (v) the net
income (or loss) of any Restricted Subsidiary during such period if and to the
extent that the declaration or payment of dividends or
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similar distributions by such Restricted Subsidiary to the Company or any
Restricted Subsidiary of any such net income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or government regulation applicable to such
Restricted Subsidiary, provided that the amount of dividends or other
distributions actually paid to the Company by such Restricted Subsidiary (other
than Salmon Creek Distributions) shall be added to Consolidated Net Income
during such period and the amount of dividends or other distributions actually
paid to a Restricted Subsidiary of the Company (the "Recipient Restricted
Subsidiary") by such Restricted Subsidiary (other than Salmon Creek
Distributions) shall be included in computing the net income (or net loss, as
the case may be) of such Recipient Restricted Subsidiary during such period; and
(vi) the transfer of the Kaiser Shares to the Company by MAXXAM; provided that
there shall be excluded from Consolidated Net Income, to the extent otherwise
included therein, the amount of dividends and distributions made with the net
proceeds of any Equity Offering by any Subsidiary of the Company.
"Credit Agreement" means the agreement dated November 10, 1995, between
Bank of America, National Trust and Savings Association and Pacific Lumber,
together with all related notes, letters of credit, collateral documents and
guarantees and any other related agreements and instruments executed and
delivered in connection therewith, in each case, as amended, supplemented,
restated, restructured, renewed, extended, refinanced or otherwise modified, in
whole or in part, from time to time.
"Deed of Trust" means the Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993, from
Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit of
the Collateral Agent named therein, as the same has been or may be amended,
supplemented or otherwise modified from time to time.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default as specified in the provisions described
below in the second paragraph under "-- Events of Default; Notice and Waiver."
"EBITDA" of the Company means, for any period, the sum for such period of
Consolidated Net Income (excluding, to the extent included in Consolidated Net
Income for such period, any gains (net of applicable taxes) from any sale,
transfer or other disposition of any Capital Stock or ownership interests in any
Unrestricted Subsidiary to which non-cash proceeds received by a Restricted
Subsidiary in respect of a Salmon Creek Distribution have been contributed by a
Restricted Subsidiary as contemplated by the provision described in the fourth
paragraph under "-- Certain Covenants -- Limitation on Restricted Payments")
plus, to the extent reflected in the income statement for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and
depletion expense, (iv) amortization expense (including amortization of deferred
financing costs), and (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; (A) in the case of clauses (iii), (iv) and (v) of this definition, of
the Company and its Subsidiaries determined on a consolidated basis in
accordance with GAAP for such period, but without giving effect to any such
items and amounts attributable to any Unrestricted Subsidiary during such period
or to Scotia Pacific so long as any Timber Notes are outstanding, and (B) in the
case of clauses (iv) and (v) of this definition, excluding the amounts thereof
excluded from the definition of "Consolidated Interest Expense" pursuant to
clause (ii) of such definition.
"Equity Offering" means any sale, public or private, of equity securities
of any person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor statute thereto), and the rules and regulations promulgated
thereunder.
"Exempt Distribution" means any and all dividends, cash, instruments and
other property and proceeds received, receivable or otherwise distributed on any
of the Pledged Shares other than: (i) any liquidating dividend or other
liquidating distribution or other similar extraordinary dividend or
distribution; (ii) any dividend or other distribution on Pledged MGI Shares (or
on Stock of MGI's permitted successor pursuant to the provision described above
under "-- Security -- Merger by MGI") if the amount of all dividends and other
distributions on the Stock of MGI made on or after the Issue Date to and
including the date of such
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dividend or other distribution on such Pledged MGI Shares (other than dividends
and distributions to the extent that such dividends or distributions were
previously paid or delivered to the Trustee for inclusion in the Collateral,
whether by deposit into an Account or otherwise, and other than amounts referred
to in clauses (iv), (v) and (vi) below) exceeds 100% of the consolidated net
income of MGI plus 100% of the consolidated depletion expense of MGI, each
determined in accordance with GAAP, accrued on a cumulative basis subsequent to
September 30, 1996; (iii) any dividend or other distribution on any Pledged
Kaiser Shares to the extent of the amount, if any, by which all dividends and
other distributions on such Pledged Kaiser Shares during the 12-month period
ending on and including the date on which such dividend or distribution is paid
(other than dividends and distributions to the extent that such dividends or
distributions were previously paid or delivered to the Trustee for inclusion in
the Collateral, whether by deposit into an Account or otherwise, and other than
amounts referred to in clauses (iv), (v) and (vi) below) exceeds, on a per share
basis, 7.5% of the average of the daily closing prices (or average bid and asked
prices if closing prices are not available) of such Kaiser Shares over such
consecutive 12-month period; (iv) any Salmon Creek Distribution; (v) any
dividend or other distribution consisting of proceeds of any Primary Share Sale
by MGI or Kaiser or proceeds of any Pledged Share Sale; and (vi) any dividend or
other distribution of proceeds of a transaction effected pursuant to and in
accordance with the provision described above in the fourth paragraph under "--
Security -- Release and Substitution of Pledged Kaiser Shares" or the provision
described above under "-- Security -- Merger by MGI." Notwithstanding the
foregoing, any dividend or other distribution made on any Pledged MGI Shares and
received by the Company during any fiscal year shall be an Exempt Distribution
if such dividend or distribution, together with all other dividends and other
distributions previously so made during such fiscal year (exclusive of amounts
referred to in clauses (iv), (v) and (vi) above), does not exceed 120% of the
interest that has become payable or is to become payable on the Notes during
such year.
"Extraordinary Distribution" means any and all dividends, cash, instruments
and other property and proceeds received, receivable or otherwise distributed on
any Pledged Shares other than: (i) an Exempt Distribution; (ii) any Salmon Creek
Distribution; (iii) any dividend or other distribution consisting of proceeds of
any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale;
and (iv) any dividend or other distribution of proceeds of a transaction
effected pursuant to and in accordance with the provision described above in the
fourth paragraph under "-- Security -- Release and Substitution of Pledged
Kaiser Shares" or the provision of the Indenture described above under
"-- Security -- Merger by MGI."
"GAAP" means, at any date, generally accepted accounting principles as in
effect on December 31, 1995, and used in the preparation of the Company's
consolidated balance sheet at such date and the Company's statements of
consolidated income and cash flows for the year then ended.
"Holder" or "Securityholder" means the person in whose name a Note is
registered on the Registrar's books.
"Indebtedness" of any person means, at any date, any of the following
(without duplication): (i) the principal amount of all obligations
(unconditional or contingent) of such person for borrowed money (whether or not
there is recourse to the whole of the assets of such person or only to a portion
thereof) and the principal amount of all obligations (unconditional or
contingent) of such person evidenced by debentures, notes or other similar
instruments (including, without limitation, reimbursement obligations with
respect to letters of credit (except to the extent collateralized by cash or
Cash Equivalents), performance bonds (except to the extent collateralized by
cash or Cash Equivalents) and bankers' acceptances (except to the extent
collateralized by cash or Cash Equivalents)); (ii) all obligations of such
person to pay the deferred purchase price of property or services, except (A)
accounts payable and other current liabilities arising in the ordinary course of
business and (B) compensation, pension obligations and other obligations arising
from employee benefits and employee arrangements; (iii) Capital Lease
Obligations of such person; (iv) all Indebtedness of others secured by a Lien on
any asset of such person (other than assets referred to in clause (vi) of the
provision described in the third paragraph under "-- Certain
Covenants -- Limitation on Restricted Payments" and the proceeds of such assets)
whether or not such Indebtedness is assumed or guaranteed by such person; (v)
all Indebtedness of others guaranteed by such person; and (vi) all Redeemable
Stock, valued at the greater of its voluntary or involuntary maximum fixed
repurchase price (or its stated liquidation value in the case of Preferred Stock
that is not by its terms redeemable) exclusive of accrued and unpaid dividends;
and the amounts thereof shall be
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the outstanding balance of any such unconditional obligations as described in
clauses (i) through (v) (other than clause (iv)), and the maximum liability of
any such contingent obligations at such date as described in clauses (i) through
(v) (other than with respect to clause (iv)), and, in the case of clause (iv),
the lesser of the fair value (as determined by the Board of Directors) at such
date of any asset subject to any Lien securing the Indebtedness of others and
the principal amount of the Indebtedness secured; provided that the Indebtedness
of any person shall not include (x) obligations of such person arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds in the ordinary course
of business; provided that such obligations are extinguished within two Business
Days after their Incurrence and (y) obligations of such person resulting from
the endorsement of negotiable instruments in the ordinary course of business.
For purposes of the Indenture, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were purchased on any date on which Indebtedness is required to
be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Redeemable Stock, such fair market
value shall be determined in good faith by the board of directors of the issuer
of such Redeemable Stock.
"Intercompany Note" means that certain intercompany note, dated as of the
Issue Date, payable by MAXXAM to the Company.
"Interest Payment Default" means a default in the payment of interest when
due and payable on any of the Notes which would constitute an Event of Default
if such payment were not made within the applicable cure or grace period.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement, currency swap agreement or other
financial agreement or arrangement designed to protect the Company or any
Subsidiary of the Company against fluctuations in interest rates or currency
exchange rates, as in effect from time to time.
"Investment" means, with respect to any person (such person being referred
to in this definition as the "Investor") (without duplication), (i) any amount
paid or any property transferred, in each case, directly or indirectly, by the
Investor for Capital Stock or Redeemable Stock, partnership interests or other
securities of, or as a contribution to the capital of any other person, (ii) any
direct or indirect loan or advance by the Investor to any other person other
than accounts receivable of the Investor relating to the purchase and sale of
property or services arising in the ordinary course of business, and (iii) any
direct or indirect guarantee by the Investor of any Indebtedness of any other
person.
"Issue Date" means the date of initial issuance of Notes pursuant to the
Indenture.
"Kaiser" means Kaiser Aluminum Corporation, a Delaware corporation, and any
successor pursuant to a transaction governed by and in accordance with the
provision described in the fourth paragraph under "-- Security -- Release and
Substitution of Pledged Kaiser Shares" or a similar provision of the MGI
Indenture (see the second paragraph under "Principal Indebtedness -- MGI
Notes -- Release and Substitution of Kaiser Shares").
"Kaiser Share Cash Equivalents" means (i) the amount of any Trust Moneys
constituting proceeds of any Primary Share Sale by Kaiser or a Pledged Share
Sale of Pledged Kaiser Shares or any Extraordinary Distribution on Pledged
Kaiser Shares (or the proceeds of any non-cash consideration received in any
such transaction) that are released from the Lien of the MGI Indenture and
thereupon pledged under the Indenture as a result of such Trust Moneys not
having been utilized to purchase MGI Notes pursuant to an offer by MGI to
purchase MGI Notes at a price at least equal to the respective Call Prices of
the MGI Notes or as a result of payment in full of the MGI Notes or defeasance
of the MGI Notes pursuant to Article 8 of the MGI Indenture, divided by (ii) the
greater of (A) the Net Proceeds per share received by the Company with respect
to Pledged Kaiser Shares released from the Lien of the MGI Indenture in the
transaction that resulted in the deposit of such Trust Moneys thereunder and (B)
$9.00 (as adjusted to reflect any subdivision, combination or reclassification
of Kaiser Shares). To the extent that any of the Net Proceeds referred to in
clause (ii)(A) of the preceding sentence are other than cash, the amount of such
non-cash Net Proceeds
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attributable to each Pledged Kaiser Share released from the Lien of the MGI
Indenture for purposes of such clause (ii)(A) shall be determined by a
nationally recognized investment banking firm selected by the Company based on
the fair market value per share of such non-cash Net Proceeds received by the
Company in such transaction. As used in this definition, each of the terms
Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary
Distribution, Trust Moneys, Call Prices and Net Proceeds has the meaning
ascribed to such term in the MGI Indenture (as in effect on the date of the
Indenture).
"Kaiser Shares" means, at any time, the 27,938,250 shares of common stock,
par value $.01 per share, of Kaiser owned by the Company, and, as of the Issue
Date, pledged under the MGI Indenture, as such shares are (and any number
thereof as utilized in the Indenture is) adjusted to reflect any subdivision,
combination or reclassification (in a merger or otherwise) of such Kaiser shares
on or after the Issue Date, and any securities or property substituted for such
Kaiser Shares pursuant to any Kaiser Transaction (as such term is defined in the
MGI Indenture as in effect on the date of the Indenture; see the second
paragraph under "Principal Indebtedness -- MGI Notes -- Release and Substitution
of Kaiser Shares") under the MGI Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required by applicable law to be open in the States of New
York, California, Minnesota and Texas.
"Lien" means, with respect to any asset, any lien, mortgage, pledge,
security interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement and any lease in the nature thereof) in
respect of such asset.
"Make-Whole Amount" with respect to a Note means an amount equal to the
excess, if any, of (i) the present value of the remaining interest, premium and
principal payments due on such Note as if such Note were redeemed on August 1,
2000, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (ii) the outstanding principal amount of such Note. "Treasury Rate"
is defined as the yield to maturity at the time of the computation of United
States Treasury securities with a constant maturity (as compiled by and
published in the most recent Federal Reserve Statistical Release H.15 (519),
which has become publicly available at least two Business Days prior to the date
of the redemption notice or, if such Statistical Release is no longer published,
any publicly available source of similar market data) most nearly equal to the
then remaining maturity of the Notes assuming redemption of the Notes on August
1, 2000; provided, however, that if the Make-Whole Average Life of such Note is
not equal to the constant maturity of the United States Treasury securities for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Make-Whole Average Life of such Notes is less than
one year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
"Make-Whole Average Life" means the number of years (calculated to the
nearest one-twelfth) between the date of redemption and August 1, 2000.
"Make-Whole Price" with respect to any Note means the greater of (i) the
sum of the outstanding principal amount and the Make-Whole Amount of such Note,
and (ii) 110% of the outstanding principal amount of such Note.
"MAXXAM" means MAXXAM Inc., a Delaware corporation, and, subject to the
provisions described under "-- Guaranty," any successor corporation by way of
merger, consolidation or purchase of all or substantially all of its assets.
"money" or "U.S. Legal Tender" means such coin or currency of the United
States of America as at the time of payment is legal tender for the payment of
public and private debts.
"MGI" means MAXXAM Group Inc., a Delaware corporation, and any successor
Restricted Subsidiary pursuant to a transaction governed by and in accordance
with the provision described above under "-- Security -- Merger by MGI."
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"MGI Indenture" means the Indenture dated as of August 4, 1993, between MGI
and Fleet National Bank, as successor to Shawmut Bank, N.A., as trustee,
pursuant to which the MGI Notes were issued, as the same has been or may be
amended, supplemented or otherwise modified from time to time.
"MGI Notes" means the debt securities outstanding pursuant to, and whose
terms are governed by, the MGI Indenture.
"MPI" means MAXXAM Properties Inc., a Delaware corporation, and any
successor corporation by way of merger, consolidation or purchase of all or
substantially all of its assets.
"MXM Guaranty" means the Unconditional Guarantee of Payment and Performance
dated June 17, 1991 to General Electric Capital Corp. by MAXXAM Inc. and MGI ,
as amended by agreements dated as of June 17, 1992 and December 30, 1992, as
amended, supplemented or otherwise modified from time to time in a manner that
is not materially adverse to the Holders.
"Net Cash Proceeds" means cash payments received (but if received in a
currency other than United States dollars, such payments shall not be deemed
received until the earliest time at which such currency is converted into United
States dollars) by the Company and/or any of its Restricted Subsidiaries
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, or the cash
realization of any non-cash proceeds of any Asset Sale, but, in each case, only
as and when, and to the extent, received by the Company or any of its Restricted
Subsidiaries) from an Asset Sale, in each case and without duplication, net of
(i) fees, expenses and other expenditures in connection with such Asset Sale
(whether or not such fees, expenses or expenditures are then due and payable or
made, as the case may be), (ii) the amounts paid to repurchase or repay any
Indebtedness, or the amount of any Indebtedness retained, in each case which
Indebtedness is either (A) secured, directly or indirectly, by Liens on the
assets which are the subject of such Asset Sale or (B) associated with such
assets and due in connection with such Asset Sale, and other fees, expenses and
other expenditures, in each case, incurred in connection with such Asset Sale or
the repurchase, repayment or assumption of such Indebtedness (whether or not
such fees, expenses or expenditures are then due and payable), (iii) all amounts
deemed appropriate by the Company (as evidenced by a signed certificate of the
Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to
be provided as a reserve, in accordance with GAAP, against any liabilities
associated with such assets which are the subject of such Asset Sale, (iv) all
foreign, federal, state and local taxes payable (including taxes reasonably
estimated to be payable) in connection with or as a result of such Asset Sale,
(v) with respect to any Asset Sale by a Restricted Subsidiary of the Company or
any Primary Share Sale, the portion of such cash payments required to be paid to
persons holding a minority interest in such Restricted Subsidiary and (vi) if
such Asset Sale is a Primary Share Sale by MGI, any of the proceeds from such
Primary Share Sale distributed by the issuer in such Primary Share Sale to its
stockholders; provided, in each such case, such fees, expenses, expenditures and
other amounts are not payable to an Affiliate of the Company.
"Net Proceeds" means any property, assets or other consideration of any
kind, whether tangible or intangible, received by the Company as a dividend or
distribution on any Pledged Shares of proceeds of any Primary Share Sale by, or
from any Pledged Share Sale of any of the Pledged Shares of, MGI or Kaiser, in
each case and without duplication net of (i) fees, expenses and other
expenditures in connection with such Pledged Share Sale (whether or not such
fees, expenses or expenditures are then due and payable or made, as the case may
be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the
amount of any Indebtedness assumed, in each case which Indebtedness is either
(A) secured, directly or indirectly, by Liens on the assets which are the
subject of such Pledged Share Sale or (B) associated with such assets and due in
connection with such Pledged Share Sale, and other fees, expenses and other
expenditures, in each case, incurred in connection with such Pledged Share Sale
or the repurchase, repayment or assumption of such Indebtedness (whether or not
such fees, expenses or expenditures are then due and payable), (iii) all amounts
deemed appropriate by the Company (as evidenced by a signed certificate of the
Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to
be provided as a reserve, in accordance with GAAP, against any liabilities
associated with such shares which are the subject of such Pledged Share Sale and
(iv) all foreign, federal, state and local taxes payable (including taxes
reasonably estimated to be payable) in
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connection with or as a result of such dividend or distribution or Pledged Share
Sale; provided, in each such case, such fees, expenses, expenditures and other
amounts are not payable to an Affiliate of the Company; and provided, further,
that, if other than cash, Net Proceeds shall have as their value for purposes of
the Indenture their fair value as reasonably determined by the Board of
Directors.
"Notice of Acceleration" means a written notice delivered during the
continuance of an Event of Default to the Company by the Trustee or by the
holders of at least 25% in aggregate principal amount of Notes then outstanding,
stating that an Event of Default has occurred and is continuing and that the
principal amount of and accrued and unpaid interest, if any, on all of the Notes
are due and payable; provided that a Notice of Acceleration shall be deemed to
have been delivered and to be effective for all purposes under Article 10 of the
Indenture upon the occurrence and during the continuance of certain events of
bankruptcy with respect to the Company constituting Events of Default.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer,
the Secretary, an Assistant Secretary, the Controller or an Assistant Controller
of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee, as the case may be.
"Pacific Lumber" means The Pacific Lumber Company, a Delaware corporation,
and any successor corporation by way of merger, consolidation or purchase of all
or substantially all of its assets.
"Pacific Lumber Indenture" means the indenture, dated as of March 23, 1993,
between Pacific Lumber and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, as trustee, pursuant to which the Pacific
Lumber Senior Notes were issued, as amended, supplemented or otherwise modified,
or, in accordance with and subject to the provisions of the Indenture described
below in the third paragraph under "-- Limitation on Indebtedness," restated,
restructured, renewed or refinanced in whole or in part from time to time.
"Pacific Lumber Senior Notes" means the debt securities outstanding
pursuant to, and whose terms are governed by, the Pacific Lumber Indenture.
"person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Pledged Kaiser Shares" means, at any time, any Kaiser Shares which are
included in the Collateral at such time, and any securities or other property
substituted for Pledged Kaiser Shares pursuant to the provision described above
in the fourth paragraph under "-- Security -- Release and Substitution of
Pledged Kaiser Shares" included in the Collateral at such time.
"Pledged MGI Shares" means, at any time, any shares of Stock of MGI
included in the Collateral at such time, and any securities or other property
substituted for Pledged MGI Shares pursuant to the provision described above
under "-- Security -- Merger by MGI" included in the Collateral at such time.
"Pledged Share Sale" means a sale to any person of Pledged Shares other
than (i) a sale in connection with a transaction pursuant to and in accordance
with the provision described above under "-- Security -- Merger by MGI," (ii) a
sale in connection with a transaction pursuant to and in accordance with the
provision described above in the fourth paragraph under "-- Security -- Release
and Substitution of Pledged Kaiser Shares" or (iii) a sale of Pledged MGI Shares
by the Company or one of its Subsidiaries to any of the Company's Subsidiaries,
in which the purchaser becomes a pledgor with respect to such Pledged Shares
pursuant to Article 10 of the Indenture.
"Pledged Shares" means the Pledged MGI Shares and the Pledged Kaiser
Shares.
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"Preferred Stock," as applied to the Capital Stock or Redeemable Stock of
any corporation, means Capital Stock or Redeemable Stock of any class or classes
(however designated) which is preferred as to the payment of dividends, or as to
the distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such corporation, over shares of Capital Stock or Redeemable
Stock, as the case may be, of any other class of such corporation.
"Primary Share Sale" means (i) any issuance and sale of Stock by MGI other
than to the Company or any of its Subsidiaries (provided that no issuance of
Stock in connection with a transaction pursuant to and in accordance with the
provision described above under "-- Security -- Merger by MGI" shall constitute
a Primary Share Sale) and (ii) any issuance and sale of common stock by Kaiser
(provided that no issuance of Stock in connection with a transaction pursuant to
and in accordance with the provision described above in the fourth paragraph
under "-- Security -- Release and Substitution of Pledged Kaiser Shares," or
pursuant to and in accordance with any similar provision of the MGI Indenture as
in effect on the date of the Indenture, shall constitute a Primary Share Sale).
"Public Equity Offering" means an underwritten public offering of common
stock of the Company or MGI (or the successor in a transaction with MGI pursuant
to the provision described above under " -- Security -- Merger by MGI") pursuant
to an effective registration statement filed pursuant to the Securities Act.
"Redeemable Stock" of any person means any equity security of such person
that by its terms is required to be redeemed prior to the final Stated Maturity
of all principal of the Notes, or is redeemable at the option of the holder
thereof at any time prior to the final Stated Maturity of all principal of the
Notes and shall also include, in the case of the Company, all Preferred Stock of
the Company's Restricted Subsidiaries.
"Released Kaiser Shares" means (i) all or any portion of the Kaiser Shares
transferred to the Company by MAXXAM as of the Issue Date (as such shares are
(and any number thereof as utilized in the Indenture is) adjusted to reflect any
subdivision, combination or reclassification (in a merger or otherwise) of such
Kaiser Shares on or after the Issue Date) that are released after the Issue Date
from the Lien of the MGI Indenture as a result of (a) payment in full of the MGI
Notes, (b) defeasance of the MGI Notes pursuant to Article 8 of the MGI
Indenture, or (c) early retirement of a portion of the MGI Notes resulting in a
release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant
to Section 10.05(c)(1) thereof (see the first paragraph under "Description of
Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser
Shares"); and (ii) all or any portion of any securities or other property
substituted for Kaiser Shares under the MGI Indenture pursuant to a transaction
described in the second paragraph under "Description of Principal
Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares" that are
released from the Lien of the MGI Indenture as a result of an occurrence
referred to in clause (a), (b) or (c) of the preceding clause (i); provided,
however, that Kaiser Shares and other collateral released from the Lien of the
MGI Indenture pledged to secure Indebtedness that refinances the MGI Notes (as
permitted by the provision described in the third paragraph under
" -- Security -- Collateral") shall not be deemed to be Released Kaiser Shares.
"Restricted Investment" means any Investment in an Affiliate (other than
any Unrestricted Subsidiary referred to in the provision described in the last
paragraph under " -- Certain Covenants -- Limitation on Restricted Payments") of
the Company, except for (i) the Intercompany Note and (ii) the Company's
ownership of Kaiser Shares or any other asset that is included in the Collateral
under the Indenture or the collateral under the MGI Indenture.
"Restricted Subsidiary" means, as of any determination date, each of the
Subsidiaries of the Company which is not as of such determination date an
Unrestricted Subsidiary of the Company.
"Salmon Creek" means Salmon Creek Corporation, a Delaware corporation, or
any successor corporation, by way of merger, consolidation, purchase of all or
substantially all of its assets, or otherwise, which holds the Salmon Creek
Property on the date of the Indenture but which may not acquire any other assets
(other than assets incidental to the operation, disposition, management and
maintenance of the Salmon Creek Property or assets received (i) in respect of
all or any part of the Stock of Salmon Creek, (ii) in respect of all
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or any part of the real property constituting the Salmon Creek Property or (iii)
otherwise in connection with Salmon Creek or the Salmon Creek Property, except
in connection with the harvesting of timber located on the Salmon Creek
Property), except in exchange for or out of the proceeds of the sale or
disposition of the Salmon Creek Property.
"Salmon Creek Distribution" means a dividend or other distribution
identified as a "Salmon Creek Distribution" by the Company in writing to the
Trustee at the time of such dividend or other distribution. The Indenture
provides that the Company will not so identify any dividend or distribution,
except for any dividends and other distributions on Pledged MGI Shares or on
shares of Stock of any other Restricted Subsidiary of the Company of amounts or
other consideration received by the Company or any of its Subsidiaries from any
person or entity (i) in respect of all or any part of the Stock of Salmon Creek,
(ii) in respect of all or any part of the real property constituting the Salmon
Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon
Creek Property, except in connection with the harvesting of timber located on
the Salmon Creek Property.
"Salmon Creek Property" means any of the property described on Exhibit C to
the Indenture or any assets or Stock, in each case, held by Salmon Creek.
"Scotia Pacific" means Scotia Pacific Holding Company, a Delaware
corporation, and any successor corporation, by way of merger, consolidation,
purchase of all or substantially all of its assets, or otherwise.
"Scotia Pacific Agreements" means any agreements between Scotia Pacific and
Pacific Lumber or any Subsidiary of Pacific Lumber as the same may be amended
after the date of the Indenture in accordance with the terms thereof, including,
without limitation, the Master Purchase Agreement, dated as of March 23, 1993,
between Scotia Pacific and Pacific Lumber, the Services Agreement, dated as of
March 23, 1993, between Scotia Pacific and Pacific Lumber, the Additional
Services Agreement, dated as of March 23, 1993, between Scotia Pacific and
Pacific Lumber, the Environmental Indemnification Agreement, dated as of March
23, 1993, between Scotia Pacific and Pacific Lumber, and the Reciprocal Rights
Agreement, dated as of March 18, 1993, among Scotia Pacific, Pacific Lumber and
Salmon Creek.
"Securities Act" means the Securities Act of 1933, as amended (or any
successor statute thereto), and the rules and regulations promulgated
thereunder.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
which at the time of determination had, or any group of Restricted Subsidiaries
which, if merged into each other at the time of determination, would at the time
of determination have had, (i) assets which, as of the date of the Company's
most recent quarterly consolidated balance sheet, constituted at least 10% of
the Company's total assets on a consolidated basis as of such date, (ii)
revenues for the 12-month period ending on the date of the Company's most recent
quarterly consolidated statement of income which constituted at least 10% of the
Company's total revenues on a consolidated basis for such period or (iii) EBITDA
for the 12-month period ending on the date of the Company's most recent
quarterly consolidated statement of income which constituted at least 10% of the
Company's total EBITDA on a consolidated basis for such period (it being
understood that for the purposes of clause (iii) of this definition, EBITDA of
any Restricted Subsidiary or group of Restricted Subsidiaries of the Company for
any period shall be that portion of the Company's total EBITDA attributable to
such Restricted Subsidiary or group of Restricted Subsidiaries during such
period).
"Stated Maturity," when used with respect to the payment of any principal
of, or accrued interest on, any Note, means the date specified in such Note as
the fixed date on which such principal of or accrued interest on such Note is
due and payable, as the case may be.
"Stock" of any person means, collectively, the Capital Stock and the
Redeemable Stock of such person.
"Subsidiary" means, with respect to any person, (i) any corporation of
which more than 50% of the outstanding Capital Stock and Redeemable Stock having
ordinary voting power to elect a majority of the board of directors of the
corporation (irrespective of whether at the time Capital Stock or Redeemable
Stock of any other class or classes of such corporation shall or might have
voting power upon the occurrence of any contingency) is at the time owned,
directly or indirectly, by such person, or by one or more other Subsidiaries
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of such person, or by such person and one or more other Subsidiaries of such
person, or (ii) any other entity of which more than 50% of the outstanding
equity ownership interests are at the time owned, directly or indirectly, by
such person, or by one or more other Subsidiaries of such person, or by such
person and one or more other Subsidiaries of such person. Notwithstanding the
foregoing, neither Kaiser nor any Subsidiary of Kaiser shall be deemed a
Subsidiary of the Company for any purpose under the Indenture unless ownership
by the Company of more than 50% of the outstanding Capital Stock of Kaiser
resulted from the acquisition (other than in connection with a Kaiser
Transaction, a dividend or distribution on Capital Stock of Kaiser, a
reclassification of shares of Capital Stock of Kaiser or any other transaction
in which the Company or any Restricted Subsidiary of the Company receives
Capital Stock or other securities of Kaiser in exchange for or in respect of
other shares of Capital Stock or securities of Kaiser) by the Company of Kaiser
Capital Stock after the Issue Date.
"Taking" means any sale, transfer or other disposition of all or any part
of the assets of the Company and its Restricted Subsidiaries that occurs by
reason of condemnation or eminent domain or other similar proceedings exercised
by, or by consensual transfer by the Company or its Restricted Subsidiaries of
assets to, the United States of America or any State, municipality, agency or
other governmental authority thereof.
"Tax Sharing Agreements" means (i) the tax allocation agreement, dated May
21, 1988, by and among MAXXAM, Pacific Lumber and certain other subsidiaries of
MAXXAM and MGI, as amended by the tax allocation agreement, dated as of March
23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek,
and as further amended by the tax allocation agreement, dated as of August 4,
1993, by and between MAXXAM and MGI, (ii) the tax allocation agreement, dated as
of July 3, 1990, by and between MAXXAM and Britt and (iii) the tax allocation
agreement, dated as of the Issue Date, by and between MAXXAM and the Company;
each as amended, supplemented or otherwise modified from time to time.
"Timber Note Indenture" means the indenture, dated as of March 23, 1993,
between Scotia Pacific and State Street Bank and Trust Company, as successor to
The First National Bank of Boston, as trustee, pursuant to which the Timber
Notes were issued, as amended, supplemented or otherwise modified from time to
time.
"Timber Notes" means the 7.95% Timber Collateralized Notes due 2015, issued
by Scotia Pacific as amended, supplemented or otherwise modified, in whole or in
part, from time to time in accordance with the terms of the Timber Note
Indenture.
"Trustee" means the party named as such in the Indenture until a successor
replaces it in accordance with the terms of the Indenture and, thereafter, means
the successor.
"Trust Moneys" has the meaning ascribed to such term in the first paragraph
under " -- Security -- Deposit of Trust Moneys into Accounts."
"Uniform Commercial Code" means the New York Uniform Commercial Code as in
effect from time to time, except with respect to matters concerning the validity
and perfection of security interests of the Trustee in favor of the Holders in
the Accounts, in which case such term shall mean the Minnesota Uniform
Commercial Code as in effect from time to time.
"Unrestricted Investments Outstanding" means, at any time of determination,
in respect of any Unrestricted Subsidiary, the difference between (i) the sum of
all Unrestricted Investments theretofore made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary after the date of the Indenture,
minus (ii) the amount of all dividends and distributions paid to the Company or
a Restricted Subsidiary (to the extent that the Company does not elect to
include the amount of such dividends and distributions in the computation of
Consolidated Net Income pursuant to the parenthetical of clause (iii) of the
definition thereof at the time of determination), and all repayments of the
principal amount of loans or advances by such Unrestricted Subsidiary to the
Company or any of its Restricted Subsidiaries during the period that such person
was an Unrestricted Subsidiary and any other reduction of Unrestricted
Investments in such Unrestricted Subsidiary during the period that such person
was an Unrestricted Subsidiary (the amount of any Unrestricted Investment
returned or reduced, if other than in cash or a sum certain guaranteed, to be
the fair market value as determined in good faith by the Board of Directors,
whose determination shall be evidenced
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by a resolution of the Board of Directors filed with the Trustee); provided that
the amount of Unrestricted Investments Outstanding in respect of any
Unrestricted Subsidiary shall at no time be a negative amount.
"Unrestricted Subsidiary" means (i) each of the Subsidiaries of the Company
so designated by a resolution adopted by the Company's Board of Directors and
whose creditors have no direct or indirect recourse (including, but not limited
to, recourse with respect to the payment of principal or interest on
Indebtedness of such Subsidiary) to the Company or a Restricted Subsidiary
(except to the extent such recourse arises (A) solely by operation of law and
not pursuant to a contractual or other consensual arrangement or (B) pursuant to
an Investment or a Restricted Investment permitted by the Indenture), (ii) any
joint venture, partnership or other person (other than a Subsidiary of the
Company, Kaiser or a Subsidiary of Kaiser) in which the Company and/or its
Subsidiaries have an equity ownership interest equal to or greater than 5% and
(except for any Unrestricted Subsidiary referred to in the provision described
in the last paragraph under " -- Certain Covenants -- Limitation on Restricted
Payments") in which no Affiliate of the Company has a direct or an indirect
equity ownership interest in excess of 5% therein other than by virtue of the
direct or indirect equity ownership interest in such joint venture, partnership
or other person held (in the aggregate) by the Company and/or one or more of its
Subsidiaries and (iii) Salmon Creek. The Board of Directors may designate an
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that any such
redesignation shall be deemed to be an Incurrence by the Company and its
Restricted Subsidiaries of the Indebtedness (if any) of such redesignated
Restricted Subsidiary for purposes of the covenant described below under
" -- Certain Covenants -- Limitation on Indebtedness" as of the date of such
redesignation to the extent that such Indebtedness does not already constitute
Indebtedness of the Company or one or more of its Restricted Subsidiaries.
Subject to the foregoing, the Board of Directors of the Company also may
designate any Restricted Subsidiary (other than Scotia Pacific so long as there
are any Timber Notes outstanding) to be an Unrestricted Subsidiary, provided
that (x) the amount of any outstanding Investments by the Company and its
Restricted Subsidiaries in such Restricted Subsidiary shall be deemed to be
Unrestricted Investments Outstanding at the time of such designation and (y)
immediately after giving effect to such designation and to the characterization
of the Investments by the Company and its Restricted Subsidiaries in such newly
designated Unrestricted Subsidiary, the Company and its remaining Restricted
Subsidiaries could make at least $1.00 of additional Restricted Payments or
Unrestricted Investments pursuant to the covenant described below under
" -- Certain Covenants -- Limitation on Restricted Payments."
"U.S. Governmental Obligations" means any evidence of obligations issued
directly or fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof for the payment of which the full faith and
credit of the United States of America is pledged and which are not callable at
the issuer's option.
"U.S. Legal Tender." See the definition of "money."
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary (i)
which is a corporation of which all of the outstanding shares of Capital Stock
and Redeemable Stock having ordinary voting power to elect a majority of the
board of directors of such corporation (irrespective of whether at the time
Capital Stock or Redeemable Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) are owned at the time, directly or indirectly (through one or more
Wholly Owned Restricted Subsidiaries), by the Company (except for director's
qualifying shares), or (ii) which is any other entity of which all of the
outstanding equity ownership interests are owned at the time, directly or
indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the
Company.
CERTAIN COVENANTS
Limitation on Indebtedness
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or become liable with respect to, contingently
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or otherwise (collectively, "Incur"), any Indebtedness (including, without
duplication, guarantees of Indebtedness by the Company and/or its Restricted
Subsidiaries), except that the Company and its Restricted Subsidiaries (other
than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur
Indebtedness (including, without duplication, guarantees of Indebtedness by the
Company and/or its Restricted Subsidiaries), if, immediately after giving effect
thereto and the receipt and application of the proceeds thereof, the
Consolidated Cash Flow Coverage Ratio of the Company would exceed 2.0 to 1.
Notwithstanding the foregoing provision, the Company and/or its Restricted
Subsidiaries (other than, except in the case of clauses (xi) and (xii) below,
Scotia Pacific so long as there are any Timber Notes outstanding) may Incur
(without duplication) the following: (i) Indebtedness in respect of the Notes;
(ii) aggregate Indebtedness under the Credit Agreement in an amount not to
exceed at any time outstanding $40,000,000; (iii) Indebtedness outstanding on
the Issue Date, including the indebtedness outstanding pursuant to the MGI
Indenture or the Pacific Lumber Indenture (other than the Timber Notes which are
governed by clause (xi) below); (iv) Indebtedness in connection with one or more
letters of credit issued pursuant to (A) self-insurance obligations (other than
workmen's compensation obligations), the aggregate face or stated amount of
which, together with the aggregate amount of any related reimbursement
obligations (without duplication) does not exceed $1,000,000 at any time
outstanding, and (B) workmen's compensation obligations; (v) Indebtedness owed
by the Company to a Restricted Subsidiary or owed by a Restricted Subsidiary to
the Company or to any other Restricted Subsidiary of the Company; (vi) Capital
Lease Obligations (other than Capital Lease Obligations permitted by clause
(xii) below) not exceeding in the aggregate $10,000,000 at any time outstanding;
(vii) Indebtedness under any Interest Rate Protection Agreement to the extent
that such Interest Rate Protection Agreement is related to payment obligations
on Indebtedness otherwise permitted under the Limitation on Indebtedness
covenant; (viii) Indebtedness Incurred in connection with Indebtedness the
interest on which is exempt from federal income tax under the Code in an
aggregate amount not exceeding $10,000,000 at any time outstanding; (ix)
Indebtedness owed to or guaranteed by any governmental agency, instrumentality
or other authority Incurred to provide relief from natural disasters or other
similar assistance; (x) Indebtedness Incurred after August 4, 1993 (in addition
to (and without duplication of) Indebtedness otherwise permitted by the
Limitation on Indebtedness covenant), in an aggregate principal amount not
exceeding $25,000,000 at any one time outstanding in the case of Indebtedness
Incurred by Pacific Lumber and its Subsidiaries which are Restricted
Subsidiaries, $15,000,000 at any one time outstanding in the case of
Indebtedness Incurred by MGI and its Restricted Subsidiaries other than Pacific
Lumber and its Subsidiaries that are Restricted Subsidiaries, and $7,500,000 at
any one time outstanding in the case of Indebtedness Incurred by the Company;
(xi) Indebtedness of Scotia Pacific under the Timber Notes or the Timber Note
Indenture or in respect of the Scotia Pacific Agreements or any other agreement
entered into in connection with the Timber Notes, as the same may be amended
from time to time in accordance with the covenant described below under
"Amendment of Scotia Pacific Agreements"; and (xii) Capital Lease Obligations of
Scotia Pacific.
Notwithstanding anything to the contrary in the two immediately preceding
paragraphs, the Indenture permits the Company and its Restricted Subsidiaries
(other than Scotia Pacific so long as there are any Timber Notes outstanding) to
Incur Indebtedness all of the net proceeds of which (after premiums, reasonable
fees, expenses, and costs related to the Incurrence of such Indebtedness) are
applied to renew, extend, restructure, restate, refund or otherwise refinance,
in whole or in part (collectively "refinance"), the Indebtedness permitted by
the provisions described in the first paragraph of this description of the
limitation of Indebtedness or in clauses (i) and (iii) of the immediately
preceding paragraph or any one or more successive refinancings thereof
(collectively, "Refinancing Indebtedness"), provided that: (i) such Refinancing
Indebtedness is in an aggregate amount not exceeding the aggregate amount
outstanding of the Indebtedness being so refinanced plus an amount equal to the
premiums, reasonable fees and expenses incurred in connection with such
refinancing; (ii) with respect to Refinancing Indebtedness which refinances
Indebtedness of the Company which ranks (pursuant to its terms) subordinate in
right and priority of payment to the Notes, (A) the final stated maturity date
of such Refinancing Indebtedness shall not be earlier than the final stated
maturity date of the Indebtedness being so refinanced, (B) in the case of such
Refinancing Indebtedness Incurred by the Company, such Refinancing Indebtedness
is ranked (pursuant to its terms) subordinate in right and priority of payment
to the Notes to the same extent as the Indebtedness being so refinanced, and
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(C) such Refinancing Indebtedness has an Average Life at the time it is Incurred
which is not less than the remaining Average Life of the Indebtedness being so
refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing
Indebtedness to refinance Indebtedness of the Company pursuant to the provisions
described in this paragraph except to the extent that such Refinancing
Indebtedness constitutes a guarantee by such Restricted Subsidiary of
Indebtedness of the Company (it being understood that such Restricted Subsidiary
may incur Indebtedness to refinance Indebtedness of the Company to the extent
that the Incurrence of such Indebtedness is otherwise permitted by the
provisions described in the preceding two paragraphs).
Any revocation of the designation of an Unrestricted Subsidiary shall be
deemed for purposes of the Limitation on Indebtedness covenant to be an
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of the
Indebtedness of such Unrestricted Subsidiary as of the time of such revocation
to the extent such Indebtedness does not already constitute Indebtedness of the
Company or one of its Restricted Subsidiaries.
Notwithstanding anything to the contrary in the foregoing, so long as Britt
remains a Restricted Subsidiary, Britt may not Incur after the Issue Date
Indebtedness (other than Indebtedness in respect of the Notes, the MGI Notes and
Indebtedness owed to the Company or MGI and Refinancing Indebtedness in respect
of the foregoing) in an aggregate principal amount exceeding $5,000,000 at any
time outstanding.
The Indenture contains no limitations on the amount of Indebtedness which
any Unrestricted Subsidiary may incur, create, assume, guarantee or otherwise
become liable.
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary, directly or indirectly, to, (i)(x) declare or pay any
dividend or make any distribution on the Company's Capital Stock or the
Company's Redeemable Stock (other than (A) in either case, dividends or
distributions payable in Capital Stock that is not convertible or exchangeable
into Redeemable Stock or Indebtedness of the Company and (B) in the case of the
Company's Redeemable Stock, dividends and distributions in an amount not
exceeding (in addition to any dividends or distributions declared or paid in
accordance with clause (A) above) the amount stated to be payable on such
Redeemable Stock pursuant to the provisions thereof) or (y) purchase, redeem or
otherwise acquire or retire for value any Capital Stock or Redeemable Stock of
the Company (each of the foregoing in clauses (x) and (y) a "Restricted
Payment"), (ii) make any Restricted Investment, (iii) make any Investment in an
Unrestricted Subsidiary (an "Unrestricted Investment"), or (iv) redeem,
repurchase, defease or otherwise acquire or retire for value (a "Repurchase"),
prior to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, Indebtedness of the Company which ranks (pursuant to its terms)
subordinate in right and priority of payment to the Notes and which was
scheduled to mature subsequent to the final stated maturity of all principal of
the Notes (other than acquisitions of such Indebtedness in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of such acquisition), if, at the
time of such Restricted Payment, Restricted Investment, Unrestricted Investment
or Repurchase: (A) a Default shall have occurred and be continuing; or (B) after
giving effect to such Restricted Payment, Restricted Investment, Unrestricted
Investment or Repurchase, by the Company or any Restricted Subsidiary, the
aggregate amount (i) expended for all such Restricted Payments and Repurchases
subsequent to the Issue Date, (ii) of all Restricted Investments then
outstanding (the amount expended for such Restricted Payments, Repurchases and
Restricted Investments subsequent to the Issue Date, the amount of any
Restricted Investments outstanding at any time, and the amount of any Restricted
Investments returned or reduced, in each case if other than in cash or a sum
certain guaranteed, to be the fair market value as determined in good faith by
the Board of Directors, whose determination shall be evidenced by a resolution
of the Board of Directors filed with the Trustee), and (iii) of all Unrestricted
Investments Outstanding, exceeds the sum of: (1) 50% of the aggregate
Consolidated Net Income of the Company accrued on a cumulative basis subsequent
to September 30, 1996 (or, in case such aggregate cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss), and (2) the aggregate net cash
proceeds, received by the Company as capital contributions to the Company
subsequent to September 30, 1996, or from the issue or sale (other than to a
Subsidiary of the Company) subsequent to September 30, 1996 of Capital Stock
(including Capital Stock issued upon the conversion of, or
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in exchange for, Indebtedness or Redeemable Stock (other than that issued
pursuant to clause (ii) of the penultimate paragraph under this description of
the Limitation on Restricted Payments covenant) and including upon exercise of
warrants or options or other rights to purchase such Capital Stock, issued
subsequent to September 30, 1996), or from the issue or sale, subsequent to
September 30, 1996 of any Indebtedness (other than that issued pursuant to
clause (ii) of the penultimate paragraph under this description of the
Limitation on Restricted Payments covenant) or, without duplication, other
security of the Company convertible or exercisable into such Capital Stock that
has been so converted or exercised.
Transactions and payments which are permitted by the provisions described
below in the second paragraph under " -- Limitation on Transactions with
Affiliates" will not be considered Restricted Payments or Restricted
Investments.
The provisions of the Limitation on Restricted Payments covenant described
above will not be violated by reason of: (i) the payment of any dividend or
distribution or the redemption of any securities within 60 days after the date
of declaration of such dividend or distribution or the giving of the formal
notice of such redemption, if at said date of declaration of such dividend or
distribution or the giving of the formal notice of such redemption, such
dividend, distribution or redemption would have complied with the first
paragraph under this description of the Limitation on Restricted Payments
covenant and so long as no Event of Default exists as of the payment date; (ii)
redemptions, repurchases, defeasances, acquisitions or retirements for value, of
indebtedness of the Company which ranks (pursuant to its terms) subordinate in
right and priority of payment to the Notes from the proceeds of Refinancing
Indebtedness permitted by the provision described above in the third paragraph
under " -- Limitation on Indebtedness"; (iii) the acquisition, redemption or
retirement of any shares of the Company's Capital Stock or any Indebtedness of
the Company in exchange for, or in connection with a substantially concurrent
issuance of, Capital Stock of the Company (provided such Capital Stock is not
exchangeable for or convertible into Redeemable Stock or Indebtedness of the
Company or any of its Subsidiaries); (iv) the repurchase of the Company's
Capital Stock or Redeemable Stock with the proceeds of a substantially
concurrent issuance of the Company's Capital Stock that is not convertible or
exchangeable into Redeemable Stock or Indebtedness of the Company; (v) the
making by Pacific Lumber or its Restricted Subsidiaries of an Unrestricted
Investment to the extent the amount of Unrestricted Investments Outstanding made
pursuant to this clause (v) does not exceed $25 million, provided that none of
the funds used by Pacific Lumber or its Restricted Subsidiaries to make any such
Unrestricted Investment is obtained from the Company or any Restricted
Subsidiary (other than Pacific Lumber or a Restricted Subsidiary of Pacific
Lumber); (vi) dividends or distributions of (A) any Kaiser Shares that are
either (x) released from the Lien of the Indenture pursuant to the provision
described in the second paragraph under " -- Security -- Release and
Substitution of Pledged Kaiser Shares" or (y) Released Kaiser Shares that are
not required to be subjected to the Lien of the Indenture upon release from the
Lien of the MGI Indenture or (B) cash, securities or other property received by
the Company upon the sale of any such Kaiser Shares or (C) any proceeds of
Kaiser Shares that are (x) released from the Lien of the Indenture or (y)
released from the Lien of the MGI Indenture and not required to be subjected to
the Lien of the Indenture upon such release; or (vii) the payment of any
dividends or distributions by the Company with fifty percent (50%) of the fair
market value (as determined in good faith by the Board of Directors, whose
determination shall be evidenced by a resolution of the Board of Directors filed
with the Trustee) of Salmon Creek Distributions received by the Company (less
50% of any income taxes payable by the Company in respect of the receipt by the
Company of such Salmon Creek Distributions, or in respect of the sale or other
disposition by the Company of any non-cash proceeds of such Salmon Creek
Distributions (to the extent that Salmon Creek Distributions dividended or
distributed by the Company are the proceeds of such sales or other
dispositions)) provided that: (x) such dividends or distributions (to the extent
made in cash) shall not exceed 50% of the amount of cash so received by the
Company (including any cash realization of any non-cash proceeds of any Salmon
Creek Distribution, but, in each case, only as, when, and to the extent,
received by the Company) in respect of Salmon Creek Distributions, and (y) such
dividends or distributions (to the extent made in kind with property received by
the Company in a Salmon Creek Distribution) shall be valued at fair market value
(as determined in good faith by the Board of Directors, whose determination
shall be evidenced by a resolution of the Board of Directors filed with the
Trustee, except to the extent the fair market value exceeds $10 million, in
which case such determination shall be made by an investment banking firm with
capital of at
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least $250 million or a nationally recognized appraiser or other expert selected
by the Company whose opinion shall be delivered, and shall be acceptable, to the
Trustee). No payment or other transfer made pursuant to the provisions described
in clauses (ii) through (vii) of this paragraph will reduce the amount available
for Restricted Payments, Restricted Investments, Unrestricted Investments or
Repurchases under the provisions described in the first paragraph under this
description of the Limitation on Restricted Payments covenant and the
application of proceeds from the issuance of Capital Stock applied pursuant to
the provision described in clause (iii) or (iv) of this paragraph will not
reduce the amount available for Restricted Payments, Restricted Investments,
Unrestricted Investments or Repurchases under the provisions described in the
first paragraph under this description of the Limitation on Restricted Payments
covenant; provided, however, that the proceeds from the issuance of Capital
Stock pursuant to the provisions described in clauses (iii) and (iv) of this
paragraph will not increase the amount available for Restricted Payments,
Unrestricted Investments, Restricted Investments and Repurchases under the
provisions described in the first paragraph under this description of the
Limitation on Restricted Payments covenant.
Notwithstanding anything to the contrary contained in the Indenture (but
subject to the covenant entitled " -- Limitation on Transactions With
Affiliates"), the Company or any of its Restricted Subsidiaries shall be
permitted to contribute any non-cash proceeds received in respect of a Salmon
Creek Distribution to one or more Unrestricted Subsidiaries and such
contribution(s) shall not constitute an Unrestricted Investment under the
Indenture.
Ownership of Capital Stock of Subsidiaries and Kaiser Shares
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of,
directly or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia
Pacific (it being understood that no issue, sale, assignment, transfer or other
disposition of any Capital Stock or Redeemable Stock of any Restricted
Subsidiary (other than Scotia Pacific) shall be deemed to violate the provision
described in this clause (i) provided that Pacific Lumber thereafter continues
to own directly all outstanding Stock of Scotia Pacific), (ii) any Capital Stock
or Redeemable Stock of MGI, Pacific Lumber, Britt or MPI if immediately
thereafter, or as a consequence thereof, the Company shall beneficially own,
directly or indirectly, less than a majority of the Voting Stock and outstanding
equity interests (on a fully diluted basis) of any such company (other than in a
transaction governed by and in compliance with the provision described above
under "-- Security -- Merger by MGI" or Section 10.13 of the MGI Indenture (as
in effect on the date of the Indenture)), (iii) any assets of Scotia Pacific for
consideration consisting in whole or in part of Capital Stock or Redeemable
Stock of another person which is not a Wholly Owned Restricted Subsidiary, (iv)
any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than
Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) (except to the Company or to
one or more Restricted Subsidiaries) or any assets of any Restricted Subsidiary
(other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) for consideration
consisting in whole or in part of Capital Stock or Redeemable Stock of another
person which is not a Wholly Owned Restricted Subsidiary unless, in the case of
this clause (iv), immediately after giving effect thereto and the receipt and
application of the proceeds therefrom, the Consolidated Cash Flow Coverage Ratio
of the Company would be greater than 1.5 to 1; provided, however, that this
provision shall permit, assuming compliance with certain provisions governing
the release of Collateral described above under "-- Security" (including the
provisions described under "-- Merger by MGI") and the provisions described
below under " -- Successor Company," in each case to the extent applicable, the
disposition in a single transaction or in a series of related transactions of
all of the Capital Stock of any Restricted Subsidiary then owned by the Company
or its Restricted Subsidiaries for a consideration consisting of cash or other
property (other than Capital Stock or Redeemable Stock of another person) which
is at least equal to the fair value (as reasonably determined by the Board of
Directors of the Company) of such Capital Stock; and provided, further, that any
entity resulting from any transaction or disposition permitted by the covenant
described in clause (iv) of this paragraph shall be or become a Restricted
Subsidiary.
The Indenture also provides that, until such time as the maximum number of
Kaiser Shares required to be pledged as Collateral pursuant to the Indenture are
included in the Collateral, the Company shall not sell, transfer, assign, pledge
or otherwise dispose of any Kaiser Shares (i) to a Subsidiary of the Company or
to
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MAXXAM or (ii) in violation of any of the provisions of the MGI Indenture. In
addition, the Indenture provides that the Company shall not sell, transfer,
assign, pledge or otherwise dispose of any Pledged Shares except pursuant to the
provisions described under "-- Security -- Release for Pledged Share Sales,"
"-- Release and Substitution of Pledged Kaiser Shares" and "-- Merger by MGI"
and under "-- Successor Company" and except for certain tax liens, liens arising
by operation of law and judgment liens.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual restriction or
encumbrance on the ability of any such Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or Redeemable
Stock or any other interest or participation in, or measured by, its profits, in
each case, owned by the Company, or pay any Indebtedness owed to the Company or
any Restricted Subsidiary of the Company, (ii) make loans or advances to the
Company or any Restricted Subsidiary of the Company, or (iii) make any transfer
of any of its assets to the Company or a Restricted Subsidiary.
The foregoing provisions will not prohibit encumbrances or restrictions now
or hereafter existing under or by reason of: (i) the Indenture, the MGI
Indenture or the Pacific Lumber Indenture; (ii) the Credit Agreement; (iii)(A)
customary provisions restricting subletting or assignment of any lease of the
Company or any Restricted Subsidiary of the Company, or (B) customary
restrictions imposed on the transfer of copyrighted or patented materials or
provisions in agreements that restrict the assignment of such agreement or any
rights thereunder; (iv) any instrument governing Indebtedness or other
obligations of a person acquired (whether pursuant to a purchase of stock or
assets) by the Company or any Restricted Subsidiary or applicable to any assets
so acquired at the time such person became a Subsidiary of the Company or such
assets were acquired by the Company or a Restricted Subsidiary (excluding
instruments entered into by such person in connection with, or in contemplation
of, its becoming a Subsidiary of the Company or its assets being acquired by the
Company or any Restricted Subsidiary, as the case may be), which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person or the property or assets of the person so
acquired (including the Capital Stock or Redeemable Stock thereof) or any entity
formed to effect such acquisition, and, in each case, the monetary proceeds
thereof; (v) Indebtedness or other obligations existing on the Issue Date; (vi)
the subordination (pursuant to its terms) in right and priority of payment to
Indebtedness of the Company or any of its Restricted Subsidiaries of any
Indebtedness owed by the Company or any Restricted Subsidiary of the Company to
the Company or any of its other Restricted Subsidiaries, provided (A) the
Indebtedness is permitted under the Indenture and (B) the Board of Directors has
determined in good faith at the time of the creation of such encumbrance or
restriction that such encumbrance or restriction would not singly or in the
aggregate have a material adverse effect on the Holders of the Notes; (vii)
restrictions imposed by covenants contained in any refinancing of Indebtedness
or other obligations described in clauses (i), (ii), (iv), (v) and (ix) of this
paragraph, provided that such restrictions are, in the good faith determination
of the Board of Directors, on the whole, not materially more restrictive than
such restrictions contained in such refinanced Indebtedness; (viii) restrictions
imposed by applicable laws or regulations or pursuant to condemnation or eminent
domain proceedings; (ix) restrictions on Scotia Pacific and/or any of its
Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of Trust, the
Timber Note Indenture or any other agreements entered into in connection with
the Timber Notes, as the same may be amended in accordance with the provision of
the Indenture described below under "-- Amendment of Scotia Pacific Agreements";
(x) an agreement which has been entered into for the sale or disposition of all
or substantially all of the Stock or assets of a Restricted Subsidiary of the
Company, provided, however, that such encumbrances or restrictions are limited
to the Stock or assets being sold or disposed of; (xi) applicable law and
agreements with foreign governments with respect to assets located in their
respective jurisdictions; or (xii) customary provisions placing limitations on
the payment of dividends on shares of stock contained in the terms of Preferred
Stock instruments issued in compliance with the Indenture. Although there is no
single established meaning of the phrase "all or substantially all of the Stock
or assets" under the law governing the Indenture and the amount of Stock or
assets that will constitute "all or substantially all of the Stock or assets" of
a Subsidiary of the Company is not readily quantifiable, a determination as to
whether
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an agreement described in clause (x) of this paragraph has been entered into
will depend on the percentage of issued and outstanding Stock or operating and
total assets transferred, as the case may be, among other measurements, and the
facts and circumstances of the transaction. In any particular transaction, this
determination will be made by the Company, and, subject to the limitations on a
Holder's rights to institute suit with respect to the Indenture or the Notes (as
described below under "-- Events of Default; Notice and Waiver"), a Holder could
institute an action to dispute the Company's determination in any particular
transaction.
The provisions of the first paragraph under this description of the
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
covenant do not prohibit Liens not prohibited by the provisions described below
under "-- Limitation on Liens" or restrictions on the sale or other disposition
of any property securing Indebtedness, provided that such Indebtedness is
otherwise permitted by the Indenture.
Limitation on Asset Sales
The Indenture provides that neither the Company nor any Restricted
Subsidiary thereof will consummate any Asset Sale unless (except in the case of
an Asset Sale which is a Taking) (i) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal to the fair
value of the assets subject to such Asset Sale (as reasonably determined by the
Board of Directors), including the value of all non-cash consideration, and (ii)
at least 75% of the aggregate consideration (excluding indemnities) received
therefor by the Company or such Restricted Subsidiary is in the form of money or
Cash Equivalents. The amount of any liabilities of the Company or any Restricted
Subsidiary of the Company that is actually assumed by the transferee in such
Asset Sale shall be deemed to be money for purposes of determining the
percentage of money and Cash Equivalent consideration received by the Company
and its Restricted Subsidiaries.
When the Asset Sale Offer Amount (as defined below) exceeds $25,000,000,
each holder of the Notes will have the right to require the Company to apply the
total amount of such Asset Sale Offer Amount to purchase the Notes tendered
pursuant to an offer by the Company to purchase Notes at a purchase price equal
to 100% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to (but not including) the date of purchase, in accordance
with the procedures set forth in the Indenture. The Company will make such an
offer in the form, and requiring the information, specified in the Indenture to
the holders of the Notes (and to beneficial owners as required by applicable
law, including the Exchange Act and the rules and regulations thereof) within 30
days following the date that the aggregate Asset Sale Offer Amount exceeds
$25,000,000 (provided that the Company may in its discretion make such an offer
before such $25,000,000 threshold is met). The procedures pursuant to which the
Company will purchase the Notes, if a holder so elects, are substantially the
same as those described above under " -- Change of Control," provided that, if
the Asset Sale Offer Amount is insufficient to fund an offer to purchase all of
the outstanding Notes tendered into such Offer, such offer may be an offer to
purchase Notes on a pro rata basis. In no event will any Net Cash Proceeds that
are subjected to an offer to purchase Notes be required to be subjected to more
than one offer to purchase Notes.
For purposes of the foregoing requirement, "Asset Sale Offer Amount" means
the sum of the amount of Net Cash Proceeds from each Asset Sale by the Company
and its Restricted Subsidiaries (excluding the amount of Net Cash Proceeds that
has been subjected to a prior offer to purchase Notes in accordance with the
foregoing requirement) that, on the 360th day following consummation of such
Asset Sale (or the 540th day following the consummation of an Asset Sale to the
extent that such Asset Sale is by MGI and/or any Subsidiary of MGI that is a
Restricted Subsidiary (other than Pacific Lumber or any Subsidiary of Pacific
Lumber that is a Restricted Subsidiary) and is governed by the terms of the MGI
Indenture (an "MGI Asset Sale") or the 590th day following the consummation of
an Asset Sale to the extent that such Asset Sale is by Pacific Lumber and/or any
Subsidiary of Pacific Lumber that is a Restricted Subsidiary, other than Scotia
Pacific so long as any Timber Notes are outstanding, and is governed by the
terms of the Pacific Lumber Indenture (a "PL Asset Sale")), the Company and/or
its Restricted Subsidiaries have not either: (i) reinvested, or entered into
binding obligations (subject to customary closing and termination provisions) to
reinvest, in additional assets to be used in one or more lines of business
(including capital expenditures) in
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which the Company and its Restricted Subsidiaries are engaged as of the Issue
Date (or reasonably related extensions of such lines); or (ii) applied to make
repayments or purchases of the Notes, the MGI Notes or the Pacific Lumber Senior
Notes (or Indebtedness ranking pari passu in right and priority of payment with
the Notes, the MGI Notes or the Pacific Lumber Senior Notes); provided that (x)
Net Cash Proceeds of any MGI Asset Sale, to the extent not applied pursuant to
the provisions described in clauses (i) and (ii) above, shall be included in the
Asset Sale Offer Amount only to the extent permitted to be distributed or paid
as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on
the date of the Indenture) and applicable law on the earlier of (A) the 450th
day following the consummation of such MGI Asset Sale and (B) the consummation
of any offer to purchase MGI Notes which MGI is required to make with such Net
Cash Proceeds pursuant to the MGI Indenture, (y) Net Cash Proceeds of any PL
Asset Sale, to the extent not applied pursuant to the provisions described in
clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount
only to the extent (A) permitted to be distributed or paid as a dividend
pursuant to Section 4.04(a) of the Pacific Lumber Indenture and applicable law
on the earlier of (1) the 450th day following the consummation of such PL Asset
Sale and (2) the consummation of any offer to purchase Pacific Lumber Senior
Notes which Pacific Lumber is required to make with such Net Cash Proceeds
pursuant to the Pacific Lumber Indenture and (B) permitted to be distributed or
paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in
effect on the date of the Indenture) and applicable law on the earlier of (1)
the 590th day following the consummation of such PL Asset Sale and (2) the
consummation of any offer to purchase MGI Notes which MGI is required to make
with such Net Cash Proceeds pursuant to the MGI Indenture, and (z) Net Cash
Proceeds of any Primary Share Sale by MGI, to the extent not applied pursuant to
the provisions described in clauses (i) and (ii) above, shall be included in the
Asset Sale Offer Amount only to the extent permitted to be distributed or paid
as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on
the date of the Indenture) on the 270th day following the consummation of such
Primary Share Sale.
The foregoing will not apply to (i) a consolidation or merger of the
Company or a transfer, conveyance, sale or lease of all or substantially all of
the Company's assets, provided that any such transaction complies with the terms
contained in the covenant described below under " -- Successor Company," or (ii)
any transaction permitted by the covenant described above under " -- Limitation
on Restricted Payments."
Primary Share Sales generally will constitute Asset Sales, except for (i)
Primary Share Sales effected by Kaiser and (ii) Primary Share Sales by MGI to
the extent Net Proceeds thereof are distributed on the Pledged MGI Shares. Any
Net Proceeds of a Primary Share Sale that are distributed on any Pledged Shares
will be used to fund an offer to purchase Notes or optional redemption of Notes
in accordance with the provisions described above under " -- Security -- Offers
to Purchase Notes with Certain Proceeds of Collateral" and under
" -- Security -- Release of Trust Moneys to Fund Optional Redemptions."
The Company will comply with all applicable tender offer rules (including,
without limitation, Sections 13(e) and 14(e) of the Exchange Act and the Rules
and Regulations promulgated pursuant thereto) if a purchase option is triggered
under the circumstances described herein.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries, Salmon Creek (or any successor to Salmon Creek
or any transferee of substantially all of the assets of Salmon Creek so long as
such successor or transferee is a Subsidiary of the Company) or any Unrestricted
Subsidiary to which the Company or any of its Restricted Subsidiaries makes a
contribution of non-cash proceeds received in respect of a Salmon Creek
Distribution pursuant to the provision described in the last paragraph under
"Limitation on Restricted Payments" (each, a "Company Party") to, enter into any
transaction or transactions with any Affiliate of the Company, unless: (i) the
terms thereof are not less favorable to the Company Party than those that could
reasonably be obtained in a comparable transaction at such time with a person
who is not an Affiliate of the Company; (ii) such transaction shall have been
approved as meeting such standard, in good faith, by a majority of the members
of the Board of Directors; and (iii) with respect to any transaction or series
of related transactions involving payments and consideration in excess of
$10,000,000, the Company shall have obtained and made available to the Trustee
an opinion of a nationally recognized
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investment banking firm stating that the terms of such transaction or series of
transactions are fair from a financial point of view to the Company Party. The
Company will deliver to the Trustee, within 60 days after the end of each fiscal
quarter of the Company, an Officers' Certificate which will briefly describe and
specify the aggregate dollar amount of transactions (other than the transactions
set forth in the next paragraph, except in clause (vii) thereof) with Affiliates
of the Company occurring during such fiscal quarter.
The provisions contained in the foregoing paragraph do not apply to: (i)
any transactions permitted by the provisions described above in the first
paragraph, or in clauses (i), (v), (vi) and (vii) of the third paragraph, under
" -- Limitation on Restricted Payments"; (ii) the execution and delivery of,
performance of, and the making of any payments required by, the Tax Sharing
Agreements; (iii) the execution and delivery of, performance of, and the making
of any payments required by, the Bering Agreement; (iv) the making of payments
to MAXXAM for reimbursement for actual services provided thereby to the Company
and its Subsidiaries based on actual costs and an allocable share of overhead
expenses consistent with prior practices; (v) compensation, indemnification and
other benefits paid or made available to officers, directors and employees of
any Company Party for services rendered in such person's capacity as an officer,
director, or employee (including reimbursement or advancement of reasonable
out-of-pocket expenses and directors' and officers' liability insurance); (vi)
execution and delivery of, the performance of, and the making of any payments
required by, the MXM Guaranty; (vii) the execution, delivery and performance of,
and the making of any payments or the taking of any action required or
contemplated by, any agreements initially entered into by a Company Party with
one or more Affiliates, in which MAXXAM (and no other Affiliate) has an equity
interest of 30% or less (each, a "Headwaters Joint Venture") relating to the
ownership, holding, development or disposition of any non-cash or non-Cash
Equivalent property (whether an individual property or a group of properties)
received by Pacific Lumber or any of its Subsidiaries as a Salmon Creek
Distribution in connection with or relating to the transactions referred to in
or contemplated by the information set forth above under the caption "Business
of the Company -- Headwaters Agreement" (each, an "Initial Salmon Creek
Agreement") provided that each Initial Salmon Creek Agreement satisfies the
provisions described above in the foregoing paragraph and that each subsequent
agreement entered into by a Company Party and any transaction between any
Headwaters Joint Venture and any Affiliate subsequent to the execution of an
Initial Salmon Creek Agreement that relate to the subject matter of such Initial
Salmon Creek Agreement satisfies the provisions of clauses (i) and (ii)
described above in the foregoing paragraph; provided, further, that (a) each
such subsequent agreement involving payments and other consideration paid to or
received by any Company Party, or involving payments and other consideration
paid to or received from any Headwaters Joint Venture by any Affiliate, in
excess of $10.0 million shall satisfy the requirements of the first paragraph of
this " -- Limitation on Transactions with Affiliates" covenant, and (b) any
material amendment of any Initial Salmon Creek Agreement or any such subsequent
agreement shall be on terms (considered as a whole) no less favorable to any
Company Party, relative to MAXXAM, than the terms of such Initial Salmon Creek
Agreement; (viii) the execution, delivery and performance of any agreements
granting any Lien permitted by the provision described in clause (xv) under
" -- Limitation on Liens" or any amendment to any such agreement, to the extent
that such agreement or amendment thereto does not create or evidence
Indebtedness of the Company or any Restricted Subsidiary of the Company; and
(ix) the making of the loan evidenced by the Intercompany Note and any amendment
to the Intercompany Note to the extent such amendment does not materially
adversely affect the Company's ability to pay its obligations on the Notes; in
the case of clauses (iii) and (iv) of this paragraph, to the extent the
aggregate amount of payments pursuant to such clauses does not exceed $5.0
million in any calendar year, which amount shall be adjusted for each calendar
year, commencing with the calendar year beginning January 1, 1996 (each, an
"Adjustment Period"), by multiplying such amount by a fraction, the numerator of
which shall be the then most recent Producer Price Index (Lumber and Wood
Products Commodity Groups) (Standard Industrial Classification No. 2400), as
published by the United States Department of Labor, Bureau of Labor Statistics
(the "PPI Index"), in effect on the first day of such Adjustment Period, and the
denominator of which shall be the most recent PPI Index published as of January
1, 1993.
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Limitation on Liens
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will incur, assume, suffer to exist, create or otherwise cause to
be effective Liens upon any of their respective assets to secure Indebtedness
except: (i) Liens existing on the Issue Date; (ii) Liens securing all or any
Indebtedness outstanding under the Credit Agreement; (iii) Liens incurred or
pledges and deposits in connection with workers' compensation, unemployment
insurance and other social security benefits, leases, appeal bonds and other
obligations of like nature incurred by the Company or any Restricted Subsidiary
in the ordinary course of business; (iv) Liens imposed by law, including,
without limitation, mechanics', carriers', warehousemen's, materialmen's,
suppliers' and vendors' Liens, incurred by the Company or any Restricted
Subsidiary in the ordinary course of business; (v) zoning restrictions,
easements, licenses, covenants, reservations, restrictions on the use of real
property or minor irregularities of title incident thereto, which do not in the
aggregate have a material adverse effect on the operation of the business of the
Company or its Restricted Subsidiaries taken as a whole; (vi) Liens for ad
valorem, income or property taxes or assessments and similar charges either (A)
not delinquent or (B) contested in good faith by appropriate proceedings and as
to which the Company has set aside on its books reserves to the extent required
by GAAP; (vii) Liens in respect of purchase money Indebtedness incurred to
acquire assets or Stock provided that such Liens are limited to the assets or
Stock acquired with the proceeds of such Indebtedness (and the proceeds of such
assets or Stock); (viii) Liens securing Indebtedness permitted by the covenant
described above under "-- Limitation on Indebtedness" which refinances secured
Indebtedness, so long as such Liens are limited to the collateral which secures
the Indebtedness being refinanced and the proceeds of such collateral; (ix)
Liens on any assets or the Stock of any Subsidiary of the Company which assets
or Stock are acquired by the Company or a Restricted Subsidiary subsequent to
the date of the Indenture and which Liens were in existence on or prior to the
acquisition of such assets or Stock of such Subsidiary (to the extent that such
Liens were not created in contemplation of such acquisition); provided that such
Liens are limited to the assets so acquired or the Stock of such acquired
Subsidiary (or the entity organized to effect such acquisition) and the proceeds
thereof; (x) Liens securing Indebtedness permitted by the provisions described
above in clauses (vi), (viii), (ix) or (xii) of the second paragraph under
"-- Limitation on Indebtedness"; provided, in each such case, that such Liens
are limited to the assets financed with the proceeds of the Indebtedness
incurred pursuant to such provisions (and the proceeds of such assets); (xi)
Liens securing Indebtedness under any Interest Rate Protection Agreement
permitted by the provisions described above in clause (vii) of the second
paragraph under "-- Limitation on Indebtedness," provided that such Liens are
limited to the collateral which secures the Indebtedness to which such Interest
Rate Protection Agreement relates; (xii) Liens imposed pursuant to condemnation
or eminent domain or substantially similar proceedings or in connection with
compliance with environmental laws or regulations; (xiii) Liens granted pursuant
to the Timber Notes, the Timber Note Indenture or the Deed of Trust, in
connection with the Timber Notes or in connection with any of the Scotia Pacific
Agreements, or in connection with any other agreement entered into in connection
with the Timber Notes; (xiv) other Liens securing Indebtedness not exceeding
$25,000,000 in aggregate principal amount; (xv) Liens on assets referred to in
the provision described in clause (vi) of the third paragraph under
"-- Limitation on Restricted Payments" and on the proceeds of such assets; and
(xvi) Liens in favor of the Trustee pursuant to the Indenture, Liens in favor of
the trustee under and pursuant to the MGI Indenture and Liens in favor of the
trustee under and pursuant to the Pacific Lumber Indenture.
Amendment of Scotia Pacific Agreements or Intercompany Note
The Indenture provides that the Company will not permit Scotia Pacific to
agree to amend the Timber Note Indenture, the Deed of Trust, or any of the
Scotia Pacific Agreements, unless such amendment (i) is to cure any ambiguity,
omission, defect or inconsistency, or to add to the covenants of Scotia Pacific
for the benefit of the Company or the Holders or to surrender any right or power
conferred in the Master Purchase Agreement on Scotia Pacific, or (ii) does not
materially adversely affect the ability of the Company to pay principal or
interest on the Notes when due. The Indenture also provides that the Company
will not agree to any amendment or modification of the Intercompany Note unless
such amendment (i) is to cure any ambiguity, omission, defect or inconsistency,
or to add to the covenants of MAXXAM for the benefit of the
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Company or the Holders or (ii) does not materially adversely affect the ability
of the Company to pay principal or interest on the Notes when due.
Limitation on Liens on Pledged Shares
Except for certain tax Liens, Liens arising by operation of law and
judgment Liens, the Company may not permit to exist, will defend the Pledged
Shares and the Intercompany Note against, and will take such action as is
necessary to remove, any Lien or claim on or in respect of any Pledged Shares
and/or the InterCompany Note.
Declaration and Payment of Dividends by MGI
MGI shall, to the extent that there exists any consensual restriction or
encumbrance on its ability to pay dividends or make any other distributions on
its Capital Stock ("Dividend Encumbrances"), declare and pay dividends to its
stockholders to the maximum extent permitted by the instruments or other
agreements containing such Dividend Encumbrances, unless the Board of Directors
of MGI determines in good faith (whose determination shall be evidenced by a
resolution of the Board of Directors filed with the Trustee) that the
declaration or payment of such dividend would be detrimental to the capital and
other operating needs of MGI.
SUCCESSOR COMPANY
The Indenture provides that, except as permitted by the provisions
described above under "-- Security -- Merger by MGI," the Company may not
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all of its assets to, any person or group of related persons in a
single transaction or series of related transactions, or permit any of its
Restricted Subsidiaries to enter into any such transaction or transactions if
such transaction or transactions in the aggregate would result in a transfer of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries on a consolidated basis to any person other than the Company,
unless (except as permitted by the provisions contained in Article 10 of the
Indenture): (i) the resulting, surviving or transferee person (if other than the
Company) is organized and existing under the laws of the United States of
America or a State thereof or the District of Columbia and such entity expressly
assumes by supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture (in which event the Company (except in the event of a
lease of all or substantially all of the Company's assets) shall be relieved of
its obligations under the Indenture and the Notes) and such entity and/or each
other person that, upon consummation of such transaction or transactions,
obtains ownership of any portion of the Collateral (to the extent such
Collateral is not released from the Lien of the Indenture in accordance with the
terms thereof) grants a security interest in such Collateral (of like tenor to
the security interest theretofore granted on the Issue Date with respect to such
Collateral) and expressly assumes, by supplemental indenture to the Indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company with respect to such Collateral set forth in
Article 10 of the Indenture; (ii) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing, (iii) except in
the case of a merger, or a transfer of all or substantially all assets, of a
Restricted Subsidiary into or to the Company or into or to another Restricted
Subsidiary, immediately after giving effect to such transaction, the
Consolidated Cash Flow Coverage Ratio of the Company or the surviving entity
would exceed 2.0 to 1.0, (iv) the Company shall have delivered to the Trustee an
Officers' Certificate to the foregoing effect and an Opinion of Counsel, stating
that such consolidation, merger or transfer, conveyance or lease (other than the
calculation of the Consolidated Cash Flow Coverage Ratio as to which counsel
need not opine) and such supplemental indenture comply with the Indenture; and
(v) the Lien of the Indenture on the Collateral in favor of the Trustee for the
benefit of Holders of the Notes has not been materially impaired in
contravention of the provisions of the Indenture as a result of such transaction
or transactions, provided that MGI may merge or consolidate with or transfer
substantially all of its assets to a Restricted Subsidiary of the Company
pursuant to a transaction in compliance with the provisions described above
under "-- Security -- Merger by MGI." Each person that becomes a pledgor with
respect to any Collateral upon consummation of such transaction or
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transactions will succeed to, and may exercise every right and power of, the
Company with respect to such Collateral prior to such consummation with the same
effect as if such person had originally been a pledgor with respect to such
Collateral under the Indenture and each person who ceases to be such a pledgor
upon such consummation will be relieved of its obligations as a pledgor under
the Indenture. Although there is no single established meaning of the phrase
"all or substantially all of the assets" under the law governing the Indenture
and the amount of assets that will constitute "all or substantially all" of the
assets of the Company and its Restricted Subsidiaries on a consolidated basis is
not readily quantifiable, a determination as to whether such a sale, lease,
conveyance or other disposition has occurred will depend on the percentage of
operating and total assets transferred, among other measurements, and other
facts and circumstances of the transaction. Based upon the foregoing factors, it
is possible that a sale, lease, conveyance or other disposition of a significant
amount of assets by the Company would not be deemed to constitute a sale, lease,
conveyance or other disposition of "all or substantially all" of the assets of
the Company and, subject to the limitations on a Holder's rights to institute
suit with respect to the Indenture (as described under "Events of Default;
Notice and Waiver"), a Holder could institute an action to dispute the Company's
determination in any particular transaction.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that if an Event of Default occurs and is
continuing, the Trustee, or the holders of at least 25% of the aggregate
principal amount of the Notes then outstanding may declare the principal amount
of and accrued interest on all the Notes to be due and payable. In the case of
certain events of bankruptcy or insolvency the principal of and interest on all
the Notes then outstanding will automatically become and be immediately due and
payable. Under certain circumstances specified in the Indenture, the holders of
a majority in aggregate principal amount of the Notes then outstanding, by
notice to the Trustee, may rescind an acceleration and its consequences.
An "Event of Default" under the Indenture includes: (i) failure of the
Company to pay interest for a period of 30 days or principal when due on any of
the Notes; (ii) the failure of the Company to perform any other covenant or
agreement contained in the Indenture for 60 days after notice (other than a
covenant or agreement on the part of the Company, a default in whose performance
or breach is specifically addressed elsewhere in the "Event of Default"
provisions); (iii) a payment default at final maturity or acceleration of
payment of any indebtedness of the Company, or any Restricted Subsidiary
thereof, in an aggregate principal amount exceeding $10,000,000; (iv) certain
events of bankruptcy, insolvency or reorganization with respect to the Company
or any Significant Subsidiary; and (v) a final judgment or order for the payment
of money aggregating in excess of $10,000,000 (to the extent not covered by
insurance) being rendered against the Company or any Restricted Subsidiary and
not discharged within 60 days after such judgment or order becomes final and
non-appealable.
A holder of the Notes may not pursue any remedy with respect to the
Indenture or the Notes unless: (1) the holders of at least 25% of the aggregate
principal amount of the Notes then outstanding give to the Trustee written
notice stating that an Event of Default is continuing; (2) the holders of at
least 25% of the aggregate principal amount of the Notes then outstanding make a
written request to the Trustee to pursue the remedy; (3) such holders offer to
the Trustee reasonable security or indemnity against any loss, liability or
expense to be incurred in complying with such request; (4) the Trustee does not
comply with the request within 60 days after receipt of the notice, request and
offer of security or indemnity and such Event of Default has not been cured or
waived; and (5) the holders of a majority of the aggregate principal amount of
the Notes then outstanding do not give the Trustee a direction inconsistent with
the request during such 60-day period. A holder of the Notes may not use the
Indenture to prejudice the rights of another holder of the Notes or to obtain a
preference or priority over another holder of the Notes.
Where any event occurs which, with the giving of notice and the lapse of
time, would become an Event of Default under clauses (iii) or (v) above, the
Company is required under the Indenture to deliver to the Trustee, within 30
days after the occurrence thereof, an Officers' Certificate regarding that
event. Such notice must specify the status of such event and what action the
Company is taking or proposes to take with respect thereto. The Indenture
further provides that the Company must deliver an Officers' Certificate within
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120 days after the end of each fiscal year stating whether the signers know of
any Default that occurred during such period and, if so, describing the Default
and its status.
REPORTS TO HOLDERS OF THE NOTES
MAXXAM is, and the Company is not, subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act. Whether or not the Company and MAXXAM
are subject to such requirements, each of the Company and MAXXAM shall file with
the Commission (unless the Commission will not accept the same for filing) and
the Trustee, within fifteen days after it is or would have been required to file
the same with the Commission, copies of such annual reports and such
information, documents and other reports as it would file if it were subject to
the requirements of Section 13 or 15(d) of the Exchange Act. In addition, the
Company and MAXXAM have agreed that, for so long as any Notes remain
outstanding, they will furnish to the holders and to securities analysts and
prospective investors, upon request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture and the Notes may be amended,
supplemented or otherwise modified with the consent of the holders of at least a
majority (or, in the case of an amendment, supplement or other modification of
the provisions of Article 10 of the Indenture, which relates to the Collateral,
at least 66 2/3%) of the aggregate principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of at least a majority of the aggregate
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note affected thereby, no amendment, supplement,
other modification or waiver may, among other things: reduce the amount of Notes
whose holders must consent to an amendment, supplement, other modification or
waiver; reduce the rate of or extend the stated maturity of any payment of
interest on any Note; reduce the principal amount (at maturity or any other
time) of or extend the Stated Maturity of any payment of principal of any Note,
including upon redemption, or payment of the Asset Sale Purchase Price or Change
of Control Purchase Price; reduce the premium payable upon the redemption of any
Note, including upon redemption, or payment of the Asset Sale Purchase Price or
Change of Control Purchase Price; or make any Note payable in money other than
that stated in the Note. The right of any Holder to receive payment of principal
and interest in the Notes held by such Holder on or after the respective due
dates expressed therein, or to bring suit for enforcement of any such payment on
or after such respective due dates, may not be impaired or affected without such
Holder's consent; provided that no Holder shall have the right to institute any
such suit, if and to the extent that the institution or prosecution thereof or
the entry of judgment therein would, under applicable law, result in the
surrender, impairment, waiver or loss of the Lien on the Collateral created by
the Indenture. Without the consent of any holder of the Notes, the Company and
the Trustee may amend, supplement or otherwise modify the Indenture or the Notes
to cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor corporation of the obligations of the Company or
MAXXAM thereunder, to comply with certain provisions of Article 10 of the
Indenture, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to add to the covenants of the Company for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Company under the Indenture, to comply with the Trust Indenture Act or to make
any change that does not adversely affect the rights of any holder of the Notes.
DISCHARGE OF THE INDENTURE
The Indenture permits the Company to terminate the majority of its
obligations under the Indenture, other than the obligation to pay interest on
and the principal of the Notes and certain other obligations, at any time, if
(i) it irrevocably deposits in trust with the Trustee money or U.S. Government
Obligations sufficient for the payment of principal and interest on the Notes to
maturity or redemption, as the case may be, and (ii) it complies with certain
other conditions, including delivery to the Trustee of an opinion of counsel
relating to certain events of bankruptcy, and an opinion of counsel or a ruling
received from the Internal Revenue Service to the effect that holders of the
Notes will not recognize income, gain or loss for federal
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income tax purposes as a result of the exercise of such right and will be
subject to federal income tax in the same amount and in the same manner and at
the same times as would have been the case otherwise, provided that the Company
will not be required to deliver to the Trustee such an Opinion of Counsel upon
the exercise of this option within one year of either the Stated Maturity or a
date fixed for redemption of the Notes.
In addition, the Indenture permits the Company to terminate the majority of
its obligations under the Indenture (including its obligations to pay interest
on and the principal of the Notes), at any time, if all of the Notes have been
delivered to the Trustee for cancellation or if (i) the Notes mature within one
year or all of them are to be called for redemption within one year under
arrangements satisfactory to the Trustee for giving the notice of redemption and
(ii) the Company has irrevocably deposited or caused to be deposited with the
Trustee an amount sufficient to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for cancellation, for
principal and interest to the stated maturity or redemption. In such case,
holders of the Notes must look to the deposited money for payment.
CONCERNING THE TRUSTEE
First Bank National Association is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
TAX TREATMENT BY COMPANY
The Company will treat the Notes as debt for federal income tax purposes.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be represented by a
single, permanent global Note, in definitive, fully registered form without
interest coupons (the "Global New Note") and will be deposited with the Trustee
as custodian for DTC and registered in the name of Cede, or such other nominee
as DTC may designate. The Global New Note (and any New Note issued in exchange
therefor) will be subject to certain restrictions on transfer set forth therein
and in the Indenture and will bear the respective legends regarding such
restrictions set forth under the heading "Notice to Investors."
New Notes that are (i) originally issued to or transferred to institutional
"accredited investors" who are not "qualified institutional buyers" (as such
terms are defined under "Notice to Investors"), (ii) except as described below,
purchased by or transferred to Persons outside the United States pursuant to
sales in accordance with Regulation S under the Securities Act or (iii) held by
qualified institutional buyers who elect to take physical delivery of their
Notes (and which are then unable to trade through DTC) (collectively, the
"Non-Global Purchasers") will be issued in the form of registered definitive
certificates (the "Certificated New Notes"). Upon the transfer to a qualified
institutional buyer of Certificated New Notes initially issued to a Non-Global
Purchaser, such Certificated New Notes may, unless the Global New Note has
previously been exchanged for Certificated New Notes, be exchanged for an
interest in the Global New Note representing the principal amount of New Notes
being transferred. Certificated New Notes will be subject to certain
restrictions on transfer set forth therein and in the Indenture and will bear
the respective legends regarding such restrictions set forth under the heading
"Notice to Investors."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
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Upon the issuance of the Global New Note, DTC or its custodian will credit,
on its internal system, the respective principal amount of the individual
beneficial interests represented by such Global New Note to the accounts of
persons who have accounts with DTC. Such accounts initially will be designated
by or on behalf of the Initial Purchasers. Ownership of beneficial interests in
the Global New Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Ownership
of beneficial interests in the Global New Note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global New Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Note represented by such Global New Note for
all purposes under the Indenture and such New Note. No beneficial owners of an
interest in the Global New Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
New Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, MAXXAM, the Trustee, nor the
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global New Note or for maintaining, supervising or reviewing
any records of such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect to the Global New Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such Global
New Note, as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in such
Global New Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in accordance with
DTC rules. If an owner of New Notes requires physical delivery of Certificated
New Notes for any reason, including to sell New Notes to persons in states that
require such delivery of such New Notes or to pledge such New Notes, such owner
must transfer its interest in the Global New Note, in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
None of the Company, MAXXAM or the Trustee will have any responsibility for
the performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global New Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated New Notes. Upon any such issuance, the Trustee is
required to register such Certificated New Notes in the name of, and cause the
same to be delivered to, such person or persons (or the nominee of any thereof).
All such Certificated New Notes would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if DTC is at any time
unwilling or unable to continue as a depositary for the Global New Note and a
successor depositary is not appointed by the Company within 90 days, the Company
will issue Certificated New Notes in exchange for the Global New Note, which, in
the case of New Notes issued in exchange for the Global New Notes will bear the
legend referred to under the heading "Notice to Investors."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material anticipated federal income
tax consequences expected to result to holders from the acquisition, ownership
and disposition of the New Notes. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative
pronouncements, all of which are subject to change, possibly with retroactive
effect. No ruling has been or will be requested by the Company from the Internal
Revenue Service (the "Service") on any matters relating to the New Notes, and
there can be no assurance that the Service will have a similar view with respect
to the tax consequences described below.
The following discussion is for general information only. The tax treatment
of a holder of the New Notes may vary depending upon such holder's particular
situation. The discussion only addresses the tax consequences to holders who
acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes
as capital assets and does not deal with special classes of holders, such as
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities, foreign corporations and persons who are not citizens or
residents of the United States, that may be subject to special rules not
discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS.
THE EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a holder thereof for federal income tax purposes.
An exchanging holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The Old Notes were issued and the New Notes will be issued without original
issue discount. Stated interest on the Old Notes and New Notes will be taxable
to a holder as ordinary interest income at the time it is accrued or paid in
accordance with such holder's method of accounting for tax purposes.
BOND PREMIUM ON THE NEW NOTES
If a holder of a New Note purchased the Old Notes for an amount in excess
of the amount payable at the maturity date (or a call date, if appropriate) of
the Old Notes, the holder may deduct such excess as amortizable bond premium
over the aggregate terms of the Old Notes and the New Notes (taking into account
earlier call dates, as appropriate), under a yield-to-maturity formula. The
deduction is available only if an election is made by the purchaser or is in
effect. This election is revocable only with the consent of the Service. The
election applies to all obligations owned or subsequently acquired by the
holder. The holder's adjusted tax basis in the Old Notes and the New Notes will
be reduced to the extent of the deduction of amortizable bond premium. Except as
may otherwise be provided in future regulations, under the Code the amortizable
bond premium is treated as an offset to interest income on the Old Notes and the
New Notes rather than as a separate deduction item.
MARKET DISCOUNT ON THE NEW NOTES
Tax consequences of a disposition of the New Notes may be affected by the
market discount provisions of the Code. These rules generally provide that if a
holder acquired the Old Notes (other than in an original issue) at a market
discount which equals or exceeds 1/4 of 1% of the stated redemption price of the
Old Notes at maturity multiplied by the number of remaining complete years to
maturity and thereafter recognizes gain upon a disposition (or makes a gift) of
the New Notes, the lesser of (i) such gain (or appreciation, in the case of a
gift) or (ii) the portion of the market discount which accrued while the Old
Notes or New Notes were held by such holder will be treated as ordinary income
at the time of the disposition (or gift). For these
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purposes, market discount means the excess (if any) of the stated redemption
price at maturity over the basis of such Old Notes or New Notes immediately
after their acquisition by the holder. A holder of the New Notes may elect to
include any market discount (whether accrued under the Old Notes or the New
Notes) in income currently rather than upon disposition of the New Notes. This
election once made applies to all market discount obligations acquired on or
after the first taxable year to which the election applies, and may not be
revoked without the consent of the Service.
A holder of any New Note who acquired the Old Note at a market discount
generally will be required to defer the deduction of a portion of the interest
on any indebtedness incurred or maintained to purchase or carry such Old Note or
New Note until the market discount is recognized upon a subsequent disposition
of such New Note. Such a deferral is not required, however, if the holder elects
to include accrued market discount in income currently.
REDEMPTION OR SALE OF THE NEW NOTES
Generally, any redemption or sale of the New Notes by a holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the extent that
such cash or property received is attributable to accrued, but previously
untaxed, interest) and the holder's tax basis in the New Notes. The tax basis of
a holder of the New Notes should generally be equal to the price paid for the
Old Notes exchanged therefor, increased by any accrued market discount on the
New Notes (and the Old Notes exchanged therefor) included in the holder's income
prior to sale or redemption of the New Notes, or reduced by any amortizable bond
premium applied against the holder's income prior to sale or redemption of the
New Notes. Such gain or loss generally would be long-term capital gain or loss
if the holding period exceeded one year, except to the extent it constitutes
accrued market discount.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A 31% "backup" withholding tax and information reporting requirements apply
to certain payments of interest and original issue discount on an obligation,
and to proceeds of the sale of an obligation before maturity, to certain
non-corporate holders. The Company, and/or any paying and/or collection agent,
including a broker, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
unless the holder furnishes its taxpayer identification number (i.e., social
security number in the case of an individual) in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies (with respect to payments of interest) as to no loss of exemption from
backup withholding and meets certain other conditions. Backup withholding,
however, in any event, generally does not apply to payments to certain "exempt
recipients" such as corporations.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market making or other trading activities (other than Old
Notes acquired directly from the Company), may exchange Old Notes for New Notes
in the Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and must,
therefore, acknowledge that it will deliver a prospectus in connection with any
resale of New Notes received in the Exchange Offer. This prospectus delivery
requirement may be satisfied by the delivery by such broker-dealer of this
Prospectus, as it may be amended or supplemented from time to time. The Company
has agreed that, for a period of 180 days after the effective date of this
Prospectus, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer who receives New Notes in the Exchange Offer for use in
connection with any such sale. The Company will not receive any proceeds from
any sales of New Notes by broker-dealers. New Notes received by broker-dealers
for their own accounts pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
of New Notes by broker-dealers may be made directly to a purchaser or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. In addition, if any Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder cannot rely on the position
of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1988), and interpreted in the Commission's letters to Shearman & Sterling
(available July 2, 1993) and K-III Communications Corporation (available May 14,
1993), and similar no-action or interpretive letters issued to third parties,
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Company has agreed to
pay all expenses incident to the Exchange Offer other than commissions or
concessions of any brokers or dealers and will indemnify Eligible Holders
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer that receives New
Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior
to using the Prospectus in connection with the sale or transfer of New Notes,
and acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements herein not misleading (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented prospectus to such broker-dealer.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents filed
with the Commission under the Exchange Act:
All documents and reports subsequently filed by the Company or the
Guarantor pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to termination of the transactions
to which this Prospectus relates shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded, except as so modified or superseded, shall
not be deemed to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference,
other than exhibits to such documents unless they are specifically incorporated
by reference into such documents. Requests for such copies should be directed
to: MAXXAM Group Holdings Inc., 5847 San Felipe, Suite 2600, Houston, Texas
77057, Attention: General Counsel.
LEGAL MATTERS
The validity of the New Notes and the Guaranty will be passed upon for the
Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The audited financial statements and schedule included or incorporated by
reference in this Prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
193
<PAGE> 196
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
AUDITED FINANCIAL STATEMENTS OF THE COMPANY
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-3
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-4
Consolidated Statement of Operations for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-6
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF THE COMPANY
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-29
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-30
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-31
Condensed Notes to Consolidated Financial Statements............................... F-32
Unaudited Summary Quarterly Financial Data......................................... F-38
AUDITED FINANCIAL STATEMENTS OF MAXXAM
MAXXAM INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-39
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-40
Consolidated Statement of Operations for the Years Ended December 31,
1995, 1994 and 1993............................................................. F-41
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-42
Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-43
Notes to Consolidated Financial Statements......................................... F-44
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MAXXAM
MAXXAM INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-78
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-79
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-80
Condensed Notes to Consolidated Financial Statements............................... F-81
Unaudited Summary Quarterly Financial Data......................................... F-88
CONDENSED FINANCIAL INFORMATION OF MAXXAM
MAXXAM INC. -- Parent Only (Unconsolidated)
Audited Information:
Report of Independent Public Accountants........................................ F-89
Balance Sheet at December 31, 1995 and 1994..................................... F-90
Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993.... F-91
Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.... F-92
Notes to Financial Statements................................................... F-93
</TABLE>
F-1
<PAGE> 197
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Unaudited Information:
Balance Sheet at September 30, 1996............................................. F-94
Statement of Operations for the Nine Months Ended September 30, 1996 and 1995... F-95
Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995... F-96
Notes to Unaudited Financial Statements......................................... F-97
AUDITED FINANCIAL STATEMENTS OF KAISER
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-98
Consolidated Balance Sheets at December 31, 1995 and 1994.......................... F-99
Statement of Consolidated Income (Loss) for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-100
Statement of Consolidated Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................... F-101
Notes to Consolidated Financial Statements......................................... F-102
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF KAISER
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets at September 30, 1996.................................. F-126
Statement of Consolidated Income for the Nine Months Ended September 30, 1996 and
1995............................................................................ F-127
Statement of Consolidated Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-128
Notes to Interim Consolidated Financial Statements................................. F-129
Unaudited Summary Quarterly Financial Data......................................... F-134
AUDITED FINANCIAL STATEMENTS OF MGI
MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants........................................... F-135
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-136
Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-137
Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994
and 1993........................................................................ F-138
Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993................................................ F-139
Notes to Consolidated Financial Statements......................................... F-140
UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MGI
MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1996................................... F-156
Consolidated Statement of Operations for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-157
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996
and 1995........................................................................ F-158
Condensed Notes to Consolidated Financial Statements............................... F-159
Unaudited Summary Quarterly Financial Data......................................... F-163
</TABLE>
F-2
<PAGE> 198
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of MAXXAM Group Holdings Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM
Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, cash flows and stockholder's equity
(deficit) for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Holdings Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As explained in Notes 7 and 8 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
San Francisco, California
December 23, 1996
F-3
<PAGE> 199
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 48,396 $ 48,575
Marketable securities.............................................. 36,568 19,514
Receivables:
Trade........................................................... 20,576 23,170
Other........................................................... 1,624 7,435
Inventories........................................................ 81,181 73,375
Prepaid expenses and other current assets.......................... 7,101 3,717
--------- ---------
Total current assets....................................... 195,446 175,786
Timber and timberlands, net of depletion of $139,554 and $123,942 at
December 31, 1995 and 1994, respectively........................... 312,983 325,223
Property, plant and equipment, net................................... 101,033 104,206
Deferred financing costs, net........................................ 27,288 30,096
Deferred income taxes................................................ 67,208 70,631
Restricted cash...................................................... 31,367 32,402
Other assets......................................................... 5,542 6,122
--------- ---------
$ 740,867 $ 744,466
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................... $ 4,166 $ 3,703
Accrued interest................................................... 25,354 25,765
Accrued compensation and related benefits.......................... 9,611 10,622
Deferred income taxes.............................................. 11,489 14,231
Other accrued liabilities.......................................... 4,435 3,266
Long-term debt, current maturities................................. 14,195 13,670
--------- ---------
Total current liabilities.................................. 69,250 71,257
Long-term debt, less current maturities.............................. 764,310 768,786
Other noncurrent liabilities......................................... 33,813 30,365
--------- ---------
Total liabilities.......................................... 867,373 870,408
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares authorized;
1,000 shares issued............................................. 1 1
Additional capital................................................. 89,767 89,767
Accumulated deficit................................................ (216,274) (215,710)
--------- ---------
Total stockholder's deficit................................ (126,506) (125,942)
--------- ---------
$ 740,867 $ 744,466
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 200
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net sales:
Lumber and logs......................................... $216,898 $227,430 $ 215,743
Other................................................... 25,694 22,199 17,696
-------- -------- --------
242,592.. 249,629 233,439
-------- -------- --------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation)........................................ 127,124 129,598 134,563
Selling, general and administrative expenses............ 15,884 16,250 20,108
Depletion and depreciation.............................. 25,296 24,685 24,545
-------- -------- --------
168,304 170,533 179,216
-------- -------- --------
Operating income.......................................... 74,288 79,096 54,223
Other income (expense):
Investment, interest and other income................... 9,393 14,367 9,992
Interest expense........................................ (77,824) (77,383) (81,870)
-------- -------- --------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles........................ 5,857 16,080 (17,655)
Credit (provision) in lieu of income taxes................ (1,621) 3,150 3,584
-------- -------- --------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of changes in
accounting principles................................... 4,236 19,230 (14,071)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes............. -- -- (272,016)
-------- -------- --------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles.............. 4,236 19,230 (286,087)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312....................... -- (14,866) --
Loss on early extinguishment of debt, net of related
credit in lieu of income taxes of $16,211............ -- -- (31,467)
Cumulative effect of changes in accounting principles:
Cumulative effect of changes in accounting principles
attributable to equity in loss of Kaiser............. -- -- (240,954)
Postretirement benefits other than pensions, net of
related credit in lieu of income taxes of $1,566..... -- -- (2,348)
Accounting for income taxes............................. -- -- 22,818
-------- -------- --------
Net income (loss)......................................... $ 4,236 $ 4,364 $(538,038)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 201
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 4,236 $ 4,364 $(538,038)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation........................... 25,296 24,685 24,545
Amortization of deferred financing costs and
discounts on long-term debt........................ 13,328 12,127 7,435
Net (purchases) sales of marketable securities....... (19,533) 5,321 12,389
Net gains on marketable securities................... (4,175) (1,669) (6,414)
Loss from net assets transferred to MAXXAM, net...... -- -- 272,016
Extraordinary loss on early extinguishment of debt,
net................................................ -- -- 31,467
Cumulative effect of changes in accounting
principles, net.................................... -- -- 220,484
Decrease (increase) in inventories, net of
depletion.......................................... (7,695) 3,634 (2,077)
Increase in accounts payable......................... 463 832 471
Decrease (increase) in receivables................... 5,778 (7,660) 7,558
Decrease (increase) in prepaids and other assets..... (3,384) (528) 212
Decrease (increase) in accrued and deferred income
taxes.............................................. 2,713 (3,349) (4,095)
Increase (decrease) in other liabilities............. 7,734 (2,283) (185)
Decrease in accrued interest......................... (411) (451) (7,284)
Other................................................ 1,020 (86) 848
-------- -------- --------
Net cash provided by operating activities....... 25,370 34,937 19,332
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............... 2,500 -- --
Net proceeds from sale of assets........................ 18 1,149 256
Capital expenditures.................................... (9,852) (11,322) (11,120)
Increase in net assets transferred to MAXXAM............ -- -- (11,770)
-------- -------- --------
Net cash used for investing activities.......... (7,334) (10,173) (22,634)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on
long-term debt....................................... (14,300) (13,237) (716,551)
Net borrowings (payments) under revolving credit
agreements........................................... -- (2,900) 2,900
Incurrence of financing costs........................... (150) (213) (34,738)
Proceeds from issuance of long-term debt................ -- -- 790,000
Restricted cash deposits (withdrawals), net............. 1,035 1,160 (33,562)
Dividends paid.......................................... (4,800) -- (20,000)
-------- -------- --------
Net cash used for financing activities.......... (18,215) (15,190) (11,951)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (179) 9,574 (15,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 48,575 39,001 54,254
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 48,396 $ 48,575 $ 39,001
======== ======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable
securities........................................... $ (6,648) $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller............................................... 615 910 --
Net assets transferred to MAXXAM........................ -- -- 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.............. $ 64,907 $ 65,707 $ 80,188
Income taxes paid (refunded)............................ (5,190) 1,170 46
Tax allocation payments to MAXXAM....................... -- 397 1,722
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 202
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK ADDITIONAL EARNINGS
($1.00 PAR) CAPITAL (DEFICIT) TOTAL
----------- ---------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance, January 1, 1993........................... $ 1 $ 89,737 $ 368,495 $ 458,233
Net loss......................................... -- -- (538,038) (538,038)
Dividend......................................... -- -- (20,000) (20,000)
Gain from issuance of Kaiser Aluminum Corporation
common stock.................................. -- 30 -- 30
Net assets transferred to MAXXAM................. -- -- (30,531) (30,531)
--- ------- --------- ---------
Balance, December 31, 1993......................... 1 89,767 (220,074) (130,306)
Net income....................................... -- -- 4,364 4,364
--- ------- --------- ---------
Balance, December 31, 1994......................... 1 89,767 (215,710) (125,942)
Net income....................................... -- -- 4,236 4,236
Dividend......................................... -- -- (4,800) (4,800)
--- ------- --------- ---------
Balance, December 31, 1995......................... $ 1 $ 89,767 $(216,274) $(126,506)
=== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 203
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF MGHI
MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to
facilitate the offering of Senior Secured Notes. Subsequent to its formation,
MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM
Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further,
concurrent with the consummation of the Private Offering of $130,000 aggregate
principal amount of the Company's Senior Secured Notes due 2003 as described in
Note 6, MAXXAM transfered to the Company, as an additional capital contribution,
27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock
representing a 34.7% interest in Kaiser on a fully diluted basis. The
contribution of MGI's capital stock has been accounted for as a reorganization
of entities under common control, which requires MGHI to record the assets and
liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the
successor entity to MGI and as such, the accompanying consolidated financial
statements of MGHI and its subsidiaries (together, the "Company") reflect both
the historical operating results of MGI and MAXXAM's purchase accounting
adjustments which principally relate to MGI's timber and depreciable assets. The
purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May
1988. The contribution of the Kaiser common stock has been reflected in the
consolidated financial statements of the Company as if such contribution
occurred as of the beginning of the earliest period presented, at MAXXAM's
historical cost using the equity method of accounting. The Company conducts its
business primarily through the operations of its subsidiaries, including MGI.
FORMATION OF THE FOREST PRODUCTS GROUP
Prior to the Forest Products Group Formation (as defined below), MGI
operated in three industries: aluminum, through its majority owned subsidiary,
Kaiser, a fully integrated aluminum producer, forest products, through The
Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"),
each a wholly owned subsidiary; and real estate management and development,
through the Palmas del Mar development located in Puerto Rico ("Palmas") which
was owned by MGI's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4,
1993, contemporaneously with the consummation of the sale of the MGI Notes (as
defined in Note 6), MGI (i) transferred to MAXXAM 50 million common shares of
Kaiser held by a subsidiary of MGI, representing MGI's (and MAXXAM's) entire
interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of
MAXXAM common stock held by a subsidiary of MGI, (iii) transferred to MAXXAM
certain notes receivable, long-term investments, and other assets, each net of
related liabilities, collectively having a carrying value to MGI of
approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary
Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being
in satisfaction of a $15,000 promissory note evidencing a cash loan made by
MAXXAM to MGI in January 1993. On the same day, MAXXAM assumed approximately
$17,500 of certain liabilities of MGI that were unrelated to MGI's forest
products operations or were related to operations which have been disposed of by
MGI. Additionally, on September 28, 1993, MGI transferred to MAXXAM its interest
in Palmas. The foregoing transactions are collectively referred to as the
"Forest Products Group Formation." MGI presented the loss from net assets
transferred to MAXXAM pursuant to the Forest Products Group Formation (including
certain allocated costs from MAXXAM for general and administrative expenses
unrelated to MGI's forest products operations) in a manner similar to that which
would have been presented if MGI had discontinued the operations relating to
such net assets. See Note 2.
As a result of the Forest Products Group Formation, MGI and therefore the
Company is engaged in forest products operations conducted through its wholly
owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in
several principal aspects of the lumber industry, including the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into lumber
and the manufacture of lumber into a variety
F-8
<PAGE> 204
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
of finished products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which is obtained
from Pacific Lumber. Housing, construction and remodeling are the principal
markets for the Company's lumber products. Export sales generally constitute
less than 4% of forest product sales. A significant portion of forest product
sales are made to third parties located west of the Mississippi river.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the
subsequent resolution of any one of the contingent matters described in Note 10
could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the reported
amounts of the Company's consolidated assets and liabilities.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MGHI and its
subsidiaries. MGHI is a wholly owned subsidiary of MAXXAM. Intercompany balances
and transactions have been eliminated. Certain reclassifications have been made
to prior years' consolidated financial statements to be consistent with the
current year's presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, marketable securities portfolios were carried at the lower of cost or
market at the balance sheet date. The cost of the securities sold is determined
using the first-in, first-out method. Included in investment, interest and other
income for each of the three years ended December 31, 1995 were: 1995 -- net
unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net
unrealized holding losses of $1,094 and net realized gains of $2,763; and
1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized
losses and net unrealized gains of $841. Net unrealized losses represent the
amount required to reduce the short-term marketable securities portfolios from
cost to market value prior to December 31, 1993.
Inventories
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method.
F-9
<PAGE> 205
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Timber and Timberlands
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is stated at
cost, net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount initially deposited into an account
(the "Liquidity Account") held by the trustee under the indenture governing the
7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific
Lumber. See Note 6. The Liquidity Account is not available, except under certain
limited circumstances, for Scotia Pacific's working capital purposes; however,
it is available to pay the Rated Amortization (as defined in Note 6) and
interest on the Timber Notes if and to the extent that cash flows are
insufficient to make such payments. The required Liquidity Account balance will
generally decline as principal payments are made on the Timber Notes.
Investment, interest and other income for the years ended December 31, 1995,
1994 and 1993 includes interest of approximately $2,560, $2,638 and $2,101,
respectively, attributable to an investment rate agreement (at 7.95% per annum)
with the financial institution which holds the Liquidity Account.
At December 31, 1995 and 1994, cash and cash equivalents include $19,742
and $19,439, respectively, (the "Payment Account") which is reserved for debt
service payments on the Timber Notes (see Note 6). The Payment Account and the
Liquidity Account are each held by a different financial institution. In the
event of nonperformance by such financial institutions, the Company's exposure
to credit loss is represented by the amounts deposited plus any unpaid accrued
interest thereon. The Company mitigates its concentrations of credit risk with
respect to these restricted cash deposits by maintaining them at high credit
quality financial institutions and monitoring the credit ratings of these
institutions.
Stockholder's Equity (Deficit)
The adjustment to the Company's additional capital for the year ended
December 31, 1993 resulted from a transaction relating to Kaiser's common stock
prior to the Forest Products Group Formation. Pursuant to the terms of an
amended compensation plan, Kaiser issued 4,228 shares to certain members of its
management in 1993. As a result of this transaction, MGI's equity in Kaiser's
net assets differed from MGI's historical cost. MGI accounted for this
difference as an adjustment to additional capital.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the Timber Notes, the 10 1/2%
Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior
Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured
Discount Notes due 2003 (the "MGI Discount Notes" and together
F-10
<PAGE> 206
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
with the MGI Senior Notes, the "MGI Notes"), and on the current rates offered
for borrowings similar to the other debt. The Timber Notes, the Pacific Lumber
Senior Notes and the MGI Notes are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active market.
The estimated fair values of the Company's financial instruments, along
with the carrying amounts of the related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575
Marketable securities (held for trading
purposes)............................... 36,568 36,568 19,514 19,514
Restricted cash........................... 31,367 31,367 32,402 32,402
Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
</TABLE>
F-11
<PAGE> 207
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
2. NET ASSETS TRANSFERRED TO MAXXAM
As a result of the Forest Products Group Formation (as described in Note
1), MGI transferred all of its interest in Kaiser's common stock, the assets and
related liabilities of Palmas, and certain other net assets that were unrelated
to MGI's forest products operations, to MAXXAM. MGI did not incur any gain or
loss relating to the transfer of such assets and liabilities to MAXXAM.
The net loss from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1993
------------
<S> <C>
Net sales:
Aluminum operations................................................... $1,016,966
Real estate and other................................................. 19,654
----------
1,036,620
----------
Cost and expenses:
Aluminum operations................................................... 1,091,353
Real estate and other................................................. 28,132
----------
1,119,485
----------
Loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles................. (82,865)
Credit for income taxes................................................. 31,050
Minority interests...................................................... 3,641
----------
Loss before extraordinary item and cumulative effect of changes in
accounting principles................................................. (48,174)
Extraordinary item:
Loss on redemption of debt, net of related benefits for income taxes
and minority interests of $11,249 and $2,791, respectively......... (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of related benefits
for income taxes and minority interests of $108,271 and $29,406,
respectively....................................................... (200,670)
Accounting for income taxes........................................... (4,127)
----------
Loss from net assets transferred to MAXXAM.............................. $ (272,016)
==========
</TABLE>
F-12
<PAGE> 208
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Net assets transferred to MAXXAM are as follows as of the date of transfer:
<TABLE>
<S> <C>
Current assets:
Aluminum operations.................................................... $ 780,791
Real estate and other.................................................. 16,480
----------
797,271
----------
Current liabilities:
Aluminum operations.................................................... 477,805
Real estate and other.................................................. 28,853
----------
506,658
----------
Net current assets....................................................... 290,613
----------
Non-current assets:
Aluminum operations.................................................... 1,722,362
Real estate and other.................................................. 56,422
----------
1,778,784
----------
Non-current liabilities:
Aluminum operations.................................................... 1,790,946
Minority interests in aluminum operations.............................. 221,907
Real estate and other.................................................. 26,013
----------
2,038,866
----------
Net assets transferred to MAXXAM......................................... $ 30,531
==========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Lumber........................................................... $65,566 $61,313
Logs............................................................. 15,615 12,062
------- -------
$81,181 $73,375
======= =======
</TABLE>
During 1993, Pacific Lumber's inventory quantities were reduced. This
reduction resulted in the liquidation of Pacific Lumber's LIFO inventory
quantities carried at prevailing costs from prior years which were higher than
the current cost of inventory. The effect of this inventory liquidation
increased cost of goods sold by approximately $222 for the year ended December
31, 1993.
F-13
<PAGE> 209
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Logging roads, land and improvements.............. 15 years $ 7,929 $ 7,545
Buildings......................................... 33 years 29,661 28,209
Machinery and equipment........................... 5-15 years 121,343 118,059
Construction in progress.......................... 520 30
-------- --------
159,453 153,843
Less: accumulated depreciation.................... (58,420) (49,637)
-------- --------
$101,033 $104,206
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $9,795, $9,260 and $8,610, respectively.
5. INVESTMENT IN KAISER
Concurrent with the consummation of the offering on December 23, 1996
described in Note 6, the Company received, as a capital contribution from
MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as
collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully
integrated producer and marketer of alumina, primary aluminum and fabricated
aluminum products. Kaiser's common stock is publicly traded on the New York
Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares
represent a 39.0% equity interest in Kaiser at December 31, 1995 (34.7% on a
fully diluted basis, after giving effect to the conversion of Kaiser's
outstanding preferred stock into an equal number of common shares). The Company
follows the equity method of accounting for its investment in Kaiser.
As described in Note 1, the Company and MAXXAM are entities under common
control; accordingly, the Company has recorded its investment in Kaiser at
MAXXAM's historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company recorded
its equity share of such losses in January 1993 up to an amount of its
investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses
with respect to the results of operations attributable to Kaiser's common
stockholders have exceeded cumulative earnings. The Company is under no
obligation to provide any economic support to Kaiser, and accordingly, has not
recorded any amounts attributable to its equity in Kaiser's results of
operations for any period subsequent to January 1993. The Company will not
record its equity in Kaiser's results of operations until such time as future
earnings exceed the cumulative losses incurred.
F-14
<PAGE> 210
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The market value for the Pledged Kaiser Shares based on the price per share
quoted at the close of business on December 20, 1996 was $321,290. There can be
no assurance that such value would be realized should the Company dispose of its
investment in the Pledged Kaiser Shares. The following table contains summarized
financial information of Kaiser.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Current assets.............................................. $ 932,800 $ 842,800
Property, plant and equipment, net.......................... 1,109,600 1,133,200
Other assets................................................ 770,800 722,100
---------- ----------
Total assets...................................... $2,813,200 $2,698,100
========== ==========
Current liabilities......................................... $ 601,100 $ 583,100
Long-term debt, less current maturities..................... 749,200 751,100
Other liabilities........................................... 1,282,500 1,230,400
Minority interests.......................................... 122,700 116,200
Stockholders' equity:
Preferred................................................. 98,100 100,100
Common.................................................... (40,400) (82,800)
---------- ----------
57,700 17,300
---------- ----------
Total liabilities and stockholders' equity........ $2,813,200 $2,698,100
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................... $ 2,237,800 $ 1,781,500 $ 1,719,100
Costs and expenses.......................... (2,027,200) (1,837,700) (1,842,500)
Other expenses.............................. (108,000) (95,900) (85,100)
----------- ----------- -----------
Income (loss) before income taxes, minority
interests, extraordinary loss, and
cumulative effect of changes in accounting
principles................................ 102,600 (152,100) (208,500)
(Provision) credit for income taxes......... (37,200) 53,800 86,900
Minority interests.......................... (5,100) (3,100) (1,500)
----------- ----------- -----------
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles................................ 60,300 (101,400) (123,100)
Extraordinary loss on early extinguishment
of debt, net of taxes..................... -- (5,400) (21,800)
Cumulative effect of changes in accounting
principles, net of taxes.................. -- -- (507,300)
----------- ----------- -----------
Net income (loss)........................... 60,300 (106,800) (652,200)
Dividends on preferred stock................ (17,600) (20,100) (6,300)
----------- ----------- -----------
Net income (loss) available to common
stockholders.............................. $ 42,700 $ (126,900) $ (658,500)
=========== =========== ===========
Equity in earnings (loss) of Kaiser......... $ -- $ -- $ (240,954)
=========== =========== ===========
</TABLE>
F-15
<PAGE> 211
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The equity in loss of Kaiser of $240,954 for the year ended December 31,
1993 includes a $239,849 charge attributable to the Company's equity in Kaiser's
cumulative effect of the change in accounting for postretirement benefits other
than pensions and a $1,105 charge attributable to the Company's equity in
Kaiser's cumulative effect of the change in accounting for income taxes.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015......................................................... $350,233 $363,811
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount.............................................. 92,498 82,779
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000
Other.......................................................... 774 866
-------- --------
778,505 782,456
Less: current maturities....................................... (14,195) (13,670)
-------- --------
$764,310 $768,786
======== ========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber
Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary,
issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific used the
net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber
Notes, together with Pacific Lumber's cash and marketable securities, to (i)
retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A
Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes"), and (c) $41,750 aggregate principal amount of
Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the
"Debentures;" the Series A Notes, the Series B Notes and the Debentures are
referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay
accrued interest on the Old Pacific Lumber Securities through the date of
redemption; (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility
loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi)
pay a $25,000 dividend to a subsidiary of the Company. These transactions
resulted in a pre-tax extraordinary loss of $38,001, consisting primarily of the
payment of premiums and the write-off of amortized deferred financing costs on
the Old Pacific Lumber Securities.
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179,364 of the
Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's
contract rights and certain other assets, (iii) the funds deposited in the
Payment Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathemati-
F-16
<PAGE> 212
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
cal formulas set forth in the Timber Note Indenture. The minimum amount of
principal which Scotia Pacific must pay (on a cumulative basis) through any
Timber Note payment date in order to avoid an Event of Default (as defined in
the Timber Note Indenture) is referred to as rated amortization ("Rated
Amortization"). If all payments of principal are made in accordance with Rated
Amortization, the payment date on which Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific must pay through each Timber Note payment date in order to avoid
prepayment or deficiency premiums is referred to as scheduled amortization
("Scheduled Amortization"). If all payments of principal are made in accordance
with Scheduled Amortization, the payment date on which Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Substantially all of the Company's consolidated assets are owned by MGI;
substantially all of MGI's consolidated assets are owned by Pacific Lumber, and
a significant portion of Pacific Lumber's assets are owned by Scotia Pacific.
The Company expects that Pacific Lumber will provide a major portion of MGI's
future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for
a significant portion of its operating cash flow. The holders of the Timber
Notes have priority over the claims of creditors of Pacific Lumber with respect
to the assets and cash flows of Scotia Pacific, and the holders of the Pacific
Lumber Senior Notes have priority over the claims and creditors of MGI
(including the holders of the MGI Senior Notes and the MGI Discount Notes) and
the Company with respect to the assets and cash flows of Pacific Lumber. Under
the terms of the Timber Note Indenture, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from
operations exceeds the amounts required by the Timber Note Indenture to be
reserved for the payment of current debt service (including interest, principal
and premiums) on the Timber Notes, capital expenditures and certain other
operating expenses.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, in whole but not in part, at any time. The redemption price of the
Timber Notes is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.
Interest on the Pacific Lumber Senior Notes is payable semi-annually on
March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the
option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a
price of 103% of the principal amount plus accrued interest. The redemption
price is reduced annually until March 1, 2000, after which time the Pacific
Lumber Senior Notes are redeemable at par.
Pacific Lumber has a revolving credit agreement with a bank (as amended and
restated, the "Revolving Credit Agreement") which expires on May 31, 1998.
Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's
trade receivables and inventories, with interest computed at the bank's
reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The
Revolving Credit Agreement provides for borrowings of up to $60,000, of which
$15,000 may be used for standby letters of credit and $30,000 is restricted to
timberland acquisitions. Borrowings made pursuant to the portion of the credit
facility restricted to timberland acquisitions would also be secured by the
purchased timberlands. As of December 31, 1995, $48,090 of borrowings was
available under the Revolving Credit Agreement, of which $3,090 was available
for letters of credit and $30,000 was restricted to timberland acquisitions. No
borrowings were outstanding as of December 31, 1995, and letters of credit
outstanding amounted to $11,910. The Revolving Credit Agreement contains
covenants substantially similar to those contained in the Indenture governing
the Pacific Lumber Senior Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes
and the Revolving Credit Agreement contain various covenants which, among other
things, limit the payment of dividends and restrict transactions between Pacific
Lumber and its affiliates. As of December 31, 1995, under the most restrictive
of these covenants, approximately $15,663 of dividends could be paid by Pacific
Lumber.
F-17
<PAGE> 213
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
On August 4, 1993, MGI issued $100,000 aggregate principal amount of the
MGI Senior Notes and $126,720 aggregate principal amount (approximately $70,000
net of original issue discount) of the MGI Discount Notes, which, together with
the MGI Senior Notes, are referred to collectively as the "MGI Notes". The MGI
Notes are secured by MGI's pledge of 100% of the common stock of Pacific Lumber,
Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common
stock it received as a result of the Forest Products Group Formation. The
indenture governing the MGI Notes, among other things, restricts the ability of
MGI to incur additional indebtedness, engage in transactions with affiliates,
pay dividends and make investments. As of December 31, 1995, under the most
restrictive of these covenants, approximately $1,899 of dividends could be paid
by MGI, of which $1,600 was paid in January 1996. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the
Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of
$33,222 and $43,941 at December 31, 1995 and 1994, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.
MGI used a portion of the net proceeds from the sale of the MGI Notes to
retire the entire outstanding balance of MGI's 12 3/4% Notes at 101% of their
principal amount, plus accrued interest through November 14, 1993. MGI used the
remaining portion of the net proceeds from the sale of the MGI Notes, together
with a portion of its existing cash resources, to pay a $20,000 dividend to
MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000
aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000
at 100% of their principal amount plus accrued interest thereon.
The Company incurred a pre-tax extraordinary loss associated with the early
retirement of MGI's 12 3/4% Notes of $9,677 consisting of net interest cost of
$3,763, the write-off of $3,472 of unamortized deferred financing costs, a
premium of $1,500 and the write-off of $942 of unamortized original issue
discount.
Maturities
The following table of scheduled maturities of long-term debt outstanding
at December 31, 1995 reflects Scheduled Amortization with respect to the Timber
Notes:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
7.95% Scotia Pacific Timber
Collateralized Notes.......... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009
11 1/4% MGI Senior Secured
Notes......................... -- -- -- -- -- 100,000
12 1/4% MGI Senior Secured
Discount Notes................ -- -- -- -- -- 125,720
10 1/2% Pacific Lumber Senior
Notes......................... -- -- -- -- -- 235,000
Other........................... 92 93 94 94 95 306
------- ------- ------- ------- ------- --------
$14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035
======= ======= ======= ======= ======= ========
</TABLE>
Private Offering
The Company completed an offering (the "Offering") of $130,000 principal
amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured
Notes") on December 23, 1996 (the "Issue
F-18
<PAGE> 214
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Date"). Interest is payable semiannually on February 1 and August 1 of each year
beginning February 1, 1997. The MGHI Senior Secured Notes were not registered
under the Securities Act of 1933, and may not be offered or sold in the United
States absent registration or on applicable exemption from registration
requirements. The MGHI Senior Notes rank pari passu in right and priority of
payment with any future senior indebtedness of the Company, and are guaranteed
on a senior, unsecured basis by MAXXAM. The MGHI Senior Secured Notes will be
effectively subordinated to liabilities of the Company's subsidiaries, including
trade payables.
The net proceeds from the Offering on the Issue Date, after estimated
expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant
to an intercompany note (the "Intercompany Note") which will be pledged to
secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest
at the rate of 11% per annum (payable semiannually prior to the interest payment
dates applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003.
MAXXAM will be entitled to defer the payment of interest on the Intercompany
Note on any interest payment date to the extent that the Company has sufficient
available funds to satisfy its obligations on the MGHI Senior Secured Notes on
such date. Any such deferred interest will be added to the principal amount of
the Intercompany Note and be payable at maturity.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total
consolidated indebtedness would have increased from $772,877 to $902,877. The
Indentures governing the MGI Notes were amended to, among other things, provide
for the contribution of the Kaiser Shares to the Company.
Pursuant to an agreement with the initial purchasers of the MGHI Senior
Secured Notes, the Company and MAXXAM have agreed to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission within 60 days of the Issue Date with respect to a registered offer
to exchange the MGHI Senior Secured Notes for new notes with substantially
identical terms (the "Exchange Offer"), and to use their reasonable best efforts
to have the Registration Statement declared effective within 150 days of the
Issue Date and the Exchange Offer consummated within 180 days of the Issue Date.
The Exchange Date will be made only by means of a prospectus.
Restricted Net Assets of Subsidiaries
At December 31, 1995, certain debt instruments restricted the ability of
MGI to transfer assets, make loans and advances to pay dividends to the Company.
As of December 31, 1995, all of the assets of MGI and its subsidiaries are
subject to such restrictions.
7. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes. Prior to August 4, 1993, the
Company and each of its subsidiaries computed their tax liabilities or tax
benefits on a separate company basis (except as discussed in the following
paragraph), in accordance with their respective tax allocation agreements with
MAXXAM.
Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation
agreement that, among other things, amended the tax calculations with respect to
Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms
of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the
federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and
certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. The PL
Tax
F-19
<PAGE> 215
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for
its federal income tax liability computed on a separate company basis as if it
was never connected with MAXXAM. The remaining subsidiaries of MGI are each
liable to MAXXAM for their respective income tax liabilities computed on a
separate company basis as if they were never connected with MAXXAM, pursuant to
their respective tax allocation agreements.
MGI's tax allocation agreement with MAXXAM, (the "MGI Tax Allocation
Agreement"), provides that MGI's federal income tax liability is computed as if
MGI files a consolidated tax return with all of its subsidiaries except Salmon
Creek, and that such corporations were never connected with MAXXAM (the "MGI
Consolidated Tax Liability"). The federal income tax liability of MGI is the
difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of
the separate tax liabilities for MGI's subsidiaries (computed as discussed
above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax
Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay
the amount of such difference to MGI.
A federal consolidated tax liability is also computed for MGHI and its
subsidiaries, as if MGHI and its subsidiaries, except Salmon Creek, file a
consolidated tax return and that such corporations were never connected with
MAXXAM (the "MGHI Consolidated Tax Liability"). The federal income tax liability
of MGHI is the difference between the MGHI Consolidated Tax Liability and the
MGI Consolidated Tax Liability. To the extent that the MGHI Consolidated Tax
Liability is less than the MGI Consolidated Tax Liability, MAXXAM is obligated
to pay the amount of such difference to MGHI.
The credit (provision) in lieu of income taxes on income (loss) from
continuing operations before income taxes, extraordinary items and cumulative
effect of changes in accounting principles consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes.... $ (167) $ -- $ (988)
State and local....................................... (35) (55) (253)
------- ------ ------
(202) (55) (1,241)
------- ------ ------
Deferred:
Federal credit (provision) in lieu of income taxes.... (410) 1,938 5,054
State and local....................................... (1,009) 1,267 (229)
------- ------ ------
(1,419) 3,205 4,825
------- ------ ------
$(1,621) $3,150 $3,584
======= ====== ======
</TABLE>
The 1994 deferred federal credit in lieu of income taxes of $1,938 includes
a credit relating to reserves the Company no longer believed were necessary, the
1993 deferred federal credit in lieu of income taxes of $4,054 includes $2,061
for the benefit of operating loss carryforwards generated in 1993 and includes a
$1,082 benefit for increasing net deferred income tax assets (liabilities) as of
the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act
of 1993 which retroactively increased the federal statutory income tax rate from
34% to 35% for periods beginning on or after January 1, 1993.
F-20
<PAGE> 216
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
A reconciliation between the credit (provision) in lieu of income taxes and
the amount computed by applying the federal statutory income tax rate to income
(loss) from continuing operations before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles.................... $ 5,857 $16,080 $(17,655)
======= ======= ========
Amount of federal income tax based upon the statutory
rate................................................ $(2,050) $(5,628) $ 6,179
Revision of prior years' tax estimates and other
changes in valuation allowances..................... 907 7,739 (3,468)
Increase in net deferred income tax assets due to tax
rate change......................................... -- -- 1,082
State and local taxes, net of federal tax benefit..... (679) 787 (313)
Other................................................. 201 252 104
------- ------- --------
$(1,621) $ 3,150 $ 3,584
======= ======= ========
</TABLE>
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1994, the Company recorded an extraordinary loss related to the
settlement of litigation in connection with MGI's acquisition of Pacific Lumber
(see Note 10). The Company reported the loss net of related deferred income
taxes of $6,312 which is less than the federal and state statutory income tax
rates due to expenses for which no tax benefit was recognized.
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1993, the Company reported an extraordinary loss related to the
early extinguishment of debt. The Company reported the loss net of related
deferred income taxes of $16,211 which approximated the federal statutory income
tax rate in effect an the dates the transactions occurred.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
adoption of SFAS 109 changed the Company's method of accounting for income taxes
to an asset and liability approach from the deferral method prescribed by APB
11. The asset and liability approach requires the recognition of deferred income
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Under this method, deferred income tax assets and liabilities are determined
based on the temporary differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates. The cumulative effect of the
change in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $22,818. The implementation of SFAS 109 required the
Company to restate certain assets and liabilities to their pre-tax amounts from
their net-of-tax amounts originally recorded in connection with the acquisitions
of Pacific Lumber in 1986, MGI in 1988 and Britt in 1990. As a result of
restating these assets and liabilities, the loss from continuing operations
before income taxes, extraordinary item and cumulative effect of changes in
accounting principles for the year ended December 31, 1993 was decreased by
$514.
F-21
<PAGE> 217
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards................................ $ 83,705 $ 86,864
Timber and timberlands....................................... 41,803 46,955
Other liabilities............................................ 17,203 10,460
Postretirement benefits other than pensions.................. 2,316 2,145
Other........................................................ 327 1,818
Valuation allowances......................................... (51,595) (52,060)
-------- --------
Total deferred income tax assets, net................ 93,759 96,182
-------- --------
Deferred income tax liabilities:
Inventories.................................................. (17,313) (19,179)
Property, plant and equipment................................ (16,899) (16,952)
Other........................................................ (3,828) (3,651)
-------- --------
Total deferred income tax liabilities................ (38,040) (39,782)
-------- --------
Net deferred income tax assets................................. $ 55,719 $ 56,400
======== ========
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards. As of December 31, 1995, approximately $41,803 of the net
deferred income tax assets listed above relate to the excess of the tax basis
over financial statement basis with respect to timber and timberlands. The
Company believes that it is more likely than not that this net deferred income
tax asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis. Also included
in net deferred income tax assets as of December 31, 1995 is $32,110 which
relates to the benefit of loss and credit carryforwards, net of valuation
allowances. The Company evaluated all appropriate factors to determine the
proper valuation allowances for loss and credit carryforwards. These factors
included any limitations concerning use of the carryforwards, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
The Company has concluded that it will more likely than not generate sufficient
taxable income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided.
Included in the net deferred income tax assets listed above are $50,504 and
$51,501 at December 31, 1995 and 1994, respectively, which are recorded pursuant
to the tax allocation agreements with MAXXAM.
The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
1995, under the terms of the respective tax allocation agreements. The
utilization of certain of these attributes is subject to limitations.
<TABLE>
<CAPTION>
EXPIRING
THROUGH
--------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses......................................... $224,485 2010
Net capital losses........................................... 5,177 1997
Minimum tax credit........................................... 167 --
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses......................................... $185,803 2010
</TABLE>
F-22
<PAGE> 218
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLANS
Pacific Lumber has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by The Employee Retirement Income Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........ $ 1,483 $1,643 $ 1,600
Interest cost on projected benefit obligation.......... 1,693 1,263 918
Actual loss (gain) on plan assets...................... (3,900) 10 (2,128)
Net amortization and deferral.......................... 2,460 (859) 1,359
------- ------ -------
Net periodic pension cost.............................. $ 1,736 $2,057 $ 1,749
======= ====== =======
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation.................................... $ 16,910 $ 11,809
Non-vested benefit obligation................................ 1,214 779
-------- --------
Total accumulated benefit obligation................. $ 18,124 $ 12,588
======== ========
Projected benefit obligation................................... $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt
securities................................................... (18,363) (13,184)
-------- --------
Projected benefit obligation in excess of plan assets.......... 3,478 1,863
Unrecognized net transaction asset............................. 24 29
Unrecognized net gain (loss)................................... (27) 1,475
Unrecognized prior service cost................................ (45) (50)
-------- --------
Accrued pension liability.................................... $ 3,430 $ 3,317
======== ========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.25% 8.5% 7.5%
Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
</TABLE>
Pacific Lumber has an unfunded defined benefit plan for certain
postretirement and other benefits which covers substantially all employees of
Pacific Lumber. Participants of the plan are eligible for certain health care
benefits upon termination of employment and retirement and commencement of
pension benefits. Participants make contributions for a portion of the cost of
their health care benefits.
F-23
<PAGE> 219
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are accrued over the period the employees provide services to the date
of their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the change in
accounting principle for the adoption of SFAS 106 was recorded as a charge to
results of operations of $2,348, net of related income taxes of $1,566. The
deferred income tax benefit related to the adoption of SFAS 106 was recorded at
the federal and state statutory rates in effect on the date SFAS 106 was
adopted.
A summary of the components of net periodic postretirement benefit cost is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $228 $216 $153
Interest cost on accumulated postretirement benefit
obligation.................................................. 317 294 315
Net amortization and deferral................................. (53) (7) --
---- ---- ----
Net periodic postretirement benefit cost...................... $492 $503 $468
==== ==== ====
</TABLE>
The adoption of SFAS 106 increased the Company's loss from continuing
operations before extraordinary item and cumulative effect of changes in
accounting principles by $212 ($360 before tax) for the year ended December 31,
1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $ 634 $ 860
Actives eligible for benefits...................................... 726 656
Actives not eligible for benefits.................................. 3,317 2,355
------ ------
Accumulated postretirement benefit obligation.................... 4,677 3,871
Unrecognized net gain.............................................. 553 972
------ ------
Postretirement benefit liability................................. $5,230 $4,843
====== ======
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to
decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one
percentage point increase in the assumed health care cost trend rate would
increase the accumulated postretirement benefit obligation as of December 31,
1995 by approximately $674 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by approximately $90.
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994,
respectively.
Subsequent to December 31, 1993, Pacific Lumber's employees were eligible
to participate in a defined contribution savings plan sponsored by MAXXAM. This
plan is designed to enhance the existing retirement programs of participating
employees. Employees may elect to contribute up to 16% of their compensation to
the plan. For those participants who have elected to make voluntary
contributions to the plan, Pacific Lumber's contributions consist of a matching
contribution of up to 4% of the compensation of participants for
F-24
<PAGE> 220
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
each calendar quarter. The cost to the Company of this plan was $1,281 and
$1,215 for the years ended December 31, 1995 and 1994, respectively.
Pacific Lumber is self-insured for workers' compensation benefits. Included
in accrued compensation and related benefits and other noncurrent liabilities
are accruals for workers' compensation claims amounting to $8,900 and $9,233 at
December 31, 1995 and 1994, respectively. Workers' compensation expenses
amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995,
1994 and 1993, respectively.
9. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting and data processing services. In addition, MAXXAM provides the
Company with office space and various office personnel, insurance, legal,
operating, financial and certain other services. MAXXAM's expenses incurred on
behalf of the Company are reimbursed by the Company through payments consisting
of (i) an allocation of the lease expense for the office space utilized by or on
behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses
incurred by MAXXAM, including, but not limited to, labor costs of personnel
rendering services to the Company. Charges by MAXXAM for such services were
$1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company believes that the services being rendered are on terms
not less favorable to the Company than those which would be obtainable from
unaffiliated third parties.
In 1994, in connection with the litigation settlement described in Note 10,
Pacific Lumber paid approximately $3,185 to a law firm in which a director of
Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately
$1,931 in connection with the offering of the Pacific Lumber Senior Notes and
the Timber Notes to this same law firm.
10. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against MAXXAM, the Company,
Pacific Lumber, former directors of Pacific Lumber and others concerning the
Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was
paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by
Pacific Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. In 1994, the Company recorded an extraordinary
loss of $14,866 related to the settlement and associated costs, including a
$2,000 accrual for certain contingent claims and $4,400 of related legal fees,
net of benefits for federal and state income taxes of $6,312.
The Company's forest products operations are primarily conducted by Pacific
Lumber and are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. While the Company does not expect that
Pacific Lumber's compliance with such existing laws and regulations will have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity, Pacific Lumber is subject to certain pending
matters described below, including the resolution of issues relating to the
final designation of critical habitat for the marbled murrelet, which could have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Moreover, the laws and regulations relating
to the Company's forest products operations are modified from time to time and
are subject to judicial and administrative interpretation. There can be no
assurance that certain pending or future governmental regulations, legislation
or judicial or administrative decisions would not materially and adversely
affect Pacific Lumber or its ability to harvest timber.
F-25
<PAGE> 221
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation.
Pursuant to the Headwaters Agreement described in Note 11 below (the "Headwaters
Agreement"), the Takings Litigation has been stayed by the court at the request
of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 11 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require that timber companies project timber growth and
harvest on their timberlands over a 100-year planning period and establish a
long-term sustained yield ("LTSY") harvest level that takes into account
environmental and economic considerations. The proposed sustained yield plan
("SYP") must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's
projected timber inventory is capable of sustaining the LTSY harvest level in
the last decade of the 100-year planning period. On December 17, 1996, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the
same as Pacific Lumber's average annual timber harvest over the last five years.
The proposed SYP also indicates that Pacific Lumber's average annual timber
harvest during the first decade of the SYP would approximate the LTSY harvest
level. During the second decade of the proposed SYP, Pacific Lumber's average
annual timber harvest would be approximately 8% less than that proposed for the
first decade. The SYP, when approved, will be valid for ten years. Thereafter,
revised SYPs will be prepared every decade that will address the LTSY harvest
level based upon reassessment of changes in the resource base and protection of
public resources. The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the
F-26
<PAGE> 222
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Multi-Species HCP will permit Pacific Lumber to harvest its timberlands
(including over the next two decades a substantial portion of its old growth
timberlands not transferred pursuant to the Headwaters Agreement) to achieve
maximum sustained yield. The SYP is subject to review and approval by the CDF,
and there can be no assurance that the SYP will be approved in its proposed
form. Until the SYP is reviewed and approved, Pacific Lumber is unable to
predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and submitting
corresponding amendments to its SYP; however, there can be no assurance that it
would be able to do so and the amount of such acquisitions would be limited by
Pacific Lumber's available financial resources. The Company is unable to predict
the ultimate impact the sustained yield regulations will have on its future
consolidated financial position, results of operations or liquidity. See Note 11
below for a description of certain terms of the Headwaters Agreement relating to
the SYP.
Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of the Company's timber harvesting plans ("THPs") and other timber
harvesting operations, and the Company expects that such groups and individuals
will continue to file such objections to certain of the Company's THPs and other
timber harvesting operations. In addition, lawsuits are pending and/or
threatened which seek to prevent the Company from implementing certain of its
approved THP's and/or which challenge other operations of the Company. These
challenges have severely restricted Pacific Lumber's ability to harvest old
growth timber on its property. To date, challenges with respect to the Company's
THPs relating to young growth timber have been limited; however, no assurance
can be given as to the extent of such challenges in the future. The Company
believes that environmentally focused challenges to its timber harvesting
operations are likely to occur in the future, particularly with respect to
virgin and residual old growth timber. Although such challenges have delayed or
prevented the Company from conducting a portion of its operations, they have not
had a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to predict
the future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate costs that may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
11. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
F-27
<PAGE> 223
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
12. OTHER ITEMS
Investment, Interest and Other Income
In February 1994, Pacific Lumber received a franchise tax refund of $7,243,
the substantial portion of which represents interest from the State of
California relating to tax years 1972 through 1985. This amount is included in
investment, interest and other income for the year ended December 31, 1994.
Items Related to 1992 Earthquake
In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of
$1,527 and $1,200, respectively, resulting from business interruption insurance
reimbursements for higher operating costs and the related loss of revenues
resulting from the April 1992 earthquake. Other receivables at December 31, 1994
included $1,684 related to earthquake related insurance claims.
F-28
<PAGE> 224
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 53,122 $ 48,396
Marketable securities............................................ 31,852 36,568
Receivables:
Trade......................................................... 11,466 20,576
Other......................................................... 2,429 1,624
Inventories...................................................... 78,113 81,181
Prepaid expenses and other current assets........................ 5,612 7,101
--------- ---------
Total current assets..................................... 182,594 195,446
Timber and timberlands, net of depletion of $151,273 and $139,554
at September 30, 1996 and December 31, 1995, respectively........ 303,011 312,983
Property, plant and equipment, net of accumulated depreciation of
$65,108 and $58,420 at September 30, 1996 and December 31, 1995,
respectively..................................................... 101,214 101,033
Deferred financing costs, net...................................... 24,996 27,288
Deferred income taxes.............................................. 65,162 67,208
Restricted cash.................................................... 30,453 31,367
Other assets....................................................... 5,843 5,542
--------- ---------
$ 713,273 $ 740,867
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................. $ 5,436 $ 4,166
Accrued compensation and related benefits........................ 9,791 9,611
Accrued interest................................................. 9,217 25,354
Deferred income taxes............................................ 11,489 11,489
Other accrued liabilities........................................ 3,828 4,435
Long-term debt, current maturities............................... 16,258 14,195
--------- ---------
Total current liabilities................................ 56,019 69,250
Long-term debt, less current maturities............................ 756,619 764,310
Other noncurrent liabilities....................................... 26,518 33,813
--------- ---------
Total liabilities........................................ 839,156 867,373
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $1.00 par value; 3,000 shares authorized;
1,000 shares issued........................................... 1 1
Additional capital............................................... 89,767 89,767
Accumulated deficit.............................................. (215,651) (216,274)
--------- ---------
Total stockholder's deficit.............................. (125,883) (126,506)
--------- ---------
$ 713,273 $ 740,867
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 225
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales:
Lumber and logs...................................................... $183,913 $161,151
Other................................................................ 15,667 19,761
-------- --------
199,580 180,912
-------- --------
Operating expenses:
Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997
Selling, general and administrative expenses......................... 11,344 12,243
Depletion and depreciation........................................... 20,175 18,957
-------- --------
146,136 127,197
-------- --------
Operating income....................................................... 53,444 53,715
Other income (expense):
Investment, interest and other income................................ 8,377 6,835
Interest expense..................................................... (58,388) (58,228)
-------- --------
Income before income taxes............................................. 3,433 2,322
Credit (provision) in lieu of income taxes............................. 1,090 (772)
-------- --------
Net income............................................................. $ 4,523 $ 1,550
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 226
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 4,523 $ 1,550
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion and depreciation........................................ 20,175 18,957
Amortization of deferred financing costs and discounts on
long-term debt................................................... 10,815 9,772
Decrease in receivables........................................... 11,478 12,683
Net sales (purchases) of marketable securities.................... 8,351 (10,542)
Decrease (increase) in inventories, net of depletion.............. 1,588 (6,067)
Increase in accounts payable...................................... 1,270 853
Decrease (increase) in prepaid expenses and other assets.......... 1,188 (1,132)
Decrease in accrued interest...................................... (16,137) (16,330)
Increase (decrease) in other liabilities.......................... (8,729) 9,618
Net gains on marketable securities................................ (3,635) (2,362)
Decrease (increase) in accrued and deferred income taxes.......... (120) 562
Other............................................................. (28) 465
-------- --------
Net cash provided by operating activities.................... 30,739 18,027
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............................ -- 2,500
Net proceeds from sale of assets..................................... 110 9
Capital expenditures................................................. (8,986) (6,624)
-------- --------
Net cash used for investing activities....................... (8,876) (4,115)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net..................................... 914 563
Repurchase of and principal payments on long-term debt............... (14,151) (14,256)
Dividends paid....................................................... (3,900) (4,800)
-------- --------
Net cash used for financing activities....................... (17,137) (18,493)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 4,726 (4,581)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 48,396 48,575
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 53,122 $ 43,994
======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities........ $ -- $ 6,648
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest........................... $ 63,710 $ 64,786
Tax allocation payments to (receipts from) MAXXAM Inc., net.......... 167 --
Income taxes paid (refunded)......................................... (1,549) (5,461)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 227
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
FORMATION OF MGHI
MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to
facilitate the offering of Senior Secured Notes. Subsequent to its formation,
MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM
Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further,
concurrent with the consummation of the Private Offering of $130,000 aggregate
principal amount of the Company's Senior Secured Notes due 2003 as described in
Note 6, MAXXAM transfered to the Company, as an additional capital contribution,
27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock
representing a 34.7% interest in Kaiser on a fully diluted basis. The
contribution of MGI's capital stock has been accounted for as a reorganization
of entities under common control, which requires MGHI to record the assets and
liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the
successor entity to MGI and as such, the accompanying financial statements of
MGHI and its subsidiaries (together, the "Company") reflect both the historical
operating results of MGI and MAXXAM's purchase accounting adjustments which
principally relate to MGI's timber and depreciable assets. The purchase
accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The
contribution of the Kaiser common stock has been reflected in the consolidated
financial statements of the Company as if such contribution occurred as of the
beginning of the earliest period presented, at MAXXAM's historical cost using
the equity method of accounting. The Company conducts its business primarily
through the operations of its subsidiaries, including MGI.
BASIS OF PRESENTATION
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the Audited
Consolidated Financial Statements of the Company and the Notes thereto which are
contained elsewhere herein. Any capitalized terms used but not defined in the
following Condensed Notes to Consolidated Financial Statements have the same
meaning given to them in the Audited Consolidated Financial Statements of the
Company. All references to the "Company" include MGHI and its subsidiary
companies unless otherwise noted or the context indicates otherwise. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the entire
year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation. The Company is a wholly owned subsidiary of MAXXAM.
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account held by the
Trustee under the indenture governing the Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5,676 and $19,742, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
F-32
<PAGE> 228
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Lumber..................................................... $58,827 $ 65,566
Logs....................................................... 19,286 15,615
------- -------
$78,113 $ 81,181
======= =======
</TABLE>
4. INVESTMENT IN KAISER
Concurrent with the consummation of the offering on December 23, 1996
described in Note 5, the Company received, as a capital contribution from
MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as
collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully
integrated producer and marketer of alumina, primary aluminum and fabricated
aluminum products. Kaiser's common stock is publicly traded on the New York
Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares
represent a 39.0% equity interest in Kaiser at September 30, 1996 (34.7% on a
fully diluted basis, after giving effect to the conversion of Kaiser's
outstanding preferred stock into an equal number of common shares). The Company
follows the equity method of accounting for its investment in Kaiser.
As described in Note 1, the Company and MAXXAM are entities under common
control; accordingly, the Company has recorded its investment in Kaiser at
MAXXAM's historical cost. During the first quarter of 1993, losses exhausted
Kaiser's equity with respect to its common stockholders. The Company recorded
its equity share of such losses in January 1993 up to an amount of its
investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses
with respect to the results of operations attributable to Kaiser's common
stockholders have exceeded cumulative earnings. The Company is under no
obligation to provide any economic support to Kaiser, and accordingly, has not
recorded any amounts attributable to its equity share of Kaiser's results of
operations for any period subsequent to January 1993. The Company will not
record its equity share of Kaiser's results of operations until such time as
future earnings exceed the cumulative losses incurred.
The market value for the Pledged Kaiser Shares based on the price per share
quoted at the close of business on December 20, 1996 was $321,290. There can be
no assurance that such value would be realized should the Company dispose of its
investment in the Pledged Kaiser Shares. The following table contains summarized
financial information of Kaiser.
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current assets............................................. $ 940,400 $ 932,800
Property, plant and equipment, net......................... 1,126,400 1,109,600
Other assets............................................... 802,400 770,800
---------- ----------
Total assets..................................... $ 2,869,200 $2,813,200
========== ==========
Current liabilities........................................ $ 542,000 $ 601,100
Long-term debt, less current maturities.................... 858,400 749,200
Other liabilities.......................................... 1,286,000 1,282,500
Minority interests......................................... 119,400 122,700
Stockholders' equity:
Preferred................................................ 98,100 98,100
Common................................................... (34,700) (40,400)
---------- ----------
63,400 57,700
---------- ----------
Total liabilities and stockholders' equity....... $ 2,869,200 $2,813,200
========== ==========
</TABLE>
F-33
<PAGE> 229
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales................................................. $ 1,652,100 $ 1,646,700
Costs and expenses........................................ (1,564,700) (1,497,300)
Other expenses............................................ (65,300) (81,100)
----------- -----------
Income before income taxes and minority interests......... 22,100 68,300
Provision for income taxes................................ (8,400) (24,600)
Minority interests........................................ (2,200) (4,400)
----------- -----------
Net income................................................ 11,500 39,300
Dividends on preferred stock.............................. (6,300) (15,500)
----------- -----------
Net income available to common stockholders............... $ 5,200 $ 23,800
=========== ===========
Equity in earnings of Kaiser.............................. $ -- $ --
=========== ===========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015............................................ $ 336,130 $350,233
11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount.................................... 101,021 92,498
10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235,000 235,000
Other...................................................... 726 774
-------- --------
772,877 778,505
Less: current maturities................................... (16,258) (14,195)
-------- --------
$ 756,619 $764,310
======== ========
</TABLE>
PRIVATE OFFERING
The Company completed an offering (the "Offering") of $130,000 principal
amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured
Notes") on December 23, 1996 (the "Issue Date"). Interest is payable
semiannually on February 1 and August 1 of each year beginning February 1, 1997.
The MGHI Senior Secured Notes were not registered under the Securities Act of
1933, and may not be offered or sold in the United States absent registration or
on applicable exemption from registration requirements. The MGHI Senior Notes
rank pari passu in right and priority of payment with any future senior
indebtedness of the Company, and are guaranteed on a senior, unsecured basis by
MAXXAM. The MGHI Senior Secured Notes will be effectively subordinated to
liabilities of the Company's subsidiaries, including trade payables.
The net proceeds from the Offering on the Issue Date, after estimated
expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant
to an intercompany note (the "Intercompany Note") which will be pledged to
secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest
at the rate of 11% per annum (payable semiannually on the interest payment dates
applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003.
MAXXAM will be entitled to defer the
F-34
<PAGE> 230
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
payment of interest on the Intercompany Note on any interest payment date to the
extent that the Company has sufficient available funds to satisfy its
obligations on the MGHI Senior Secured Notes on such date. Any such deferred
interest will be added to the principal amount of the Intercompany Note and be
payable at maturity.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total
consolidated indebtedness would have increased from $772,877 to $902,877. The
Indentures governing the MGI Notes were amended to, among other things, provide
for the contribution of the Kaiser Shares to the Company.
Pursuant to an agreement with the initial purchasers of the MGHI Senior
Secured Notes, the Company and MAXXAM have agreed to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission within 60 days of the Issue Date with respect to a registered offer
to exchange the MGHI Senior Secured Notes for new notes with substantially
identical terms (the "Exchange Offer"), and to use their reasonable best efforts
to have the Registration Statement declared effective within 150 days of the
Issue Date and the Exchange Offer consummated within 180 days of the Issue Date.
The Exchange Date will be made only by means of a prospectus.
6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The credit in lieu of income taxes for the nine months ended September 30,
1996 includes a benefit of $2,620 relating to the refund of taxes previously
paid in connection with a settlement of certain federal income tax matters in
June 1996. The Company received the cash refund in August 1996.
7. CONTINGENCIES
The Company's forest products operations are primarily conducted by The
Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
endangered species and critical habitat, and air and water quality. While the
Company does not expect that Pacific Lumber's compliance with such existing laws
and regulations will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity, Pacific
Lumber is subject to certain pending matters described below, including the
resolution of issues relating to the final designation of critical habitat for
the marbled murrelet, which could have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Moreover, the laws and regulations relating to the Company's forest products
operations are modified from time to time and are subject to judicial and
administrative interpretation. There can be no assurance that certain pending or
future governmental regulations, legislation or judicial or administrative
decisions would not materially and adversely affect Pacific Lumber or its
ability to harvest timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation") alleging that certain
portions of its timberlands have been "taken" and seeking just compensation.
Pursuant to
F-35
<PAGE> 231
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
the Headwaters Agreement described in Note 8 below (the "Headwaters Agreement"),
the Takings Litigation has been stayed by the court at the request of the
parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such times as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by the Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 8 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
a multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require that timber companies project timber growth and
harvest on their timberlands over a 100-year planning period and establish a
long-term sustained yield ("LTSY") harvest level that takes into account
environmental and economic considerations. The proposed sustained yield plan
("SYP") must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's
projected timber inventory is capable of sustaining the LTSY harvest level in
the last decade of the 100-year planning period. On December 17, 1996, Pacific
Lumber submitted a proposed SYP to the California Department of Forestry
("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the
same as Pacific Lumber's average annual timber harvest over the last five years.
The proposed SYP also indicates that Pacific Lumber's average annual timber
harvest during the first decade of the SYP would approximate the LTSY harvest
level. During the second decade of the proposed SYP, Pacific Lumber's average
annual timber harvest would be approximately 8% less than that proposed for the
first decade. The SYP, when approved, will be valid for ten years. Thereafter,
revised SYPs will be prepared every decade that will address the LTSY harvest
level based upon reassessment of changes in the resource base and protection of
public resources. The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP will
permit Pacific Lumber to harvest its timberlands (including over the next two
decades a substantial portion of its old growth timberlands not transferred
pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The
SYP is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form. Until the SYP is reviewed
and approved, Pacific Lumber is unable to predict the impact that these
regulations will have on its future timber harvesting practices. It is possible
that the results of the review and approval process could require Pacific Lumber
to reduce its timber harvest in future years from the harvest levels set forth
in the proposed SYP. Pacific Lumber believes it would be able to mitigate the
effect of any required reduction in harvest level by acquisitions of additional
timberlands and submitting corresponding amendments to its SYP; however, there
can be no assurance that it would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial resources.
The Company is unable to predict the ultimate impact the sustained yield
regulations will have on its future consolidated financial position, results of
operations or
F-36
<PAGE> 232
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
liquidity. See Note 8 below for a description of certain terms of the Headwaters
Agreement relating to the SYP.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs") and other timber harvesting operations, and the Company expects
that such groups and individuals will continue to file such objections to
certain of the Company's THPs and other timber harvesting operations. In
addition, lawsuits are pending and/or threatened which seek to prevent the
Company from implementing certain of its approved THPs and/or which challenge
other operations of the Company. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth timber
have been limited; however, no assurance can be given as to the extent of such
challenges in the future. The Company believes that environmentally focused
challenges to its timber harvesting operations are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from conducting a
portion of its operations, they have not had a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the Company's consolidated financial
position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate costs that may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
8. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
F-37
<PAGE> 233
MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.................................... $ 59.8 $ 71.3 $ 68.5
Gross profit................................. 26.7 29.9 28.4
Operating income............................. 16.7 19.3 17.4
Net income................................... .3 4.1 .1
1995 QUARTERLY INFORMATION:
Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7
Gross profit................................. 22.5 32.6 29.8 30.6
Operating income............................. 12.7 22.0 19.0 20.6
Net income (loss)............................ (3.1) 3.3 1.3 2.7
1994 QUARTERLY INFORMATION:
Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2
Gross profit................................. 23.6 31.9 29.1 35.4
Operating income............................. 13.5 23.0 19.7 22.9
Income before extraordinary item............. 1.2 3.4 8.5 6.2
Extraordinary loss -- net.................... -- (14.9) -- --
Net income (loss)............................ 1.2 (11.5) 8.5 6.2
</TABLE>
F-38
<PAGE> 234
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As explained in Notes 5 and 6 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes, postretirement benefits other than pensions and postemployment
benefits.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
F-39
<PAGE> 235
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1995 1994
-------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 104.2 $ 84.6
Marketable securities................................................. 45.9 40.3
Receivables:
Trade, net of allowance for doubtful accounts of $5.5 and $4.4 at
December 31, 1995 and 1994, respectively.......................... 246.2 176.8
Other.............................................................. 98.9 62.9
Inventories........................................................... 606.8 541.4
Prepaid expenses and other current assets............................. 129.7 185.3
-------- --------
Total current assets.......................................... 1,231.7 1,091.3
Property, plant and equipment, net...................................... 1,231.9 1,231.6
Timber and timberlands, net of depletion of $139.6 and $123.9 at
December 31, 1995 and 1994, respectively.............................. 313.0 325.2
Investments in and advances to unconsolidated affiliates................ 189.1 169.7
Deferred income taxes................................................... 414.0 425.6
Long-term receivables and other assets.................................. 452.6 447.4
-------- --------
$3,832.3 $3,690.8
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................................... $ 196.7 $ 161.8
Accrued interest...................................................... 58.0 62.0
Accrued compensation and related benefits............................. 166.5 138.3
Other accrued liabilities............................................. 148.4 200.2
Payable to affiliates................................................. 90.2 81.8
Long-term debt, current maturities.................................... 25.1 33.7
-------- --------
Total current liabilities..................................... 684.9 677.8
Long-term debt, less current maturities................................. 1,585.1 1,582.5
Accrued postretirement benefits......................................... 742.6 743.1
Other noncurrent liabilities............................................ 680.3 618.4
-------- --------
Total liabilities............................................. 3,692.9 3,621.8
-------- --------
Commitments and contingencies
Minority interests...................................................... 223.2 344.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible Preferred
Stock; shares issued: 1995 -- 669,701 and 1994 -- 669,957.......... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359.......................................... 5.0 5.0
Additional capital.................................................... 155.0 53.2
Accumulated deficit................................................... (208.5) (302.9)
Pension liability adjustment.......................................... (16.1) (11.4)
Treasury stock, at cost (shares held: preferred -- 845; common:
1995 -- 1,355,512 and 1994 -- 1,355,768)........................... (19.5) (19.5)
-------- --------
Total stockholders' deficit................................... (83.8) (275.3)
-------- --------
$3,832.3 $3,690.8
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 236
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS OF DOLLARS
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
Aluminum operations........................................ $2,237.8 $1,781.5 $1,719.1
Forest products operations................................. 242.6 249.6 233.5
Real estate and other operations........................... 84.8 84.6 78.5
-------- -------- --------
2,565.2 2,115.7 2,031.1
-------- -------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation
and depletion):
Aluminum operations..................................... 1,798.4 1,625.5 1,587.7
Forest products operations.............................. 127.1 129.6 134.6
Real estate and other operations........................ 65.4 62.8 65.3
Selling, general and administrative expenses............... 195.8 169.4 183.0
Depreciation and depletion................................. 120.9 121.1 120.8
Restructuring of aluminum operations....................... -- -- 35.8
-------- -------- --------
2,307.6 2,108.4 2,127.2
-------- -------- --------
Operating income (loss)...................................... 257.6 7.3 (96.1)
Other income (expense):
Investment, interest and other income (expense)............ 18.2 (2.2) 69.8
Interest expense........................................... (172.7) (167.3) (169.5)
Amortization of deferred financing costs................... (8.6) (9.6) (15.6)
-------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles...................................... 94.5 (171.8) (211.4)
Credit (provision) for income taxes.......................... (14.8) 77.1 82.5
Minority interests........................................... (22.2) (22.0) (3.0)
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principles........................ 57.5 (116.7) (131.9)
Extraordinary item:
Loss on early extinguishment of debt, net of related
benefits for minority interests of $nil in 1994 and $2.8
in 1993 and income taxes of $2.9 in 1994 and $27.5 in
1993, respectively...................................... -- (5.4) (50.6)
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions and
postemployment benefits, net of related benefits for
minority interests of $64.6 and income taxes of
$240.2.................................................. -- -- (444.3)
Accounting for income taxes................................ -- -- 26.6
-------- -------- --------
Net income (loss)............................................ $ 57.5 $ (122.1) $ (600.2)
======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles.............. $ 6.08 $ (12.35) $ (13.95)
Extraordinary item......................................... -- (.57) (5.35)
Cumulative effect of changes in accounting principles...... -- -- (44.17)
-------- -------- --------
Net income (loss).......................................... $ 6.08 $ (12.92) $ (63.47)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 237
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 57.5 $(122.1) $ (600.2)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and depletion............................................... 120.9 121.1 120.8
Minority interests....................................................... 22.2 22.0 3.0
Amortization of deferred financing costs and discounts on long-term
debt.................................................................... 19.5 19.3 21.7
Amortization of excess investment over equity in net assets of
unconsolidated affiliates.............................................. 11.4 11.6 11.9
Equity in (earnings) loss of unconsolidated affiliates................... (19.1) 15.0 4.9
Net gain on sales of real estate, mortgage loans and other assets........ (9.7) (6.5) (45.8)
Net gains on marketable securities....................................... (8.6) (4.2) (7.1)
Net sales (purchases) of marketable securities........................... (4.0) 12.9 31.1
Extraordinary loss on early extinguishment of debt, net.................. -- 5.4 50.6
Cumulative effect of changes in accounting principles, net............... -- -- 417.7
Decrease (increase) in prepaid expenses and other assets................. 84.5 (47.9) 5.4
Increase (decrease) in accounts payable.................................. 34.7 26.3 (14.1)
Decrease (increase) in receivables....................................... (103.6) 24.5 5.0
Decrease (increase) in inventories....................................... (65.3) (37.5) 10.9
Increase in accrued and deferred income taxes............................ (13.1) (77.2) (96.5)
Increase (decrease) in payable to affiliates and other liabilities....... (1.2) 37.5 110.5
Increase (decrease) in accrued interest.................................. (1.0) 8.3 14.3
Other.................................................................... 12.8 (4.0) 8.0
------- ------- ---------
Net cash provided by operating activities........................... 137.9 4.5 52.1
------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments................... 39.3 30.0 143.0
Capital expenditures........................................................ (97.7) (89.3) (86.2)
Investment in subsidiaries and joint ventures............................... (15.9) (7.4) (9.4)
Other....................................................................... (1.1) (1.2) (2.8)
------- ------- ---------
Net cash provided by (used for) investing activities................ (75.4) (67.9) 44.6
------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................................... 5.7 229.7 1,201.3
Net borrowings (payments) under revolving credit agreements and short-term
borrowings (payments).................................................... 4.4 (191.8) (107.6)
Proceeds from issuance of Kaiser capital stock.............................. 1.2 100.1 119.3
Restricted cash (deposits), net of withdrawals.............................. 1.0 1.2 (33.6)
Redemptions, repurchase of and principal payments an long-term debt......... (40.9) (39.1) (1,219.4)
Dividends paid to Kaiser's minority preferred stockholders.................. (20.5) (13.7) (5.6)
Redemption of preference stock.............................................. (8.8) (8.5) (4.2)
Incurrence of financing costs............................................... (1.8) (19.7) (47.9)
Other....................................................................... 16.8 5.9 3.0
------- ------- ---------
Net cash provided by (used for) financing activities................ (42.9) 64.1 (94.7)
------- ------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... 19.6 .7 2.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 84.6 83.9 81.9
------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 104.2 $ 84.6 $ 83.9
======= ======= =========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net margin borrowings (repayments) for marketable securities................ $ (6.9) $ 5.9 $ (.9)
Reduction of stockholders' deficit due to redemption of Kaiser preferred
stock.................................................................... 136.2 -- --
Contribution of property in exchange for joint venture interest,
net of deferred gain of $8.6............................................. 1.3 -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest.................................. $ 162.8 $ 149.3 $ 149.1
Income taxes paid, net...................................................... 30.3 18.3 13.2
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 238
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK RETAINED PENSION
STOCK ------------------- ADDITIONAL EARNINGS LIABILITY TREASURY
($.50 PAR) SHARES ($.50 PAR) CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL
---------- ------ ---------- ---------- -------- ---------- -------- -------
(IN MILLIONS OF DOLLARS AND SHARES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........ $ .3 8.7 $5.0 $ 47.9 $ 419.4 $ (9.0) $(19.7) $ 443.9
Net loss...................... -- -- -- -- (600.2) -- -- (600.2)
Gain from issuance of Kaiser
Aluminum Corporation common
stock...................... -- -- -- 3.3 -- -- -- 3.3
Additional pension
liability.................. -- -- -- -- -- (14.9) -- (14.9)
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31, 1993...... .3 8.7 5.0 51.2 (180.8) (23.9) (19.7) (167.9)
Net loss...................... -- -- -- -- (122.1) -- -- (122.1)
Gain from issuance of Kaiser
Aluminum Corporation common
stock...................... -- -- -- 2.2 -- -- -- 2.2
Conversions of preferred stock
to common stock............ -- -- -- (.2) -- -- .2 --
Reduction of pension
liability.................. -- -- -- -- -- 12.5 -- 12.5
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31, 1994...... .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3)
--- --- ---- ------ ------- ------ ------ ------
Net income.................... -- -- -- -- 57.5 -- -- 57.5
Gain from issuance of Kaiser
Aluminum Corporation common
stock...................... -- -- -- 2.5 -- -- -- 2.5
Redemption of Kaiser Aluminum
Corporation preferred
stock...................... -- -- -- 99.3 36.9 -- -- 136.2
Additional pension
liability.................. -- -- -- -- -- (4.7) -- (4.7)
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31, 1995...... $ .3 8.7 $5.0 $155.0 $ (208.5) $(16.1) $(19.5) $ (83.8)
=== === ==== ====== ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 239
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company
The consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries. All references to the "Company"
include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to
50%-owned) are accounted for utilizing the equity method of accounting. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.
The Company is a holding company and, as such, conducts substantially all
of its operations through its subsidiaries. The Company operates in three
principal industries: aluminum, through its majority owned subsidiary, Kaiser
Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest
products, through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI") and
MGI's wholly owned subsidiaries, principally The Pacific Lumber Company
("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate investment
and development, managed through its wholly owned subsidiary, MAXXAM Property
Company; and other commercial operations through various other wholly owned
subsidiaries.
Description of the Company's Operations
Kaiser operates in the aluminum industry through its principal operating
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in
all principal aspects of the aluminum industry -- the mining of bauxite (the
major aluminum-bearing ore), the refining of bauxite into alumina (the
intermediate material), the production of aluminum, and the manufacture of
fabricated and semi-fabricated aluminum products. KACC's production levels of
alumina and primary aluminum exceed its internal requirements and allow it to be
a major seller of alumina and primary aluminum in domestic and international
markets. The substantial portion of the Company's consolidated assets,
liabilities, revenues, results of operations and cash flows are attributable to
Kaiser (see Note 11).
Pacific Lumber operates in several principal aspects of the lumber
industry -- the growing and harvesting of redwood and Douglas-fir timber, the
milling of logs into lumber and the manufacture of lumber into a variety of
finished products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which is obtained
from Pacific Lumber. Housing, construction and remodeling markets are the
principal markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest products sales. A significant portion of
forest products sales are made to third parties located west of the Mississippi
river.
The Company, principally through its wholly owned subsidiaries, is engaged
in the business of residential and commercial real estate investment and
development, primarily in California, Arizona, Texas and Puerto Rico. With
respect to periods after October 6, 1995, other commercial operations include
the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited
partnership which owns and operates a Class I horse racing facility in the
greater Houston metropolitan area.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties
F-44
<PAGE> 240
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
with respect to such estimates and assumptions are inherent in the preparation
of the Company's consolidated financial statements; accordingly, it is possible
that the subsequent resolution of any one of the contingent matters described in
Note 9 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the reported
amounts of the Company's consolidated assets and liabilities.
The cumulative losses of Kaiser in the first and second quarters of 1993,
principally due to the implementation of the new accounting standard for
postretirement benefits other than pensions as described in Note 6, eliminated
Kaiser's equity with respect to its common stock; accordingly, the Company
recorded 100% of Kaiser's losses in the third and fourth quarters of 1993 and
all of 1994, without regard to the minority interests represented by Kaiser's
other common stockholders (as described in Note 7). The Company recorded 100% of
Kaiser's earnings in 1995 and will continue to do so until such time as the
cumulative losses recorded by the Company with respect to Kaiser's minority
common stockholders are recovered.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, marketable securities were carried at the lower of cost or market. The
cost of the securities sold is determined using the first-in, first-out method.
Included in investment, interest and other income (expense) for each of the
three years ended December 31, 1995 were: 1995 -- net unrealized holding gains
of $1.9 and net realized gains of $6.8; 1994 -- net unrealized holding losses of
$1.0 and net realized gains of $5.2; and 1993 -- net realized gains of $4.2, the
recovery of $2.0 of net unrealized losses and net unrealized gains of $.9. Net
unrealized losses represent the amount required to reduce the short-term
marketable securities portfolios from cost to market value prior to December 31,
1993.
Inventories
Inventories are stated at the lower of cost or market. Cost for the
aluminum and forest products operations inventories is primarily determined
using the last-in, first-out ("LIFO") method. Other inventories of the aluminum
operations, principally operating supplies and repair and maintenance parts, are
stated at the lower of average cost or market. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.
The Company recorded pre-tax charges of approximately $19.4 in 1993 because
of reductions in the carrying value of its aluminum operations inventories
caused principally by prevailing lower prices for alumina, primary aluminum and
fabricated aluminum products.
F-45
<PAGE> 241
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products..................................... $ 91.5 $ 49.4
Primary aluminum and work in process............................. 195.9 203.1
Bauxite and alumina.............................................. 119.6 102.3
Operating supplies and repair and maintenance parts.............. 118.7 113.2
------ ------
525.7 468.0
------ ------
Forest Products Operations:
Lumber........................................................... 65.5 61.3
Logs............................................................. 15.6 12.1
------ ------
81.1 73.4
------ ------
$606.8 $541.4
====== ======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed principally utilizing the straight-line
method at rates based upon the estimated useful lives of the various classes of
assets.
Timber and Timberlands
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
At December 31, 1995 and 1994, cash and cash equivalents includes $19.7 and
$19.4, respectively, which is reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At
December 31, 1995 and 1994, long-term receivables and other assets includes
$31.4 and $32.4, respectively, of restricted cash deposits held for the benefit
of the Timber Note holders as described in Note 4. Each of these deposits is
held by a different financial institution. In the event of nonperformance by
such financial institutions, the Company's exposure to credit loss is
represented by the amounts deposited plus any unpaid accrued interest thereon.
The Company mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality financial
institutions and monitoring the credit ratings of these institutions.
Restructuring of Aluminum Operations
In 1993, Kaiser implemented a restructuring plan primarily for its
flat-rolled products operation at its Trentwood plant in response to
overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock
markets and declining demand for aluminum products sold to customers in the
commercial aerospace
F-46
<PAGE> 242
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
industry, all of which had resulted in declining prices in Trentwood's key
markets. Additionally, KACC implemented a plan to streamline its casting
operations, which included the shutdown of two facilities located in Ohio. This
entire restructuring was successfully completed by the end of 1995. The pre-tax
charge for this restructuring of $35.8 included $25.2 for pension, severance and
other termination benefits at Trentwood; $8.0 related to casting facilities; and
$2.6 for various other items.
Investment, Interest and Other Income (Expense)
During 1994, the Company, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against the Company, MGI,
Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's
acquisition of Pacific Lumber. Of the $52.0 settlement $33.0 was paid by
insurance carriers of the Company and Pacific Lumber, $14.8 was paid by Pacific
Lumber, and the balance was paid by other defendants and through the assignment
of certain claims. In 1994, the Company recorded a pre-tax loss of $21.2 which
consists of Pacific Lumber's $14.8 cash payment to the settlement fund, a $2.0
accrual for certain contingent claims, and $4.4 of related legal fees. Insofar
as these matters do not originate from, or relate in any manner to, its ongoing
operations, the Company recorded the settlement as a charge to investment,
interest and other income (expense). Additionally, in February 1994, Pacific
Lumber received a franchise tax refund of $7.2, the substantial portion of which
represents interest, from the state of California relating to tax years 1972
through 1985. The net effect of these transactions are included in investment,
interest and other income (expense) for the year ended December 31, 1994.
Investment, interest and other income (expense) for the years ended
December 31, 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9, respectively,
of pre-tax charges related principally to establishing additional litigation
reserves for asbestos claims and environmental reserves for potential solid
waste disposal and soil and ground water remediation matters, each pertaining to
operations which were discontinued prior to the acquisition of Kaiser by the
Company in 1988. Investment, interest and other income for the year ended
December 31, 1993 includes a fourth quarter pre-tax gain of $47.8 from the sale
of sixteen multi-family real estate properties for cash proceeds of $113.6.
Foreign Currency Translation
The Company uses the United States dollar as the functional currency for
its foreign operations.
Derivative Financial Instruments
Gains and losses arising from the use of derivative financial instruments
are reflected in Kaiser's operating results concurrently with the consummation
of the underlying hedged transactions. Deferred gains or losses are included in
prepaid expenses and other current assets and other accrued liabilities. Kaiser
does not hold or issue derivative financial instruments for trading purposes
(see Note 10).
F-47
<PAGE> 243
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the publicly traded issues and
on the current rates offered for borrowings similar to the other debt. MGI's
publicly traded debt issues are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active market.
The fair value of foreign currency contracts generally reflects the estimated
amounts that Kaiser would receive to enter into similar contracts at the balance
sheet date, thereby taking into account unrealized gains or losses on open
contracts (see Note 10). The estimated fair values of the Company's financial
instruments, along with the carrying amounts of the related assets
(liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 104.2 $ 104.2 $ 84.6 $ 84.6
Marketable securities (held for
trading purposes)................... 45.9 45.9 40.3 40.3
Restricted cash....................... 31.4 31.4 32.4 32.4
Long-term debt........................ (1,610.2) (1,672.0) (1,616.2) (1,545.9)
Foreign currency contracts............ -- 1.9 -- 3.5
</TABLE>
Stock-Based Compensation
The Company applies the intrinsic value based method for accounting for
stock or stock-based compensation awards described by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note 8).
Per Share Information
Per share calculations are based on the weighted average number of common
shares outstanding in each year and, if dilutive, weighted average common
equivalent shares and common stock options based upon the average price of the
Company's common stock during the year. The weighted average number of common
and common equivalent shares was 9,459,293 shares, 9,447,878 shares and
9,457,083 shares for the years ended December 31, 1995, 1994 and 1993,
respectively.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
KACC INVESTORS
Kaiser's investments in unconsolidated affiliates are held by KACC. KACC
holds a 28.3% interest in Queensland Alumina Limited ("QAL"), a leading producer
of alumina, and a 49% interest in both Kaiser Jamaica Bauxite Company, a bauxite
supplier, and Anglesey Aluminium Limited ("Anglesey"), which produces primary
aluminum. KACC provides some of its affiliates with services such as financing,
management and engineering. Purchases from these affiliates for the acquisition
and processing of bauxite, alumina and primary aluminum aggregated $284.4,
$219.7 and $206.6 for the years ended December 31, 1995, 1994 and 1993,
respectively (see Note 9). KACC received dividends of $8.1 from the investees
for the year ended December 31, 1995. No dividends were received for the years
ended December 31, 1994 or 1993. KACC's equity in earnings (loss) before income
taxes of such operations is treated as a reduction (increase) in cost of sales.
At December 31, 1995 and 1994, KACC's net receivables from these affiliates were
not material.
F-48
<PAGE> 244
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Summarized combined financial information for KACC's investees is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Current assets..................................................... $429.0 $342.3
Property, plant and equipment, net................................. 330.8 349.4
Other assets....................................................... 39.3 42.4
------ ------
Total assets............................................. $799.1 $734.1
====== ======
Current liabilities................................................ $125.4 $122.4
Long-term debt..................................................... 331.8 307.6
Other liabilities.................................................. 35.6 31.0
Stockholders' equity............................................... 306.3 273.1
------ ------
Total liabilities and stockholders' equity............... $799.1 $734.1
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales............................................. $ 685.9 $ 489.8 $ 510.3
Costs and expenses.................................... (618.7) (494.8) (527.2)
Credit (provision) for income taxes................... (18.7) (6.3) 1.9
------- ------- -------
Net income (loss)..................................... $ 48.5 $ (11.3) $ (15.0)
======= ======= =======
KACC's equity in earnings (loss) of affiliates........ $ 19.2 $ (1.9) $ (3.3)
======= ======= =======
</TABLE>
KACC's equity in earnings (loss) differs from the summary net income (loss)
for unconsolidated affiliates due to various percentage ownerships in the
constituent entities and the amortization of the excess of KACC's investment in
the affiliates over its equity in their net assets. At December 31, 1995, KACC's
investment in these affiliates exceeded its equity in their net assets by $54.9.
KACC is amortizing this amount over a twelve-year period which results in an
annual charge of approximately $11.4.
OTHER INVESTEES
In 1995, pursuant to a joint venture agreement with SunCor Development
Company ("SunCor") for the purpose of developing and managing a real estate
project, the Company, through a wholly owned real estate subsidiary, contributed
950 acres of undeveloped land valued at $10.0 and cash of $1.0 in exchange for a
50% interest. SunCor, the managing partner, contributed $11.0 in cash in
exchange for its 50% interest. A subsidiary of the Company and SunCor are each
guarantors of 50% of $4.6 aggregate principal amount of the joint venture's
debt. At December 31, 1995, the joint venture had assets of $32.6, liabilities
of $10.5 and equity of $22.1. For the year ended December 31, 1995, the joint
venture incurred losses of $.2.
On July 8, 1993, the Company, through various subsidiaries, acquired
control of the general partner and became responsible for the management of
SHRP, Ltd. for an investment of $9.1. The Company's subsidiaries held an initial
equity interest in SHRP, Ltd. of 29.7%. The Company increased its equity
interest in SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in
October 1994. At December 31, 1994, SHRP, Ltd. had assets of $76.9 ($6.5
current), liabilities of $88.6 ($13.4 current) and a deficiency in net assets of
$11.7. SHRP, Ltd. incurred net losses for the years ended December 31, 1994 and
1993 of approximately $20.0 and $5.9, respectively. The Company recorded losses
with respect to its investment in SBRP, Ltd. of $13.1 and $1.6 for the year
ended December 31, 1994 and for the period from July 8, 1993 to December 31,
1993, respectively.
F-49
<PAGE> 245
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 ACQUISITION OF MAJORITY INTEREST IN SHRP, LTD.
On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together
with SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the
Company), filed voluntary petitions seeking to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code. The bankruptcy plan (the
"Plan") was confirmed on September 22, 1995, and the transactions called for by
the Plan were completed on October 6, 1995. Such transactions included cash
contributions to SHRP, Ltd. from a new investor group totaling $5.9 (of which
wholly owned subsidiaries of the Company contributed $5.8). Additionally, a
wholly owned subsidiary of the Company contributed a tract of land to SHRP, Ltd.
(with a fair market value of $2.3). The new managing general partner of the
reorganized SHRP, Ltd. is a wholly owned subsidiary of the Company. In an
unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the
Company purchased, for $7.3 (which approximated fair value), $14.6 aggregate
initial principal amount of the SHRP Notes (as defined in Note 4) and the
corresponding equity interest in SHRP Equity, Inc. (a Delaware corporation and
an additional general partner of the reorganized SHRP, Ltd.) to which the
selling noteholder was entitled. After giving effect to the previously described
transactions, wholly owned subsidiaries of the Company hold, directly or
indirectly, approximately 78.8% of the equity in the reorganized SBRP, Ltd.
Supplemental cash flows disclosure related to the acquisition of SHRP, Ltd. in
October 1995 is as follows: assets acquired of $29.3, assumed liabilities of
$20.7, and additional minority interest of $2.8.
The assets and liabilities of SHRP, Ltd. are included in the accompanying
Consolidated Balance Sheet as of December 31, 1995, and the results of SHRP,
Ltd.'s operations and cash flows for the period from October 6, 1995 to December
31, 1995 are included in the accompanying Consolidated Statements of Operations
and Cash Flows. The carrying value of SHRP, Ltd.'s assets and liabilities
following its emergence from the Chapter 11 proceedings differs in material
amounts from those of the predecessor entity. The pro forma disclosures,
assuming SHRP, Ltd. was included in the Company's consolidated results of
operations are as follows: revenue -- $2,579.3, $2,135.9; income (loss) before
extraordinary items -- $50.6, ($125.0); net income (loss) -- $50.6, ($130.4);
and earnings (loss) per common and common equivalent share -- $5.35, ($13.80),
for the years ended December 31, 1995 and 1994, respectively. The pro forma
information excludes amounts attributable to SHRP, Ltd.'s extraordinary gain of
$14.9 resulting from the restructuring transactions contained in the Plan. The
extraordinary gain was omitted because the Company believes the item would
distort normal trends.
3. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Land and improvements.............................. 5-30 years $ 185.8 $ 176.1
Buildings.......................................... 5-45 years 272.4 259.6
Machinery and equipment............................ 3-40 years 1,388.5 1,330.8
Construction in progress........................... 63.3 45.0
-------- --------
1,910.0 1,811.5
Less: accumulated depreciation..................... (678.1) (579.9)
-------- --------
$1,231.9 $1,231.6
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $105.4, $105.7 and $104.9, respectively.
F-50
<PAGE> 246
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Corporate:
14% MAXXAM Senior Subordinated Reset Notes due
May 20, 2000................................................ $ 25.0 $ 25.0
12 1/2% MAXXAM Subordinated Debentures due December 15, 1999,
net of discount............................................. 16.5 20.9
Other.......................................................... .1 .2
Aluminum Operations:
1994 KACC Credit Agreement..................................... 13.1 6.7
9 7/8% KACC Senior Notes due February 15, 2002, net of
discount.................................................... 223.8 223.6
Alpart CARIFA Loan............................................. 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003.... 400.0 400.0
Other.......................................................... 61.2 69.2
Forest Products Operations:
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015........................................................ 350.2 363.8
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount............................................. 92.5 82.8
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235.0 235.0
Other.......................................................... .8 .9
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due September 1,
2001, net of discount....................................... 13.3 --
RTC Portfolio secured notes due December 31, 1999, interest at
prime plus 3%............................................... 8.0 10.0
MCOP Credit Agreement.......................................... .7 2.6
Other notes and contracts, primarily secured by receivables,
buildings, real estate and equipment........................ 10.0 15.5
-------- --------
1,610.2 1,616.2
Less: current maturities.................................... (25.1) (33.7)
-------- --------
$1,585.1 $1,582.5
======== ========
</TABLE>
CORPORATE
14% MAXXAM Senior Subordinated Reset Notes due 2000 (the "Reset Notes")
Pursuant to the terms of the indenture governing the Reset Notes, no
further adjustments to the interest rate are permitted. The Reset Notes are
redeemable at the Company's option, in whole or in part, at par.
12 1/2% MAXXAM Subordinated Debentures due 1999 (the "12 1/2% Debentures")
The 12 1/2% Debentures, which are net of discount of $1.1 and $1.7 at
December 31, 1995 and 1994, respectively, have mandatory redemptions of $3.2 in
December 1997 and $3.3 in December 1998. The 12 1/2% Debentures are redeemable
at the Company's option, in whole or in part, at par.
F-51
<PAGE> 247
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
MAXXAM Demand Loan Agreement
On October 10, 1994, the Company entered into a demand loan and pledge
agreement (the "Custodial Trust Agreement") with Custodial Trust Company
providing for up to $25.0 in borrowings. Any amounts drawn would be payable upon
demand and be secured by Kaiser common stock owned by the Company (or such other
marketable securities acceptable to the lender) with an initial market value (as
defined therein) of approximately three times the amount borrowed. Borrowings
under the Custodial Trust Agreement would bear interest at the prime rate plus
1% per annum. The Custodial Trust Agreement contains a negative pledge on 22
million shares of Kaiser's common stock owned by the Company and provides that
the Company may sell such shares upon 24 hours notice to the Custodial Trust
Company. No borrowings were outstanding as of December 31, 1995.
ALUMINUM OPERATIONS
The 1994 KACC Credit Agreement (as amended, the "1994 KACC Credit
Agreement")
The 1994 KACC Credit Agreement consists of a $325.0 five-year secured
revolving line of credit which matures in 1999. KACC is able to borrow under the
facility by means of revolving credit advances and letters of credit (up to
$125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base
relating to eligible accounts receivable and inventory. As of December 31, 1995,
$259.3 (of which $72.4 could have been used for letters of credit) was available
to KACC under the 1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is
unconditionally guaranteed by Kaiser and by certain significant subsidiaries of
KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per
annum, at KACC's election, equal to a Reference Rate (as defined) plus 1 1/2% or
LIBOR (Reserve Adjusted) (as defined) plus 3 1/4%. Effective June 30, 1995, the
interest rate margins applicable to borrowings under the 1994 KACC Credit
Agreement may be reduced by up to 1 1/2% (non-cumulatively), based on a
financial test, determined quarterly. As of December 31, 1995, the financial
test permitted a reduction of 1 1/2% per annum in margins effective January 1,
1996. Kaiser recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in
the first quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to Kaiser's previous credit agreement (the
"1989 KACC Credit Agreement").
The 1994 KACC Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on Kaiser's and KACC's ability to, among other
things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures and enter into unrelated
lines of business. The 1994 KACC Credit Agreement is secured by, among other
things, (i) mortgages on KACC's major domestic plants (excluding Kaiser's
Gramercy alumina plant), (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and trademarks and
substantially all other personal property of KACC and certain of its
subsidiaries, (iii) a pledge of all of the stock of KACC owned by Kaiser, and
(iv) pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries
and pledges of a portion of the stock of certain partially owned foreign
affiliates. Substantially all of the identifiable assets of the bauxite and
alumina and aluminum processing segments (see Note 11) are attributable to KACC
and collateralize the 1994 KACC Credit Agreement indebtedness.
9 7/8% KACC Senior Notes due 2002 (the "KACC Senior Notes")
Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") (see Note 7), KACC issued
$225.0 of the KACC Senior Notes. The net proceeds from the offering of the KACC
Senior Notes were used to reduce outstanding borrowings under the revolving
credit facility of the 1989 KACC Credit Agreement immediately prior to the
effectiveness of the
F-52
<PAGE> 248
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1994 KACC Credit Agreement and for working capital and general corporate
purposes. The KACC Senior Notes are net of discount of $1.2 and $1.4 at December
31, 1995 and 1994, respectively.
12 3/4% KACC Senior Subordinated Notes due 2003 (the "KACC Senior
Subordinated Notes")
On February 1, 1993, KACC issued $400.0 of the KACC Senior Subordinated
Notes. The net proceeds from the sale of the KACC Senior Subordinated Notes were
used to retire KACC's 14 1/4% Senior Subordinated Notes due 1995, to prepay
$18.0 of the term loan under the 1989 KACC Credit Agreement and to reduce
outstanding borrowings under the revolving credit facility of the 1989 KACC
Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of
$33.0, consisting primarily of the payment of premiums and the write-off of
unamortized discount and deferred financing costs on the 14 1/4% Senior
Subordinated Notes.
The obligations of KACC with respect to the KACC Senior Notes and the KACC
Senior Subordinated Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. Pursuant to the terms of the indentures governing the KACC
Senior Notes and the KACC Senior Subordinated Notes, at December 31, 1995, $66.0
was available for payment of dividends on Kaiser's common stock. However,
pursuant to the terms of the 1994 KACC Credit Agreement, at December 31, 1995,
Kaiser is precluded from paying any dividends on its common stock. Further, the
indentures governing the KACC Senior Notes and the KACC Subordinated Notes
provide that KACC must offer to purchase such notes upon the occurrence of a
Change of Control (as defined therein), and the 1994 KACC Credit Agreement
provides that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.
Alpart CARIFA Loan
In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned
subsidiary of KACC) entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the
proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of
the loan parallel the bonds' repayment terms. The $38.0 aggregate principal
amount of Series A bonds matures on June 1, 2008. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B
bonds matures on June 1, 2007 and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance interim
loans from the partners in Alpart, to pay eligible project costs for the
expansion and modernization of its alumina refinery and related port and bauxite
mining facilities, and to pay certain costs of issuance. Under the terms of the
loan agreement, Alpart must remain a qualified recipient for Caribbean Basin
Initiative funds as defined by applicable laws. Alpart has agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds. Alpart's obligations under the loan agreement are secured by a $64.2
letter of credit guaranteed by the partners in Alpart (of which $22.5 is
guaranteed by Kaiser's minority partner).
FOREST PRODUCTS OPERATIONS
Scotia Pacific Timber Notes and 10 1/2% Pacific Lumber Senior Notes due
2003 (the "Pacific Lumber Senior Notes")
On March 23, 1993, Pacific Lumber issued $235.0 of the Pacific Lumber
Senior Notes and its newly formed wholly owned subsidiary, Scotia Pacific
Holding Company ("Scotia Pacific"), issued $385.0 of the Timber Notes. Pacific
Lumber and Scotia Pacific used the net proceeds from the sale of the Pacific
Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash
and marketable securities, to (i) retire (a) $163.8 aggregate principal amount
of Pacific Lumber's 12% Series A Senior Notes due July 1,
F-53
<PAGE> 249
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1996 (the "Series A Notes"), (b) $299.7 aggregate principal amount of Pacific
Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes"),
and (c) $41.7 aggregate principal amount of Pacific Lumber's 12 1/2% Senior
Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes,
the Series B Notes and the Debentures are referred to collectively as the "Old
Pacific Lumber Securities"), (ii) pay accrued interest on the Old Pacific Lumber
Securities through the date of redemption, (iii) pay the applicable redemption
premiums on the Old Pacific Lumber Securities, (iv) repay Pacific Lumber's $28.9
cogeneration facility loan, (v) fund the initial deposit of $35.0 to an account
held by the trustee for the Timber Notes (the "Liquidity Account"), and (vi) pay
a $25.0 dividend to a subsidiary of MGI. These transactions resulted in a
pre-tax extraordinary loss of $38.1, consisting primarily of the payment of
premiums and the write-off of unamortized discounts and deferred financing costs
on the Old Pacific Lumber Securities.
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179.4 of the
Company's consolidated balance at December 31, 1995), (ii) substantially all of
Scotia Pacific's property and equipment, and (iii) other property including cash
equivalents reserved for debt service payments and the funds deposited in the
Liquidity Account.
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The minimum amount
of principal which Scotia Pacific must pay (on a cumulative basis) through any
Timber Note payment date in order to avoid an Event of Default (as defined in
the Timber Note Indenture) is referred to as rated amortization ("Rated
Amortization"). If all payments of principal are made in accordance with Rated
Amortization, the payment date on which Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific must pay through each Timber Note payment date in order to avoid payment
of prepayment or deficiency premiums is referred to as scheduled amortization
("Scheduled Amortization"). If all payments of principal are made in accordance
with Scheduled Amortization, the payment date on which Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, in whole but not in part, at any time. The redemption price of the
Timber Notes is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.
Interest on the Pacific Lumber Senior Notes is payable semi-annually on
March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the
option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a
price of 103% of the principal amount plus accrued interest. The redemption
price is reduced annually until March 1, 2000, after which time the Pacific
Lumber Senior Notes are redeemable at par.
Pacific Lumber Revolving Credit Agreement (as amended and restated, the
"Pacific Lumber Credit Agreement")
Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1998, are secured by Pacific Lumber's trade receivables and inventories,
with interest computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for
borrowings of up to $60.0, of which $15.0 may be used for standby letters of
credit and $30.0 is restricted to timberland
F-54
<PAGE> 250
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisitions. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of December 31, 1995, $48.1 of borrowings was available under
the Pacific Lumber Credit Agreement, of which $3.1 was available for letters of
credit and $30.0 was restricted to timberland acquisitions. No borrowings were
outstanding as of December 31, 1995, and letters of credit outstanding amounted
to $11.9. The Pacific Lumber Credit Agreement contains covenants substantially
similar to those contained in the indenture governing the Pacific Lumber Senior
Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes,
and the Pacific Lumber Credit Agreement contain various covenants which, among
other things, limit the payment of dividends and restrict transactions between
Pacific Lumber and its affiliates. As of December 31, 1995, under the most
restrictive of these covenants, approximately $15.7 of dividends could be paid
by Pacific Lumber.
11 1/4% MGI Senior Secured Notes due 2003 (the "MGI Senior Notes") and
12 1/4% MGI Senior Secured Discount Notes due 2003 (the "MGI Discount
Notes")
On August 4, 1993, MGI issued $100.0 aggregate principal amount of the MGI
Senior Notes and $126.7 aggregate principal amount (approximately $70.0 net of
original issue discount) of the MGI Discount Notes (together, the "MGI Notes").
The MGI Notes are secured by MGI's pledge of 100% of the common stock of Pacific
Lumber, Britt and MAXXAM Properties Inc. (a wholly owned subsidiary of MGI) and
by the pledge of 28 million shares of Kaiser's common stock owned by the
Company. The indenture governing the MGI Notes, among other things, restricts
the ability of MGI to incur additional indebtedness, engage in transactions with
affiliates, pay dividends and make investments. As of December 31, 1995, under
the most restrictive of these covenants, approximately $1.9 of dividends could
be paid by MGI, of which $1.6 was paid in January 1996. The MGI Notes are senior
indebtedness of MGI; however, they are effectively subordinate to the
liabilities of MGI's subsidiaries, which include the Timber Notes and the
Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33.2
and $43.9 at December 31, 1995 and 1994, respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.
MGI used a portion of the net proceeds from the sale of the MGI Notes to
retire the entire outstanding balance of its former 12 3/4% Notes at 101% of
their principal amount, plus accrued interest through November 14, 1993. MGI
used the remaining portion of the net proceeds from the sale of the MGI Notes,
together with a portion of its existing cash resources, to pay a $20.0 dividend
to the Company. The Company used such proceeds to redeem, on August 20, 1993,
$20.0 aggregate principal amount of its Reset Notes at 100% of their principal
amount plus accrued interest thereon. The early retirement of the 12 3/4% Notes
and the redemption of $20.0 aggregate principal amount of the Reset Notes
resulted in a pre-tax extraordinary loss of $9.8 consisting of net interest
cost, the write-off of unamortized deferred financing costs, premiums and the
write-off of unamortized original issue discount
REAL ESTATE AND OTHER OPERATIONS
11% SHRP, Ltd. Senior Secured Extendible Notes due 2001 (the "SHRP Notes")
The SHRP Notes were issued on October 6, 1995 at an aggregate principal
amount of $37.9, maturing on September 1, 2001. The SHRP Notes were recorded at
their estimated fair value which resulted in a discount of approximately $17.1.
At December 31, 1995, the aggregate principal amount (including accrued interest
thereon) of the SHRP Notes and the unamortized discount were $38.8 and $17.0,
respectively. On October 20, 1995, a wholly owned subsidiary of the Company
purchased approximately 39% of the SHRP
F-55
<PAGE> 251
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Notes from an unrelated party. Accordingly, the amount of indebtedness shown in
the accompanying table has been adjusted to reflect the elimination of the
Company's holdings. Should the Texas Legislature pass certain gaming
legislation, the SHRP Notes may be extended to September 1, 2003; such extension
would increase the rate of interest to 13% per annum. The SHRP Notes are secured
by substantially all of the assets of SHRP, Ltd., which aggregate $33.6 of the
assets reflected on the accompanying Consolidated Balance Sheet at December 31,
1995. Interest on the SHRP Notes is payable in-kind on April 1 and October 1,
and will not be payable in cash until a specified level of cash flow from
operations has been achieved. Once cash interest payments commence, subsequent
interest payments may not be paid in-kind. The indenture governing the SHRP
Notes generally precludes the payment of cash distributions until two
consecutive cash interest payments have been made.
RTC Portfolio Secured Notes due 1999 (the "RTC Portfolio Loan")
As of December 31, 1995, approximately $8.0 was outstanding pursuant to the
RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan provides
for additional borrowings of up to approximately $12.1 on or before March 31,
1996. The Company anticipates that such amount will be borrowed if such date is
not extended. Upon the sale of any secured property or loan, principal payments
are required based on the release price (as defined) of such property or loan.
The entire amount of the loan must also be paid if the principal balance
declines to less than $8.0.
The MCOP Credit Agreement (as amended, the "MCOP Credit Agreement")
On July 15, 1995, a real estate subsidiary of the Company, MCO Properties
Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank
which will expire on May 15, 1998. Borrowings under the MCOP Credit Agreement
are secured primarily by (i) MCOP's eligible receivables and real estate held
for investment or development and sale, (ii) MCOP's pledge of the common stock
of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's
subsidiaries and the Company. Further, the Company has pledged MCOP's common
stock as additional security. Interest is computed at the bank's prime rate plus
1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit Agreement
contains various covenants including a minimum net worth requirement and
limitations on the payment of dividends, investments and the incurrence of
indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0,
of which $8.5 may be used for standby letters of credit. The available credit is
subject to borrowing base limitation calculations. As of December 31, 1995,
$10.6 of additional borrowings was available under the MCOP Credit Agreement and
outstanding letters of credit amounted to $2.1.
F-56
<PAGE> 252
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
OTHER
Maturities
Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
14% MAXXAM Senior Subordinated Reset
Notes................................... $ -- $ -- $ -- $ -- $25.0 $ --
12 1/2% MAXXAM Subordinated Debentures.... -- 3.2 3.3 11.1 -- --
1994 KACC Credit Agreement................ -- -- -- 13.1 -- --
9 7/8% KACC Senior Notes.................. -- -- -- -- -- 225.0
Alpart CARIFA Loan........................ -- -- -- -- -- 60.0
12 3/4% KACC Senior Subordinated Notes.... -- -- -- -- -- 400.0
7.95% Scotia Pacific Timber Collateralized
Notes................................... 14.1 16.2 19.3 21.6 24.0 255.0
11 1/4% MGI Senior Secured Notes.......... -- -- -- -- -- 100.0
12 1/4% MGI Senior Secured Discount
Notes................................... -- -- -- -- -- 125.7
10 1/2% Pacific Lumber Senior Notes....... -- -- -- -- -- 235.0
11% SHRP, Ltd. Senior Secured Extendible
Notes................................... -- -- -- -- -- 43.4
RTC Portfolio secured notes............... -- -- -- 8.0 -- --
Other..................................... 11.0 10.2 10.1 1.6 2.0 38.0
----- ----- ----- ----- ----- --------
$25.1 $29.6 $32.7 $55.4 $51.0 $1,482.1
===== ===== ===== ===== ===== ========
</TABLE>
Capitalized Interest
Interest capitalized during the years ended December 31, 1995, 1994 and
1993 was $2.8, $3.0 and $4.4, respectively.
Restricted Net Assets of Subsidiaries
Certain debt instruments restrict the ability of the Company's subsidiaries
to transfer assets, make loans and advances and pay dividends to the Company. As
of December 31, 1995, all of the assets relating to the Company's aluminum,
forest products, real estate and other operations are subject to such
restrictions. The Company could eliminate all of such restrictions with respect
to approximately $200.2 (see Note 11) of the Company's real estate assets with
the extinguishment of $18.7 of debt.
5. INCOME TAXES
Income (loss) before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles by geographic area is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Domestic............................................... $(49.4) $(177.9) $(223.4)
Foreign................................................ 143.9 6.1 12.0
------ ------- -------
$ 94.5 $(171.8) $(211.4)
====== ======= =======
</TABLE>
F-57
<PAGE> 253
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is subject to domestic income taxes.
The credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary item and cumulative effect of changes
in accounting principles consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $ (4.3) $ -- $ (.1)
State and local........................................ (.4) (.2) (1.3)
Foreign................................................ (40.2) (18.0) (7.9)
------ ------ ------
(44.9) (18.2) (9.3)
------ ------ ------
Deferred:
Federal................................................ 35.4 94.3 77.1
State and local........................................ (.4) .4 2.7
Foreign................................................ (4.9) .6 12.0
------ ------ ------
30.1 95.3 91.8
------ ------ ------
$(14.8) $ 77.1 $ 82.5
====== ====== ======
</TABLE>
The 1994 federal deferred credit for income taxes of $94.3 includes $36.0
for the benefit of operating loss carryforwards generated in 1994. The 1993
federal deferred credit for income taxes of $77.1 includes $29.2 for the benefit
of operating loss carryforwards generated in 1993 and a $7.0 benefit for
increasing net deferred income tax assets (liabilities) as of the date of
enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993,
which retroactively increased the federal statutory income tax rate from 34% to
35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles.................................... $ 94.5 $(171.8) $(211.4)
====== ======= =======
Amount of federal income tax based upon the statutory
rate..................................................... $(33.1) $ 60.1 $ 74.0
Revision of prior years' tax estimates and other changes in
valuation allowances..................................... 24.2 16.7 (.6)
Percentage depletion....................................... 4.2 5.6 6.4
Foreign taxes, net of federal tax benefit.................. (6.9) (5.3) (5.0)
State and local taxes, net of federal tax benefit.......... (2.4) .1 .9
Increase in net deferred income tax assets due to tax rate
change................................................... -- 1.8 7.0
Removal of Kaiser from the Company's consolidated federal
return group............................................. -- -- 3.5
Other...................................................... (.8) (1.9) (3.7)
------ ------- -------
$(14.8) $ 77.1 $ 82.5
====== ======= =======
</TABLE>
F-58
<PAGE> 254
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The caption entitled "Revision of prior years' tax estimates and other
changes in valuation allowances," as shown in the preceding table, includes
amounts for the reversal of reserves which the Company no longer believes are
necessary, other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets. Generally, the reversal
of reserves relate to the expiration of the relevant statute of limitations with
respect to certain income tax returns, or the resolution of specific income tax
matters with the relevant tax authorities. For the years ended December 31,
1995, 1994 and 1993, the reversal of reserves which the Company believes are no
longer necessary amounted to $20.0, $20.1 and $2.9, respectively.
As shown in the Consolidated Statement of Operations for the years ended
December 31, 1994 and 1993, the Company reported extraordinary losses on the
early extinguishment of debt. The Company reported the losses net of related
deferred federal income taxes of $2.9 and $27.5, respectively, which
approximated the federal statutory income tax rate in effect on the dates the
transactions occurred.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
adoption of SFAS 109 changed the Company's method of accounting for income taxes
to an asset and liability approach from the deferral method prescribed by
Accounting Principles Board Opinion No. 11, Accounting for Income Taxes. The
asset and liability approach requires the recognition of deferred income tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. Under
this method, deferred income tax assets and liabilities are determined based on
the temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates. The cumulative effect of the
change in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $26.6. The implementation of SFAS 109 required the
Company to restate certain assets and liabilities to their pre-tax amounts from
their net-of-tax amounts originally recorded in connection with the acquisitions
of various subsidiaries in prior years. As a result of restating these assets
and liabilities, the loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles for the year
ended December 31, 1993 was increased by $5.9.
F-59
<PAGE> 255
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Certain of the deferred income tax assets and liabilities listed in the
following table are included in the Consolidated Balance Sheet in the captions
entitled prepaid expenses and other current assets, other accrued liabilities
and other noncurrent liabilities. The components of the Company's net deferred
income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions.................... $ 293.6 $ 297.2
Loss and credit carryforwards.................................. 190.5 208.8
Other liabilities.............................................. 139.0 133.5
Real estate.................................................... 58.1 71.5
Pensions....................................................... 56.0 51.0
Timber and timberlands......................................... 41.9 46.2
Foreign and state deferred income tax liabilities.............. 30.8 28.1
Property, plant and equipment.................................. 23.3 23.7
Other.......................................................... 32.5 26.7
Valuation allowances........................................... (141.5) (147.0)
------- -------
Total deferred income tax assets, net.................. 724.2 739.7
------- -------
Deferred income tax liabilities:
Property, plant and equipment.................................. (177.9) (202.7)
Investments in and advances to unconsolidated affiliates....... (66.4) (63.8)
Inventories.................................................... (15.5) (27.4)
Other.......................................................... (22.8) (20.0)
------- -------
Total deferred income tax liabilities.................. (282.6) (313.9)
------- -------
Net deferred income tax assets................................... $ 441.6 $ 425.8
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $291.8 of the net deferred income tax assets listed
above are attributable to Kaiser. Of this amount, approximately $97.7 relates to
the benefit of loss and credit carryforwards, net of valuation allowances. The
Company evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations concerning their
use, the year the carryforwards expire and the levels of taxable income
necessary for utilization. For example, full valuation allowances were provided
for certain credit carryforwards that expire in the near term. With regard to
future levels of income, the Company believes that Kaiser, based on the cyclical
nature of its business, its history of prior operating earnings and its
expectations for future years, will more likely than not generate sufficient
taxable income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided. The remaining
portion of Kaiser's net deferred income tax assets is approximately $194.1 at
December 31, 1995. A principal component of this amount is the tax benefit
associated with the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual will occur
over a thirty to forty-year period. If such deductions create or increase a net
operating loss in any one year, Kaiser has the ability to carry forward such
loss for fifteen taxable years. For these reasons, the Company believes a
long-term view of profitability is appropriate and has concluded that this net
deferred income tax asset will more likely than not be realized despite Kaiser's
operating losses incurred in recent years. The net deferred income tax assets
listed above which are not attributable to Kaiser are approximately $149.8 as of
December 31, 1995. This amount includes approximately $91.2 which relates to the
excess of the tax basis over financial statement basis with respect to timber
and
F-60
<PAGE> 256
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
timberlands and real estate. The Company has concluded that it is more likely
than not that these net deferred income tax assets will be realized based in
part upon the estimated values of the underlying assets which are in excess of
their tax basis.
The Company files consolidated federal income tax returns together with its
domestic subsidiaries. As a consequence of Kaiser's public offering of shares on
June 30, 1993, as discussed in Note 7, Kaiser and its subsidiaries are no longer
included in the consolidated federal income tax return group of the Company.
Kaiser and its subsidiaries have become members of a new consolidated return
group of which Kaiser is the common parent corporation (the "New Kaiser Tax
Group"). The New Kaiser Tax Group files consolidated federal income tax returns
for taxable periods beginning on or after July 1, 1993.
The following table presents the tax attributes for federal income tax
purposes at December 31, 1995 attributable to the Company and to the New Kaiser
Tax Group. The utilization of certain of these tax attributes is subject to
limitations.
<TABLE>
<CAPTION>
NEW KAISER TAX GROUP
THE COMPANY --------------------
--------------------
EXPIRING EXPIRING
THROUGH THROUGH
----------- -----------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss................ $26.4 2010 $ -- --
Prior year net operating losses................ 51.2 2009 32.9 2007
General business tax credits................... .9 2002 28.4 2008
Foreign tax credits............................ -- -- 89.7 2000
Alternative minimum tax credits................ 1.5 Indefinite 19.4 Indefinite
Alternative Minimum Tax Attribute Carryforwards:
Current year net operating loss................ $21.6 2010 $ -- --
Prior year net operating losses................ 42.4 2009 17.1 2002
Foreign tax credits............................ -- -- 83.5 2000
</TABLE>
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has unfunded defined postretirement benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits (and life insurance benefits for Kaiser employees) upon retirement.
Retirees from companies other than Kaiser make contributions for a portion of
the cost of their health care benefits.
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are accrued over the period the employees provide services to the date
of their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the change in
accounting principle for the adoption of SFAS 106 was recorded as a charge to
results of operations of $437.9, net of related benefits for minority interests
of $63.6 and income taxes of $236.8. The deferred income tax benefit related to
the adoption of SFAS 106 was recorded at the federal statutory rate in effect on
the date SFAS 106 was adopted, before giving effect to certain valuation
allowances.
The adoption of SFAS 106 increased the Company's loss before extraordinary
item and cumulative effect of changes in accounting principles by $13.3, or
$1.41 per share ($19.9 before income taxes), for the year ended December 31,
1993.
F-61
<PAGE> 257
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP
is mandatory for all salaried retirees over 65 and for the United Steelworkers
of America ("USWA") retirees who retire after December 31, 1995, and when they
become 65, and voluntary for other hourly retirees of Kaiser's operations in
California, Louisiana, and Washington. The USWA contract, ratified on February
28, 1995, also contained changes to the retiree health benefits including
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower Kaiser's expenses for retiree
medical care.
Postretirement benefits other than pensions are generally provided through
contracts with various insurance carriers. The Company has not funded the
liability for these benefits, which are expected to be paid out of cash
generated by operations. A summary of the components of net periodic
postretirement benefit cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service cost-benefits earned during the year................ $ 4.9 $ 8.8 $ 7.4
Interest cost on accumulated postretirement benefit
obligation................................................ 52.7 57.5 59.0
Net amortization and deferral............................... (9.1) (3.2) --
----- ----- -----
Net periodic postretirement benefit cost.................... $48.5 $63.1 $66.4
===== ===== =====
</TABLE>
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $558.9 $568.3
Actives eligible for benefits...................................... 31.5 31.4
Actives not eligible for benefits.................................. 65.5 102.8
------ ------
Accumulated postretirement benefit obligation............ 655.9 702.5
Unrecognized prior service cost.................................... 111.1 31.8
Unrecognized net gain (loss)....................................... 22.4 55.8
------ ------
Postretirement benefit liability......................... $789.4 $790.1
====== ======
</TABLE>
The annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rates) are approximately 8.0% and 7.5%
for retirees under age 65 and over age 65, respectively, and are assumed to
decrease gradually to approximately 5.0% in 2008 and remain at that level
thereafter. Each one percentage point increase in the assumed health care cost
trend rate would increase the accumulated postretirement benefit obligation as
of December 31, 1995 by approximately $69.7 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost by
approximately $7.9.
The discount rates and rates of compensation increase used in determining
the accumulated postretirement benefit obligation were 7.5% and 5.0% at December
31, 1995, respectively, and 8.5% and 5.0% at December 31, 1994, respectively.
RETIREMENT PLANS
The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit plans.
The benefits are determined under formulas based on years of
F-62
<PAGE> 258
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
service and the employee's compensation. The Company's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by ERISA.
The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Under the
MAXXAM Inc. Savings Plan (the "MAXXAM Savings Plan"), employees may elect to
contribute up to 16% of their compensation to the plan. For those participants
who have elected to make voluntary contributions to the MAXXAM Savings Plan, the
Company's contributions consist of a matching contribution of up to 4% of the
compensation of participants for each calendar quarter. Under the Kaiser
Aluminum Savings and Retirement Plan, salaried employees may elect to contribute
from 2% to 18% of their compensation to the plan. For those eligible
participants who have elected to make contributions to the plan, Kaiser's
contributions are determined based on earnings and net worth formulas. In 1995,
Kaiser adopted the Kaiser Aluminum Total Compensation System, an unfunded
incentive compensation program, which provides incentive pay based upon
performance against plan over a three-year period.
A summary of the components of net periodic pension costs for the defined
benefit plans and total pension costs for the defined contribution plans and
non-qualified retirement and incentive plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the year.......... $ 12.1 $ 13.6 $ 13.0
Interest cost on projected benefit obligations........ 62.5 59.5 60.8
Return on assets:
Actual gain........................................ (118.7) (.8) (73.9)
Deferred gain (loss)............................... 64.6 (53.0) 15.9
Net amortization and deferral......................... 8.7 2.8 4.7
------- ------ ------
Net periodic pension cost............................. 29.2 22.1 20.5
Defined contribution plans.............................. 5.4 2.8 1.7
Non-qualified retirement and incentive plans............ 8.2 5.0 4.3
------- ------ ------
$ 42.8 $ 29.9 $ 26.5
======= ====== ======
</TABLE>
F-63
<PAGE> 259
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following table sets forth the funded status and amounts recognized for
the defined benefit plans in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation...................................... $ 781.7 $ 684.3
Non-vested benefit obligation.................................. 31.1 42.9
------- -------
Total accumulated benefit obligation................... $ 812.8 $ 727.2
======= =======
Projected benefit obligation..................................... $ 853.1 $ 761.2
Plan assets at fair value, primarily common stocks and fixed
income obligations............................................. (623.1) (546.9)
------- -------
Projected benefit obligation in excess of plan assets............ 230.0 214.3
Unrecognized net transition obligation........................... (.6) (.9)
Unrecognized net loss............................................ (54.9) (40.4)
Unrecognized prior service cost.................................. (29.1) (31.6)
Adjustment required to recognize minimum liability............... 49.8 42.9
------- -------
Accrued pension cost................................... $ 195.2 $ 184.3
======= =======
</TABLE>
The assumptions used in accounting for the defined benefit plans were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.5% 8.5% 7.5%
Expected long-term rate of return on assets.................. 9.5% 9.5% 10.0%
</TABLE>
The Company has recorded an additional pension liability equal to the
excess of the accumulated benefit obligation over the fair value of plan assets.
The amount of the additional pension liability in excess of unrecognized prior
service cost is recorded as a reduction to stockholders' equity. In 1995 and
1994, the pension liability adjustment increased by $4.7 and decreased by $12.5,
respectively. These adjustments were recorded net of a related deferred federal
and state income tax credit (provision) of $2.8 and ($7.3), respectively, which
approximated the federal and state statutory rates.
POSTEMPLOYMENT BENEFITS
The Company adopted Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits ("SFAS 112") as of January 1,
1993. The costs of postemployment benefits are accrued over the period the
employees provide services to the date of their full eligibility for such
benefits. Previously, such costs were expensed as actual claims were incurred.
The cumulative effect of the change in accounting principle for the adoption of
SFAS 112 was recorded as a charge to results of operations of $6.4, net of
related benefits for minority interests of $1.0 and income taxes of $3.4.
F-64
<PAGE> 260
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. MINORITY INTERESTS
Minority interests represent the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Kaiser Aluminum Corporation:
Common stock, par $.01........................................... $ -- $ --
$.65 Depositary Shares........................................... -- 128.0
8.255% PRIDES.................................................... 98.1 100.1
Subsidiary redeemable preference stock:
KACC Series A and B Cumulative Preference Stock, par $1.......... 29.7 29.1
KACC Cumulative Convertible Preference Stock, par $100........... 1.7 1.7
KACC Minority Interests:
Alumina Partners of Jamaica...................................... 73.9 70.4
Volta Aluminium Company Limited.................................. 14.9 13.6
Kaiser LaRoche Hydrate Partners.................................. 2.5 1.4
Sam Houston Race Park, Ltd......................................... 2.4 --
------ ------
$223.2 $344.3
====== ======
</TABLE>
As a result of Kaiser's issuance of preferred stock in 1993 and 1994, the
1995 redemption of the Depositary Shares (each as described below), and the
issuance of Kaiser's common stock in connection with the LTIP (as described
below), the Company's equity interest in Kaiser has decreased to approximately
62% on a fully diluted basis, as of December 31, 1995.
KAISER PROPOSED RECAPITALIZATION
On February 5, 1996, Kaiser announced that it had filed a preliminary proxy
statement with the Securities and Exchange Commission relating to a proposed
recapitalization. Under the terms of the proposed recapitalization, the relative
ownership interest and voting power of stockholders would be unchanged as a
result of the recapitalization (except as a result of the treatment of
fractional shares). The proposed recapitalization would (i) provide for two
classes of common stock: Class A Common Shares, $.01 par value, with one vote
per share and a new lesser-voting class designated as Common Stock, $.01 par
value, with 1/10 vote per share, (ii) redesignate as Class A Common Shares the
100 million currently authorized shares of existing common stock and authorize
250 million shares to be designated as Common Stock, and (iii) change each
issued share of Kaiser's existing common stock into (a) .33 of a Class A Common
Share and (b) .67 of a share of Common Stock. Kaiser would pay cash in lieu of
fractional shares. Kaiser anticipates that both the Class A Common Shares and
the Common Stock would be approved for trading on the New York Stock Exchange.
Upon the effective date of the recapitalization, approximately 23.6 million
Class A Common Shares and 48.0 million shares of Common Stock would be issued
and outstanding. The proportionate voting power of the holders of the PRIDES
would increase immediately after the effectiveness of the recapitalization until
such shares are redeemed or converted, which would occur on or before December
31, 1997. As of January 31, 1996, holders of the existing common stock and the
PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all
stockholders. Immediately after the recapitalization, the voting power of such
holders of the PRIDES would increase to 19.6% in the aggregate, with a
corresponding reduction in the voting power of such holders of the existing
common stock. At such time as the PRIDES were redeemed or converted, the
relative voting power of such holders of the PRIDES would decrease and the
relative voting power for both such holders of the PRIDES and the existing
common stock would be approximately the same as it would have been had the
recapitalization not occurred.
F-65
<PAGE> 261
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
$.65 DEPOSITARY SHARES
On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares
(the "Depositary Shares"), each representing one-tenth of a share of Series A
Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares").
In connection with the issuance of the Depositary Shares, Kaiser issued an
additional 2,132,950 of its Depositary Shares to MGI in exchange for a $15.0
promissory note issued by KACC which evidenced a $15.0 cash loan made by MGI to
KACC in January 1993 (the "MGI Loan"). Kaiser made capital contributions and
intercompany loans to KACC from the proceeds of the sale of the Series A Shares.
KACC used approximately $13.7 of such funds to prepay the remaining balance of
the term loan under the 1989 KACC Credit Agreement and $105.6 of such funds to
reduce outstanding borrowings under the revolving credit facility of the 1989
KACC Credit Agreement. The Depositary Shares called for the payment of quarterly
dividends (when and as declared by Kaiser's Board of Directors) of approximately
$3.2 ($.1625 per share). The Company accounted for Kaiser's issuance of the
Depositary Shares as additional minority interest.
On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A
Shares, which resulted in the simultaneous redemption of all 19,382,950
Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common
stock, (ii) cash equal to all accrued and unpaid dividends up to and including
the day immediately prior to the redemption date of $2.8, and (iii) cash in lieu
of any fractional shares of common stock that would have otherwise been
issuable.
During 1994, the Company sold 1,239,400 of the Depositary Shares for
aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. From
January through May of 1995, the Company sold the remaining Depositary Shares
that it owned for aggregate net proceeds of $7.6, resulting in pre-tax gains of
$1.3. As a result of these sales, the shares of Kaiser's common stock which were
issued upon redemption of the Series A Shares are held by minority stockholders.
The Company has recorded 100% of the losses attributable to Kaiser's common
stock since July 1993, as Kaiser's cumulative losses through that date had
eliminated Kaiser's equity with respect to its common stock. The redemption of
Kaiser's Series A Shares, together with the voluntary redemption of 181,700
shares of PRIDES in 1995, decreased Kaiser's preferred equity, and reduced
Kaiser's deficit in common equity, by $136.2. Accordingly, the Company recorded
an adjustment to reduce the minority interests reflected on its Consolidated
Balance Sheet for that same amount, with an offsetting decrease in the Company's
stockholders' deficit.
8.255% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES
During the first quarter of 1994, Kaiser consummated a public offering for
the sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of
the PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds to
make non-interest bearing loans to KACC (evidenced by notes) which are designed
to provide sufficient funds to make the required dividend payments on the PRIDES
until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $66.9 of
such net proceeds to make capital contributions to KACC. Holders of shares of
PRIDES have a 4/5 vote for each share held of record and, except as required by
law, are entitled to vote together with the holders of Kaiser's common stock and
together with the holders of any other classes or series of Kaiser's stock who
are entitled to vote in such manner on all matters submitted to a vote of common
stockholders. On December 31, 1997, unless either previously redeemed or
converted at the option of the holder, each outstanding share of PRIDES will
mandatorily convert into one share of Kaiser's common stock. subject to
adjustment in certain events, and the right to receive an amount in cash equal
to all accrued and unpaid dividends thereon. Shares of PRIDES are not
redeemable, at the election of Kaiser, prior to December 31, 1996. At any time
and from time to time on or after December 31, 1996, Kaiser may redeem any or
all of the outstanding shares of PRIDES. Upon any such redemption, each holder
will receive, in exchange for each share of PRIDES, the number of shares of
Kaiser's common stock equal to
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MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(i) the sum of $11.9925, declining after December 31, 1996 to $11.75 until
December 31, 1997, plus, in the event Kaiser does not elect to pay cash
dividends to the redemption date, all accrued and unpaid dividends thereon
divided by (ii) the Current Market Price (as defined) on the applicable date of
determination, but in no event less than .8333 of a share of Kaiser's common
stock, subject to adjustment in certain events. At any time prior to December
31, 1997, unless previously redeemed, each share of PRIDES is convertible at the
option of the holder thereof into .8333 of a share of Kaiser's common stock
(equivalent to a conversion price of $14.10 per share of Kaiser's common stock),
subject to adjustment in certain events. The number of shares of Kaiser's common
stock a holder will receive upon redemption, and the value of the shares
received upon conversion, will vary depending on the market price of Kaiser's
common stock from time to time. The PRIDES call for the payment of quarterly
dividends of approximately $2.1 ($.2425 per share). The Company accounted for
Kaiser's issuance of the PRIDES as, additional minority interest.
SUBSIDIARY REDEEMABLE PREFERENCE STOCK
In March 1985, KACC entered into a three-year agreement with the USWA
whereby shares of a new series of KACC Cumulative (1985 Series A) Preference
Stock (the "Series A Stock") would be issued to an employee stock ownership plan
in exchange for certain elements of wages and benefits. Concurrently, a similar
plan was established for certain nonbargaining employees which provided for the
issuance of KACC Cumulative (1985 Series B) Preference Stock (the "Series B
Stock"). The Series A Stock and the Series B Stock ("Series A and B Stock") each
have a liquidation and redemption value of $50 per share plus accrued dividends,
if any, and have a total redemption value of $36.9 at December 31, 1995.
Changes in Series A and B Stock are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year........................................... 912,167 1,081,548 1,163,221
Redeemed.................................................... (174,804) (169,381) (81,673)
-------- --------- ---------
End of year................................................. 737,363 912,167 1,081,548
======== ========= =========
</TABLE>
No additional Series A or B Stock will be issued. While held by the plan
trustee, Series B Stock is entitled to cumulative annual dividends, when and as
declared by KACC's Board of Directors, payable in Series B Stock or in cash at
the option of KACC, based on a formula tied to KACC's income before tax from
aluminum operations. When distributed to plan participants (generally upon
separation from KACC, the Series A and B Stock is entitled to an annual cash
dividend of $5 per share, payable quarterly, when and as declared by KACC's
Board of Directors.
Redemption fund agreements require KACC to make annual payments by March 31
of each year based on a formula tied to KACC's consolidated net income until the
redemption funds are sufficient to redeem all Series A and B Stock. On an annual
basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March
1994 and 1995, KACC contributed $4.3 for each of the years ended December 31,
1993 and 1994, and will contribute $4.3 in March 1996 for the year ended
December 31, 1995.
Under the USWA labor contract effective November 1, 1990, KACC was
obligated to offer to purchase up to 40 shares of Series A Stock from each
active participant in 1994 at a price equal to its redemption value of $50 per
share. The employees could elect to receive their shares, accept cash or place
the proceeds into KACC's 401(k) savings plan. Under separate action, KACC also
offered to purchase 40 shares of Series B Stock from active participants in
1994. Under the provisions of these contracts, in February 1994, KACC purchased
$4.6 and $.8 of the Series A Stock and Series B Stock, respectively.
F-67
<PAGE> 263
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Under the USWA labor contract effective November 1, 1994, KACC was
obligated to offer to purchase up to 40 shares of Series A Stock from each
active participant in 1995 at a price equal to its redemption value of $50 per
share. KACC also agreed to offer to purchase up to an additional 80 shares from
each participant in 1998. In addition, a profitability test was satisfied for
1995; therefore, KACC will offer to purchase from each active participant an
additional 20 shares of such preference stock held in the stock ownership plan
for the benefit of substantially the same employees in 1996. The employees may
elect to receive their shares. accept cash or place the proceeds into KACC's
401(k) savings plan. KACC also will offer to make comparable purchases of Series
B Stock from active participants.
The Series A and B Stock is distributed in the event of death or retirement
of the plan participant, or in other specified circumstances. KACC may also
redeem such stock at $50 per share plus accrued dividends, if any. At the option
of the plan participant, the trustee shall redeem stock distributed from the
plans at the redemption value to the extent funds are available in the
redemption fund. Under the Tax Reform Act of 1986, at the option of the plan
participant, KACC must purchase distributed shares earned after December 31,
1985 at the redemption value on a five-year installment basis, with interest at
market rates. The obligation of KACC to make such installment payments must be
secured.
The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on two
annual dividend payment dates, or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Series A and B Stock
restricts the ability of KACC to redeem or pay dividends on its common stock if
KACC is in default on any dividends payable on the Series A and B Stock.
KAISER STOCK INCENTIVE PLANS
Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain
key employees. All compensation vested at December 31, 1993 under the LTIP was
paid to the participants in cash or common stock of Kaiser. Under the LTIP, as
amended, 764,092 restricted shares of Kaiser common stock were distributed to
six Kaiser executives during 1993 for benefits generally earned but not vested
as of December 31, 1992. These shares generally vest at the rate of 25% per
year. Kaiser is recording the related expense of $6.5 over the four-year period
ending December 31, 1996.
In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A
total of 2,500,000 shares of Kaiser common stock were reserved for awards or for
payment of rights granted under the plan, of which 544,839 shares were available
to be awarded at December 31, 1995. During 1994, 102,564 restricted shares,
which vest at the rate of 25% per year, were distributed to two Kaiser
executives. Kaiser is recording the related expense of $1.0 over the four-year
period ending December 31, 1998.
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<PAGE> 264
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In 1993 and 1994, the Compensation Committee of Kaiser's Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These options generally will vest at
the rate of 20-25% per year. Information relating to nonqualified stock options
is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................... 1,119,680 664,400 --
Granted............................................ -- 494,800 664,400
Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920) --
Expired or forfeited............................... (38,095) (32,600) --
--------- --------- -------
Outstanding at end of year (prices ranging from
$7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year......................... 211,755 120,180 --
========= ========= =======
</TABLE>
8. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The holders of the Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock (the "Class A Preferred Stock") are entitled to
receive, if and when declared, preferential cash dividends at the rate of $.05
per share per annum and will participate thereafter on a share for share basis
with the holders of stock in all cash dividends, other than cash dividends on
the common stock in any fiscal year to the extent not exceeding $.05 per share.
Stock dividends declared on the common stock will result in the holders of the
Class A Preferred Stock receiving an identical stock dividend payable in shares
of Class A Preferred Stock. At the option of the holder, the Class A Preferred
Stock is convertible at any time into shares of common stock at the rate of one
share of common stock for each share of Class A Preferred Stock. Each holder of
Class A Preferred Stock is generally entitled to ten votes per share on all
matters presented to a vote of the Company's stockholders.
STOCK OPTION PLANS
In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan. The 1994 Omnibus Plan
replaced the Company's 1984 Phantom Share Plan (the "1984 Plan") which expired
in June 1994, although previous grants thereunder remain outstanding. In
December 1994, options to purchase 25,000 shares of common stock of the Company
were granted to an executive officer. In addition, also in December 1994,
another executive officer relinquished stock appreciation rights relating to
50,000 shares of common stock of the Company in exchange for options to purchase
45,000 shares of Class A Preferred Stock. The exercise price of these options is
$30.375 per share (the quoted market price at the date of grant). In November
1995, stock appreciation rights equivalent to 36,000 shares of common stock of
the Company were granted to certain employees with an exercise price of $45.15
(reflecting a 20% premium above the quoted market price at the date of grant).
These options (or rights, as applicable) vest at the rate of 20% per year
commencing one year from the date of grant. At December 31, 1995, 14,000 of
rights granted pursuant to the 1994 Omnibus Plan were exercisable. The Company
paid $2.7 with respect to the 1984 Plan for the year ended December 31, 1995.
Amounts paid with respect to the 1984 Plan for the years ended December 31,
F-69
<PAGE> 265
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1994 and 1993 were not significant. The following table summarizes the options
or rights outstanding and exercisable relating to the 1984 Plan and the 1994
Omnibus Plan:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year...................... 238,000 267,800 226,300
Granted............................................... 36,000 70,000 50,000
Exercised............................................. (66,100) (37,050) (8,500)
Expired or forfeited.................................. -- (62,750) --
------- ------- -------
Outstanding at end of year (prices ranging from $13.75
to $45.15 per share)................................ 207,900 238,000 267,800
======= ======= =======
Exercisable at end of year............................ 93,900 124,100 133,725
======= ======= =======
</TABLE>
Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. In May 1995 and 1994, options to purchase 900 shares and 1,500 shares of
common stock, respectively, were granted to three non-employee directors. The
exercise prices of there options are $31.60 and $36.50 per share, respectively,
based on the quoted market price at the date of grant. The options vest at the
rate of 25% per year commencing one year from the date of grant At December 31,
1995, 375 of such options were exercisable.
In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the
"MGI 1976 Plan") were converted into the right to receive, upon exercise of each
option, $6.11 in cash, .25 shares of the Company's common stock (88,500 shares)
and $6.00 principal amount of the Reset Notes. Options granted under the MGI
1976 Plan generally were exercisable for a period of ten years from the date of
grant. During 1993, 60,000 options granted under the MGI 1976 Plan at a price of
$10.875 per share were surrendered for a cash payment in lieu of the
consideration referred to above. At December 31, 1993, all options granted under
the MGI 1976 Plan bad been exercised.
SHARES RESERVED FOR ISSUANCE
At December 31, 1995, the Company had the following shares reserved for
future issuance:
<TABLE>
<S> <C>
Common shares:
Class A Preferred Stock................................................. 668,856
1994 Omnibus Plan....................................................... 939,000
1994 Director Plan...................................................... 32,600
---------
1,640,456
=========
Class A Preferred Stock:
1994 Omnibus Plan....................................................... 955,000
=========
</TABLE>
RIGHTS
On November 29, 1989, the Board of Directors of the Company declared a
dividend to its stockholders consisting of (i) one Series A Preferred Stock
Purchase Right (the "Series A Right") for each outstanding share of the
Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase
Right (the "Series B Right") for each outstanding share of the Company's common
stock. The Series A Right and the Series B Right are collectively referred to
herein as the "Rights." The Rights are exercisable only if a person or group of
affiliated or associated persons (an "Acquiring Person") acquires beneficial
ownership, or the right
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<PAGE> 266
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
to acquire beneficial ownership, of 15% or more of the Company's common stock,
or announces a tender offer that would result in beneficial ownership of 15% or
more of the outstanding common stock. Any person or group of affiliated or
associated persons who, as of November 29, 1989, was the beneficial owner of at
least 15% of the outstanding common stock will not be deemed to be an Acquiring
Person unless such person or group acquires beneficial ownership of additional
shares of common stock (subject to certain exception). Each Series A Right, when
exercisable, entities the registered holder to purchase from the Company one
share of Class A Preferred Stock at an exercise price of $165.00, subject to
adjustment. Each Series B Right, when exercisable, entities the registered
holder to purchase from the Company one one-hundredth of a share of the
Company's new Class B Junior Participating Preferred Stock, with a par value of
$.50 per share (the "Junior Preferred Stock"), at an exercise price of $165.00,
subject to adjustment.
Under certain circumstances, including if any person becomes an Acquiring
Person other than through certain offers for all outstanding shares of stock of
the Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy common
stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring Person
will be null and void. In addition, under certain circumstances, the Board is
authorized to exchange all outstanding and exercisable Rights for stock, in the
ratio of one share of Class A Preferred Stock per Series A Right and one share
of common stock of the Company per Series B Right. The Rights, which do not have
voting privileges, expire in 1999, but may be redeemed by action of the Board
prior to that time for $.01 per right, subject to certain restrictions.
VOTING CONTROL
Federated Development Inc., a wholly owned subsidiary of Federated
Development Company ("Federated"), and Mr. Charles E. Hurwitz collectively own
99.1% of the Company's Class A Preferred Stock and 31.1 % of the Company's
common stock (resulting in combined voting control of approximately 60.7% of the
Company). Mr. Hurwitz is the Chairman of the Board, President and Chief
Executive Officer of the Company and Chairman and Chief Executive Officer of
Federated. Federated is wholly owned by Mr. Hurwitz, members of his immediate
family and trusts for the benefit thereof.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company, principally through KACC, has financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 10), letters of credit and other guarantees. Such
purchase agreements and tolling arrangements include long-term agreements for
the purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations expire in 2008. Under the agreements, KACC is unconditionally
obligated to pay its proportional share of debt, operating costs and certain
other costs of this joint venture. At December 31, 1995, such indebtedness was
$88.9, with $26.7 due in 1997 and $62.2 due in 2002. KACC's share of payments,
including operating costs and certain other expenses under the agreement, was
$77.5, $85.6 and $86.7 for the years ended December 31, 1995, 1994 and 1993,
respectively. KACC also has agreements to supply alumina to and to purchase
aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1995 are
as follows: years ending December 31, 1996 -- $27.7; 1997 -- $25.5;
1998 -- $28.3; 1999 -- $33.0; 2000 -- $29.9; thereafter -- $187.3. Rental
expense for operating leases was $31.4, $29.2 and $31.3 for the years ended
December 31,
F-71
<PAGE> 267
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995, 1994 and 1993, respectively. The minimum future rentals receivable under
noncancelable subleases at December 31, 1995 were $67.6.
ENVIRONMENTAL CONTINGENCIES
Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claim and litigation based upon such
laws. KACC is currently subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, (as amended by
the Superfund Amendments Reauthorization Act of 1986, "CERCLA") and, along with
certain other entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National Priorities
List under CERCLA.
Based on Kaiser's evaluation of these and other environmental matters.
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The following
table presents the changes in such accruals, which are primarily included in
other noncurrent liabilities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year................................ $40.1 $40.9 $46.4
Additional amounts.......................................... 3.3 2.8 1.7
Less expenditures........................................... (4.5) (3.6) (7.2)
----- ----- -----
Balance at end of year...................................... $38.9 $40.1 $40.9
===== ===== =====
</TABLE>
These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology and Kaiser's
assessment of the likely remediation action to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an
aggregate of approximately $10.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $23.0 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. While uncertainties are inherent in the final outcome of
these environmental matters, and it is impossible to determine the actual costs
that ultimately may be incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years. At December 31, 1995,
the number of claims pending was approximately 59,700,
F-72
<PAGE> 268
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
compared to 25,200 at December 31, 1994. During 1995, approximately 41,700
claims were received and approximately 7,200 were settled or dismissed. KACC
believes that, although there can be no assurance, the recent increase in
pending claims may be attributable in part to tort reform legislation in Texas
which was passed by the legislature in March 1995 and which became effective on
September 1, 1995. The legislation, among other things, is designed to restrict,
beginning September 1, 1995, the filing of cases in Texas that do not have a
sufficient nexus to that jurisdiction, and to impose, generally as of September
1, 1996, limitations relating to joint and several liability in tort cases. A
substantial portion of the asbestos-related claims that were filed and served on
KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to
September 1, 1995.
Based on past experience and reasonably anticipated future activity, KACC
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and KACC's actual
costs could exceed these estimates. KACC's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an asbestos-related cost accrual of
$160.1, before consideration of insurance recoveries, is included primarily in
other noncurrent liabilities at December 31, 1995. KACC estimates that annual
future cash payments in connection with such litigation will be approximately
$13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of
approximately $78.0 thereafter through 2008. While KACC does not believe there
is a reasonable basis for estimating such costs beyond 2008, and, accordingly,
did not accrue such costs, there is a reasonable possibility that such costs may
continue beyond 2008, and such costs may be substantial.
KACC believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. KACC believes, based on prior insurance-related recoveries with
respect to asbestos-related claims, existing insurance policies, and the advice
of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of these policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $137.9 determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
OTS CONTINGENCY AND RELATED MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated formal administrative proceedings against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and others
(the "respondents") with respect to the failure of United Savings Association of
Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc.
("UFG"). The Notice claims that the Company was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
F-73
<PAGE> 269
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other respondents, including allegations
that through USAT it was involved in prohibited transactions with Drexel,
Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in
excess of $138.0 from the Company, civil money penalties and a removal from, and
prohibition against the Company and the other respondents engaging in, the
banking industry. The Company has concluded that it is unable to determine a
reasonable estimate of the loss (or range of loss), if any, that could result
from this contingency. Accordingly, it is impossible to assess the ultimate
impact, if any, of the outcome this matter may have on the Company's
consolidated financial position, results of operations or liquidity.
On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed
a civil action entitled Federal Deposit Insurance Corporation, as manager of the
FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action")
in the U.S. District Court for the Southern District of Texas (the "Court"). The
FDIC action did not name the Company as a defendant. The suit against Mr.
Hurwitz seeks damages in excess of $250.0 based on the allegation that Mr.
Hurwitz was a controlling shareholder, de facto senior officer and director of
USAT, and was involved in certain decisions which contributed to the insolvency
of USAT. The FDIC further alleges, among other things, that M. Hurwitz was
obligated to ensure that UFG, Federated and the Company maintained the net worth
of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to
this action. On December 8, 1995, the Company filed a motion to intervene in
this action and conditioned it on the Court joining the OTS to this action. The
Company filed with its motion to intervene a proposed complaint which alleges
that the OTS violated the Administrative Procedures Act by rejecting the
Company's bid for USAT. The Company's bylaws provide for indemnification of its
officers and directors to the fullest extent permitted by Delaware law. The
Company is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is ultimately
determined that the individual was not entitled to indemnification. In addition,
the Company's indemnity obligation can, under certain circumstances, include
amounts other than defense costs, including judgments and settlements. The
Company has concluded that it is unable to determine a reasonable estimate of
the loss (or range of loss), if any, that could result from this contingency. It
is impossible to assess the ultimate outcome of the foregoing matter or its
potential impact on the Company's consolidated financial position, results of
operations or liquidity.
The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
KACC enters into a number of financial instruments in the normal course of
business that are designed to reduce its exposure to fluctuations in foreign
exchange rates, alumina, primary aluminum and fabricated aluminum products
prices and the cost of purchased commodities.
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its affiliates in
Australia and the United Kingdom, which expose KACC to certain exchange rate
risks. In order to mitigate its exposure, KACC periodically enters into forward
foreign exchange and currency option contracts in Australian dollars and Pounds
Sterling to hedge these commitments. The forward foreign currency exchange
contracts are agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the future. At
December 31, 1995, KACC had net forward foreign exchange contracts totaling
$102.8 for the purchase of 142.4 Australian dollars through April 30, 1997.
F-74
<PAGE> 270
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, KACC has
developed strategies which include forward sales of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. Under the
principal components of KACC's price risk management strategy, which can be
modified at any time, (i) varying quantities of KACC's anticipated production
are sold forward at fixed prices, (ii) call options are purchased to allow KACC
to participate in certain higher market prices, should they materialize, for a
portion of KACC's primary aluminum and alumina sold forward, (iii) option
contracts are entered into to establish a price range KACC will receive for a
portion of its primary aluminum and alumina, and (iv) put options are purchased
to establish minimum prices KACC will receive for a portion of its primary
aluminum and alumina. In this regard, with respect to its 1996 anticipated
production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of
primary aluminum at fixed prices.
In addition, KACC enters into forward fixed price arrangements with certain
customers which provide for the delivery of a specific quantity of fabricated
aluminum products over a specified future period of time. In order to establish
the cost of primary aluminum for a portion of such sales, KACC may enter into
forward sales and options contracts. In this regard, at December 31, 1995, KACC
had purchased 53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,721
per metric ton ($.78 per pound) of primary aluminum, and forward foreign
exchange contracts was $4.1.
KACC has established margin accounts with its counterparties related to
aluminum forward sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized losses
related to these contracts. At December 31, 1995, KACC was not required to
maintain any such margin deposits. At December 31, 1994, KACC had $50.5 on
deposit with various counterparties with respect to such deposit requirements.
These amounts were included in prepaid expenses and other current assets.
KACC is exposed to credit risk in the event of non-performance by other
parties to these currency and commodity contracts, but KACC does not anticipate
non-performance by any of these counterparties given their creditworthiness.
When appropriate, KACC arranges master netting agreements.
F-75
<PAGE> 271
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
11. SEGMENT INFORMATION
The following tables present financial information by industry segment and
by geographic area at December 31, 1995 and 1994 and for the three years ended
December 31, 1995, 1994 and 1993.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
REAL
BAUXITE FOREST ESTATE AND
YEARS AND ALUMINUM PRODUCTS OTHER
ENDED ALUMINA PROCESSING OPERATIONS OPERATIONS CORPORATE TOTAL
----- ------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.................... 1995 $514.2 $1,723.6 $242.6 $ 84.8 $ -- $2,565.2
1994 432.5 1,349.0 249.6 84.6 -- 2,115.7
1993 423.4 1,295.7 233.5 78.5 -- 2,031.1
Operating income (loss)........ 1995 37.2 179.3 74.3 (13.6) (19.6) 257.6
1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3
1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1)
Effect of changes in accounting
principles on operating
income (loss):
Postretirement benefits other
than pensions.............. 1993 (2.3) (16.9) (.4) (.2) (.1) (19.9)
Income taxes................. 1993 (6.3) (5.6) .1 .7 -- (11.1)
Equity in earnings (loss) of
unconsolidated affiliates.... 1995 3.5 15.7 -- (.1) -- 19.1
1994 (4.6) 2.7 -- -- (13.1) (15.0)
1993 (2.5) (.8) -- -- (1.6) (4.9)
Depreciation and depletion..... 1995 30.0 58.4 25.3 6.2 1.0 120.9
1994 32.3 57.2 24.7 5.9 1.0 121.1
1993 33.8 57.3 24.5 4.1 1.1 120.8
Capital expenditures........... 1995 30.2 49.2 9.9 10.5 .2 100.0
1994 29.4 40.6 11.3 7.6 .4 89.3
1993 35.8 31.9 11.1 7.1 .3 86.2
Investments in and advances to
unconsolidated affiliates.... 1995 130.3 47.9 -- 10.9 -- 189.1
1994 137.1 32.6 -- -- -- 169.7
Identifiable assets............ 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3
1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
</TABLE>
Sales to unaffiliated customers exclude intersegment sales between bauxite
and alumina and aluminum processing of $159.7, $146.8 and $129.4 for the years
ended December 31, 1995, 1994 and 1993, respectively. Intersegment sales are
made on a basis intended to reflect the market value of the products.
Operating losses for Corporate represent general and administrative
expenses of MAXXAM Inc. that are not attributable to the Company's industry
segments. General and administrative expenses of Kaiser are allocated in, the
Company's industry segment presentation based upon those segments' ratio of
sales to unaffiliated customers.
F-76
<PAGE> 272
MAXXAM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
GEOGRAPHICAL INFORMATION
<TABLE>
<CAPTION>
YEARS OTHER
ENDED DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL
----- -------- --------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers... 1995 $1,916.9 $ 191.7 $239.4 $217.2 $ -- $2,565.2
1994 1,597.4 169.9 180.0 168.4 -- 2,115.7
1993 1,489.8 155.4 207.5 178.4 -- 2,031.1
Sales and transfers among
geographic areas................ 1995 -- 79.6 -- 191.5 (271.1) --
1994 -- 98.7 -- 139.4.. (238.1) --
1993 -- 88.2 -- 79.6.. (167.8) --
Operating income (loss)........... 1995 79.0 9.8 83.5 85.3 -- 257.6
1994 (65.3) 9.9 18.3 44.4 -- 7.3
1993 (118.6) (11.8) 21.9 12.4 -- (96.1)
Equity in earnings (loss) of
unconsolidated affiliates....... 1995 (.3) -- -- 19.4 -- 19.1
1994 (12.9) -- -- (2.1) -- (15.0)
1993 (1.6) -- -- (3.3) -- (4.9)
Investments in and advances to
unconsolidated affiliates....... 1995 12.1 27.1 -- 149.9 -- 189.1
1994 1.2 28.8 -- 139.7 -- 169.7
Identifiable assets............... 1995 3,037.0 381.9 196.5 216.9 -- 3,832.3
1994 2,926.5 364.8 200.0 199.5 -- 3,690.8
</TABLE>
Sales and transfers among geographic areas are made on a basis intended to
reflect the market value of the products.
Included in results of operations are aggregate foreign currency
translation and transaction gains of $5.3, $.8 and $4.9 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Export sales were less than 10% of total revenues during the years ended
December 31, 1995, 1994 and 1993. For the year ended December 31, 1995, sales to
any one customer did not exceed 10% of consolidated revenues. For the years
ended December 31, 1994 and 1993, the Company had bauxite and alumina sales of
$58.2 and $40.7, respectively, and aluminum processing sales of $147.7 and
$145.7, respectively, to one customer.
F-77
<PAGE> 273
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 120.5 $ 104.2
Marketable securities............................................ 50.6 45.9
Receivables:
Trade, net of allowance for doubtful accounts of $5.8 and $5.5
at September 30, 1996 and December 31, 1995, respectively.... 220.8 246.2
Other......................................................... 67.8 98.9
Inventories...................................................... 623.6 606.8
Prepaid expenses and other current assets........................ 156.5 129.7
-------- --------
Total current assets..................................... 1,239.8 1,231.7
Property, plant and equipment, net of accumulated depreciation of
$750.6 and $678.1 at September 30, 1996 and December 31, 1995,
respectively..................................................... 1,252.4 1,231.9
Timber and timberlands, net of depletion of $151.3 and $139.6 at
September 30, 1996 and December 31, 1995, respectively........... 303.0 313.0
Investments in and advances to unconsolidated affiliates........... 186.3 189.1
Deferred income taxes.............................................. 435.5 414.0
Long-term receivables and other assets............................. 466.1 452.6
-------- --------
$ 3,883.1 $3,832.3
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 170.7 $ 196.7
Accrued interest................................................. 24.8 58.0
Accrued compensation and related benefits........................ 126.2 166.5
Other accrued liabilities........................................ 170.6 148.4
Payable to affiliates............................................ 96.6 90.2
Long-term debt, current maturities............................... 26.4 25.1
-------- --------
Total current liabilities................................ 615.3 684.9
Long-term debt, less current maturities............................ 1,683.9 1,585.1
Accrued postretirement benefits.................................... 736.7 742.6
Other noncurrent liabilities....................................... 684.5 680.3
-------- --------
Total liabilities........................................ 3,720.4 3,692.9
-------- --------
Commitments and contingencies
Minority interests................................................. 217.9 223.2
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock; shares issued: 669,701....................... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,685..................................... 5.0 5.0
Additional capital............................................... 155.6 155.0
Accumulated deficit.............................................. (180.5) (208.5)
Pension liability adjustment..................................... (16.1) (16.1)
Treasury stock, at cost (shares held: preferred -- 845; common --
1,355,512).................................................... (19.5) (19.5)
-------- --------
Total stockholders' deficit.............................. (55.2) (83.8)
-------- --------
$ 3,883.1 $3,832.3
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 274
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Net sales:
Aluminum operations................................................... $1,652.1 $1,646.7
Forest products operations............................................ 199.6 180.9
Real estate and other operations...................................... 69.4 65.0
-------- --------
1,921.1 1,892.6
-------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation and
depletion):
Aluminum operations................................................ 1,394.8 1,329.8
Forest products operations......................................... 114.6 96.0
Real estate and other operations................................... 57.1 48.4
Selling, general and administrative expenses.......................... 152.9 140.5
Depreciation and depletion............................................ 92.9 91.0
-------- --------
1,812.3 1,705.7
-------- --------
Operating income........................................................ 108.8 186.9
Other income (expense):
Investment, interest and other income (expense)....................... 35.1 8.7
Interest expense...................................................... (135.5) (136.1)
-------- --------
Income (loss) before income taxes and minority interests................ 8.4 59.5
Credit (provision) for income taxes..................................... 27.1 (4.6)
Minority interests...................................................... (7.5) (19.8)
-------- --------
Net income.............................................................. $ 28.0 $ 35.1
======== ========
Net income per common and common equivalent share....................... $ 2.96 $ 3.71
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 275
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 28.0 $ 35.1
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and depletion.......................................... 92.9 91.0
Net sales of marketable securities.................................. 1.0 8.9
Minority interests.................................................. 7.5 19.8
Amortization of deferred financing costs and discounts on long-term
debt............................................................... 15.9 14.3
Amortization of excess investment over equity in net assets of
unconsolidated affiliates.......................................... 9.1 8.7
Equity in income of unconsolidated affiliates....................... (7.5) (17.1)
Net gain on sale of real estate, mortgage loans and other assets.... (17.4) (3.8)
Decrease (increase) in receivables.................................. 57.1 (72.9)
Increase (decrease) in payable to affiliates and other
liabilities........................................................ (40.5) 9.0
Increase in inventories............................................. (18.2) (68.6)
Decrease in accrued interest........................................ (31.2) (33.1)
Decrease (increase) in prepaid expenses and other assets............ (27.4) 82.9
Decrease in accounts payable........................................ (25.9) (4.8)
Increase in accrued and deferred income taxes....................... (25.9) (11.1)
Other............................................................... (4.0) (5.3)
------- ------
Net cash provided by operating activities...................... 13.5 53.0
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments.............. 35.0 24.8
Capital expenditures................................................... (108.0) (54.9)
Other.................................................................. (2.4) (9.6)
------- ------
Net cash used for investing activities......................... (75.4) (39.7)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit agreements....................... 117.3 53.0
Proceeds from issuance of long-term debt............................... 4.3 7.2
Principal payments on long-term debt................................... (32.6) (35.3)
Dividends paid to Kaiser's minority preferred stockholders............. (8.4) (18.4)
Redemption of preference stock......................................... (5.2) (8.8)
Other.................................................................. 2.8 4.6
------- ------
Net cash provided by financing activities...................... 78.2 2.3
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 16.3 15.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 104.2 84.6
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 120.5 $100.2
======= ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities.......... $ -- $ 6.9
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock..................................................... $ -- $134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest............................. $ 150.9 $154.8
Income taxes paid...................................................... 21.7 21.4
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 276
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
Annual Report on Form 10-K filed by MAXXAM Inc. with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (the "Form 10-K"). All
references to the "Company" include MAXXAM Inc. and its subsidiary companies
unless otherwise noted or the context indicates otherwise. Any capitalized terms
used but not defined in the following Condensed Notes to the Consolidated
Financial Statements have the same meaning given to them as in the Form 10-K.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation.
2. RESTRICTED CASH
Long-term receivables and other assets, as reflected on the accompanying
consolidated balance sheet, includes restricted cash in the amount of $30.5 and
$31.4 at September 30, 1996 and December 31, 1995, respectively. Such restricted
cash represents the amount deposited into an account held by the Trustee under
the indenture governing the Timber Notes of the Company's indirect wholly owned
subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5.7 and $19.7, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products............................. $ 108.4 $ 91.5
Primary aluminum and work in process..................... 190.0 195.9
Bauxite and alumina...................................... 122.5 119.6
Operating supplies and repair and maintenance parts...... 124.6 118.7
------ ------
545.5 525.7
------ ------
Forest Products Operations:
Lumber................................................... 58.8 65.5
Logs..................................................... 19.3 15.6
------ ------
78.1 81.1
------ ------
$ 623.6 $606.8
====== ======
</TABLE>
F-81
<PAGE> 277
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Corporate:
14% MAXXAM Senior Subordinated Reset Notes due
May 20, 2000............................................ $ 25.0 $ 25.0
12 1/2% MAXXAM Subordinated Debentures due December 15,
1999, net of discount................................... 16.7 16.5
Other...................................................... -- .1
Aluminum Operations:
1994 KACC Credit Agreement................................. 131.2 13.1
9 7/8% KACC Senior Notes due February 15, 2002, net of
discount................................................ 224.0 223.8
Alpart CARIFA Loan......................................... 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1,
2003.................................................... 400.0 400.0
Other...................................................... 52.1 61.2
Forest Products Operations:
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015........................................... 336.1 350.2
10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235.0 235.0
11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount................................... 101.0 92.5
Other...................................................... .8 .8
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due
September 1, 2001, net of discount...................... 15.6 13.3
RTC Portfolio secured notes due December 31, 1999, interest
at prime plus 3%........................................ 3.8 8.0
Other notes and contracts, secured by receivables,
buildings, real estate and equipment.................... 9.0 10.7
-------- --------
1,710.3 1,610.2
Less: current maturities..................................... (26.4) (25.1)
-------- --------
$ 1,683.9 $1,585.1
======== ========
</TABLE>
On April 24, 1996, the Securities and Exchange Commission ("SEC") declared
effective a shelf registration statement which the Company had filed with
respect to up to $200.0 aggregate principal amount of debt securities. The
Company has not determined the amount, interest rates, maturity, collateral (if
any) or other terms of such debt securities or the timing of any offering of
such debt securities. The debt securities could be secured by, or convertible
into, shares of common stock of Kaiser Aluminum Corporation ("Kaiser," a
majority-owned subsidiary of the Company) owned by the Company. In that regard,
Kaiser also filed a shelf registration statement with the SEC, which was also
declared effective on April 24, 1996, covering 10 million shares of its common
stock owned by the Company. The Company would use the net proceeds (or portions
thereof) from the sale of such debt securities to retire outstanding debt, for
working capital and general corporate purposes.
F-82
<PAGE> 278
MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SUBSEQUENT EVENT -- KAISER OFFERING OF 10 7/8% SENIOR NOTES
On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the
"Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the
"10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at
maturity. The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness
under KACC's credit agreement dated as of February 15, 1994, as amended (the
"1994 KACC Credit Agreement") and KACC's 9 7/8% Senior Notes due 2002 (the
"Senior Notes") in right and priority of payment and are guaranteed on a senior,
unsecured basis by certain of Kaiser's subsidiaries (the "Subsidiary
Guarantors"). Net proceeds from the Offering on the Issuance Date, after
estimated expenses, were approximately $168.9, of which $91.7 were utilized to
reduce the outstanding borrowings under the revolving credit facility of the
1994 KACC Credit Agreement to zero. The remaining net proceeds (approximately
$77.2) were invested in short-term investments pending their application for
working capital and general corporate purposes, including capital projects.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $1,710.3 to $1,753.2,
borrowing capacity of $273.1 would have been available for use under the 1994
KACC Credit Agreement and the Company would have had available additional cash
proceeds from the Offering of $37.7.
During October 1996, the 1994 KACC Credit Agreement was amended to, among
other things, provide for the Offering of the 10 7/8% Senior Notes discussed
above and to modify certain of the financial covenants contained in the 1994
KACC Credit Agreement.
5. PER SHARE INFORMATION
Per share calculations are based on the weighted average number of common
shares outstanding in each period and, if dilutive, weighted average common
equivalent shares assumed to be issued from the exercise of common stock options
based upon the average price of the Company's common stock during the period.
6. CREDIT (PROVISION) FOR INCOME TAXES
The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) the revision of prior years' tax estimates
and other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. Revision of
prior years' tax estimates includes amounts for the reversal of reserves which
the Company no longer believes are necessary. Generally, the reversal of
reserves relate to the expiration of the relevant statute of limitations with
respect to certain income tax returns, or the resolution of specific income tax
matters with the relevant tax authorities. The credit for income taxes for the
nine months ended September 30, 1996 includes a benefit of $30.4 relating to the
reversal of reserves the Company no longer believes are necessary. The Company's
provision for income taxes for the nine months ended September 30, 1995,
reflects a benefit of $17.7 relating to the reversal of reserves the Company no
longer believes are necessary.
7. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
Kaiser and its principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based on such laws. KACC is
currently subject to a number of lawsuits under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments Reauthorization Act of 1986 ("CER-
F-83
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
CLA"), and, along with certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.
Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. At September
30, 1996, the balance of such accruals, which is primarily included in other
noncurrent liabilities, was $32.9. These environmental accruals represent
Kaiser's estimate of costs reasonably expected to be incurred based on presently
enacted laws and regulations currently available facts, existing technology, and
Kaiser's assessment of the likely remediation action to be taken. Kaiser expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $2.0 to $10.0 for the years 1996 through 2000 and an
aggregate of approximately $7.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved in
early 1997. While uncertainties are inherent in the final outcome of these
environmental matters, and it is impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a substantial number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that certain
of their injuries were caused by, among other things, exposure to asbestos
during, and as a result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at least 15 years. At
September 30, 1996, the number of such lawsuits pending was approximately
75,900, as compared to 59,700 at December 31, 1995. In 1995, approximately
41,700 of such claims were received and approximately 7,200 were settled or
dismissed. During the first nine months of 1996, approximately 20,000 of such
claims were received and approximately 3,800 were settled or dismissed.
Based on past experience and reasonably anticipated future activity, Kaiser
has established an accrual for estimated asbestos-related costs for claims filed
and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs, and Kaiser's actual
costs could exceed these estimates. Kaiser's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing and
amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an estimated asbestos-related cost
accrual of $160.0 before consideration of insurance recoveries, is included
primarily in other noncurrent liabilities at September 30, 1996. Kaiser
estimates that annual future cash payments in connection with such litigation
will be approximately $13.0 to $20.0 for each of the years 1996 through 2000,
and an aggregate of approximately $78.0 thereafter through 2008. While Kaiser
does not believe there is a reasonable basis for estimating such costs beyond
2008, and, accordingly, did not accrue such costs, there is a reasonable
possibility that such costs may continue beyond 2008, and that such costs may be
substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and the first nine months of 1996 were filed in
Texas. KACC has been advised by its regional counsel that,
F-84
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
although there can be no assurance, the increase in pending claims may have been
attributable in part to tort reform legislation in Texas. Although
asbestos-related claims are currently exempt from certain aspects of the Texas
tort reform legislation, management has been advised that efforts to remove the
asbestos-related exemption in the tort reform legislation relating to the
doctrine forum non conveniens, as well as other developments in the legislative
and legal environment in Texas, may be responsible for the accelerated pace of
new claims experienced in late 1995 and its continuance through the first nine
months of 1996, albeit at a somewhat reduced rate.
Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of KACC's insurance carriers are currently subject to pending litigation and
other carriers have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. Kaiser believes, based on prior insurance-related recoveries
with respect to asbestos-related claims, existing insurance policies, and the
advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance
coverage law relating to the terms and conditions of those policies, that
substantial recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3, determined on the same basis
as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at September 30, 1996.
Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from Kaiser's
underlying assumptions. While uncertainties are inherent in the final outcome of
these asbestos matters and it is impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
OTS CONTINGENCY AND RELATED MATTERS
On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated formal administrative proceedings against
the Company and others by filing a Notice of Charges (the "Notice"). The Notice
alleges misconduct by the Company, Federated Development Company ("Federated," a
New York business trust wholly owned by Mr. Charles E. Hurwitz, members of his
immediate family and trusts for the benefit thereof), Mr. Hurwitz and others
(the "Respondents") with respect to the failure of United Savings Association of
Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc.
("UFG"). The Notice claims that the Company was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other Respondents, including, among
other things, allegations that through USAT it was involved in prohibited
transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things,
seeks unspecified damages in excess of $138.0 from the Company, civil money
penalties and a removal from, and prohibition against the Company and the other
Respondents engaging in, the banking industry. The Company has concluded that it
is unable to determine a reasonable estimate of the loss (or range of loss), if
any, that could result from this contingency. Accordingly, it is impossible to
assess the ultimate impact, if any, of the outcome this matter may have on the
Company's consolidated financial position, results of operations or liquidity.
On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed
a civil action entitled Federal Deposit Insurance Corporation, as manager of the
FSLIC Resolution Fund v. Charles E. Hurwitz
F-85
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern
District of Texas (the "Court"). The FDIC action did not name the Company as a
defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 based
on the allegation that Mr. Hurwitz was a controlling shareholder, de facto
senior officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT. The FDIC further alleges, among other
things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the
Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz
filed a motion to join the OTS to this action. On December 8, 1995, the Company
filed a motion to intervene in this action and conditioned it on the Court
joining the OTS to this action. The Company also filed a proposed complaint with
its motion to intervene which alleges that the OTS violated the Administrative
Procedures Act by rejecting the Company's bid for USAT. The Court has scheduled
a pre-trial conference for November 19, 1996. The Company's bylaws provide for
indemnification of its officers and directors to the fullest extent permitted by
Delaware law. The Company is obligated to advance defense costs to its officers
and directors, subject to the individual's obligation to repay such amount if it
is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can, under
certain circumstances, include amounts other than defense costs, including
judgments and settlements. The Company has concluded that it is unable to
determine a reasonable estimate of the loss (or range of loss), if any, that
could result from this contingency. It is impossible to assess the ultimate
outcome of the foregoing matter or its potential impact on the Company's
consolidated financial position, results of operations or liquidity.
OTHER CONTINGENCIES
The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is impossible to determine
the actual costs that ultimately may be incurred, management currently believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
8. HEADWATERS AGREEMENT
On September 28, 1996, the Company and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP covering all of Pacific Lumber's existing
timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by
F-86
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MAXXAM INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
third parties that any party reasonably believes will significantly delay or
impair the transactions described in the Headwaters Agreement, and (e) the
dismissal with prejudice at closing of the Takings litigation.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
Kaiser's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. KACC enters
into primary aluminum hedging transactions from time to time in the normal
course of business. Primary aluminum hedging transactions are designed to
mitigate Kaiser's exposure to declines in the market price of primary aluminum,
while retaining the ability to participate in favorable environments that may
materialize. KACC has employed strategies which include forward sales and
purchases of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. At September 30, 1996, KACC had sold forward, at
fixed prices, approximately 69,000 and 93,600 tons (all references to tons in
this report refer to metric tons of 2,204.6 pounds) of primary aluminum in
excess of its projected internal fabrication requirements for 1997 and 1998,
respectively, and had purchased put options to establish a minimum price for
66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. During
October 1996, KACC purchased put options to establish a minimum price for an
additional 126,000 tons of primary aluminum in excess of its projected 1997
internal fabrication requirements and entered into options contracts that
established a price range for an additional 48,000 tons of Kaiser's 1998
surplus.
In addition, at September 30, 1996, KACC had sold forward approximately 73%
and 85% of the alumina available to it in excess of its projected internal
smelting requirements for 1997 and 1998, respectively. Virtually all of such
1997 and 1998 sales were made at prices indexed to future prices of primary
aluminum.
From time to time, KACC also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, KACC had option contracts for the purchase of
approximately 40,000 MMBtu of natural gas per day during the first quarter of
1997, and a combination of fixed price purchase and option contracts for 20,000
MMBtu of natural gas per day for the period April 1997 to December 1998. At
September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel
oil per month for the period January 1997 through December 1998.
KACC also enters into hedging transactions in the normal course of business
that are designed to reduce its exposure to fluctuations in foreign exchange
rates. At September 30, 1996, KACC had net forward foreign exchange contracts
totaling approximately $81.6 for the purchase of 110.0 Australian dollars from
January 1997 through June 1998, in respect of its commitments for 1997 and 1998
expenditures denominated in Australian dollars.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts was
approximately $46.4.
F-87
<PAGE> 283
MAXXAM INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.......................................... $612.2 $ 667.7 $641.2
Gross profit....................................... 128.5 126.8 99.3
Operating income................................... 53.2 46.0 9.6
Net income......................................... 5.8 16.9 5.3
Per common and common equivalent share:
Net income...................................... 0.61 1.79 0.56
1995 QUARTERLY INFORMATION:
Net sales.......................................... $581.3 $ 673.3 $638.0 $ 672.6
Gross profit....................................... 113.0 160.2 145.2 155.9
Operating income (loss)............................ 40.6 81.9 64.4 70.7
Net income (loss).................................. (1.0) 25.4 10.7 22.4
Per common and common equivalent share:
Net income (loss)............................... (0.11) 2.69 1.13 2.37
1994 QUARTERLY INFORMATION:
Net sales.......................................... $489.0 $ 543.8 $544.9 $ 538.0
Gross profit....................................... 55.6 78.0 79.1 85.1
Operating income (loss)............................ (15.0) 6.5 9.0 6.8
Loss before extraordinary item..................... (34.5) (43.2) (14.9) (24.1)
Extraordinary item, net............................ (5.4) -- -- --
Net loss........................................... (39.9) (43.2) (14.9) (24.1)
Per common and common equivalent share:
Loss before extraordinary item.................. (3.65) (4.57) (1.58) (2.55)
Extraordinary item, net......................... (0.57) -- -- --
Net loss........................................ (4.22) (4.57) (1.58) (2.55)
</TABLE>
F-88
<PAGE> 284
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of MAXXAM Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of MAXXAM Inc. (included on pages F-40
through F-77), and have issued our report thereon dated February 16, 1996. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The condensed financial information of MAXXAM Inc. (included on
pages F-90 through F-93) is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This condensed financial information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
F-89
<PAGE> 285
MAXXAM INC.
BALANCE SHEET
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS 1995 1994
------- -------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 20.4 $ 15.5
Marketable securities.................................................. 9.3 20.8
Other current assets................................................... 1.8 4.4
------- -------
Total current assets........................................... 31.5 40.7
Deferred income taxes.................................................... 64.2 68.4
Other assets............................................................. 3.7 4.6
------- -------
$ 99.4 $ 113.7
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities............................... $ 7.4 $ 10.5
Long-term debt, current maturities..................................... .2 2.4
------- -------
Total current liabilities...................................... 7.6 12.9
Long-term debt, less current maturities.................................. 41.6 44.6
Losses recognized in excess of investment in subsidiaries................ 12.4 198.9
Notes payable to subsidiaries, net of notes receivable and advances...... 18.8 12.2
Other noncurrent liabilities............................................. 102.8 120.4
------- -------
Total liabilities.............................................. 183.2 389.0
------- -------
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A
$.05 Non-Cumulative Participating Convertible Preferred Stock;
shares issued: 1995 -- 669,701 and 1994 -- 669,957.................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized; shares
issued: 10,063,359.................................................. 5.0 5.0
Additional capital..................................................... 155.0 53.2
Accumulated deficit.................................................... (208.5) (302.9)
Pension liability adjustment........................................... (16.1) (11.4)
Treasury stock, at cost (shares held: preferred -- 845; common:
1995 -- 1,355,512 and 1994 -- 1,355,768)............................ (19.5) (19.5)
------- -------
Total stockholders' deficit.................................... (83.8) (275.3)
------- -------
$ 99.4 $ 113.7
======= =======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-90
<PAGE> 286
MAXXAM INC.
STATEMENT OF OPERATIONS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Investment, interest and other income.......................... $ 5.6 $ 12.6 $ 3.0
Interest expense............................................... (6.2) (11.7) (13.7)
General and administrative expenses............................ (18.9) (11.0) (15.4)
Equity in earnings (losses) of subsidiaries.................... 43.6 (132.0) (615.5)
------ ------- -------
Income (loss) before income taxes and cumulative effect of
changes in accounting principles............................. 24.1 (142.1) (641.6)
Credit (provision) for income taxes............................ 33.4 20.0 (3.1)
------ ------- -------
Income (loss) before cumulative effect of changes in accounting
principles................................................... 57.5 (122.1) (644.7)
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of related
credit for income taxes of $.2............................ -- -- (.4)
Accounting for income taxes.................................. -- -- 44.9
------ ------- -------
Net income (loss).............................................. $ 57.5 $(122.1) $(600.2)
====== ======= =======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-91
<PAGE> 287
MAXXAM INC.
STATEMENT OF CASH FLOWS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 57.5 $(122.1) $(600.2)
Adjustments to reconcile net income (loss) to net cash provided
by
(used for) operating activities:
Equity in losses (earnings) of subsidiaries................... (43.6) 132.0 615.5
Net sales of marketable securities............................ 14.5 6.8 18.3
Amortization of deferred financing costs and discounts on
long-term debt............................................... .3 .3 .5
Cumulative effect of changes in accounting principles, net.... -- -- (44.5)
Decrease in receivables....................................... .6 1.1 .8
Increase in accrued and deferred income taxes................. (18.9) (7.9) (13.1)
Increase (decrease) in accounts payable and other
liabilities.................................................. (14.5) (5.3) 24.3
Other......................................................... 2.3 (.2) 2.6
------ ------- -------
Net cash provided by (used for) operating activities..... (1.8) 4.7 4.2
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares................... 7.6 10.3 --
Dividends received from subsidiaries............................. 4.8 7.5 66.1
Investments in and net advances from (to) subsidiaries........... .4 (27.5) (22.2)
Capital expenditures............................................. (.2) (.4) (.3)
------ ------- -------
Net cash provided by (used for) investing activities..... 12.6 (10.1) 43.6
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on long-term
debt.......................................................... (5.9) (5.8) (24.3)
------ ------- -------
Net cash used for financing activities................... (5.9) (5.8) (24.3)
------ ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 4.9 (11.2) 23.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 15.5 26.7 3.2
------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 20.4 $ 15.5 $ 26.7
====== ======= =======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock............................................... $136.2 $ -- $ --
Distribution received from subsidiary of the Company's payable... 8.0 132.0 --
Assumption by the Company of subsidiary's payables to the Company
and affiliates................................................ -- (63.1) --
Net assets transferred (to) from subsidiary...................... (14.5) -- 30.5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 6.0 $ 7.0 $ 6.8
Income taxes paid (refunded)..................................... (.3) 1.1 (.5)
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-92
<PAGE> 288
MAXXAM INC.
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts by the
amounts recorded by the Company's subsidiaries pursuant to their respective tax
allocation agreements with the Company. The Company's net deferred income tax
assets relate primarily to the excess of the tax basis over financial statement
basis with respect to timber and timberlands and real estate held for sale by
various subsidiaries. The Company has concluded that it is more likely than not
that these net deferred income tax assets will be realized based in part upon
the estimated values of the underlying assets which are in excess of their tax
basis.
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
----- -----
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000................. $25.0 $25.0
12 1/2% Subordinated Debentures due December 15, 1999, net of
discount of $1.1 and $1.7 at December 31, 1995 and 1994,
respectively....................................................... 16.5 20.9
Other................................................................ .3 1.1
----- -----
41.8 47.0
Less: current maturities............................................. (.2) (2.4)
----- -----
$41.6 $44.6
===== =====
</TABLE>
Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows: years ending December 31, 1996-$.2; 1997-$3.3; 1998-$3.3;
1999-$11.1; 2000-$25.0.
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES
At December 31, 1995, the Company's indebtedness to its subsidiaries, which
includes accrued interest, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Unsecured note payable, interest at 6%............................. $ 18.3 $ 60.9
Unsecured notes payable, interest at 7%............................ 13.7 12.9
Secured notes receivable, interest at 12% on first $15.0, at prime
plus 1% to 2% on remainder....................................... -- (43.6)
Net advances....................................................... (13.2) (18.0)
------ ------
$ 18.8 $ 12.2
====== ======
</TABLE>
In August 1995, the notes receivable reflected above were canceled to
reduce the 6% unsecured note payable by $45.5 ($43.6 plus accrued interest).
F-93
<PAGE> 289
MAXXAM INC.
BALANCE SHEET
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 37.9 $ 20.4
Marketable securities............................................ 18.7 9.3
Other current assets............................................. 1.6 1.8
------- --------
Total current assets..................................... 58.2 31.5
Deferred income taxes.............................................. 71.9 64.2
Investment in subsidiaries in excess of losses recognized.......... 18.9 --
Other assets....................................................... 3.8 3.7
------- --------
$ 152.8 $ 99.4
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities......................... $ 11.1 $ 7.4
Long-term debt, current maturities............................... -- .2
------- --------
Total current liabilities................................ 11.1 7.6
Long-term debt, less current maturities............................ 41.7 41.6
Losses recognized in excess of investment in subsidiaries.......... -- 12.4
Notes payable to subsidiaries, net of notes receivable and
advances......................................................... 62.9 18.8
Other noncurrent liabilities....................................... 92.3 102.8
------- --------
Total liabilities........................................ 208.0 183.2
------- --------
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock; shares issued: 699,701....................... .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,685..................................... 5.0 5.0
Additional capital............................................... 155.6 155.0
Accumulated deficit.............................................. (180.5) (208.5)
Pension liability adjustment..................................... (16.1) (16.1)
Treasury stock, at cost (shares held: preferred -- 845;
common -- 1,355,512).......................................... (19.5) (19.5)
------- --------
Total stockholders' deficit.............................. (55.2) (83.8)
------- --------
$ 152.8 $ 99.4
======= ========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-94
<PAGE> 290
MAXXAM INC.
STATEMENT OF OPERATIONS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------ ------
(UNAUDITED)
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Investment, interest and other income.................................... $ (.2) $ 3.4
Interest expense......................................................... (4.5) (4.7)
General and administrative expenses...................................... (28.8) (13.8)
Equity in earnings of subsidiaries....................................... 15.9 26.6
------ ------
Income (loss) before income taxes........................................ (17.6) 11.5
Credit for income taxes.................................................. 45.6 23.6
------ ------
Net income............................................................... $ 28.0 $ 35.1
====== ======
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-95
<PAGE> 291
MAXXAM INC.
STATEMENT OF CASH FLOWS
(UNCONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
----- ------
(UNAUDITED)
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $28.0 $ 35.1
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Equity in earnings of subsidiaries.................................. (15.9) (26.6)
Net sales (purchases) of marketable securities...................... (8.0) 18.6
Decrease in receivables, prepaids and other assets.................. .1 2.6
Increase in accrued and deferred income taxes....................... (8.3) (8.1)
Decrease in accounts payable and other liabilities.................. (6.8) (14.5)
Other............................................................... 1.1 .3
----- ------
Net cash provided by (used for) operating activities........... (9.8) 7.4
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares......................... -- 7.6
Dividends received from subsidiaries................................... 3.9 4.8
Investments in and net advances from subsidiaries...................... 23.9 1.9
Capital expenditures................................................... (.2) (.2)
----- ------
Net cash provided by investing activities...................... 27.6 14.1
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on long-term debt..... (.3) (5.8)
----- ------
Net cash used for financing activities......................... (.3) (5.8)
----- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 17.5 15.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 20.4 15.5
----- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $37.9 $ 31.2
===== ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reduction of stockholders' deficit due to redemption of Kaiser
preferred stock..................................................... $ -- $134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................................... $ 2.8 $ 3.1
Income taxes paid...................................................... .7 .3
</TABLE>
See notes to consolidated financial statements and accompanying notes.
F-96
<PAGE> 292
MAXXAM INC.
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
A. DEFERRED INCOME TAXES
The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts by the
amounts recorded by the Company's subsidiaries pursuant to their respective tax
allocation agreements with the Company. The Company's net deferred income tax
assets relate primarily to the excess of the tax basis over financial statement
basis with respect to timber and timberlands and real estate held for sale by
various subsidiaries. The Company has concluded that it is more likely than not
that these net deferred income tax assets will be realized based in part upon
the estimated values of the underlying assets which are in excess of their tax
basis.
B. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000......... $25.0 $25.0
12 1/2% Subordinated Debentures due December 15, 1999, net of
discount of $0.9 at September 30, 1996 and $1.1 at
December 31, 1995.......................................... 16.7 16.5
Other........................................................ -- .3
----- -----
41.7 41.8
Less: current maturities..................................... -- (.2)
----- -----
$41.7 $41.6
===== =====
</TABLE>
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES
At September 30, 1996, the Company's indebtedness to its subsidiaries,
which includes accrued interest, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Unsecured note payable, interest at 6%....................... $19.1 $ 18.3
Unsecured notes payable, interest at 7%...................... 14.3 13.7
Net advances................................................. 29.5 (13.2)
----- ------
$62.9 $ 18.8
===== ======
</TABLE>
The increase in net advances is principally due to cash receipts from the
sale of real property and notes from the RTC Portfolio. There are no
restrictions which would preclude the Company's subsidiaries from declaring a
dividend of such advances to the Company.
F-97
<PAGE> 293
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum Corporation (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994, and the related statements of consolidated income and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kaiser Aluminum Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 16, 1996
F-98
<PAGE> 294
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1995 1994
-------- --------
(IN MILLIONS OF
DOLLARS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 21.9 $ 17.6
Receivables:
Trade, less allowance for doubtful receivables of $5.0 in 1995 and
$4.2 in 1994....................................................... 222.9 150.7
Other.............................................................. 85.7 48.5
Inventories........................................................... 525.7 468.0
Prepaid expenses and other current assets............................. 76.6 158.0
--------- ---------
Total current assets.......................................... 932.8 842.8
Investments in and advances to unconsolidated affiliates................ 178.2 169.7
Property, plant, and equipment -- net................................... 1,109.6 1,133.2
Deferred income taxes................................................... 269.1 271.2
Other assets............................................................ 323.5 281.2
--------- ---------
Total......................................................... $2,813.2 $2,698.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 184.5 $ 152.1
Accrued interest...................................................... 32.0 32.6
Accrued salaries, wages, and related expenses......................... 105.3 77.7
Accrued postretirement medical benefit obligation -- current
portion............................................................ 46.8 47.0
Other accrued liabilities............................................. 129.4 176.9
Payable to affiliates................................................. 94.2 85.3
Long-term debt -- current portion..................................... 8.9 11.5
--------- ---------
Total current liabilities..................................... 601.1 583.1
Long-term liabilities................................................... 548.5 495.5
Accrued postretirement medical benefit obligation....................... 734.0 734.9
Long-term debt.......................................................... 749.2 751.1
Minority interests...................................................... 122.7 116.2
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares;
Series A Convertible, stated value $.10, issued and outstanding,
nil and 1,938,295 in 1995 and 1994................................ .2
PRIDES Convertible, par value $.05, issued and outstanding,
8,673,850 and 8,855,550 in 1995 and 1994.......................... .4 .4
Common stock, par value $.01, authorized 100,000,000 shares; issued
and outstanding, 71,638,514 and 58,205,083 in 1995 and 1994........ .7 .6
Additional capital.................................................... 530.3 527.8
Accumulated deficit................................................... (459.9) (502.6)
Additional minimum pension liability.................................. (13.8) (9.1)
--------- ---------
Total stockholders' equity.................................... 57.7 17.3
--------- ---------
Total......................................................... $2,813.2 $2,698.1
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-99
<PAGE> 295
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales..................................................... $2,237.8 $1,781.5 $1,719.1
-------- -------- --------
Costs and expenses:
Cost of products sold....................................... 1,798.4 1,625.5 1,587.7
Depreciation................................................ 94.3 95.4 97.1
Selling, administrative, research and development, and
general.................................................. 134.5 116.8 121.9
Restructuring of operations................................. 35.8
-------- -------- --------
Total costs and expenses............................ 2,027.2 1,837.7 1,842.5
-------- -------- --------
Operating income (loss)....................................... 210.6 (56.2) (123.4)
Other expense:
Interest expense............................................ (93.9) (88.6) (84.2)
Other -- net................................................ (14.1) (7.3) (.9)
-------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in
accounting principles....................................... 102.6 (152.1) (208.5)
(Provision) credit for income taxes........................... (37.2) 53.8 86.9
Minority interests............................................ (5.1) (3.1) (1.5)
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect
of changes in accounting principles......................... 60.3 (101.4) (123.1)
Extraordinary loss on early extinguishment of debt, net of tax
benefit of $2.9 and $11.2 for 1994 and 1993, respectively... (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of
tax benefit of $237.7....................................... (507.3)
-------- -------- --------
Net income (loss)............................................. $ 60.3 $ (106.8) $ (652.2)
Dividends on preferred stock.................................. (17.6) (20.1) (6.3)
-------- -------- --------
Net income (loss) available to common shareholders............ $ 42.7 $ (126.9) $ (658.5)
======== ======== ========
Earnings (loss) per common and common equivalent share:
Primary:
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles............. $ .69 $ (2.09) $ (2.25)
Extraordinary loss....................................... (.09) (.38)
Cumulative effect of changes in accounting principles.... (8.84)
-------- -------- --------
Net income (loss)........................................ $ .69 $ (2.18) $ (11.47)
======== ======== ========
Fully diluted............................................... $ .72
========
Weighted average common and common equivalent shares
outstanding (000):
Primary..................................................... 62,264 58,139 57,423
======== ======== ========
Fully diluted............................................... 71,809
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-100
<PAGE> 296
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 60.3 $(106.8) $ (652.2)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation............................................. 94.3 95.4 97.1
Amortization of excess investment over equity in
unconsolidated affiliates.............................. 11.4 11.6 11.9
Amortization of deferred financing costs and discount on
long-term debt......................................... 5.4 6.2 11.2
Equity in (income) losses of unconsolidated affiliates... (19.2) 1.9 3.3
Restructuring of operations.............................. 35.8
Minority interests....................................... 5.1 3.1 1.5
Extraordinary loss on early extinguishment of
debt -- net............................................ 5.4 21.8
Cumulative effect of changes in accounting
principles -- net...................................... 507.3
(Increase) decrease in receivables....................... (109.7) 36.4 (6.1)
(Increase) decrease in inventories....................... (57.7) (41.1) 13.0
Decrease (increase) in prepaid expenses and other
assets................................................. 82.9 (60.6) (5.2)
Increase (decrease) in accounts payable.................. 32.4 25.8 (10.3)
(Decrease) increase in accrued interest.................. (.6) 9.3 19.2
Increase in payable to affiliates and accrued
liabilities............................................ 10.6 50.8 76.9
Decrease in accrued and deferred income taxes............ (7.4) (68.8) (96.4)
Other.................................................... 10.9 9.3 8.1
------- ------- ---------
Net cash provided by (used for) operating
activities........................................ 118.7 (22.1) 36.9
------- ------- ---------
Cash flows from investing activities:
Net proceeds from disposition of property and investments... 8.6 4.1 13.1
Capital expenditures........................................ (79.4) (70.0) (67.7)
Investments in joint ventures............................... (9.0)
------- ------- ---------
Net cash used for investing activities.............. (79.8) (65.9) (54.6)
------- ------- ---------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit.... (537.7) (345.1) (1,134.5)
Borrowings of long-term debt, including revolving credit.... 532.3 378.9 1,068.1
Borrowings from MAXXAM Group Inc. (see supplemental
disclosure below)........................................ 15.0
Tender premiums and other costs of early extinguishment of
debt..................................................... (27.1)
Net short-term debt repayments.............................. (.5) (4.3)
Incurrence of financing costs............................... (.8) (19.2) (12.7)
Dividends paid.............................................. (20.8) (14.8) (6.3)
Capital stock issued........................................ 1.2 100.1 119.3
Redemption of minority interests' preference stock.......... (8.8) (8.5) (4.2)
------- ------- ---------
Net cash (used for) provided by financing
activities........................................ (34.6) 90.9 13.3
------- ------- ---------
Net increase (decrease) in cash and cash equivalents during
the year.................................................... 4.3 2.9 (4.4)
Cash and cash equivalents at beginning of year................ 17.6 14.7 19.1
------- ------- ---------
Cash and cash equivalents at end of year...................... $ 21.9 $ 17.6 $ 14.7
======= ======= =========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest.................. $ 88.8 $ 73.1 $ 53.7
Income taxes paid........................................... 35.7 16.0 13.5
Tax allocation payments from MAXXAM Inc..................... (3.9)
Supplemental disclosure of non-cash financing activities:
Exchange of the borrowings from
MAXXAM Group Inc. for capital stock...................... $ 15.0
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-101
<PAGE> 297
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority-owned
subsidiaries. The Company is a direct subsidiary of MAXXAM Inc. ("MAXXAM") and
conducts its operations through its wholly owned subsidiary, Kaiser Aluminum &
Chemical Corporation ("KACC"). KACC operates in all principal aspects of the
aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the
refining of bauxite into alumina (the intermediate material), the production of
primary aluminum, and the manufacture of fabricated and semi-fabricated aluminum
products. Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina and
primary aluminum to domestic and international third parties (see Note 10).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amount of revenues and expenses
during the reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a material effect
on the reported amounts of the Company's consolidated financial position and
results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method. Intercompany balances and transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to the
current presentation.
CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"), and Statement of Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits ("SFAS 112"), as of January 1, 1993. The
costs of postretirement benefits other than pensions and postemployment benefits
are now accrued over the period employees provide services to the date of their
full eligibility for such benefits. Previously, such costs were expensed as
actual claims were incurred. The cumulative effect of the changes in accounting
principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to
results of operations of $497.7 and $7.3, net of related income taxes of $234.2
and $3.5, respectively. These deferred income tax benefits were recorded at the
federal statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time charges affect
the Company's compliance with its existing debt covenants. The Company reserves
the right, subject to applicable collective bargaining agreements and applicable
legal requirements, to amend or terminate these benefits.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"), as of January 1, 1993. The adoption of
SFAS 109 changed the Company's method of accounting for income taxes to an asset
and liability approach from the deferral method prescribed by Accounting
Principles Board Opinion No. 11, Accounting for Income Taxes. The asset and
liability approach requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred income tax assets and liabilities are determined based on the
temporary differences between the
F-102
<PAGE> 298
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
financial statement and tax bases of assets and liabilities using enacted tax
rates. The cumulative effect of the change in accounting principle reduced the
Company's results of operations by $2.3. The adoption of SFAS 109 required the
Company to restate certain assets and liabilities to their pre-tax amounts from
their net-of-tax amounts originally recorded in connection with the acquisition
by MAXXAM in October 1988. As a result of restating these assets and
liabilities, the loss before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
CASH AND CASH EQUIVALENTS
The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
INVENTORIES
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not in excess
of LIFO cost. Other inventories, principally operating supplies and repair and
maintenance parts, are stated at the lower of average cost or market. Inventory
costs consist of material, labor, and manufacturing overhead, including
depreciation. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
<S> <C> <C>
Finished fabricated products......................................... $ 91.5 $ 49.4
Primary aluminum and work in process................................. 195.9 203.1
Bauxite and alumina.................................................. 119.6 102.3
Operating supplies and repair and maintenance parts.................. 118.7 113.2
------ ------
$525.7 $468.0
====== ======
</TABLE>
DEPRECIATION
Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of assets. The
principal estimated useful lives by class of assets are:
<TABLE>
<S> <C>
Land improvements..................................................... 8 to 25 years
Buildings............................................................. 15 to 45 years
Machinery and equipment............................................... 10 to 22 years
</TABLE>
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for a
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for this plan (see Note 6).
OTHER EXPENSE
Other expense in 1995, 1994, and 1993 includes $17.8, $16.5 and $17.9 of
pre-tax charges related principally to establishing additional: (i) litigation
reserves for asbestos claims, and (ii) environmental reserves for potential soil
and ground water remediation matters, each pertaining to operations which were
discontinued prior to the acquisition of the Company by MAXXAM in 1988.
F-103
<PAGE> 299
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Amortization of deferred financing
costs of $5.3, $6.0, and $11.2 for the years ended December 31, 1995, 1994, and
1993, respectively, are included in interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for
its foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains and losses arising from the use of derivative financial instruments
are reflected in the Company's operating results concurrently with the
consummation of the underlying hedged transactions. Deferred gains or losses as
of December 31, 1995, are included in Prepaid expenses and other current assets
and Other accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the related assets
or liabilities. Unless otherwise noted, the carrying amount of all financial
instruments is a reasonable estimate of fair value.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Debt................................................... $758.1 $806.3 $762.6 $747.6
Foreign currency contracts............................. 1.9 3.5
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Debt -- The quoted market prices were used for the Senior Notes and
12 3/4% Notes (see Note 4). The fair value of all other debt is based on
discounting the future cash flows using the current rate for debt of
similar maturities and terms.
Foreign Currency Contracts -- The fair value generally reflects the
estimated amounts that the Company would receive to enter into similar
contracts at the reporting date, thereby taking into account unrealized
gains or losses on open contracts (see Note 9).
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary earnings (loss) per common and common equivalent share are computed
by dividing net income (loss) available to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
period. Fully diluted earnings per common and common equivalent share are
computed as if the Series A Shares and 181,700 shares of PRIDES (the "Converted
PRIDES") had been converted to common shares at the beginning of the period.
Accordingly, for purposes of the fully diluted calculations, the dividends
attributable to the Series A Shares and the Converted PRIDES ($9.2 for the year
ended December 31, 1995) have not been deducted from net income, and the
weighted average number of common and common equivalent shares outstanding
includes the shares issued upon conversion of the Series A Shares and the
Converted PRIDES as if they had been outstanding for the entire period. As a
result
F-104
<PAGE> 300
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
of the redemption of the Series A Shares and conversion of the Converted PRIDES
during the 1995 period, fully diluted earnings per share are presented for such
period, even though the result is antidilutive. For the years ended December 31,
1994 and 1993, common equivalent shares attributable to the preferred stock and
non-qualified stock options were excluded from the calculation of weighted
average shares because they were antidilutive.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminum Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company
(49.0% owned). The equity in earnings (losses) before income taxes of such
operations is treated as a reduction (increase) in cost of products sold. At
December 31, 1995 and 1994, KACC's net receivables from these affiliates were
not material.
SUMMARY OF COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
<S> <C> <C>
Current assets............................................................... $429.0 $342.3
Property, plant, and equipment -- net........................................ 330.8 349.4
Other assets................................................................. 39.3 42.4
------ ------
Total assets....................................................... $799.1 $734.1
====== ======
Current liabilities.......................................................... $125.4 $122.4
Long-term debt............................................................... 331.8 307.6
Other liabilities............................................................ 35.6 31.0
Stockholders' equity......................................................... 306.3 273.1
------ ------
Total liabilities and stockholders' equity......................... $799.1 $734.1
====== ======
</TABLE>
SUMMARY OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Net sales............................................................ $685.9 $489.8 $510.3
Costs and expenses................................................... (618.7) (494.8) (527.2)
(Provision) credit for income taxes.................................. (18.7) (6.3) 1.9
------ ------ ------
Net income (loss).................................................... $ 48.5 $(11.3) $(15.0)
====== ====== ======
Company's equity in income (loss).................................... $ 19.2 $ (1.9) $ (3.3)
====== ====== ======
</TABLE>
The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity method
accounting adjustments. At December 31, 1995, KACC's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $54.9. The Company is amortizing this amount over a 12-year
period, which results in an annual amortization charge of approximately $11.4.
The Company and its affiliates have interrelated operations. KACC provides
some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the
F-105
<PAGE> 301
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisition and processing of bauxite, alumina, and primary aluminum. Purchases
from these affiliates were $284.4, $219.7, and $206.6 in the years ended
December 31, 1995, 1994, and 1993, respectively. Dividends of $8.1, nil, and nil
were received from investees in the years ended December 31, 1995, 1994, and
1993, respectively.
In 1995, a subsidiary of the Company invested $9.0 in a foreign joint
venture. This amount is included in Investments in and advances to
unconsolidated affiliates.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Land and improvements............................................. $ 151.8 $ 153.5
Buildings......................................................... 198.5 196.8
Machinery and equipment........................................... 1,337.6 1,285.0
Construction in progress.......................................... 59.6 45.0
-------- --------
1,747.5 1,680.3
Accumulated depreciation.......................................... 637.9 547.1
-------- --------
Property, plant, and equipment -- net........................... $1,109.6 $1,133.2
======== ========
</TABLE>
4. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
2001 ---------------
AND 1995 1994
1996 1997 1998 1999 2000 AFTER TOTAL TOTAL
---- ---- ---- ----- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 Credit Agreement (9.00% at December
31, 1995)................................ $13.1 $ 13.1 $ 6.7
9 7/8% Senior Notes, net................... $223.8 223.8 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00% -- 7.75%).. $1.2 $1.3 $1.4 .2 $.2 32.6 36.9 38.1
Alpart CARIFA Loan (fixed and variable
rates)................................... 60.0 60.0 60.0
Alpart Term Loan (8.95%)................... 6.3 6.2 12.5 18.7
12 3/4% Senior Subordinated Notes.......... 400.0 400.0 400.0
Other borrowings (fixed and variable
rates)................................... 1.4 1.4 7.7 .3 .2 .8 11.8 15.5
---- ---- ---- ----- --- ------ ------ ------
Total............................. $8.9 $8.9 $9.1 $13.6 $.4 $717.2 $758.1 $762.6
==== ==== ==== ===== === ======
Less current portion....................... 8.9 11.5
------ ------
Long-term debt.................... $749.2 $751.1
====== ======
</TABLE>
1994 CREDIT AGREEMENT
On February 17, 1994, the Company and KACC entered into a credit agreement
with BankAmerica Business Credit, Inc. and certain other lenders (as amended,
the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $325.0
five-year secured, revolving line of credit, scheduled to mature in 1999. KACC
is able to borrow under the facility by means of revolving credit advances and
letters of credit (up to $125.0) in an aggregate amount equal to the lesser of
$325.0 or a borrowing base relating to eligible accounts receivable plus
eligible inventory. The Company recorded a pre-tax extraordinary loss of $8.3
($5.4 after taxes) in the
F-106
<PAGE> 302
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
first quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the previous credit agreement. As of
December 31, 1995, $259.3 (of which $72.4 could have been used for letters of
credit) was available to KACC under the 1994 Credit Agreement. The 1994 Credit
Agreement is unconditionally guaranteed by the Company and by certain
significant subsidiaries of KACC. Loans under the 1994 Credit Agreement bear
interest at a rate per annum, at KACC's election, equal to a Reference Rate (as
defined) plus 1 1/2% or LIBO Rate (Reserve Adjusted) (as defined) plus 3 1/4%.
After June 30, 1995, the interest rate margins applicable to borrowings under
the 1994 Credit Agreement may be reduced by up to 1 1/2% (non-cumulatively),
based on a financial test, determined quarterly. As of December 31, 1995, the
financial test permitted a reduction of 1 1/2% per annum in margins effective
January 1, 1996.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability to, among
other things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures, and enter into
unrelated lines of business. Neither the Company nor KACC currently is permitted
to pay dividends on its common stock. The 1994 Credit Agreement is secured by,
among other things, (i) mortgages on KACC's major domestic plants (excluding the
Gramercy plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv)
pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries,
and pledges of a portion of the stock of certain partially owned foreign
affiliates.
SENIOR NOTES
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 7), KACC issued $225.0 of
its 9 7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the
offering of the Senior Notes were used to reduce outstanding borrowings under
the revolving credit facility of the 1989 Credit Agreement immediately prior to
the effectiveness of the 1994 Credit Agreement and for working capital and
general corporate purposes.
GRAMERCY SOLID WASTE DISPOSAL REVENUE BONDS
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana
Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate
principal amount of its 7 3/4% Bonds due August 1, 2022 (the "Bonds") to finance
the construction of certain solid waste disposal facilities at KACC's Gramercy
plant. The proceeds from the sale of the Bonds were deposited into a
construction fund and may be withdrawn, from time to time, pursuant to the terms
of the Sale Agreement and the Bond indenture. At December 31, 1995, $3.8
remained in the construction fund. The Sale Agreement requires KACC to make
payments to the Louisiana Parish in installments due on the dates and in the
amounts required to permit the Louisiana Parish to satisfy all of its payment
obligations under the Bonds.
ALPART CARIFA LOAN
In December 1991, Alpart entered into a loan agreement with the Caribbean
Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart
the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms
of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal
amount of Series A bonds matures on June 1, 2008. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
Rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B
bonds matures on June 1, 2007, and bears interest at a fixed rate of 8.25%.
F-107
<PAGE> 303
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project costs for the
expansion and modernization of its alumina refinery and related port and bauxite
mining facilities, and to pay certain costs of issuance. Under the terms of the
loan agreement, Alpart must remain a qualified recipient for Caribbean Basin
Initiative funds as defined in applicable laws. Alpart has agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds. Alpart's obligations under the loan agreement are secured by a $64.2
letter of credit guaranteed by the partners in Alpart (of which $22.5 is
guaranteed by the Company's minority partner in Alpart).
SENIOR SUBORDINATED NOTES
On February 1, 1993, KACC issued $400.0 of its 12 3/4% Senior Subordinated
Notes due 2003 (the "12 3/4% Notes"). The net proceeds from the sale of the
12 3/4% Notes were used to retire the 14 1/4% Senior Subordinated Notes due 1995
(the "14 1/4% Notes"), to prepay $18.0 of the term loan, and to reduce
outstanding borrowings under the revolving credit facility of the 1989 Credit
Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0
in the first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14 1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the 12 3/4%
Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC.
The indentures governing the Senior Notes and the 12 3/4% Notes (the
"Indentures") restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability, to incur
debt, undertake transactions with affiliates, and pay dividends. Further, the
Indentures provide that KACC must offer to purchase the Senior Notes and the
12 3/4% Notes, respectively, upon the occurrence of a Change of Control (as
defined therein), and the 1994 Credit Agreement provides that the occurrence of
a Change in Control (as defined therein) shall constitute an Event of Default
thereunder.
CAPITALIZED INTEREST
Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4,
respectively.
RESTRICTED NET ASSETS OF SUBSIDIARY
Certain debt instruments restrict the ability of KACC to transfer assets,
make loans and advances, and pay dividends to the Company. The restricted net
assets of KACC totaled $24.0 at December 31, 1995.
5. INCOME TAXES
Income (loss) before income taxes, minority interests, extraordinary loss,
and cumulative effect of changes in accounting principles by geographic area is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Domestic............................................... $(55.9) $(168.4) $(232.0)
Foreign................................................ 158.5 16.3 23.5
------ ------- -------
Total........................................ $102.6 $(152.1) $(208.5)
====== ======= =======
</TABLE>
Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is also subject to domestic income taxes.
F-108
<PAGE> 304
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The (provision) credit for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect of changes
in accounting principles consists of:
<TABLE>
<CAPTION>
FEDERAL FOREIGN STATE TOTAL
------- ------- ----- ------
<S> <C> <C> <C> <C>
1995
Current........................................ $(4.3) $ (40.2) $ (.1) $(44.6)
Deferred....................................... 15.2 (4.9) (2.9) 7.4
----- ------ ----- ------
Total.................................. $10.9 $ (45.1) $(3.0) $(37.2)
===== ====== ===== ======
1994
Current........................................ $ (18.0) $ (.1) $(18.1)
Deferred....................................... $71.2 .6 .1 71.9
----- ------ ----- ------
Total.................................. $71.2 $ (17.4) -- $ 53.8
===== ====== ===== ======
1993
Current........................................ $12.6 $ (7.9) $ (.1) $ 4.6
Deferred....................................... 68.5 12.0 1.8 82.3
----- ------ ----- ------
Total.................................. $81.1 $ 4.1 $ 1.7 $ 86.9
===== ====== ===== ======
</TABLE>
The 1994 federal deferred credit for income taxes of $71.2 includes $29.3
for the benefit of operating loss carryforwards generated in 1994. The 1993
federal deferred credit for income taxes of $68.5 includes $29.2 for the benefit
of operating loss carryforwards generated in 1993 and a $3.4 benefit for
increasing net deferred income tax assets (liabilities) as of the date of
enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993,
which retroactively increased the federal statutory income tax rate from 34% to
35% for periods beginning on or after January 1, 1993.
A reconciliation between the (provision) credit for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Amount of federal income tax (provision) credit based on the
statutory rate............................................... $(35.9) $53.2 $73.0
Percentage depletion........................................... 4.2 5.6 6.4
Revision of prior years' tax estimates and other changes in
valuation allowances......................................... 1.5 .2 3.9
Foreign taxes, net of federal tax benefit...................... (5.4) (5.3) (2.6)
Increase in net deferred income tax assets due to tax rate
change....................................................... 1.8 3.4
Other.......................................................... (1.6) (1.7) 2.8
------ ----- -----
(Provision) credit for income taxes............................ $(37.2) $53.8 $86.9
====== ===== =====
</TABLE>
As shown in the Statements of Consolidated Income (Loss) for the years
ended December 31, 1994 and 1993, the Company reported extraordinary losses
related to the early extinguishment of debt. The Company reported the 1994
extraordinary loss net of related deferred federal income taxes of $2.9 and
reported the 1993 extraordinary loss net of related current federal income taxes
of $11.2, which approximated the federal statutory rate in effect on the dates
the transactions occurred.
F-109
<PAGE> 305
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company adopted SFAS 109 as of January 1, 1993, as discussed in Note 1.
The components of the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions.................... $ 289.9 $ 293.7
Loss and credit carryforwards.................................. 156.1 187.6
Other liabilities.............................................. 107.8 109.6
Pensions....................................................... 56.0 51.0
Foreign and state deferred income tax liabilities.............. 30.8 28.1
Property, plant, and equipment................................. 22.9 23.1
Inventories.................................................... 1.8
Other.......................................................... 10.7 3.5
Valuation allowances........................................... (128.5) (133.9)
------- -------
Total deferred income tax assets -- net................ 547.5 562.7
------- -------
Deferred income tax liabilities:
Property, plant, and equipment................................. (179.8) (203.2)
Investments in and advances to unconsolidated affiliates....... (66.4) (63.8)
Inventories.................................................... (8.3)
Other.......................................................... (9.5) (6.4)
------- -------
Total deferred income tax liabilities.................. (255.7) (281.7)
------- -------
Net deferred income tax assets................................... $ 291.8 $ 281.0
======= =======
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $97.7 of the net deferred income tax assets listed above
relate to the benefit of loss and credit carryforwards, net of valuation
allowances. The Company evaluated all appropriate factors to determine the
proper valuation allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as the
levels of taxable income necessary for utilization. For example, full valuation
allowances were provided for certain credit carryforwards that expire in the
near term. With regard to future levels of income, the Company believes, based
on the cyclical nature of its business, its history of prior operating earnings,
and its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable to the
loss and credit carryforwards for which valuation allowances were not provided.
The remaining portion of the Company's net deferred income tax assets at
December 31, 1995, is approximately $194.1. A principal component of this amount
is the tax benefit associated with the accrual for postretirement benefits other
than pensions. The future tax deductions with respect to the turnaround of this
accrual will occur over a 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the ability to
carry forward such loss for 15 taxable years. For these reasons, the Company
believes a long-term view of profitability is appropriate and has concluded that
this net deferred income tax asset will more likely than not be realized,
despite the operating losses incurred in recent years.
As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of the net
deferred income tax assets listed above are included on the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax assets and liabilities listed
above are included on the Consolidated Balance Sheets in the captions entitled
Other accrued liabilities and Long-term liabilities.
F-110
<PAGE> 306
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company and its subsidiaries were included in the consolidated federal
income tax returns of MAXXAM for the period from October 28, 1988, through June
30, 1993. As a consequence of the issuance of the Depositary Shares on June 30,
1993, as discussed in Note 7, the Company and its subsidiaries are no longer
included in the consolidated federal income tax returns of MAXXAM. The Company
and its subsidiaries have become members of a new consolidated return group of
which the Company is the common parent corporation (the "New Kaiser Tax Group").
The New Kaiser Tax Group files consolidated federal income tax returns for
taxable periods beginning on or after July 1, 1993.
The tax allocation agreement between the Company and MAXXAM (the "Company
Tax Allocation Agreement") and the tax allocation agreement between KACC and
MAXXAM (the "KACC Tax Allocation Agreement") (collectively, the "Tax Allocation
Agreements"), terminated pursuant to their terms, effective for taxable periods
beginning after June 30, 1993. Any unused federal income tax attribute
carryforwards under the terms of the Tax Allocation Agreements were eliminated
and are not available to offset federal income tax liabilities for taxable
periods beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993
consolidated federal income tax return, the tax attribute carryforwards of the
MAXXAM consolidated return group as of December 31, 1993, were apportioned in
part to the New Kaiser Tax Group, based on the provisions of the relevant
consolidated return regulations. The benefit of such tax attribute carryforwards
apportioned to the New Kaiser Tax Group approximated the benefit of tax
attribute carryforwards eliminated under the Tax Allocation Agreements. To the
extent the New Kaiser Tax Group generates unused tax losses or tax credits for
periods beginning on or after July 1, 1993, such amounts will not be available
to obtain refunds of amounts paid by the Company or KACC to MAXXAM for periods
ending on or before June 30, 1993, pursuant to the Tax Allocation Agreements.
KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which
became effective as of October 28, 1988. Under the terms of the KACC Tax
Allocation Agreement, MAXXAM computed the federal income tax liability for KACC
and its subsidiaries (collectively, the "Subgroup") as if the Subgroup were a
separate affiliated group of corporations which was never connected with MAXXAM.
During 1991, the Company and MAXXAM entered into the Company Tax Allocation
Agreement, which became effective as of January 1, 1991. Under the terms of the
Company Tax Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including KACC and its
subsidiaries, were a separate affiliated group of corporations which was never
connected with MAXXAM. The federal income tax liability of the Company was the
difference between the tentative federal income tax liability and the liability
computed under the KACC Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements will continue to govern for
periods ended prior to July 1, 1993. Therefore, payments or refunds may still be
required by or payable to the Company or KACC under the terms of their
respective tax allocation agreements for these periods due to the final
resolution of audits, amended returns, and related matters. However, the 1994
Credit Agreement prohibits the payment by KACC to MAXXAM of any amounts due
under the KACC Tax Allocation Agreement, except for certain payments that are
required as a result of audits and only to the extent of any amounts paid after
February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement.
F-111
<PAGE> 307
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1995. The utilization of certain of these
tax attributes is subject to limitations:
<TABLE>
<CAPTION>
EXPIRING
THROUGH
-----------
<S> <C> <C>
Regular tax attribute carryforwards:
Net operating losses........................................... $32.9 2007
General business tax credits................................... 28.4 2008
Foreign tax credits............................................ 89.7 2000
Alternative minimum tax credits................................ 19.4 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses........................................... $17.1 2002
Foreign tax credits............................................ 83.5 2000
</TABLE>
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS
RETIREMENT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service. The Company's funding policies
meet or exceed all regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets are as follows:
<TABLE>
<CAPTION>
PLANS WITH
ACCUMULATED BENEFITS
EXCEEDING ASSETS(1)
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation:
Vested employees............................................. $ 753.0 $ 663.9
Nonvested employees.......................................... 28.7 41.1
------ ------
Accumulated benefit obligation............................... 781.7 705.0
Additional amounts related to projected salary increases....... 34.2 30.0
------ ------
Projected benefit obligation................................... 815.9 735.0
Plan assets (principally common stocks and fixed income
obligations) at fair value................................... (592.3) (524.6)
------ ------
Plan assets less than projected benefit obligation............. 223.6 210.4
Unrecognized net losses........................................ (54.7) (42.5)
Unrecognized net obligations................................... (.5) (.8)
Unrecognized prior-service cost................................ (28.2) (30.9)
Adjustment required to recognize minimum liability............. 49.8 42.9
------ ------
Accrued pension obligation included in the Consolidated Balance
Sheets (principally in Long-term liabilities)................ $ 190.0 $ 179.1
====== ======
</TABLE>
- ---------------
(1) Includes plans with assets exceeding accumulated benefits by approximately
$.1 and $.3 in 1995 and 1994, respectively.
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax credit
(charge) to equity of $(4.7) and $12.5 at December 31,
F-112
<PAGE> 308
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 and 1994, respectively, for the reduction (excess) of the minimum liability
over the unrecognized net obligation and prior-service cost. These amounts were
recorded net of the related income tax (provision) credit of $2.8 and $(7.3) as
of December 31, 1995 and 1994, respectively, which approximated the federal and
state statutory rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 10.0 $ 11.2 $ 10.8
Interest cost on projected benefit obligation............... 59.8 57.3 59.2
Return on assets:
Actual gain............................................... (112.2) (.8) (70.3)
Deferred gain (loss)...................................... 64.6 (53.0) 15.9
Net amortization and deferral............................... 4.2 4.1 2.3
------ ----- -----
Net periodic pension cost................................... $ 26.4 $ 18.8 $ 17.9
====== ===== =====
</TABLE>
Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................... 7.5% 8.5 % 7.5%
Expected long-term rate of return on assets..................... 9.5% 9.5 % 10.0%
Rate of increase in compensation levels......................... 5.0% 5.0 % 5.0%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. These
benefits are provided through contracts with various insurance carriers. The
Company has not funded the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company adopted SFAS 106 to
account for postretirement benefits other than pensions as of January 1, 1993,
as discussed in Note 1.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for USWA retirees who
retire after December 31, 1995, when they become 65, and voluntary for other
hourly retirees of the Company's operations in the states of California,
Louisiana, and Washington. The USWA contract, ratified on February 28, 1995,
also contained changes to the retiree health benefits. These changes included
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower the Company's expenses for
retiree medical care.
F-113
<PAGE> 309
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Company's accrued postretirement benefit obligation is composed of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees......................................................... $557.6 $566.2
Active employees eligible for postretirement benefits............ 30.7 30.2
Active employees not eligible for postretirement benefits........ 61.1 98.7
------ ------
Accumulated postretirement benefit obligation.................... 649.4 695.1
Unrecognized net gains............................................. 20.5 55.0
Unrecognized gains related to prior-service costs.................. 110.9 31.8
------ ------
Accrued postretirement benefit obligation.......................... $780.8 $781.9
====== ======
</TABLE>
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service cost.................................................... $ 4.5 $ 8.2 $ 7.1
Interest cost................................................... 52.3 56.9 58.5
Amortization of prior service cost.............................. (8.9) (3.2)
----- ----- -----
Net periodic postretirement benefit cost........................ $47.9 $61.9 $65.6
===== ===== =====
</TABLE>
The 1996 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) are 8.0% and 7.5% for retirees
under 65 and over 65, respectively, and are assumed to decrease gradually to
5.0% in 2007 and remain at that level thereafter. The health care cost trend
rate has a significant effect on the amounts reported. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1995, by
approximately $68.7 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by approximately
$7.8. The weighted average discount rate used to determine the accumulated
postretirement benefit obligation at December 31, 1995 and 1994, was 7.5% and
8.5%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement. The Company adopted SFAS 112 to account for
postemployment benefits as of January 1, 1993, as discussed in Note 1.
INCENTIVE PLANS
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company,
KACC, and their consolidated subsidiaries. All compensation vested as of
December 31, 1992, under the LTIP, as amended in 1991 and 1992, has been paid to
the participants in cash or common stock of the Company as of December 31, 1993.
Under the LTIP, as amended, 764,092 restricted shares were distributed to six
Company executives during 1993 for benefits generally earned but not vested as
of December 31, 1992. These shares generally will vest at the rate of 25% per
year. The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company adopted the Kaiser 1993
Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock
were reserved for awards or for payment of rights granted under the Plan, of
F-114
<PAGE> 310
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
which 544,839 shares were available to be awarded at December 31, 1995. Under
the Kaiser 1993 Omnibus Stock Incentive Plan, 102,564 restricted shares were
distributed to two Company executives during 1994, which will vest at the rate
of 25% per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These options generally will vest at
the rate of 20-25% per year. Information relating to nonqualified stock options
is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................... 1,119,680 664,400
Granted............................................ 494,800 664,400
Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920)
Expired or forfeited............................... (38,095) (32,600)
--------- --------- -------
Outstanding at end of year (prices ranging from
$7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year......................... 211,755 120,180
========= =========
</TABLE>
In 1995, the Company adopted the Kaiser Aluminum Total Compensation System,
an unfunded incentive compensation program. The program provides incentive pay
based on performance against plan over a three-year period. KACC also has a
supplemental savings and retirement plan for salaried employees, under which the
participants contribute a percentage of their base salaries.
The Company's expense for the above plans was $11.9, $6.1, and $5.3 for the
years ended December 31, 1995, 1994, and 1993, respectively.
F-115
<PAGE> 311
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Changes in stockholders' equity and minority interests were:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
MINORITY INTERESTS -----------------------------------------------------------
------------------ RETAINED ADDITIONAL
REDEEMABLE EARNINGS MINIMUM
PREFERENCE PREFERRED COMMON ADDITIONAL (ACCUMULATED PENSION
STOCK OTHER STOCK STOCK CAPITAL DEFICIT) LIABILITY
---------- ----- --------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992........ $ 32.8 $72.1 $ .6 $288.5 $ 282.8 $ (6.7)
Net loss........................ (652.2)
Redeemable preference stock:
Accretion..................... 4.8
Stock redemption.............. (4.0)
Conversions (1,967 preference
shares into cash)............. (.2)
Common stock issued............. 3.3
Preferred stock issued.......... $.2 134.1
Dividends on preferred stock.... (6.3)
Minority interest in
majority-owned subsidiaries... (.5)
Additional minimum pension
liability..................... (14.9)
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1993........ 33.6 71.4 .2 .6 425.9 (375.7) (21.6)
Net loss........................ (106.8)
Redeemable preference stock:
Accretion..................... 4.0
Stock redemption.............. (8.5)
Common stock issued............. 2.2
Preferred stock issued.......... .4 99.7
Dividends on preferred stock.... (20.1)
Minority interest in
majority-owned subsidiaries... 15.7
Reduction of minimum pension
liability..................... 12.5
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1994........ 29.1 87.1 .6 .6 527.8 (502.6) (9.1)
Net income...................... 60.3
Redeemable preference stock:
Accretion..................... 3.9
Stock redemption.............. (8.7)
Stock repurchase.............. 5.4
Conversions (1,222 preference
shares into cash)............. (.1)
Common stock issued upon
redemption and conversion of
preferred stock............... (.2) .1 1.1
Dividends on preferred stock.... (17.6)
Minority interest in
majority-owned subsidiaries... 6.0
Incentive plans accretion....... 1.4
Additional minimum pension
liability..................... (4.7)
----- ----- --- --- ------ ------- ------
BALANCE, DECEMBER 31, 1995........ $ 29.7 $93.0 $.4 $ .7 $530.3 $ (459.9) $(13.8)
===== ===== === === ====== ======= ======
</TABLE>
F-116
<PAGE> 312
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
REDEEMABLE PREFERENCE STOCK
In March 1985, KACC entered into a three-year agreement with the USWA
whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock"
would be issued to an employee stock ownership plan in exchange for certain
elements of wages and benefits. Concurrently, a similar plan was established for
certain nonbargaining employees which provided for the issuance of "Cumulative
(1985 Series B) Preference Stock." Series A Stock and Series B Stock ("Series A
and B Stock") each have a par value of $1 per share and a liquidation and
redemption value of $50 per share plus accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were recorded at
fair market value when issued, based on independent appraisals, with a
corresponding charge to compensation cost. Carrying values have been increased
each year to recognize accretion of redemption values and, in certain years,
there have been other increases for reasons described below. Changes in Series A
and B Stock are shown below.
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year........................................... 912,167 1,081,548 1,163,221
Redeemed.................................................... (174,804) (169,381) (81,673)
------- ------- ---------
End of year................................................. 737,363 912,167 1,081,548
======= ======= =========
</TABLE>
No additional Series A or B Stock will be issued. While held by the plan
trustee, Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in cash at the option of
KACC on or after March 1, 1991, in respect to years commencing January 1, 1990,
based on a formula tied to KACC's income before tax from aluminum operations.
When distributed to plan participants (generally upon separation from KACC), the
Series A and B Stocks are entitled to an annual cash dividend of $5 per share,
payable quarterly, when and as declared by the Board of Directors.
Redemption fund agreements require KACC to make annual payments by March 31
each year based on a formula tied to consolidated net income until the
redemption funds are sufficient to redeem all Series A and B Stock. On an annual
basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March
1994 and 1995, KACC contributed $4.3 for each of the years 1993 and 1994, and
will contribute $4.3 in March 1996 for 1995.
Under the USWA labor contract effective November 1, 1994, KACC is obligated
to offer to purchase up to 40 shares of Series A Stock from each active
participant in 1995 at a price equal to its redemption value of $50 per share.
KACC also agreed to offer to purchase up to an additional 80 shares from each
participant in 1998. In addition, a profitability test was satisfied for 1995;
therefore, KACC will offer to purchase from each active participant an
additional 20 shares of such preference stock held in the stock ownership plan
for the benefit of substantially the same employees in 1996. The employees could
elect to receive their shares, accept cash, or place the proceeds into KACC's
401(k) savings plan. KACC will provide comparable purchases of Series B Stock
from active participants.
The Series A and B Stock is distributed in the event of death, retirement,
or in other specified circumstances. KACC also may redeem such stock at $50 per
share plus accrued dividends, if any. At the option of the plan participant, the
trustee shall redeem stock distributed from the plans at redemption value to the
extent funds are available in the redemption fund. Under the Tax Reform Act of
1986, at the option of the plan participant, KACC must purchase distributed
shares earned after December 31, 1985, at redemption value on a five-year
installment basis, with interest at market rates. The obligation of KACC to make
such installment payments must be secured.
F-117
<PAGE> 313
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on two
annual dividend payment dates or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Series A and B Stock
restricts the ability of KACC to redeem or pay dividends on common stock if KACC
is in default on any dividends payable on the Series A and B Stock.
PREFERENCE STOCK
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and payment of
dividends. At December 31, 1995, such provisions were less restrictive as to the
payment of cash dividends than the 1994 Credit Agreement provisions. KACC has
the option to redeem the $100 Preference Stocks at par value plus accrued
dividends. KACC does not intend to issue any additional shares of the $100
Preference Stocks.
The 4 1/8% and 4 3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84,
$78.38, and $76.46, respectively. KACC records the $100 Preference Stock at
their exchange amounts for financial statement presentation and the Company
includes such amounts in minority interests. The outstanding shares of KACC
preference stock were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------ ------
<S> <C> <C>
4 1/8%........................................................... 3,237 3,657
4 3/4% (1957 Series)............................................. 2,342 2,605
4 3/4% (1959 Series)............................................. 13,162 13,534
4 3/4% (1966 Series)............................................. 3,473 3,640
</TABLE>
PREFERRED STOCK
Series A Convertible -- In 1993, Kaiser issued 19,382,950 of its $.65
Depositary Shares (the "Depositary Shares"), each representing one-tenth of a
share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the
"Series A Shares"). On September 19, 1995, the Company redeemed all 1,938,295
Series A Shares, which resulted in the simultaneous redemption of all Depositary
Shares in exchange for (i) 13,126,521 shares of the Company's common stock and
(ii) $2.8 in cash comprised of (a) an amount equal to all accrued and unpaid
dividends up to and including the day immediately prior to redemption date and
(b) cash in lieu of any fractional shares of common stock that would have
otherwise been issuable.
PRIDES Convertible -- In the first quarter of 1994, the Company consummated
the public offering of 8,855,550 shares of the PRIDES. The net proceeds from the
sale of the shares of PRIDES were approximately $100.1. The Company used such
net proceeds to make non-interest-bearing loans to KACC in the aggregate
principal amount of $33.2 (the aggregate dividends scheduled to accrue on the
shares of PRIDES from the issuance date until December 31, 1997, the date on
which the outstanding PRIDES will be mandatorily converted into shares of the
Company's common stock), evidenced by intercompany notes, and used the balance
of such net proceeds to make capital contributions to KACC in the aggregate
amount of $66.9.
Holders of shares of PRIDES are entitled to receive (when, as, and if the
Board of Directors declares dividends on the PRIDES) cumulative preferential
cash dividends at a rate per annum of 8.255% of the per share offering price
(equivalent to $.97 per annum for each share of PRIDES), from the date of
initial issuance, payable quarterly in arrears on the last day of March, June,
September, and December of each year.
F-118
<PAGE> 314
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Holders of shares of PRIDES have a 4/5 vote for each share held of record
and, except as required by law, are entitled to vote together with the holders
of common stock and together with the holders of any other classes or series of
stock who are entitled to vote in such manner on all matters submitted to a vote
of common stockholders.
On December 31, 1997, unless either previously redeemed or converted at the
option of the holder, each of the outstanding shares of PRIDES will mandatorily
convert into one share of the Company's common stock, subject to adjustment in
certain events, and the right to receive an amount in cash equal to all accrued
and unpaid dividends thereon (other than previously declared dividends payable
to a holder of record on a prior date).
Shares of PRIDES are not redeemable at the election of the Company, prior
to December 31, 1996. At any time and from time to time on or after December 31,
1996, the Company may redeem any or all of the outstanding shares of PRIDES.
Upon any such redemption, each holder will receive, in exchange for each share
of PRIDES, the number of shares of common stock equal to (A) the sum of
$11.9925, declining after December 31, 1996, to $11.75 until December 31, 1997,
plus, in the event the Company does not elect to pay cash dividends to the
redemption date, all accrued and unpaid dividends thereon divided by (B) the
Current Market Price (as defined) on the applicable date of determination, but
in no event less than .8333 of a share of common stock, subject to adjustment in
certain events. At any time prior to December 31, 1997, unless previously
redeemed, each share of PRIDES is convertible at the option of the holder
thereof into .8333 of a share of common stock (equivalent to a conversion price
of $14.10 per share of common stock), subject to adjustment in certain events.
The number of shares of common stock a holder will receive upon redemption, and
the value of the shares received upon conversion, will vary depending on the
market price of the common stock from time to time.
DIVIDENDS ON COMMON STOCK
The indentures governing the Senior Notes and the 12 3/4% Notes restrict,
among other things, KACC's ability, and the 1994 Credit Agreement restricts,
among other things, Kaiser's and KACC's ability, to incur debt, undertake
transactions with affiliates, and pay dividends. Under the most restrictive of
these covenants, neither the Company nor KACC currently is permitted to pay
dividends on its common stock.
At December 31, 1995, 28,000,000 shares of the Company's common stock owned
by MAXXAM were pledged as security for debt of a wholly owned subsidiary of
MAXXAM, consisting of $100.0 aggregate principal amount of 11 1/4% Senior
Secured Notes due 2003 and $125.7 aggregate principal amount of 12 1/4% Senior
Secured Discount Notes due 2003.
PROPOSED RECAPITALIZATION
On February 5, 1996, the Company announced that it filed with the SEC a
preliminary proxy statement relating to a proposed recapitalization and a
special meeting of stockholders to consider and vote upon the proposal. The
proposed recapitalization would: (i) provide for two classes of common stock:
Class A Common Shares, $.01 par value, with one vote per share and a new
lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote
per share: (ii) redesignate as Class A Common Shares the 100 million currently
authorized shares of existing common stock and authorize an additional 250
million shares to be designated as Common Stock; and (iii) change each issued
share of the Company's existing common stock, par value $.01 per share, into (a)
.33 of a Class A Common Share and (b) .67 of a share of Common Stock. The
Company would pay cash in lieu of fractional shares. The Company anticipates
that both the Class A Common Shares and the Common Stock will be approved for
trading on the New York Stock Exchange. Upon the effective date of the
recapitalization, approximately 23,640,000 Class A Common Shares and 47,998,000
shares of Common Stock would be issued and outstanding. The proportionate voting
power of the
F-119
<PAGE> 315
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
holders of the PRIDES will increase immediately after the effectiveness of the
recapitalization until such shares are redeemed or converted, which will occur
on or before December 31, 1997. As of January 31, 1996, holders of the existing
common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total
voting power of all stockholders. Immediately after the recapitalization, the
voting power of such holders of the PRIDES will increase to 19.6% in the
aggregate, with a corresponding reduction in the voting power of such holders of
the existing common stock. At such time as the PRIDES are redeemed or converted,
the relative voting power of such holders of the PRIDES will decrease and the
relative voting power for both such holders of the PRIDES and the existing
common stock will be approximately the same as it would have been had the
recapitalization not occurred.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts (see Note 9),
letters of credit, and guarantees. Such purchase agreements and tolling
arrangements include long-term agreements for the purchase and tolling of
bauxite into alumina in Australia by QAL. These obligations expire in 2008.
Under the agreements, KACC is unconditionally obligated to pay its proportional
share of debt, operating costs, and certain other costs of QAL. The aggregate
minimum amount of required future principal payments at December 31, 1995, is
$88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The KACC share
of payments, including operating costs and certain other expenses under the
agreement, was $77.5, $85.6, and $86.7 for the years ended December 31, 1995,
1994, and 1993, respectively. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1995, are
as follows: years ending December 31, 1996 -- $22.7; 1997 -- $21.6;
1998 -- $24.6; 1999 -- $29.7; 2000 -- $27.3; thereafter -- $187.0. The future
minimum rentals receivable under noncancelable subleases was $67.0 at December
31, 1995.
Rental expenses were $29.0, $26.8, and $29.0 for the years ended December
31, 1995, 1994, and 1993, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental laws, and
to claims and litigation based upon such laws. KACC currently is subject to a
number of lawsuits under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities,
has been named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and ground-
F-120
<PAGE> 316
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
water remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for the years
ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of period.................................. $40.1 $40.9 $46.4
Additional amounts.............................................. 3.3 2.8 1.7
Less expenditures............................................... (4.5) (3.6) (7.2)
----- ----- -----
Balance at end of period........................................ $38.9 $40.1 $40.9
===== ===== =====
</TABLE>
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the Company's
assessment of the likely remediation action to be taken. The Company expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an
aggregate of approximately $10.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $23.0 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties should not have a material adverse effect
on the Company's consolidated financial position, results of operations, or
liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years.
The following table presents the changes in number of such claims pending
for the years ended December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
Number of claims at beginning of period............................. 25,200 23,400 13,500
Claims received..................................................... 41,700 14,300 11,400
Claims settled or dismissed......................................... (7,200) (12,500) (1,500)
------ ------ ------
Number of claims at end of period................................... 59,700 25,200 23,400
====== ====== ======
</TABLE>
KACC has been advised by its regional counsel that, although there can be
no assurance, the recent increase in pending claims may be attributable in part
to tort reform legislation in Texas which was passed by the legislature in March
1995 and which became effective on September 1, 1995. The legislation, among
other things, is designed to restrict, beginning September 1, 1995, the filing
of cases in Texas that do not have a sufficient nexus to that jurisdiction, and
to impose, generally as of September 1, 1996, limitations relating to
F-121
<PAGE> 317
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
joint and several liability in tort cases. A substantial portion of the
asbestos-related claims that were filed and served on KACC between June 30,
1995, and November 30, 1995, were filed in Texas prior to September 1, 1995.
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed and settled through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31, 1995.
The Company estimates that annual future cash payments in connection with such
litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been recorded
for such costs which may be incurred beyond 2008, there is a reasonable
possibility that such costs may continue beyond 2008, and such costs may be
substantial.
The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery of
$137.9, determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in Other assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
KACC enters into a number of financial instruments in the normal course of
business that are designed to reduce its exposure to fluctuations in foreign
exchange rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
F-122
<PAGE> 318
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its affiliates in
Australia and the United Kingdom, which expose KACC to certain exchange rate
risks. In order to mitigate its exposure, KACC periodically enters into forward
foreign exchange and currency option contracts in Australian dollars and Pounds
Sterling to hedge these commitments. The forward foreign currency exchange
contracts are agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the future. At
December 31, 1995, KACC had net forward foreign exchange contracts totaling
approximately $102.8 for the purchase of 142.4 Australian dollars through April
30, 1997.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, KACC has
developed strategies which include forward sales of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. Under the
principal components of KACC's price risk management strategy, which can be
modified at any time, (i) varying quantities of KACC's anticipated production
are sold forward at fixed prices; (ii) call options are purchased to allow KACC
to participate in certain higher market prices, should they materialize, for a
portion of KACC's primary aluminum and alumina sold forward; (iii) option
contracts are entered into to establish a price range KACC will receive for a
portion of its primary aluminum and alumina; and (iv) put options are purchased
to establish minimum prices KACC will receive for a portion of its primary
aluminum and alumina. In this regard, in respect of its 1996 anticipated
production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of
primary aluminum at fixed prices.
In addition, KACC enters into forward fixed price arrangements with certain
customers which provide for the delivery of a specific quantity of fabricated
aluminum products over a specified future period of time. In order to establish
the cost of primary aluminum for a portion of such sales, KACC may enter into
forward and option contracts. In this regard, at December 31, 1995 KACC had
purchased 53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,721
per metric ton ($.78 per pound) of aluminum, and forward foreign exchange
contracts was $4.1.
KACC is exposed to credit risk in the event of non-performance by other
parties to these currency and commodity contracts, but KACC does not anticipate
non-performance by any of these counterparties, given their creditworthiness.
When appropriate, KACC arranges master netting agreements.
10. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
Sales and transfers among geographic areas are made on a basis intended to
reflect the market value of products.
The aggregate foreign currency gain included in determining net income was
$5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Sales of more than 10% of total revenue to a single customer were nil in
1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and $145.7 of
aluminum processing for the years ended December 31, 1994, and 1993,
respectively.
Export sales were less than 10% of total revenue during the years ended
December 31, 1995, 1994, and 1993, respectively.
F-123
<PAGE> 319
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Geographical area information relative to operations is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OTHER
DECEMBER 31, DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL
------------ -------- --------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers................ 1995 $1,589.5 $ 191.7 $239.4 $217.2 $2,237.8
1994 1,263.2 169.9 180.0 168.4 1,781.5
1993 1,177.8 155.4 207.5 178.4 1,719.1
Sales and transfers among
geographic areas......... 1995 $ 79.6 $191.5 $ (271.1)
1994 98.7 139.4 (238.1)
1993 88.2 79.6 (167.8)
Equity in income (losses)
of unconsolidated
affiliates............... 1995 $ (.2) $ 19.4 $ 19.2
1994 .2 (2.1) (1.9)
1993 (3.3) (3.3)
Operating income (loss).... 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6
1994 (128.8) 9.9 18.3 44.4 (56.2)
1993 (145.9) (11.8) 21.9 12.4 (123.4)
Investment in and advances
to unconsolidated
affiliates............... 1995 $ 1.2 $ 27.1 $149.9 $ 178.2
1994 1.2 28.8 139.7 169.7
Identifiable assets........ 1995 $2,017.9 $ 381.9 $196.5 $216.9 $2,813.2
1994 1,933.8 364.8 200.0 199.5 2,698.1
</TABLE>
F-124
<PAGE> 320
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Financial information by industry segment at December 31, 1995 and 1994,
and for the years ended December 31, 1995, 1994, and 1993, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED BAUXITE & ALUMINUM
DECEMBER 31, ALUMINA PROCESSING CORPORATE TOTAL
------------ --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers......................... 1995 $ 514.2 $1,723.6 $2,237.8
1994 432.5 1,295.7 1,781.5
1993 423.4 1,349.0 1,719.1
Intersegment sales.................. 1995 $ 159.7 $ 159.7
1994 146.8 146.8
1993 129.4 129.4
Equity in income (losses) of
unconsolidated affiliates......... 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2
1994 (4.7) 2.6 .2 (1.9)
1993 (2.5) (.8) (3.3)
Operating income (loss)............. 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6
1994 19.8 (8.4) (67.6) (56.2)
1993 (4.5) (46.3) (72.6) (123.4)
Effect of changes in accounting
principles on operating income
(loss)
SFAS 106.......................... 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2)
SFAS 109.......................... 1993 (7.7) (7.8) .3 (15.2)
Depreciation........................ 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3
1994 33.5 59.1 2.8 95.4
1993 35.3 59.9 1.9 97.1
Capital expenditures................ 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4
1994 28.9 39.9 1.2 70.0
1993 35.3 31.2 1.2 67.7
Investment in and advances to
unconsolidated affiliates......... 1995 $ 129.9 $ 47.1 $ 1.2 $ 178.2
1994 136.6 31.9 1.2 169.7
Identifiable assets................. 1995 $ 746.0 $1,341.2 $ 726.0 $2,813.2
1994 749.6 1,242.3 706.2 2,698.1
</TABLE>
F-125
<PAGE> 321
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 21.6 $ 21.9
Receivables...................................................... 261.6 308.6
Inventories...................................................... 545.5 525.7
Prepaid expenses and other current assets........................ 111.7 76.6
-------- --------
Total current assets.......................................... 940.4 932.8
Investments in and advances to unconsolidated affiliates........... 174.6 178.2
Property, plant, and equipment -- net.............................. 1,126.4 1,109.6
Deferred income taxes.............................................. 284.7 269.1
Other assets....................................................... 343.1 323.5
-------- --------
Total.................................................... $ 2,869.2 $2,813.2
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 160.5 $ 184.5
Accrued interest................................................. 13.6 32.0
Accrued salaries, wages, and related expenses.................... 64.9 105.3
Accrued postretirement medical benefit obligation -- current
portion....................................................... 46.8 46.8
Other accrued liabilities........................................ 151.7 129.4
Payable to affiliates............................................ 95.6 94.2
Long-term debt -- current portion................................ 8.9 8.9
-------- --------
Total current liabilities..................................... 542.0 601.1
Long-term liabilities.............................................. 558.3 548.5
Accrued postretirement medical benefit obligation.................. 727.7 734.0
Long-term debt..................................................... 858.4 749.2
Minority interests................................................. 119.4 122.7
Stockholders' equity:
Preferred stock.................................................. .4 .4
Common stock..................................................... .7 .7
Additional capital............................................... 530.8 530.3
Accumulated deficit.............................................. (454.7) (459.9)
Additional minimum pension liability............................. (13.8) (13.8)
-------- --------
Total stockholders' equity.................................... 63.4 57.7
-------- --------
Total.................................................... $ 2,869.2 $2,813.2
======== ========
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-126
<PAGE> 322
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
Net sales.............................................................. $1,652.1 $1,646.7
-------- --------
Costs and expenses:
Cost of products sold................................................ 1,394.8 1,329.8
Depreciation......................................................... 72.5 71.1
Selling, administrative, research and development, and general....... 97.4 96.4
-------- --------
Total costs and expenses.......................................... 1,564.7 1,497.3
-------- --------
Operating income....................................................... 87.4 149.4
Other income (expense):
Interest expense..................................................... (68.3) (71.3)
Other -- net......................................................... 3.0 (9.8)
-------- --------
Income before income taxes and minority interests...................... 22.1 68.3
Provision for income taxes............................................. (8.4) (24.6)
Minority interests..................................................... (2.2) (4.4)
-------- --------
Net income............................................................. 11.5 39.3
Dividends on preferred stock........................................... (6.3) (15.5)
-------- --------
Net income available to common shareholders............................ $ 5.2 $ 23.8
======== ========
Earnings per common and common equivalent share:
Primary.............................................................. $ .07 $ .40
======== ========
Fully diluted........................................................ $ .46
========
Weighted average common and common equivalent shares outstanding (000):
Primary........................................................... 71,843 59,015
Fully diluted..................................................... 71,613
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-127
<PAGE> 323
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 11.5 $ 39.3
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation......................................................... 72.5 71.1
Amortization of excess investment over equity in net assets of
unconsolidated affiliates........................................... 8.7 8.7
Amortization of deferred financing costs and discount on long-term
debt................................................................ 4.1 4.1
Equity in income of unconsolidated affiliates........................ (7.5) (17.2)
Minority interests................................................... 2.2 4.4
Decrease (increase) in receivables................................... 41.0 (86.6)
Increase in inventories.............................................. (19.8) (62.6)
(Increase) decrease in prepaid expenses and other assets............. (38.1) 70.5
Decrease in accounts payable......................................... (24.1) (5.2)
Decrease in accrued interest......................................... (18.4) (18.0)
(Decrease) increase in payable to affiliates and accrued
liabilities......................................................... (23.1) 12.3
Decrease in accrued and deferred income taxes........................ (18.6) (8.5)
Other................................................................ 4.6 7.8
------ ------
Net cash (used for) provided by operating activities............... (5.0) 20.1
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments............... 1.6 6.9
Expenditures for property, plant, and equipment......................... (90.8) (44.2)
Investments in unconsolidated affiliates................................ (.3) (9.0)
Redemption fund for minority interests' preference stock................ (1.3) (.2)
------ ------
Net cash used for investing activities............................. (90.8) (46.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit facility, net............ 118.1 55.6
Repayments of long-term debt............................................ (9.0) (8.5)
Incurrence of financing costs........................................... -- (.8)
Dividends paid.......................................................... (8.4) (18.7)
Capital stock issued.................................................... -- 1.2
Redemption of minority interests' preference stock...................... (5.2) (8.8)
------ ------
Net cash provided by financing activities............................ 95.5 20.0
------ ------
Net decrease in cash and cash equivalents during the period............... (.3) (6.4)
Cash and cash equivalents at beginning of period.......................... 21.9 17.6
------ ------
Cash and cash equivalents at end of period................................ $ 21.6 $ 11.2
====== ======
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest.............................. $ 82.7 $ 85.2
Income taxes paid....................................................... 22.4 26.6
Tax allocation payments to MAXXAM Inc................................... 1.1 --
</TABLE>
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
F-128
<PAGE> 324
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc.
("MAXXAM"). MAXXAM owns approximately 62% of the Company's common stock,
assuming the conversion of each outstanding share of 8.255% PRIDES, Convertible
Preferred Stock (the "PRIDES"), into one share of the Company's common stock,
with the remaining approximately 38% publicly held. The Company operates through
its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, these financial statements do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1995. In the opinion of management, the unaudited
interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature, necessary for a fair
statement of the results for the interim periods presented.
Operating results for the nine month period ended September 30, 1996, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
2. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- ----------
<S> <C> <C>
Finished fabricated aluminum products..................... $ 108.4 $ 91.5
Primary aluminum and work in process...................... 190.0 195.9
Bauxite and alumina....................................... 122.5 119.6
Operating supplies and repair and maintenance parts....... 124.6 118.7
------ ------
Total........................................... $ 545.5 $525.7
====== ======
</TABLE>
Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO
cost.
3. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary -- Earnings per common and common equivalent share are computed by
deducting preferred stock dividends from net income in order to determine net
income available to common shareholders. This amount is then divided by the
weighted average number of common and common equivalent shares outstanding
during the period. The impact of outstanding stock options on the weighted
average number of common and common equivalent shares for the nine months ended
September 30, 1996 and 1995, was immaterial.
Fully Diluted -- The PRIDES were excluded from the calculation of the
weighted average number of common and common equivalent shares outstanding for
all periods presented because they were antidilutive. For the nine months ended
September 30, 1995, a dividend of $9.1, attributable to the Company's Mandatory
Conversion Premium Dividend Preferred Stock (the "Series A Shares") which were
exchanged for approximately 13.1 million shares of the Company's common stock
and certain cash payments on September 19, 1995, have not been deducted from net
income and the weighted average number of common and
F-129
<PAGE> 325
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
common equivalent shares outstanding have been adjusted to reflect the shares of
common stock issued in the exchange as if they had been outstanding for the
entire period. As a result of the conversion of the Series A Shares, fully
diluted earnings per share for the 1995 period are presented even though the
results are antidilutive.
4. CONTINGENCIES
Environmental Contingencies -- The Company and KACC are subject to a number
of environmental laws, to fines or penalties assessed for alleged breaches of
the environmental laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with
certain other entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National Priorities
List under CERCLA.
Based upon the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
September 30, 1996, the balance of such accruals, which is primarily included in
Long-term liabilities, was $32.9. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts, existing
technology, and the Company's assessment of the likely remediation action to be
taken. The Company expects that these remediation actions will be taken over the
next several years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0 to $10.0 for the years 1996
through 2000 and an aggregate of approximately $7.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved in
early 1997. While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently believes that the
resolution of such uncertainties should not have a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.
Asbestos Contingencies -- KACC is a defendant in a number of lawsuits, some
of which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at least 15
years. At September 30, 1996, the number of such lawsuits pending was
approximately 75,900 as compared to 59,700 at December 31, 1995. During the year
1995, approximately 41,700 of such claims were received and 7,200 were settled
or dismissed. During the nine months ended September 30, 1996, approximately
20,000 of such claims were received and 3,800 were settled or dismissed.
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed and settled through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice
F-130
<PAGE> 326
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current
state of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $160.0, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at September 30,
1996. The Company estimates that annual future cash payments in connection with
such litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been recorded
for such costs which may be incurred beyond 2008, there is a reasonable
possibility that such costs may continue beyond 2008, and such costs may be
substantial.
A substantial portion of the asbestos-related claims that were filed and
served on KACC during 1995 and 1996 were filed in Texas. KACC has been advised
by its counsel that, although there can be no assurance, the increase in pending
claims may have been attributable in part to tort reform legislation in Texas.
Although asbestos-related claims are currently exempt from certain aspects of
the Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation, relating
to the doctrine of forum non conveniens, as well as other developments in the
legislative and legal environment in Texas, may be responsible for the
accelerated pace of new claims experienced in late 1995 and its continuance in
1996, albeit at a somewhat reduced rate.
The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the resolution of
these disputes. The Company believes, based on prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance policies,
and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable
insurance coverage law relating to the terms and conditions of those policies,
that substantial recoveries from the insurance carriers are probable.
Accordingly, an estimated aggregate insurance recovery of $142.3, determined on
the same basis as the asbestos-related cost accrual, is recorded primarily in
Other assets at September 30, 1996.
Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from the
Company's underlying assumptions. While uncertainties are inherent in the final
outcome of these asbestos matters and it is presently impossible to determine
the actual costs that ultimately may be incurred and insurance recoveries that
will be received, management currently believes that, based on the factors
discussed in the preceding paragraphs, the resolution of the asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Other Contingencies -- The Company and KACC are involved in various other
claims, lawsuits, and other proceedings relating to a wide variety of matters.
While uncertainties are inherent in the final outcome of such matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all
F-131
<PAGE> 327
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
products sold. KACC enters into primary aluminum hedging transactions from time
to time in the normal course of business. Primary aluminum hedging transactions
are designed to mitigate the Company's exposure to declines in the market price
of primary aluminum, while retaining the ability to participate in favorable
environments that may materialize. KACC has employed strategies which include
forward sales and purchases of primary aluminum at fixed prices and the purchase
or sale of options for primary aluminum. At September 30, 1996, KACC had sold
forward, at fixed prices, approximately 69,000 and 93,600 tons* of primary
aluminum in excess of its projected internal fabrication requirements for 1997
and 1998, respectively, and had purchased put options to establish a minimum
price for 66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively.
During October 1996, KACC purchased put options to establish a minimum price for
an additional 126,000 tons of primary aluminum in excess of its projected 1997
internal fabrication requirements and entered into options contracts that
established a price range for an additional 48,000 tons of the Company's 1998
surplus.
In addition, at September 30, 1996, KACC had sold forward approximately 73%
and 85% of the alumina available to it in excess of its projected internal
smelting requirements for 1997 and 1998, respectively. Virtually all of such
1997 and 1998 sales were made at prices indexed to future prices of primary
aluminum.
From time to time, KACC also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, KACC had option contracts for the purchase of
approximately 40,000 MMBtu of natural gas per day during the first quarter of
1997, and a combination of fixed price purchase and option contracts for 20,000
MMBtu of natural gas per day for the period April 1997 to December 1998. At
September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel
oil per month for the period January 1997 through December 1998.
KACC also enters into hedging transactions in the normal course of business
that are designed to reduce its exposure to fluctuations in foreign exchange
rates. At September 30, 1996, KACC had net forward foreign exchange contracts
totaling approximately $81.6 for the purchase of 110.0 Australian dollars from
January 1997 through June 1998, in respect of its commitments for 1997 and 1998
expenditures denominated in Australian dollars.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $46.4.
See Note 9 of the Notes to Consolidated Financial Statements of Kaiser for
the year ended December 31, 1995.
6. SUBSEQUENT EVENTS
On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the
"Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the
"10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at
maturity. The 10 7/8% Senior Notes were not registered under the Securities Act
of 1933, and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements. The 10 7/8% Senior
Notes rank pari passu with outstanding indebtedness under KACC's Credit
Agreement dated as of February 15, 1994, as amended (the "Credit Agreement") and
KACC's 9 7/8% Senior Notes due 2002 (the 9 7/8% Senior Notes) in right and
priority of payment and are guaranteed on a senior, unsecured basis by certain
of the Company's subsidiaries (the "Subsidiary Guarantors"). Net proceeds from
the Offering on the Issuance Date, after estimated expenses, were approximately
- ---------------
* All references to tons in this report refer to metric tons of 2,204.6 pounds.
F-132
<PAGE> 328
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
$168.9, of which $91.7 were utilized to reduce the outstanding borrowings under
the revolving credit facility of the Credit Agreement to zero. The remaining net
proceeds (approximately $77.2) were invested in short-term investments pending
their application for working capital and general corporate purposes, including
capital projects. Pursuant to an agreement with the initial purchasers of the
10 7/8% Senior Notes, KACC and the Subsidiary Guarantors agreed to file a
registration statement (the "Registration Statement") with the Securities &
Exchange Commission within 30 days of the Issuance Date with respect to a
registered offer to exchange the 10 7/8% Senior Notes for new notes with
substantially identical terms (the "Exchange Offer"), and to use their
reasonable best efforts to have the Registration Statement declared effective
within 90 days of the Issuance Date and the Exchange Offer consummated within
130 days of the Issuance Date. The Exchange Offer will be made only by means of
a prospectus.
On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $867.3 to $910.2, borrowing
capacity of $273.1 would have been available for use under the Credit Agreement
and the Company would have had available additional cash proceeds from the
Offering of $37.7.
During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the 10 7/8% Senior Notes discussed above and
to modify certain of the financial covenants contained in the Credit Agreement.
F-133
<PAGE> 329
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales................................. $531.1 $567.6 $553.4
Gross profit.............................. 97.4 91.5 68.4
Operating income.......................... 40.3 36.6 10.5
Net income (loss)......................... 9.9 8.2 (6.6)
Per common and common equivalent share:
Net income (loss)...................... 0.11 0.09 (0.12)
1995 QUARTERLY INFORMATION:
Net Sales................................. $513.0 $583.4 $550.3 $591.1
Gross profit.............................. 86.3 119.6 111.0 122.5
Operating income.......................... 32.6 63.6 53.2 61.2
Net income................................ 3.5 23.3 12.5 21.0
Per common and common equivalent share:
Net income (loss)...................... (0.03)(2) 0.31 0.13 0.26
1994 QUARTERLY INFORMATION:
Net sales................................. $415.1 $459.5 $461.1 $445.8
Gross profit.............................. 27.3 40.5 45.1 43.1
Operating income (loss)................... (25.6) (14.2) (6.9) (9.5)
Loss before extraordinary item............ (29.3) (23.6) (20.8) (27.7)(1)
Extraordinary loss-net.................... (5.4) -- -- --
Net loss.................................. (34.7) (23.6) (20.8) (27.7)(1)
PER COMMON AND COMMON EQUIVALENT SHARE:
Loss before extraordinary loss............ (0.58) (0.50) (0.45) (0.57)
Extraordinary loss-net.................... (0.09) -- -- --
Net loss.................................. (0.67) (0.50) (0.45) (0.57)
</TABLE>
- ---------------
(1) Includes pre-tax charges of approximately $10.3 and $10.8 principally
related to establishing additional litigation and environmental reserves in
the fourth quarters of 1994 and 1993, respectively.
(2) After deduction of $5.3 dividends on preferred stock from net income.
F-134
<PAGE> 330
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of MAXXAM Group Inc.:
We have audited the accompanying consolidated balance sheets of MAXXAM
Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.)
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and stockholder's equity (deficit) for each
of the three years in the period ended December 31, 1995. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As explained in Notes 6 and 7 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
San Francisco, California
January 19, 1996
F-135
<PAGE> 331
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 48,396 $ 48,575
Marketable securities.............................................. 36,568 19,514
Receivables:
Trade........................................................... 20,576 23,170
Other........................................................... 1,624 7,435
Inventories........................................................ 77,904 70,098
Prepaid expenses and other current assets.......................... 7,101 3,717
--------- ---------
Total current assets....................................... 192,169 172,509
Timber and timberlands, net of depletion of $204,856 and $188,003 at
December 31, 1995 and 1994, respectively........................... 337,390 350,871
Property, plant and equipment, net................................... 100,142 103,183
Deferred financing costs, net........................................ 27,288 30,096
Deferred income taxes................................................ 58,485 61,498
Restricted cash...................................................... 31,367 32,402
Other assets......................................................... 5,542 6,122
--------- ---------
$ 752,383 $ 756,681
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................... $ 4,166 $ 3,703
Accrued interest................................................... 25,354 25,765
Accrued compensation and related benefits.......................... 9,611 10,622
Deferred income taxes.............................................. 10,244 12,986
Other accrued liabilities.......................................... 4,435 3,266
Long-term debt, current maturities................................. 14,195 13,670
--------- ---------
Total current liabilities.................................. 68,005 70,012
Long-term debt, less current maturities.............................. 764,310 768,786
Other noncurrent liabilities......................................... 33,813 30,365
--------- ---------
Total liabilities.......................................... 866,128 869,163
--------- ---------
Contingencies
Stockholder's deficit:
Common stock, $.08 1/3 par value; 1000 shares authorized; 100
shares issued................................................... -- --
Additional capital................................................. 81,287 81,287
Accumulated deficit................................................ (195,032) (193,769)
--------- ---------
Total stockholder's deficit................................ (113,745) (112,482)
--------- ---------
$ 752,383 $ 756,681
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE> 332
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net sales:
Lumber and logs......................................... $216,898 $227,430 $ 215,743
Other................................................... 25,694 22,199 17,696
-------- -------- ---------
242,592 249,629 233,439
-------- -------- ---------
Operating expenses:
Cost of goods sold (exclusive of depletion and
depreciation)........................................ 127,124 129,598 134,563
Selling, general and administrative..................... 15,884 16,250 20,108
Depletion and depreciation.............................. 26,405 25,946 25,811
-------- -------- ---------
169,413 171,794 180,482
-------- -------- ---------
Operating income.......................................... 73,179 77,835 52,957
Other income (expense):
Investment, interest and other income................... 9,393 14,367 9,718
Interest expense........................................ (77,824) (77,383) (80,339)
-------- -------- ---------
Income (loss) from continuing operations before income
taxes, extraordinary items and cumulative effect of
changes in accounting principles........................ 4,748 14,819 (17,664)
Credit (provision) in lieu of income taxes................ (1,211) 3,616 3,355
-------- -------- ---------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of changes in
accounting principles................................... 3,537 18,435 (14,309)
Loss from net assets transferred to MAXXAM, net of
minority interests and related income taxes............. -- -- (512,970)
-------- -------- ---------
Income (loss) before extraordinary items and cumulative
effect of changes in accounting principles.............. 3,537 18,435 (527,279)
Extraordinary items:
Loss on litigation settlement, net of related credit in
lieu of income taxes of $6,312....................... -- (14,866) --
Loss on early extinguishment of debt, net of related
credit in lieu of income taxes of $8,856............. -- -- (17,189)
Cumulative effect of changes in accounting principles:
Postretirement benefits other than pensions, net of
related credit in lieu of income taxes of $1,566..... -- -- (2,348)
Accounting for income taxes............................. -- -- 14,916
-------- -------- ---------
Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900)
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE> 333
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation............................. 26,405 25,946 25,811
Amortization of deferred financing costs and discounts
on long-term debt.................................... 13,328 12,127 7,435
Net (purchases) sales of marketable securities......... (19,533) 5,321 12,389
Net losses (gains) on marketable securities............ (4,175) (1,669) (6,414)
Loss (income) from net assets transferred to MAXXAM,
net.................................................. -- -- 512,970
Extraordinary loss on early extinguishment of debt,
net.................................................. -- -- 17,189
Cumulative effect of changes in accounting principles,
net.................................................. -- -- (12,568)
Decrease (increase) in inventories, net of depletion... (7,695) 3,634 (2,077)
Increase (decrease) in accounts payable................ 463 832 471
Decrease (increase) in receivables..................... 5,778 (7,660) 7,558
Decrease (increase) in prepaids and other assets....... (3,384) (528) 212
Increase in accrued and deferred income taxes.......... 2,303 (3,815) (5,123)
Decrease in other liabilities.......................... 7,734 (2,283) (185)
Decrease in accrued interest........................... (411) (451) (7,284)
Other.................................................. 1,020 (86) 848
-------- -------- ---------
Net cash provided by operating activities......... 25,370 34,937 19,332
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate................. 2,500 -- --
Net proceeds from sale of assets.......................... 18 1,149 256
Capital expenditures...................................... (9,852) (11,322) (11,120)
Increase in net assets transferred to MAXXAM.............. -- -- (11,770)
-------- -------- ---------
Net cash used for investing activities............ (7,334) (10,173) (22,634)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions, repurchase of and principal payments on
long-term debt......................................... (14,300) (13,237) (716,551)
Net borrowings (payments) under revolving credit
agreements............................................. -- (2,900) 2,900
Incurrence of financing costs............................. (150) (213) (34,738)
Proceeds from issuance of long-term debt.................. -- -- 790,000
Restricted cash deposits, net............................. 1,035 1,160 (33,562)
Dividends paid............................................ (4,800) -- (20,000)
-------- -------- ---------
Net cash used for financing activities............ (18,215) (15,190) (11,951)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (179) 9,574 (15,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 48,575 39,001 54,254
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 48,396 $ 48,575 $ 39,001
======== ======== =========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (payments) for marketable
securities............................................. $ (6,648) $ 5,628 $ 1,020
Timber and timberlands acquired subject to loan from
seller................................................. 615 910 --
Net assets transferred to MAXXAM.......................... -- -- 30,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest................ $ 64,907 $ 65,707 $ 80,188
Income taxes paid (refunded).............................. (5,190) 1,170 46
Tax allocation payments to MAXXAM......................... -- 397 1,722
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE> 334
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED
($.08 1/3 ADDITIONAL EARNINGS
PAR) CAPITAL (DEFICIT) TOTAL
----------- ---------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance, January 1, 1993........................ $-- $ 81,257 $ 385,093 $ 466,350
Net loss...................................... -- -- (531,900) (531,900)
Dividend...................................... -- -- (20,000) (20,000)
Gain from issuance of Kaiser Aluminum
Corporation common stock................... -- 30 -- 30
Net assets transferred to MAXXAM.............. -- -- (30,531) (30,531)
--- ------- --------- ---------
Balance, December 31, 1993...................... -- 81,287 (197,338) (116,051)
Net income.................................... -- -- 3,569 3,569
--- ------- --------- ---------
Balance, December 31, 1994...................... -- 81,287 (193,769) (112,482)
Net income.................................... -- -- 3,537 3,537
Dividend...................................... -- -- (4,800) (4,800)
--- ------- --------- ---------
Balance, December 31, 1995...................... $-- $ 81,287 $(195,032) $(113,745)
=== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE> 335
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MAXXAM Group
Inc. ("MGI") and its subsidiaries, collectively referred to herein as the
"Company." MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
Intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.
The Company conducts its business primarily through the operations of its
subsidiaries. Prior to the Forest Products Group Formation (as defined below),
the Company operated in three industries: aluminum, through its majority owned
subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum
producer; forest products, through The Pacific Lumber Company ("Pacific Lumber")
and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real
estate management and development, through the Palmas del Mar development
located in Puerto Rico ("Palmas") which was owned by the Company's subsidiary,
MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the
consummation of the sale of the MGI Notes (as defined in Note 5), the Company
(i) transferred to MAXXAM 50 million common shares of Kaiser held by a
subsidiary of the Company, representing the Company's (and MAXXAM's) entire
interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of
MAXXAM common stock held by a subsidiary of the Company, (iii) transferred to
MAXXAM certain notes receivable, long-term investments, and other assets, each
net of related liabilities, collectively having a carrying value to the Company
of approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary
Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being
in satisfaction of a $15,000 promissory note evidencing a cash loan made by
MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed
approximately $17,500 of certain liabilities of the Company that were unrelated
to the Company's forest products operations or were related to operations which
have been disposed of by the Company. Additionally, on September 28, 1993, the
Company transferred to MAXXAM its interest in Palmas. The foregoing transactions
are collectively referred to as the "Forest Products Group Formation." The
Company presented the loss from net assets transferred to MAXXAM pursuant to the
Forest Products Group Formation (including certain allocated costs from MAXXAM
for general and administrative expenses unrelated to the Company's forest
products operations) in a manner similar to that which would have been presented
if the Company had discontinued the operations relating to such net assets. See
Note 2.
As a result of the Forest Products Group Formation, the Company is engaged
in forest products operations conducted through its wholly owned subsidiaries,
Pacific Lumber and Britt. Pacific Lumber is engaged in several principal aspects
of the lumber industry, including the growing and harvesting of redwood and
Douglas-fir timber, the milling of logs into lumber and the manufacture of
lumber into a variety of finished products. Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial portion of
which is obtained from Pacific Lumber. Housing, construction and remodeling are
the principal markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest product sales. A significant portion of forest
product sales are made to third parties located west of the Mississippi river.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published, and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with
F-140
<PAGE> 336
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent resolution
of any one of the contingent matters described in Note 9 could differ materially
from current estimates. The results of an adverse resolution of such
uncertainties could have a material effect on the reported amounts of the
Company's consolidated assets and liabilities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
Marketable Securities
Marketable securities are carried at fair value. Prior to December 31,
1993, marketable securities portfolios were carried at the lower of cost or
market at the balance sheet date. The cost of the securities sold is determined
using the first-in, first-out method. Included in investment, interest and other
income for each of the three years ended December 31, 1995 were: 1995 -- net
unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net
unrealized holding losses of $1,094 and net realized gains of $2,763; and
1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized
losses and net unrealized gains of $841. Net unrealized losses represent the
amount required to reduce the short-term marketable securities portfolios from
cost to market value prior to December 31, 1993.
Inventories
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method.
Timber and Timberlands
Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.
Property, Plant and Equipment
Property, plant and equipment, including capitalized interest, is stated at
cost, net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
Deferred Financing Costs
Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing.
Restricted Cash and Concentrations of Credit Risk
Restricted cash represents the amount initially deposited into an account
(the "Liquidity Account") held by the trustee under the indenture governing the
7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia
Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific
Lumber. See Note 5. The Liquidity Account is not available, except under certain
limited circumstances, for Scotia
F-141
<PAGE> 337
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Pacific's working capital purposes; however, it is available to pay the Rated
Amortization (as defined in Note 5) and interest on the Timber Notes if and to
the extent that cash flows are insufficient to make such payments. The required
Liquidity Account balance will generally decline as principal payments are made
on the Timber Notes. Investment, interest and other income for the years ended
December 31, 1995, 1994 and 1993 includes interest of approximately $2,560,
$2,638 and $2,101, respectively, attributable to an investment rate agreement
(at 7.95% per annum) with the financial institution which holds the Liquidity
Account.
At December 31, 1995 and 1994, cash and cash equivalents include $19,742
and $19,439, respectively, (the "Payment Account") which is reserved for debt
service payments on the Timber Notes (see Note 5). The Payment Account and the
Liquidity Account are each held by a different financial institution. In the
event of nonperformance by such financial institutions, the Company's exposure
to credit loss is represented by the amounts deposited plus any unpaid accrued
interest thereon. The Company mitigates its concentrations of credit risk with
respect to these restricted cash deposits by maintaining them at high credit
quality financial institutions and monitoring the credit ratings of these
institutions.
Stockholder's Equity (Deficit)
The adjustment to the Company's additional capital for the year ended
December 31, 1993 resulted from a transaction relating to Kaiser's common stock
prior to the Forest Products Group Formation. Pursuant to the terms of an
amended compensation plan, Kaiser issued 4,228 shares to certain members of its
management in 1993. As a result of this transaction, the Company's equity in
Kaiser's net assets differed from the Company's historical cost. The Company
accounted for this difference as an adjustment to additional capital.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the Timber Notes, the 10 1/2%
Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior
Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured
Discount Notes due 2003 (the "MGI Discount Notes"), and on the current rates
offered for borrowings similar to the other debt. The Timber Notes, the Pacific
Lumber Senior Notes, the MGI Senior Notes and the MGI Discount Notes are thinly
traded financial instruments; accordingly, their market prices at any balance
sheet date may not be representative of the prices which would be derived from a
more active market.
The estimated fair values of the Company's financial instruments, along
with the carrying amounts of the related assets (liabilities), are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575
Marketable securities (held for trading
purposes)............................... 36,568 36,568 19,514 19,514
Restricted cash........................... 31,367 31,367 32,402 32,402
Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
</TABLE>
F-142
<PAGE> 338
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
2. NET ASSETS TRANSFERRED TO MAXXAM
As a result of the Forest Products Group Formation (as described in Note
1), the Company transferred all of its interest in Kaiser's common stock, the
assets and related liabilities of Palmas, and certain other net assets that were
unrelated to the Company's forest products operations, to MAXXAM. The Company
did not incur any gain or loss relating to the transfer of such assets and
liabilities to MAXXAM.
The net loss from net assets transferred to MAXXAM is as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1993
------------
<S> <C>
Net sales:
Aluminum operations................................................... $1,016,966
Real estate and other................................................. 19,654
----------
1,036,620
----------
Costs and expenses:
Aluminum operations................................................... 1,091,353
Real estate and other................................................. 28,132
----------
1,119,485
----------
Loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles................. (82,865)
Credit for income taxes................................................. 31,050
Minority interests...................................................... 3,641
----------
Loss before extraordinary item and cumulative effect of changes in
accounting principles................................................. (48,174)
Extraordinary item:
Loss on redemption of debt, net of related benefits for income taxes
and minority interests of $11,249 and $2,791, respectively......... (19,045)
Cumulative effect of changes in accounting principles:
Postretirement and postemployment benefits, net of related benefits
for income taxes and minority interests of $237,682 and $64,554,
respectively....................................................... (440,519)
Accounting for income taxes........................................... (5,232)
----------
Loss from net assets transferred to MAXXAM.............................. $ (512,970)
==========
</TABLE>
F-143
<PAGE> 339
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Net assets transferred to MAXXAM are as follows as of the date of transfer:
<TABLE>
<S> <C>
Current assets:
Aluminum operations.................................................... $ 780,791
Real estate and other.................................................. 16,480
----------
797,271
----------
Current liabilities:
Aluminum operations.................................................... 477,805
Real estate and other.................................................. 28,853
----------
506,658
----------
Net current assets....................................................... 290,613
----------
Non-current assets:
Aluminum operations.................................................... 1,722,362
Real estate and other.................................................. 56,422
----------
1,778,784
----------
Non-current liabilities:
Aluminum operations.................................................... 1,790,946
Minority interests in aluminum operations.............................. 221,907
Real estate and other.................................................. 26,013
----------
2,038,866
----------
Net assets transferred to MAXXAM......................................... $ 30,531
==========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Lumber........................................................... $59,563 $55,310
Logs............................................................. 18,341 14,788
------- -------
$77,904 $70,098
======= =======
</TABLE>
During 1993, Pacific Lumber's inventory quantities were reduced. This
reduction resulted in the liquidation of Pacific Lumber's LIFO inventory
quantities carried at prevailing costs from prior years which were higher than
the current cost of inventory. The effect of this inventory liquidation
increased cost of goods sold by approximately $222 for the year ended December
31, 1993.
F-144
<PAGE> 340
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------
USEFUL LIVES 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Logging roads, land and improvements............. 15 years $ 7,929 $ 7,545
Buildings........................................ 33 years 29,661 28,209
Machinery and equipment.......................... 5 - 15 years 129,764 126,480
Construction in progress......................... 520 30
-------- --------
167,874 162,264
Less: accumulated depreciation................... (67,732) (59,081)
-------- --------
$100,142 $103,183
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $9,663, $9,269 and $8,670, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20,
2015......................................................... $350,233 $363,811
11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1, 2003,
net of discount.............................................. 92,498 82,779
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000
Other.......................................................... 774 866
-------- --------
778,505 782,456
Less: current maturities....................................... (14,195) (13,670)
-------- --------
$764,310 $768,786
======== ========
</TABLE>
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber
Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary,
issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific used the
net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber
Notes, together with Pacific Lumber's cash and marketable securities, to (i)
retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A
Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes"), and (c) $41,750 aggregate principal amount of
Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the
"Debentures;" the Series A Notes, the Series B Notes and the Debentures are
referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay
accrued interest on the Old Pacific Lumber Securities through the date of
redemption; (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility
loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi)
pay a $25,000 dividend to a subsidiary of the Company. These transactions
resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the
payment of premiums and the write-off of unamortized deferred financing costs on
the Old Pacific Lumber Securities.
F-145
<PAGE> 341
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership and
operation of its timber and timberlands. The Timber Notes are senior secured
obligations of Scotia Pacific and are not obligations of, or guaranteed by,
Pacific Lumber or any other person. The Timber Notes are secured by a lien on
(i) Scotia Pacific's timber and timberlands (representing $179,364 of the
Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's
contract rights and certain other assets, (iii) the funds deposited in the
Payment Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.
The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale of
logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The minimum amount
of principal which Scotia Pacific must pay (on a cumulative basis) through any
Timber Note payment date in order to avoid an Event of Default (as defined in
the Timber Note Indenture) is referred to as rated amortization ("Rated
Amortization"). If all payments of principal are made in accordance with Rated
Amortization, the payment date on which Scotia Pacific will pay the final
installment of principal is July 20, 2015. The amount of principal which Scotia
Pacific must pay through each Timber Note payment date in order to avoid
prepayment or deficiency premiums is referred to as scheduled amortization
("Scheduled Amortization"). If all payments of principal are made in accordance
with Scheduled Amortization, the payment date on which Scotia Pacific will pay
the final installment of principal is July 20, 2009.
Substantially all of the Company's consolidated assets are owned by Pacific
Lumber and a significant portion of Pacific Lumber's assets are owned by Scotia
Pacific. The Company expects that Pacific Lumber will provide a major portion of
the Company's future operating cash flow. Pacific Lumber is dependent upon
Scotia Pacific for a significant portion of its operating cash flow. The holders
of the Timber Notes have priority over the claims of creditors of Pacific Lumber
with respect to the assets and cash flows of Scotia Pacific, and the holders of
the Pacific Lumber Senior Notes have priority over the claims and creditors of
the Company with respect to the assets and cash flows of Pacific Lumber. Under
the terms of the Timber Note Indenture, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from
operations exceeds the amounts required by the Timber Note Indenture to be
reserved for the payment of current debt service (including interest, principal
and premiums) on the Timber Notes, capital expenditures and certain other
operating expenses.
Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of Scotia
Pacific, in whole but not in part, at any time. The redemption price of the
Timber Notes is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.
Interest on the Pacific Lumber Senior Notes is payable semi-annually on
March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the
option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a
price of 103% of the principal amount plus accrued interest. The redemption
price is reduced annually until March 1, 2000, after which time the Pacific
Lumber Senior Notes are redeemable at par.
Pacific Lumber has a revolving credit agreement with a bank (as amended and
restated, the "Revolving Credit Agreement") which expires on May 31, 1998.
Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's
trade receivables and inventories, with interest computed at the bank's
reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The
Revolving Credit Agreement provides for borrowings of up to $60,000, of which
$15,000 may be used for standby letters of credit and $30,000 is restricted to
timberland acquisitions. Borrowings made pursuant to the portion of the credit
facility restricted to timberland
F-146
<PAGE> 342
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
acquisitions would also be secured by the purchased timberlands. As of December
31, 1995, $48,090 of borrowings was available under the Revolving Credit
Agreement, of which $3,090 was available for letters of credit and $30,000 was
restricted to timberland acquisitions. No borrowings were outstanding as of
December 31, 1995, and letters of credit outstanding amounted to $11,910. The
Revolving Credit Agreement contains covenants substantially similar to those
contained in the indenture governing the Pacific Lumber Senior Notes.
The indentures governing the Pacific Lumber Senior Notes, the Timber Notes
and the Revolving Credit Agreement contain various covenants which, among other
things, limit the payment of dividends and restrict transactions between Pacific
Lumber and its affiliates. As of December 31, 1995, under the most restrictive
of these covenants, approximately $15,663 of dividends could be paid by Pacific
Lumber.
On August 4, 1993, the Company issued $100,000 aggregate principal amount
of the MGI Senior Notes and $126,720 aggregate principal amount (approximately
$70,000 net of original issue discount) of the MGI Discount Notes, which,
together with the MGI Senior Notes, are referred to collectively as the "MGI
Notes". The MGI Notes are secured by the Company's pledge of 100% of the common
stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million
shares of Kaiser's common stock it received as a result of the Forest Products
Group Formation. The indenture governing the MGI Notes, among other things,
restricts the ability of the Company to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments. As of December
31, 1995, under the most restrictive of these covenants, approximately $1,899 of
dividends could be paid by the Company, of which $1,600 was paid in January
1996. The MGI Notes are senior indebtedness of the Company; however, they are
effectively subordinate to the liabilities of the Company's subsidiaries, which
include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount
Notes are net of discount of $33,222 and $43,941 at December 31, 1995 and 1994,
respectively.
The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February 1,
1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.
The Company used a portion of the net proceeds from the sale of the MGI
Notes to retire the entire outstanding balance of its 12 3/4% Notes at 101% of
their principal amount, plus accrued interest through November 14, 1993. The
Company used the remaining portion of the net proceeds from the sale of the MGI
Notes, together with a portion of its existing cash resources, to pay a $20,000
dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993,
$20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes
due 2000 at 100% of their principal amount plus accrued interest thereon.
The Company incurred a pre-tax extraordinary loss associated with the early
retirement of the 12 3/4% Notes of $9,677 consisting of net interest cost of
$3,763, the write-off of $3,472 of unamortized deferred financing costs, a
premium of $1,500 and the write-off of $942 of unamortized original issue
discount.
F-147
<PAGE> 343
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Maturities
The following table of scheduled maturities of long-term debt outstanding
at December 31, 1995 reflects Scheduled Amortization with respect to the Timber
Notes:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
7.95% Scotia Pacific Timber
Collateralized Notes........... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009
11 1/4% MGI Senior Secured
Notes.......................... -- -- -- -- -- 100,000
12 1/4% MGI Senior Secured
Discount Notes................. -- -- -- -- -- 125,720
10 1/2% Pacific Lumber Senior
Notes.......................... -- -- -- -- -- 235,000
Other............................ 92 93 94 94 95 306
------- ------- ------- ------- ------- --------
$14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035
======= ======= ======= ======= ======= ========
</TABLE>
Restricted Net Assets of Subsidiaries
At December 31, 1995, certain debt instruments restricted the ability of
Pacific Lumber to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 1995, all of the assets of Pacific Lumber and
its subsidiaries are subject to such restrictions.
6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes. Prior to August 4, 1993, the
Company and each of its subsidiaries computed their tax liabilities or tax
benefits on a separate company basis (except as discussed in the following
paragraph), in accordance with their respective tax allocation agreements with
MAXXAM.
Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation
agreement that, among other things, amended the tax calculations with respect to
Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms
of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the
federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and
certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek)
(collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. The PL
Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed on a separate company basis as if
it was never connected with MAXXAM. The remaining subsidiaries of MGI are each
liable to MAXXAM for their respective income tax liabilities computed on a
separate company basis as if they were never connected with MAXXAM, pursuant to
their respective tax allocation agreements.
MGI's tax allocation agreement with MAXXAM, (as amended on August 4, 1993,
the "Tax Allocation Agreement"), provides that the Company's federal income tax
liability is computed as if MGI files a consolidated tax return with all of its
subsidiaries except Salmon Creek, and that such corporations were never
connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income
tax liability of MGI is the difference between (i) the MGI Consolidated Tax
Liability and (ii) the sum of the separate tax liabilities for the Company's
subsidiaries (computed as discussed above), but excluding Salmon Creek. To the
F-148
<PAGE> 344
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
extent that the MGI Consolidated Tax Liability is less than the aggregate
amounts in (ii), MAXXAM is obligated to pay the amount of such difference to
MGI.
The credit (provision) in lieu of income taxes on income (loss) from
continuing operations before income taxes, extraordinary items and cumulative
effect of changes in accounting principles consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Current:
Federal credit (provision) in lieu of income taxes... $ (167) $ -- $ (988)
State and local...................................... (35) (55) (253)
------- ------ -------
(202) (55) (1,241)
------- ------ -------
Deferred:
Federal credit (provision) in lieu of income taxes... (33) 2,366 4,825
State and local...................................... (976) 1,305 (229)
------- ------ -------
(1,009) 3,671 4,596
------- ------ -------
$(1,211) $3,616 $ 3,355
======= ====== =======
</TABLE>
The 1994 deferred federal credit in lieu of income taxes of $2,366 includes
a credit relating to reserves the Company no longer believes are necessary. The
1993 deferred federal credit in lieu of income taxes of $4,825 includes $2,601
for the benefit of operating loss carryforwards generated in 1993 and includes
an $850 benefit for increasing net deferred income tax assets (liabilities) as
of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation
Act of 1993 which retroactively increased the federal statutory income tax rate
from 34% to 35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) in lieu of income taxes and
the amount computed by applying the federal statutory income tax rate to income
(loss) from continuing operations before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations before
income taxes, extraordinary items and cumulative
effect of changes in accounting principles......... $ 4,748 $14,819 $(17,664)
======= ======= ========
Amount of federal income tax based upon the
statutory rate..................................... $(1,662) $(5,187) $ 6,182
Revision of prior years' tax estimates and other
changes in valuation allowances.................... 907 7,739 (3,468)
Increase in net deferred income tax assets due to tax
rate change ....................................... -- -- 850
State and local taxes, net of federal tax benefit.... (657) 812 (313)
Other................................................ 201 252 104
------- ------- --------
$(1,211) $ 3,616 $ 3,355
======= ======= ========
</TABLE>
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1994, the Company recorded an extraordinary loss related to the
settlement of litigation in connection with the
F-149
<PAGE> 345
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Company's acquisition of Pacific Lumber (see Note 9). The Company reported the
loss net of related deferred income taxes of $6,312 which is less than the
federal and state statutory income tax rates due to expenses for which no tax
benefit was recognized.
As shown in the Consolidated Statement of Operations for the year ended
December 31, 1993, the Company reported an extraordinary loss related to the
early extinguishment of debt. The Company reported the loss net of related
deferred income taxes of $8,856 which approximated the federal statutory income
tax rate in effect on the dates the transactions occurred.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
adoption of SFAS 109 changed the Company's method of accounting for income taxes
to an asset and liability approach from the deferral method prescribed by APB
11. The asset and liability approach requires the recognition of deferred income
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Under this method, deferred income tax assets and liabilities are determined
based on the temporary differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates. The cumulative effect of the
change in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $14,916. The implementation of SFAS 109 required the
Company to restate certain assets and liabilities to their pre-tax amounts from
their net-of-tax amounts originally recorded in connection with the acquisitions
of Pacific Lumber in 1986 and Britt in 1990. As a result of restating these
assets and liabilities, the loss from continuing operations before income taxes,
extraordinary item and cumulative effect of changes in accounting principles for
the year ended December 31, 1993 was decreased by $377.
The components of the Company's net deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax assets:
Loss and credit carryforwards................................ $ 83,705 $ 86,864
Timber and timberlands....................................... 32,528 37,209
Other liabilities............................................ 17,203 10,460
Postretirement benefits other than pensions.................. 2,316 2,145
Other........................................................ 327 1,818
Valuation allowances......................................... (51,595) (52,060)
-------- --------
Total deferred income tax assets, net................ 84,484 86,436
-------- --------
Deferred income tax liabilities:
Inventories.................................................. (16,068) (17,934)
Property, plant and equipment................................ (16,560) (16,563)
Other........................................................ (3,615) (3,427)
-------- --------
Total deferred income tax liabilities................ (36,243) (37,924)
-------- --------
Net deferred income tax assets................................. $ 48,241 $ 48,512
======== ========
</TABLE>
The valuation allowances listed above relate primarily to loss and credit
carryforwards. As of December 31, 1995, approximately $32,528 of the net
deferred income tax assets listed above relate to the excess of the tax basis
over financial statement basis with respect to timber and timberlands. The
Company believes that it is more likely than not that this net deferred income
tax asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis. Also included
in net deferred income tax assets as of December 31, 1995 is $32,110 which
relates to the benefit of loss and credit
F-150
<PAGE> 346
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
carryforwards, net of valuation allowances. The Company evaluated all
appropriate factors to determine the proper valuation allowances for loss and
credit carryforwards. These factors included any limitations concerning use of
the carryforwards, the year the carryforwards expire and the levels of taxable
income necessary for utilization. The Company has concluded that it will more
likely than not generate sufficient taxable income to realize the benefit
attributable to the loss and credit carryforwards for which valuation allowances
were not provided.
Included in the net deferred income tax assets listed above are $43,731 and
$44,351 at December 31, 1995 and 1994, respectively, which are recorded pursuant
to the tax allocation agreements with MAXXAM.
The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
1995, under the terms of the respective tax allocation agreements. The
utilization of certain of these attributes is subject to limitations.
<TABLE>
<CAPTION>
EXPIRING
THROUGH
-------
<S> <C> <C>
Regular Tax Attribute Carryforwards:
Net operating losses.................................................. $224,485 2010
Net capital losses.................................................... 5,177 1997
Minimum tax credit.................................................... 167 --
Alternative Minimum Tax Attribute Carryforwards:
Net operating losses.................................................. $185,803 2010
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by The Employee Retirement Income Security Act of 1974, as amended.
A summary of the components of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Service cost -- benefits earned during the year................ $ 1,483 $1,643 $ 1,600
Interest cost on projected benefit obligation.................. 1,693 1,263 918
Actual loss (gain) on plan assets.............................. (3,900) 10 (2,128)
Net amortization and deferral.................................. 2,460 (859) 1,359
------- ------ -------
Net periodic pension cost...................................... $ 1,736 $2,057 $ 1,749
======= ====== =======
</TABLE>
F-151
<PAGE> 347
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation.................................... $ 16,910 $ 11,809
Non-vested benefit obligation................................ 1,214 779
-------- --------
Total accumulated benefit obligation................. $ 18,124 $ 12,588
======== ========
Projected benefit obligation................................... $ 21,841 $ 15,047
Plan assets at fair value, primarily equity and debt
securities................................................... (18,363) (13,184)
-------- --------
Projected benefit obligation in excess of plan assets.......... 3,478 1,863
Unrecognized net transition asset.............................. 24 29
Unrecognized net gain (loss)................................... (27) 1,475
Unrecognized prior service cost................................ (45) (50)
-------- --------
Accrued pension liability............................ $ 3,430 $ 3,317
======== ========
</TABLE>
The assumptions used in accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Rate of increase in compensation levels...................... 5.0% 5.0% 5.0%
Discount rate................................................ 7.25% 8.5% 7.5%
Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
</TABLE>
The Company has an unfunded defined benefit plan for certain postretirement
and other benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
termination of employment and retirement and commencement of pension benefits.
Participants make contributions for a portion of the cost of their health care
benefits.
The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are accrued over the period the employees provide services to the date
of their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the change in
accounting principle for the adoption of SFAS 106 was recorded as a charge to
results of operations of $2,348, net of related income taxes of $1,566. The
deferred income tax benefit related to the adoption of SFAS 106 was recorded at
the federal and state statutory rates in effect on the date SFAS 106 was
adopted.
A summary of the components of net periodic postretirement benefit cost is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $228 $216 $153
Interest cost on accumulated postretirement benefit
obligation.................................................. 317 294 315
Net amortization and deferral................................. (53) (7) --
---- ---- ----
Net periodic postretirement benefit cost...................... $492 $503 $468
==== ==== ====
</TABLE>
F-152
<PAGE> 348
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The adoption of SFAS 106 increased the Company's loss from continuing
operations before extraordinary item and cumulative effect of changes in
accounting principles by $212 ($360 before tax) for the year ended December 31,
1993.
The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Retirees........................................................... $ 634 $ 860
Actives eligible for benefits...................................... 726 656
Actives not eligible for benefits.................................. 3,317 2,355
------ ------
Accumulated postretirement benefit obligation.................... 4,677 3,871
Unrecognized net gain.............................................. 553 972
------ ------
Postretirement benefit liability................................. $5,230 $4,843
====== ======
</TABLE>
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to
decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one
percentage point increase in the assumed health care cost trend rate would
increase the accumulated postretirement benefit obligation as of December 31,
1995 by approximately $674 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by approximately $90.
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994,
respectively.
Subsequent to December 31, 1993, Pacific Lumber's employees were eligible
to participate in a defined contribution savings plan sponsored by MAXXAM. This
plan is designed to enhance the existing retirement programs of participating
employees. Employees may elect to contribute up to 16% of their compensation to
the plan. For those participants who have elected to make voluntary
contributions to the plan, Pacific Lumber's contributions consist of a matching
contribution of up to 4% of the compensation of participants for each calendar
quarter. The cost to the Company of this plan was $1,281 and $1,215 for the
years ended December 31, 1995 and 1994, respectively.
Pacific Lumber is self-insured for workers' compensation benefits. Included
in accrued compensation and related benefits and other noncurrent liabilities
are accruals for workers' compensation claims amounting to $8,900 and $9,233 at
December 31, 1995 and 1994, respectively. Workers' compensation expenses
amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995,
1994 and 1993, respectively.
8. RELATED PARTY TRANSACTIONS
MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting and data processing services. In addition, MAXXAM provides the
Company with office space and various office personnel, insurance, legal,
operating, financial and certain other services. MAXXAM's expenses incurred on
behalf of the Company are reimbursed by the Company through payments consisting
of (i) an allocation of the lease expense for the office space utilized by or on
behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses
incurred by MAXXAM, including, but not limited to, labor costs of MAXXAM
personnel rendering services to the Company. Charges by MAXXAM for such services
were $1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and
1993, respectively. The Company
F-153
<PAGE> 349
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
believes that the services being rendered are on terms not less favorable to the
Company than those which would be obtainable from unaffiliated third parties.
In 1994, in connection with the litigation settlement described in Note 9,
Pacific Lumber paid approximately $3,185 to a law firm in which a director of
Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately
$1,931 in connection with the offering of the Pacific Lumber Senior Notes and
the Timber Notes to this same law firm.
9. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES
During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against MAXXAM, the Company,
Pacific Lumber, former directors of Pacific Lumber and others concerning the
Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was
paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by
Pacific Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. In 1994, the Company recorded an extraordinary
loss of $14,866 related to the settlement and associated costs, including a
$2,000 accrual for certain contingent claims and $4,400 of related legal fees,
net of benefits for federal and state income taxes of $6,312.
The Company's operations are subject to a variety of California and federal
laws and regulations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality. The Company does not expect that
compliance with such existing laws and regulations will have a material adverse
effect on its future consolidated operating results, financial position or
liquidity; however, these laws are modified from time to time and there can be
no assurance that certain pending or future legislation, governmental
regulations or judicial or administrative decisions would not adversely affect
the Company or its ability to sell lumber, logs or timber.
In 1995, the U.S. Fish and Wildlife Service (the "USFWS") published its
proposed final designation of critical habitat for the marbled murrelet (the
"Proposed Designation"), seeking to designate over four million acres as
critical habitat for the marbled murrelet, including approximately 33,000 acres
of Pacific Lumber's timberlands. The Proposed Designation was subject to a
60-day comment period and Pacific Lumber filed comments vigorously opposing the
Proposed Designation. The USFWS has not yet published its final designation of
critical habitat for the marbled murrelet. Pacific Lumber is unable to predict
when or if it would be able to harvest on any acreage finally designated as
critical habitat. Furthermore, it is impossible to determine the future adverse
impact of such designation on the Company's consolidated financial position,
results of operations or liquidity until such time as the Proposed Designation
is finalized and related regulatory and legal issues are fully resolved.
However, if Pacific Lumber is unable to harvest, or is severely limited in
harvesting, on timberlands designated as marbled murrelet critical habitat, such
restrictions could have a material adverse effect on the Company's liquidity,
consolidated financial position and results of operations. If Pacific Lumber is
unable to harvest or is severely limited in harvesting, it intends to seek full
compensation from the appropriate governmental agencies on the grounds that such
restrictions constitute a taking.
There continue to be other regulatory actions and lawsuits seeking to have
various other species listed as threatened or endangered under the federal
Endangered Species Act and/or the California Endangered Species Act and to
designate critical habitat for such species. It is uncertain what impact, if
any, such listings and/or designations of critical habitat will have on the
Company's consolidated financial position, results of operations or liquidity.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require timber companies to project the average annual growth
they will have on their timberlands during the last decade of a 100-year
planning period
F-154
<PAGE> 350
MAXXAM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
("Projected Annual Growth"). During any rolling ten-year period, the average
annual harvest over such ten-year period may not exceed Projected Annual Growth.
The first ten-year period began in May 1994. Pacific Lumber is required to
submit, by October 1996, a plan setting forth, among other things, its Projected
Annual Growth. Pacific Lumber has not completed its analysis of the projected
productivity of its timberlands and is therefore unable to predict the impact
that these regulations will have on its future timber harvesting practices;
however, the final results of this analysis could require Pacific Lumber to
reduce (or permit it to increase) its timber harvest in future years from the
average annual harvest that it has experienced in recent years. Pacific Lumber
believes that it would be able to mitigate the effect of any required reduction
in harvest level by acquisitions of additional timberlands and by increasing the
productivity of its timberlands. The Company is unable to predict the ultimate
impact the sustained yield regulations will have on its future consolidated
financial position, results of operations or liquidity.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs"), and the Company expects that such groups and individuals will
continue to file objections to certain of the Company's THPs. In addition,
lawsuits are pending which seek to prevent the Company from implementing certain
of its approved THPs and other timber operations. These challenges have severely
restricted Pacific Lumber's ability to harvest virgin old growth redwood timber
on its property (and, to a lesser extent, its residual old growth timber). To
date, challenges with respect to the Company's THPs relating to young growth and
residual old growth have been limited; however, no assurance can be given as to
the extent of such challenges in the future. The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from conducting a
portion of its operations, to date such challenges have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. It is, however, impossible to predict the future nature
or degree of such challenges or their ultimate impact on the consolidated
financial position, results of operations or liquidity of the Company.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
that the resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
10. OTHER ITEMS
Investment, Interest and Other Income
In February 1994, Pacific Lumber received a franchise tax refund of $7,243,
the substantial portion of which represents interest, from the State of
California relating to tax years 1972 through 1985. This amount is included in
investment, interest and other income for the year ended December 31, 1994.
Items Related to 1992 Earthquake
In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of
$1,527 and $1,200, respectively, resulting from business interruption insurance
reimbursements for higher operating costs and the related loss of revenues
resulting from the April 1992 earthquake. Other receivables at December 31, 1994
included $1,684 related to earthquake related insurance claims.
F-155
<PAGE> 351
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 53,122 $ 48,396
Marketable securities............................................ 31,852 36,568
Receivables:
Trade......................................................... 11,466 20,576
Other......................................................... 2,429 1,624
Inventories...................................................... 74,836 77,904
Prepaid expenses and other current assets........................ 5,612 7,101
------------- ------------
Total current assets..................................... 179,317 192,169
Timber and timberlands, net of depletion of $217,507 and $204,856
at September 30, 1996 and December 31, 1995, respectively........ 326,486 337,390
Property, plant and equipment, net of accumulated depreciation of
$74,321 and $67,732 at September 30, 1996 and December 31, 1995,
respectively..................................................... 100,422 100,142
Deferred financing costs, net...................................... 24,996 27,288
Deferred income taxes.............................................. 56,747 58,485
Restricted cash.................................................... 30,453 31,367
Other assets....................................................... 5,843 5,542
------------- ------------
$ 724,264 $ 752,383
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................. $ 5,436 $ 4,166
Accrued compensation and related benefits........................ 9,791 9,611
Accrued interest................................................. 9,217 25,354
Deferred income taxes............................................ 10,244 10,244
Other accrued liabilities........................................ 3,828 4,435
Long-term debt, current maturities............................... 16,258 14,195
------------- ------------
Total current liabilities................................ 54,774 68,005
Long-term debt, less current maturities............................ 756,619 764,310
Other noncurrent liabilities....................................... 26,518 33,813
------------- ------------
Total liabilities........................................ 837,911 866,128
------------- ------------
Contingencies
Stockholder's deficit:
Common stock, $.08 1/3 par value; 1,000 shares authorized; 100
shares issued................................................. -- --
Additional capital............................................... 81,287 81,287
Accumulated deficit.............................................. (194,934) (195,032)
------------- ------------
Total stockholder's deficit.............................. (113,647) (113,745)
------------- ------------
$ 724,264 $ 752,383
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE> 352
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales:
Lumber and logs...................................................... $183,913 $161,151
Other................................................................ 15,667 19,761
-------- --------
199,580 180,912
-------- --------
Operating expenses:
Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997
Selling, general and administrative expenses......................... 11,344 12,243
Depletion and depreciation........................................... 21,008 19,785
-------- --------
146,969 128,025
-------- --------
Operating income....................................................... 52,611 52,887
Other income (expense):
Investment, interest and other income................................ 8,377 6,835
Interest expense..................................................... (58,388) (58,228)
-------- --------
Income (loss) before income taxes...................................... 2,600 1,494
Credit (provision) in lieu of income taxes............................. 1,398 (466)
-------- --------
Net income (loss)...................................................... $ 3,998 $ 1,028
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE> 353
MAXXAM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 3,998 $ 1,028
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion and depreciation......................................... 21,008 19,785
Amortization of deferred financing costs and discounts on long-term
debt.............................................................. 10,815 9,772
Decrease in receivables............................................ 11,478 12,683
Net sales (purchases) of marketable securities..................... 8,351 (10,542)
Decrease (increase) in inventories, net of depletion............... 1,588 (6,067)
Increase in accounts payable....................................... 1,270 853
Decrease (increase) in prepaid expenses and other current assets... 1,188 (1,132)
Decrease in accrued interest....................................... (16,137) (16,330)
Increase (decrease) in other liabilities........................... (8,729) 9,618
Net gains on marketable securities................................. (3,635) (2,362)
Decrease (increase) in accrued and deferred income taxes........... (428) 256
Other.............................................................. (28) 465
-------- --------
Net cash provided by operating activities..................... 30,739 18,027
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of note receivable from affiliate............................. -- 2,500
Net proceeds from sale of assets...................................... 110 9
Capital expenditures.................................................. (8,986) (6,624)
-------- --------
Net cash used for investing activities........................ (8,876) (4,115)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash withdrawals, net...................................... 914 563
Repurchase of and principal payments on long-term debt................ (14,151) (14,256)
Dividends paid........................................................ (3,900) (4,800)
-------- --------
Net cash used for financing activities........................ (17,137) (18,493)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 4,726 (4,581)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 48,396 48,575
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 53,122 $ 43,994
======== ========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net repayments of margin borrowings for marketable securities......... $ - $ 6,648
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest............................ $ 63,710 $ 64,786
Tax allocation payments to (receipts from) MAXXAM Inc., net........... 167 --
Income taxes paid (refunded).......................................... (1,549) (5,461)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE> 354
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the Audited
Consolidated Financial Statements of MAXXAM Group Inc. and the Notes thereto
contained elsewhere herein. Any capitalized terms used but not defined in the
following Condensed Notes to Consolidated Financial Statements have the same
meaning given to them in the Audited Consolidated Financial Statement of MAXXAM
Group Inc. All references to the "Company" include MAXXAM Group Inc. and its
subsidiary companies unless otherwise noted or the context indicates otherwise.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
entire year.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996, the consolidated
results of operations for the nine months ended September 30, 1996 and 1995 and
consolidated cash flows for the nine months ended September 30, 1996 and 1995.
Certain reclassifications of prior period information have been made to conform
to the current presentation. The Company is a wholly owned subsidiary of MAXXAM
Inc. ("MAXXAM").
2. RESTRICTED CASH
Restricted cash represents the amount deposited into an account held by the
Trustee under the indenture governing the Timber Notes of the Company's indirect
wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific").
At September 30, 1996 and December 31, 1995, cash and cash equivalents also
includes $5,676 and $19,742, respectively, which is restricted for debt service
payments on the succeeding note payment date for the Timber Notes.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Lumber...................................................... $52,824 $ 59,563
Logs........................................................ 22,012 18,341
------- -------
$74,836 $ 77,904
======= =======
</TABLE>
F-159
<PAGE> 355
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized Notes due
July 20, 2015............................................. $ 336,130 $350,233
10 1/2% Pacific Lumber Senior Notes due March 1, 2003....... 235,000 235,000
11 1/4% MGI Senior Secured Notes due August 1, 2003......... 100,000 100,000
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount..................................... 101,021 92,498
Other....................................................... 726 774
-------- --------
772,877 778,505
Less: current maturities.................................... (16,258) (14,195)
-------- --------
$ 756,619 $764,310
======== ========
</TABLE>
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES
The credit in lieu of income taxes for the nine months ended September 30,
1996 includes a benefit of $2,620 relating to the refund of taxes previously
paid in connection with a settlement of certain federal income tax matters in
June 1996. The Company received the cash refund in August 1996.
6. CONTINGENCIES
The Company's forest products operations are primarily conducted by The
Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
endangered species and critical habitat, and air and water quality. While the
Company does not expect that Pacific Lumber's compliance with such existing laws
and regulations will have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity, Pacific
Lumber is subject to certain pending matters described below, including the
resolution of issues relating to the final designation of critical habitat for
the marbled murrelet, which could have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Moreover, the laws and regulations relating to the Company's forest products
operations are modified from time to time and are subject to judicial and
administrative interpretation. There can be no assurance that certain pending or
future governmental regulations, legislation or judicial or administrative
decisions would not materially and adversely affect Pacific Lumber or its
ability to harvest timber.
In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its
final designation of critical habitat for the marbled murrelet ("Final
Designation"), designating over four million acres as critical habitat for the
marbled murrelet. Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such 33,000 acres being young
growth timber. Pacific Lumber's wildlife surveys to date (based upon current
survey protocols) have indicated that Pacific Lumber has approximately 6,600
acres of occupied marbled murrelet habitat. A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls within
the area covered by the Final Designation. In order to mitigate the impact of
the Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP"). Due to, among other things, the unfavorable response of the USFWS to
Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its
subsidiaries filed two actions (the "Takings Litigation")
F-160
<PAGE> 356
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
alleging that certain portions of its timberlands have been "taken" and seeking
just compensation. Pursuant to the Headwaters Agreement described in Note 7
below (the "Headwaters Agreement"), the Takings Litigation has been stayed by
the court at the request of the parties.
It is impossible for the Company to determine the potential adverse effect
of the Final Designation on the Company's consolidated financial position,
results of operations or liquidity until such time as all of the material
regulatory and legal issues are resolved; however, if Pacific Lumber is unable
to harvest, or is severely limited in harvesting, on timberlands designated as
critical habitat for the marbled murrelet, such effect could be material. If
Pacific Lumber is unable to harvest or is severely limited in harvesting, it
intends to seek just compensation from the appropriate governmental agencies on
the grounds that such restrictions constitute a governmental taking. There
continue to be other regulatory actions and lawsuits seeking to have various
other species listed as threatened or endangered under the federal Endangered
Species Act ("ESA") and/or the California Endangered Species Act and to
designate critical habitat for such species. For example, the National Marine
Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would
make a final determination concerning whether to list the coho salmon under the
ESA in northern California, including, potentially, lands owned by Pacific
Lumber. It is uncertain what impact, if any, such listings and/or designations
of critical habitat would have on the Company's consolidated financial position,
results of operations or liquidity. See Note 7 below for a description of
certain terms of the Headwaters Agreement relating to processing and approval of
a multi-species habitat conservation plan (the "Multi-Species HCP") covering
Pacific Lumber's timberlands.
In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield objectives.
These regulations require the projected harvest by timber companies, over time,
be capable of sustaining the average annual yield achieved during the last
decade of the planning horizon, which is currently a 100-year planning period
("Projected Annual Growth"). During any rolling ten-year period, the average
annual harvest over such ten-year period may not exceed Projected Annual Growth.
The regulatory deadline for Pacific Lumber to submit a proposed sustained yield
plan ("SYP") setting forth, among other things, its Projected Annual Growth is
November 15, 1996. However, the BOF has adopted and sent to the Office of
Administrative Law for its consideration a regulation to extend the deadline to
November 15, 1997. This review is expected to be completed in the near future.
Pacific Lumber has not completed its analysis of the projected productivity of
its timberlands (including enhancements to productivity which could be achieved
by a variety of methods). Until an SYP is submitted, reviewed and fully
approved, Pacific Lumber is unable to predict the impact that these regulations
will have on its future timber harvesting practices; however, it is possible
that the final results of this analysis could require Pacific Lumber to reduce
its timber harvest in future years from the average annual harvest that it has
experienced in recent years. Pacific Lumber believes it would be able to
mitigate the effect of any required reduction in harvest level by acquisitions
of additional timberlands, although there can be no assurance that it would be
able to do so. The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position, results
of operations or liquidity. See Note 7 below for a description of certain terms
of the Headwaters Agreement relating to the SYP.
Various groups and individuals have filed objections with the California
Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's
actions and rulings with respect to certain of the Company's timber harvesting
plans ("THPs") and other timber harvesting operations, and the Company expects
that such groups and individuals will continue to file such objections to
certain of the Company's THPs and other timber harvesting operations. In
addition, lawsuits are pending and/or threatened which seek to prevent the
Company from implementing certain of its approved THPs and/or which challenge
other operations by the Company. These challenges have severely restricted
Pacific Lumber's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth timber
have been limited; however, no assurance can be given as to the extent of such
challenges in the
F-161
<PAGE> 357
MAXXAM GROUP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
future. The Company believes that environmentally focused challenges to its
timber harvesting operations are likely to occur in the future, particularly
with respect to virgin and residual old growth timber. Although such challenges
have delayed or prevented the Company from conducting a portion of its
operations, they have not had a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of such
challenges or their ultimate impact on the Company's consolidated financial
position, results of operations or liquidity.
The Company is also involved in various claims, lawsuits and proceedings
relating to a wide variety of other matters. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
determine the ultimate costs that may be incurred, management believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
7. HEADWATERS AGREEMENT
On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber
Parties") entered into an agreement (the "Headwaters Agreement") which provides
the framework for the acquisition by the United States and California of
approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to
as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters
Timberlands"). The Headwaters Timberlands would be transferred in exchange for
(a) property and consideration (including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,775 acres of adjacent timberlands to be acquired by the United
States and California (the "Elk River Timberlands"). The Pacific Lumber Parties
have agreed not to conduct logging operations (including salvage logging) on the
Headwaters Timberlands while the Headwaters Agreement is in effect. The
continuing effectiveness of the Headwaters Agreement is predicated on the
satisfaction of various conditions, including completion within ten months of
specified closing items.
The Headwaters Agreement also provides, among other things, for expedited
processing by the United States of an incidental take permit ("Permit") to be
based upon the Multi-Species HCP which is to cover all of Pacific Lumber's
existing timber properties and any timber properties acquired as a result of the
Headwaters Agreement. The agreement also requires expedited processing by
California of an SYP. Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP,
and issuance of a Permit, each in form and substance satisfactory to Pacific
Lumber, (c) the issuance by the Internal Revenue Service and the California
Franchise Tax Board of closing agreements in form and substance sought by and
satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial
decision in any litigation brought by third parties that any party reasonably
believes will significantly delay or impair the transactions described in the
Headwaters Agreement, and (e) the dismissal with prejudice at closing of the
Takings Litigation.
F-162
<PAGE> 358
MAXXAM GROUP INC. AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
1996 QUARTERLY INFORMATION:
Net sales.................................... $ 59.8 $ 71.3 $ 68.5
Gross profit................................. 26.7 29.9 28.4
Operating income............................. 16.4 19.0 17.2
Net income................................... .1 3.9 0
1995 QUARTERLY INFORMATION:
Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7
Gross profit................................. 22.5 32.6 29.8 30.6
Operating income............................. 12.4 21.8 18.7 20.3
Net income (loss)............................ (3.3) 3.2 1.1 2.5
1994 QUARTERLY INFORMATION:
Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2
Gross profit................................. 23.6 31.9 29.1 35.4
Operating income............................. 13.2 22.6 19.4 22.6
Income before extraordinary item............. 1.0 3.1 8.3 6.0
Extraordinary item -- net.................... -- (14.9) -- --
Net income (loss)............................ 1.0 (11.7) 8.3 6.0
</TABLE>
F-163
<PAGE> 359
================================================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Mail:
FIRST BANK NATIONAL ASSOCIATION
180 E. 5TH STREET
ST. PAUL, MINNESOTA 55101
ATTENTION: RICHARD PROKOSCH,
TRUST OFFICER
By Hand/Overnight Express:
FIRST BANK NATIONAL ASSOCIATION
180 E. 5TH STREET
ST. PAUL, MINNESOTA 55101
ATTENTION: RICHARD PROKOSCH,
TRUST OFFICER
Facsimile Transmission:
(612) 244-0711
To confirm receipt:
(612) 244-0721
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL)
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
================================================================================
================================================================================
OFFER TO EXCHANGE ALL OUTSTANDING
12% SENIOR SECURED NOTES DUE 2003
($130,000,000 PRINCIPAL AMOUNT) FOR
12% SERIES B SENIOR SECURED NOTES DUE 2003.
MAXXAM GROUP
HOLDINGS INC.
------------------------
PROSPECTUS
------------------------
January , 1997
================================================================================
<PAGE> 360
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MAXXAM Group Holdings Inc. (the "Company"), and MAXXAM Inc. (collectively,
with the Company, the "Registrants") are Delaware corporations. Reference is
made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"),
which enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions), or (iv) for any transaction from which the director derived an
improper personal benefit. The certificates of incorporation of each of the
Registrants contain provisions permitted by Section 102(b)(7) of the DGCL.
Reference also is made to Section 145 of the DGCL which provides that a
corporation may indemnify any person, including officers and directors, who was
or is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise, if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. A Delaware corporation may indemnify its officers, directors,
employees and agents in an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer, director, employee or agent is adjudged to be
liable to the corporation. Where an officer, director, employee or agent is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer, director, employee or agent actually and reasonably incurred in
connection therewith.
The certificates of incorporation and by-laws of each of the Registrants
provide for indemnification of their respective directors, officers and
employees to the fullest extent authorized by law.
Subject to certain limitations and exceptions, each of the Registrants has
insurance coverage for losses by any person who is or hereafter may be a
director or officer of such Registrant arising from claims against that person
for any wrongful act in his capacity as a director or officer of such Registrant
or any of its subsidiaries. The policy also provides for reimbursement to the
Registrants for indemnification given by the Registrants pursuant to common or
statutory law or certificates of incorporation or by-laws to any such person
arising from any such claims.
The foregoing discussion is qualified in its entirety by reference to the
DGCL, and the referenced certificates of incorporation and by-laws.
II-1
<PAGE> 361
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the
Company" or "MGHI"), dated November 4, 1996.
*3.2 -- By-laws of MGHI, dated November 4, 1996.
3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"),
dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1
to MAXXAM's Annual Report on Form 10-K for the year ended December
31, 1989; the "MAXXAM 1989 Form 10-K").
3.4 -- Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and Other Rights of MAXXAM's Class B Junior
Participating Preference Stock (incorporated herein by reference to
Exhibit 3.2 to the MAXXAM 1989 Form 10-K).
3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock of MAXXAM, dated July 6,
1994 (incorporated herein by reference to Exhibit 4(c) to the
Registration Statement of MAXXAM on Form S-8, Registration No.
33-54479).
3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein
by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1988).
3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI")
(incorporated herein by reference to Exhibit 3.1E to MGI's definitive
proxy statement dated October 24, 1984).
3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of September 28, 1988 (incorporated herein by reference to
Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 (the "MGI 1988 Form 10-K")).
3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of June 1, 1989 (incorporated herein by reference to Exhibit
3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to
MGI's Current Report on Form 8-K dated July 10, 1986).
*4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the
Company, as Issuer, MAXXAM, as Guarantor, and First Bank National
Association, as Trustee, regarding the Notes.
*4.2 -- Purchase Agreement, dated December 17, 1996, among the Company,
MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, regarding the Notes.
*4.3 -- Registration Rights Agreement, dated December 23, 1996, among the
Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, regarding the
Notes.
4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding
MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
</TABLE>
II-2
<PAGE> 362
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical
Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due
December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1980).
4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996 (the "CTC Loan
Agreement"), between Custodial Trust Company and MAXXAM (incorporated
herein by reference to Exhibit 4 to MAXXAM's Quarterly Report on Form
10-Q for the year ended June 30, 1996).
4.7 -- Indenture, dated as of August 4, 1993 (the "MGI Indenture"), between
Shawmut Bank, N.A. and MGI regarding MGI's 11 1/4% Senior Secured
Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003
(incorporated herein by reference to Exhibit 4.1 to MGI's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-8857; the "MGI 1993 Form 10-K").
4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum &
Chemical Corporation ("KACC"), certain related corporations and State
Street Bank and Trust Company (as successor trustee to The First
National Bank of Boston; "State Street"), regarding KACC's 12 3/4%
Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated
Note Indenture") (incorporated herein by reference to Exhibit 4.1 to
KACC's Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-3605; the "KACC 1993 Form 10-K").
4.9 -- First Supplemental Indenture, dated as of May 1, 1993, to the KACC
Senior Subordinated Note Indenture (incorporated herein by reference
to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993, File No. 1-3605).
4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and State Street, Trustee,
regarding KACC's 12 3/4% Senior Subordinated Notes due 2003
(incorporated herein by reference to Exhibit 4.3 to KACC's Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
1-3605; the "KACC 1995 Form 10-K").
4.11 -- Indenture, dated as of February 17, 1994, among KACC, certain related
corporations and First Trust National Association, Trustee, regarding
KACC's 9 7/8% Senior Notes due 2002 (incorporated herein by reference
to Exhibit 4.3 to KACC's Annual Report on the KACC 1993 Form 10-K).
4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002
(incorporated hereby by reference to Exhibit 4.5 to the KACC 1995
Form 10-K).
4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC
Credit Agreement"), among Kaiser Aluminum Corporation ("Kaiser"),
KACC, certain financial institutions and BankAmerica Business Credit,
Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to
the KACC 1993 Form 10-K).
4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Kaiser for the quarter ended June
30, 1994, File No. 1-9447).
4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.6 to the
Annual Report on Form 10-K of Kaiser for the year ended December 31,
1994, File No. 1-9447).
</TABLE>
II-3
<PAGE> 363
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, File No. 1-9447).
4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC
Credit Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-9447).
4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.11 to the
1995 KACC Form 10-K).
4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 1-3605).
4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.18 to KACC's
Registration Statement on Form S-4 dated January 2, 1997; File No.
333-19143).
4.21 -- Certificate of Designation of Series A Mandatory Conversion Premium
Dividend Preferred Stock of Kaiser, dated June 28, 1993 (incorporated
herein by reference to Exhibit 4.3 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993, File No. 1-9447; the
"Kaiser 1993 Third Quarter Form 10-Q").
4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and
filed in the state of Delaware Office of the Secretary of State on
October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to
Kaiser's Annual Report on Form 10-K for the year ended December 31,
1995, File No. 1-9447).
4.23 -- Deposit Agreement between Kaiser and The First National Bank of
Boston, dated as of June 30, 1993 (incorporated herein by reference
to Exhibit 4.4 to the Kaiser 1993 Third Quarter Form 10-Q).
4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased
Dividend Equity Securities of Kaiser, dated February 17, 1994
(incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-9447; the "Kaiser 1993 Form 10-K").
4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber
Company ("Pacific Lumber") and State Street (as successor trustee to
The First National Bank of Boston) regarding Pacific Lumber's 10 1/2%
Senior Notes due 2003 (incorporated herein by reference to Exhibit
4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-9204).
4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding
Company ("Scotia Pacific") and State Street, as Trustee, regarding
Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's
Annual Report on Form 10-K for the year ended December 31, 1993, File
No. 33-55538; the "Scotia Pacific 1993 Form 10-K").
4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment, dated as of March 23, 1993, among
Scotia Pacific, State Street, as Trustee, and State Street, as the
Collateral Agent (incorporated herein by reference to Exhibit 4.2 to
the Scotia Pacific 1993 Form 10-K).
4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995,
between Pacific Lumber and Bank of America National Trust and Savings
Association (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended
September 30, 1995; File No. 1-9204).
</TABLE>
II-4
<PAGE> 364
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and
Fixture Filing (incorporated herein by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter
ended September 30, 1995; File No. 1-9204).
4.30 -- Second Amended and Restated Credit and Security Agreement, dated July
15, 1995, among the First National Bank of Boston, MCO Properties,
Inc., Westcliff Development Corporation, Horizon Corporation, Horizon
Properties Corporation and MCO Properties L.P. (incorporated by
reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-3924).
4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam
Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP
General Partner, Inc. and First Bank National Association, Trustee
(incorporated herein by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the
"SHRP 1995 Second Quarter Form 10-Q").
4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary
guarantors (the "Subsidiary Guarantors"), and First Trust National
Association, as Trustee regarding KACC's 10 7/8% Senior Notes due
2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File
No. 1-9447).
**4.33 -- Amendment Agreement, dated December 23, 1996, relating to the CTC
Loan Agreement.
4.34 -- Indenture, dated as December 23, 1996, among KACC, the Subsidiary
Guarantors and First Trust National Association, as Trustee,
regarding KACC's 10 7/8% Series C Senior Notes due 2006 (incorporated
herein by reference to KACC's Registration Statement on Form S-4,
Registration No. 333-19143).
**4.35 -- First Supplemental Indenture, dated as of December 17, 1996, to the
MGI Indenture.
**4.36 -- Second Supplemental Indenture, dated as of December 23, 1996, to the
MGI Indenture.
Note: Pursuant to Regulation sec. 229.601, Item 601(b)(4)(iii) of
Regulation S-K, upon request of the Securities and Exchange
Commission, the Company hereby agrees to furnish a copy of any
unfiled instrument which defines the rights of holders of long-term
debt of the Company and its consolidated subsidiaries (and for any of
its unconsolidated subsidiaries for which financial statements are
required to be filed) wherein the total amount of securities
authorized thereunder does not exceed 10 percent of the total
consolidated assets of the Company.
**5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the
Notes and the Guaranty.
*10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between
MAXXAM and the Company.
10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993
(incorporated herein by reference to Exhibit 10.6 to the Amendment
No. 3 to the Registration Statement on Form S-2 of the Company,
Registration No. 33-64042; the "MGI Registration Statement").
</TABLE>
II-5
<PAGE> 365
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the
Company, Pacific Lumber and the corporations signatory thereto
(incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988, File No. 1-9204).
10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December
21, 1989 (incorporated herein by reference to Exhibit 10.21 to
Amendment No. 6 to the Registration Statement of KACC on Form S-1,
Registration No. 33-30645).
10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to the
Registration Statement of Kaiser on Form S-1, Registration No.
33-37895).
10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon
Creek Corporation and MAXXAM, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.1 to Amendment No. 3
to the Form S-1 Registration Statement of Scotia Pacific,
Registration No. 33-55538).
10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.,
dated as of July 3, 1990 (incorporated herein by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
*10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by
MAXXAM in favor of the Company.
10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated
herein by reference to Exhibit HHH to the Final Agreement to the
Schedule 13D of MGI and others in respect of the common stock of
MAXXAM).
10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM
(incorporated herein by reference to Exhibit 10.2 to KACC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993, File No.
1-3605).
10.11 -- Power Purchase Agreement, dated January 17, 1986, between Pacific
Lumber and Pacific Gas and Electric Company (incorporated herein by
reference to Exhibit 10(n) to Pacific Lumber's Registration Statement
on Form S-1, Registration No. 33-5549).
10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.1 to the Scotia
Pacific 1993 Form 10-K).
10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.2 to the Scotia
Pacific 1993 Form 10-K).
10.14 -- Additional Services Agreement between Pacific Lumber and Scotia
Pacific (incorporated herein by reference to Exhibit 10.3 to the
Scotia Pacific 1993 Form 10-K).
10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation (incorporated herein by reference to Exhibit
10.4 to the Scotia Pacific 1993 Form 10-K).
10.16 -- Environmental Indemnification Agreement between Pacific Lumber and
Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to
the Scotia Pacific 1993 Form 10-K).
10.17 -- Purchase and Services Agreement between Pacific Lumber and Britt
Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17
to Amendment No. 2 to the Form S-2 Registration Statement of Pacific
Lumber; Registration Statement No. 33-56332).
</TABLE>
II-6
<PAGE> 366
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO
Properties Inc. ("MCOP") and Federated Development Company
(incorporated herein by reference from Exhibit 10(ff) to MGI's
Registration Statement on Form S-4 on Form S-2, Registration No.
33-42300; the "MGI 1991 Registration Statement").
10.19 -- Revolving Credit and Term Loan Agreement, dated as of August 27,
1987, as amended, between MCOP and Federated Development Company
(incorporated herein by reference to Exhibit 10.82 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.20 -- Term Loan Agreement, dated as of November 17, 1987, between MCOP and
Federated Development Company (incorporated herein by reference to
Exhibit 10.83 to MAXXAM's Registration Statement on Form S-4,
Registration No. 33-20096).
10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E.
Hurwitz and MPI (incorporated herein by reference to Exhibit C to
Schedule 13-D, dated November 14, 1987, filed by the Company with
respect to MAXXAM's common stock; the "Put and Call Agreement").
10.22 -- Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated
herein by reference to Exhibit D to the Final Amendment to Schedule
13D, dated May 20, 1988, filed by the Company relating to MAXXAM's
common stock).
10.23 -- Amendment to Put and Call Agreement, dated as of February 17, 1989
(incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988, File
No. 1-3924).
10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and
among the Company, MAXXAM and certain related corporations
(incorporated herein by reference to Exhibit 10.23 to Amendment No. 5
to the MGI Registration).
10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific
Lumber Company (on behalf of itself, its subsidiaries and its
affiliates), the United States of America and the State of California
(incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated September 28, 1996).
10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between
MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM's
Zero Coupon Senior Subordinated Notes due 2007 (incorporated herein
by reference to Exhibit B to Schedule 13D dated November 24, 1987,
filed by MGI relating to MAXXAM's common stock).
10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam
Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated
herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter
10-Q).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29,
1994; "MAXXAM's 1994 Proxy Statement").
10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee
Incentive Plan (incorporated herein by reference to Exhibit 10.30 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement).
</TABLE>
II-7
<PAGE> 367
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.32 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.1 to
MAXXAM's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.34 -- Revised Capital Accumulation Plan effective January 1, 1988
(incorporated herein by reference to Exhibit 10.27 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom
Share Plan") (incorporated herein by reference to Exhibit 10.6 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1990; MAXXAM's 1990 Form 10-K").
10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom
Share Plan (incorporated herein by reference to Exhibit 10.7 to
MAXXAM's 1990 Form 10-K).
10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share
Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10(ii) to the 1991 MGI Registration Statement).
**10.39 -- Form of MAXXAM and Pacific Lumber Deferred Compensation Agreement.
10.40 -- Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.1 to KACC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993, File No. 1-3605).
10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.41 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.42 -- KACC's Bonus Plan (incorporated herein by reference to Exhibit 10.25
to Amendment No. 6 to the Registration Statement of KACC on Form S-1,
Registration No. 33-30645).
10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated
herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995
First Quarter Form 10-Q").
10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated
herein by reference to Exhibit 99 to the Proxy Statement, dated April
26, 1995, filed by Kaiser, File No. 1-9447).
10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and
Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated
herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K).
10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note
(incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM
(the "1990 Pierno Note") (incorporated herein by reference to Exhibit
10.31 to MAXXAM's 1990 Form 10-K).
</TABLE>
II-8
<PAGE> 368
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note
(incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.49 -- Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara
M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54
to MAXXAM's 1990 Form 10-K).
10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert
E. Cole (incorporated herein by reference to Exhibit 10.63 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1993).
**10.51 -- Letter Agreement dated as of March 10, 1995 between Pacific Lumber
and John A. Campbell.
**10.52 -- Employment Agreement dated as of July 1, 1991 between Pacific Lumber
and John A. Campbell.
**10.53 -- The Pacific Lumber and Britt Lumber Companies Management Incentive
Compensation Plan 1996.
**10.54 -- The Pacific Lumber and Britt Lumber Companies Management Incentive
Compensation Plan 1995.
**10.55 -- Letter Agreement dated November 10, 1992 between MAXXAM, KACC and
Gary L. Clark.
*12.1 -- Computation of consolidated ratio of earnings to fixed charges of the
Company.
*12.2 -- Computation of consolidated ratio of earnings to fixed charges of
MAXXAM.
*21.1 -- Subsidiaries of the Company.
*21.2 -- Subsidiaries of MAXXAM.
**23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in
Exhibit 5).
*23.3 -- Consent of Thelen, Marrin, Johnson & Bridges.
*23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash.
*25 -- Form T-1 Statement of Eligibility of First Trust National
Association, as trustee.
*27 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith
All other schedules are omitted because the required information is
included in the Consolidated Financial Statements or the Notes thereto or is
otherwise inapplicable.
II-9
<PAGE> 369
ITEM 22. UNDERTAKINGS
(a) (i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(ii) "The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof."
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-10
<PAGE> 370
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, MAXXAM GROUP HOLDINGS INC., HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 8TH DAY OF
JANUARY, 1997.
MAXXAM GROUP HOLDINGS INC.
By: /s/ CHARLES E. HURWITZ
--------------------------------------------
Charles E. Hurwitz, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ CHARLES E. HURWITZ Chairman of the Board, Chief January 8, 1997
- --------------------------- Executive Officer and
Charles E. Hurwitz President (Principal
Executive Officer)
/s/ PAUL N. SCHWARTZ Vice President, Chief January 8, 1997
- --------------------------- Financial Officer and
Paul N. Schwartz Director (Principal
Financial Officer)
/s/ GARY L. CLARK Vice President (Principal January 8, 1997
- --------------------------- Accounting Officer)
Gary L. Clark
/s/ JOHN A. CAMPBELL Vice President and Director January 8, 1997
- ---------------------------
John A. Campbell
/s/ JOHN T. LA DUC Vice President and Director January 8, 1997
- ---------------------------
John T. La Duc
/s/ ANTHONY R. PIERNO Vice President, General January 8, 1997
- --------------------------- Counsel and Director
Anthony R. Pierno
/s/ WILLIAM S. RIEGEL Vice President and Director January 8, 1997
- ---------------------------
William S. Riegel
</TABLE>
II-11
<PAGE> 371
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT, MAXXAM INC., HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 8TH DAY OF JANUARY,
1997.
MAXXAM INC.
By: /s/ CHARLES E. HURWITZ
-------------------------------------------
Charles E. Hurwitz, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ CHARLES E. HURWITZ Chairman of the Board, Chief January 8, 1997
- ------------------------- Executive Officer and
Charles E. Hurwitz President (Principal
Executive Officer)
/s/ PAUL N. SCHWARTZ Executive Vice President and January 8, 1997
- ------------------------- Chief Financial Officer
Paul N. Schwartz (Principal Financial Officer)
/s/ TERRY L. FREEMAN Assistant Controller January 8, 1997
- ------------------------- (Principal Accounting Officer)
Terry L. Freeman
/s/ ROBERT J. CRUIKSHANK Director January 8, 1997
- -------------------------
Robert J. Cruikshank
/s/ EZRA G. LEVIN Director January 8, 1997
- -------------------------
Ezra G. Levin
Director January 8, 1997
- -------------------------
Stanley D. Rosenberg
</TABLE>
II-12
<PAGE> 372
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
*3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the
Company" or "MGHI"), dated November 4, 1996.
*3.2 -- By-laws of MGHI, dated November 4, 1996.
3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"),
dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1
to MAXXAM's Annual Report on Form 10-K for the year ended December
31, 1989; the "MAXXAM 1989 Form 10-K").
3.4 -- Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and Other Rights of MAXXAM's Class B Junior
Participating Preference Stock (incorporated herein by reference to
Exhibit 3.2 to the MAXXAM 1989 Form 10-K).
3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock of MAXXAM, dated July 6,
1994 (incorporated herein by reference to Exhibit 4(c) to the
Registration Statement of MAXXAM on Form S-8, Registration No.
33-54479).
3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein
by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K
for the year ended December 31, 1988).
3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI")
(incorporated herein by reference to Exhibit 3.1E to MGI's definitive
proxy statement dated October 24, 1984).
3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of September 28, 1988 (incorporated herein by reference to
Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 (the "MGI 1988 Form 10-K")).
3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI,
dated as of June 1, 1989 (incorporated herein by reference to Exhibit
3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to
MGI's Current Report on Form 8-K dated July 10, 1986).
*4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the
Company, as Issuer, MAXXAM, as Guarantor, and First Bank National
Association, as Trustee, regarding the Notes.
*4.2 -- Purchase Agreement, dated December 17, 1996, among the Company,
MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, regarding the Notes.
*4.3 -- Registration Rights Agreement, dated December 23, 1996, among the
Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, regarding the
Notes.
4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding
MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000
(incorporated herein by reference to Exhibit 4.1 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
</TABLE>
<PAGE> 373
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical
Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due
December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1980).
4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996 (the "CTC Loan
Agreement"), between Custodial Trust Company and MAXXAM (incorporated
herein by reference to Exhibit 4 to MAXXAM's Quarterly Report on Form
10-Q for the year ended June 30, 1996).
4.7 -- Indenture, dated as of August 4, 1993 (the "MGI Indenture"), between
Shawmut Bank, N.A. and MGI regarding MGI's 11 1/4% Senior Secured
Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003
(incorporated herein by reference to Exhibit 4.1 to MGI's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-8857; the "MGI 1993 Form 10-K").
4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum &
Chemical Corporation ("KACC"), certain related corporations and State
Street Bank and Trust Company (as successor trustee to The First
National Bank of Boston; "State Street"), regarding KACC's 12 3/4%
Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated
Note Indenture") (incorporated herein by reference to Exhibit 4.1 to
KACC's Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-3605; the "KACC 1993 Form 10-K").
4.9 -- First Supplemental Indenture, dated as of May 1, 1993, to the KACC
Senior Subordinated Note Indenture (incorporated herein by reference
to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993, File No. 1-3605).
4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and State Street, Trustee,
regarding KACC's 12 3/4% Senior Subordinated Notes due 2003
(incorporated herein by reference to Exhibit 4.3 to KACC's Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
1-3605; the "KACC 1995 Form 10-K").
4.11 -- Indenture, dated as of February 17, 1994, among KACC, certain related
corporations and First Trust National Association, Trustee, regarding
KACC's 9 7/8% Senior Notes due 2002 (incorporated herein by reference
to Exhibit 4.3 to KACC's Annual Report on the KACC 1993 Form 10-K).
4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among
KACC, certain related corporations and First Trust National
Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002
(incorporated hereby by reference to Exhibit 4.5 to the KACC 1995
Form 10-K).
4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC
Credit Agreement"), among Kaiser Aluminum Corporation ("Kaiser"),
KACC, certain financial institutions and BankAmerica Business Credit,
Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to
the KACC 1993 Form 10-K).
4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Kaiser for the quarter ended June
30, 1994, File No. 1-9447).
4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.6 to the
Annual Report on Form 10-K of Kaiser for the year ended December 31,
1994, File No. 1-9447).
</TABLE>
<PAGE> 374
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, File No. 1-9447).
4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC
Credit Agreement (incorporated herein by reference to Exhibit 4.1 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-9447).
4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.11 to the
1995 KACC Form 10-K).
4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 1-3605).
4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit
Agreement (incorporated herein by reference to Exhibit 4.18 to KACC's
Registration Statement on Form S-4 dated January 2, 1997; File No.
333-19143).
4.21 -- Certificate of Designation of Series A Mandatory Conversion Premium
Dividend Preferred Stock of Kaiser, dated June 28, 1993 (incorporated
herein by reference to Exhibit 4.3 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993, File No. 1-9447; the
"Kaiser 1993 Third Quarter Form 10-Q").
4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and
filed in the state of Delaware Office of the Secretary of State on
October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to
Kaiser's Annual Report on Form 10-K for the year ended December 31,
1995, File No. 1-9447).
4.23 -- Deposit Agreement between Kaiser and The First National Bank of
Boston, dated as of June 30, 1993 (incorporated herein by reference
to Exhibit 4.4 to the Kaiser 1993 Third Quarter Form 10-Q).
4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased
Dividend Equity Securities of Kaiser, dated February 17, 1994
(incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
1-9447; the "Kaiser 1993 Form 10-K").
4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber
Company ("Pacific Lumber") and State Street (as successor trustee to
The First National Bank of Boston) regarding Pacific Lumber's 10 1/2%
Senior Notes due 2003 (incorporated herein by reference to Exhibit
4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 1-9204).
4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding
Company ("Scotia Pacific") and State Street, as Trustee, regarding
Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's
Annual Report on Form 10-K for the year ended December 31, 1993, File
No. 33-55538; the "Scotia Pacific 1993 Form 10-K").
4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment, dated as of March 23, 1993, among
Scotia Pacific, State Street, as Trustee, and State Street, as the
Collateral Agent (incorporated herein by reference to Exhibit 4.2 to
the Scotia Pacific 1993 Form 10-K).
4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995,
between Pacific Lumber and Bank of America National Trust and Savings
Association (incorporated herein by reference to Exhibit 4.1 to the
Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended
September 30, 1995; File No. 1-9204).
</TABLE>
<PAGE> 375
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and
Fixture Filing (incorporated herein by reference to Exhibit 4.2 to
the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter
ended September 30, 1995; File No. 1-9204).
4.30 -- Second Amended and Restated Credit and Security Agreement, dated July
15, 1995, among the First National Bank of Boston, MCO Properties,
Inc., Westcliff Development Corporation, Horizon Corporation, Horizon
Properties Corporation and MCO Properties L.P. (incorporated by
reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-3924).
4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam
Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP
General Partner, Inc. and First Bank National Association, Trustee
(incorporated herein by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the
"SHRP 1995 Second Quarter Form 10-Q").
4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary
guarantors (the "Subsidiary Guarantors"), and First Trust National
Association, as Trustee regarding KACC's 10 7/8% Senior Notes due
2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File
No. 1-9447).
**4.33 -- Amendment Agreement, dated December 23, 1996, relating to the CTC
Loan Agreement.
4.34 -- Indenture, dated as December 23, 1996, among KACC, the Subsidiary
Guarantors and First Trust National Association, as Trustee,
regarding KACC's 10 7/8% Series C Senior Notes due 2006 (incorporated
herein by reference to KACC's Registration Statement on Form S-4,
Registration No. 333-19143).
**4.35 -- First Supplemental Indenture, dated as of December 17, 1996, to the
MGI Indenture.
**4.36 -- Second Supplemental Indenture, dated as of December 23, 1996, to the
MGI Indenture.
Note: Pursuant to Regulation sec. 229.601, Item 601(b)(4)(iii) of
Regulation S-K, upon request of the Securities and Exchange
Commission, the Company hereby agrees to furnish a copy of any
unfiled instrument which defines the rights of holders of long-term
debt of the Company and its consolidated subsidiaries (and for any of
its unconsolidated subsidiaries for which financial statements are
required to be filed) wherein the total amount of securities
authorized thereunder does not exceed 10 percent of the total
consolidated assets of the Company.
**5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the
Notes and the Guaranty.
*10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between
MAXXAM and the Company.
10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993
(incorporated herein by reference to Exhibit 10.6 to the Amendment
No. 3 to the Registration Statement on Form S-2 of the Company,
Registration No. 33-64042; the "MGI Registration Statement").
</TABLE>
<PAGE> 376
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the
Company, Pacific Lumber and the corporations signatory thereto
(incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988, File No. 1-9204).
10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December
21, 1989 (incorporated herein by reference to Exhibit 10.21 to
Amendment No. 6 to the Registration Statement of KACC on Form S-1,
Registration No. 33-30645).
10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated
herein by reference to Exhibit 10.23 to Amendment No. 1 to the
Registration Statement of Kaiser on Form S-1, Registration No.
33-37895).
10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon
Creek Corporation and MAXXAM, dated as of March 23, 1993
(incorporated herein by reference to Exhibit 10.1 to Amendment No. 3
to the Form S-1 Registration Statement of Scotia Pacific,
Registration No. 33-55538).
10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.,
dated as of July 3, 1990 (incorporated herein by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
*10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by
MAXXAM in favor of the Company.
10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated
herein by reference to Exhibit HHH to the Final Agreement to the
Schedule 13D of MGI and others in respect of the common stock of
MAXXAM).
10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM
(incorporated herein by reference to Exhibit 10.2 to KACC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993, File No.
1-3605).
10.11 -- Power Purchase Agreement, dated January 17, 1986, between Pacific
Lumber and Pacific Gas and Electric Company (incorporated herein by
reference to Exhibit 10(n) to Pacific Lumber's Registration Statement
on Form S-1, Registration No. 33-5549).
10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.1 to the Scotia
Pacific 1993 Form 10-K).
10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific
(incorporated herein by reference to Exhibit 10.2 to the Scotia
Pacific 1993 Form 10-K).
10.14 -- Additional Services Agreement between Pacific Lumber and Scotia
Pacific (incorporated herein by reference to Exhibit 10.3 to the
Scotia Pacific 1993 Form 10-K).
10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and
Salmon Creek Corporation (incorporated herein by reference to Exhibit
10.4 to the Scotia Pacific 1993 Form 10-K).
10.16 -- Environmental Indemnification Agreement between Pacific Lumber and
Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to
the Scotia Pacific 1993 Form 10-K).
10.17 -- Purchase and Services Agreement between Pacific Lumber and Britt
Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17
to Amendment No. 2 to the Form S-2 Registration Statement of Pacific
Lumber; Registration Statement No. 33-56332).
</TABLE>
<PAGE> 377
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO
Properties Inc. ("MCOP") and Federated Development Company
(incorporated herein by reference from Exhibit 10(ff) to MGI's
Registration Statement on Form S-4 on Form S-2, Registration No.
33-42300; the "MGI 1991 Registration Statement").
10.19 -- Revolving Credit and Term Loan Agreement, dated as of August 27,
1987, as amended, between MCOP and Federated Development Company
(incorporated herein by reference to Exhibit 10.82 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.20 -- Term Loan Agreement, dated as of November 17, 1987, between MCOP and
Federated Development Company (incorporated herein by reference to
Exhibit 10.83 to MAXXAM's Registration Statement on Form S-4,
Registration No. 33-20096).
10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E.
Hurwitz and MPI (incorporated herein by reference to Exhibit C to
Schedule 13-D, dated November 14, 1987, filed by the Company with
respect to MAXXAM's common stock; the "Put and Call Agreement").
10.22 -- Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated
herein by reference to Exhibit D to the Final Amendment to Schedule
13D, dated May 20, 1988, filed by the Company relating to MAXXAM's
common stock).
10.23 -- Amendment to Put and Call Agreement, dated as of February 17, 1989
(incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988, File
No. 1-3924).
10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and
among the Company, MAXXAM and certain related corporations
(incorporated herein by reference to Exhibit 10.23 to Amendment No. 5
to the MGI Registration).
10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific
Lumber Company (on behalf of itself, its subsidiaries and its
affiliates), the United States of America and the State of California
(incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated September 28, 1996).
10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between
MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM's
Zero Coupon Senior Subordinated Notes due 2007 (incorporated herein
by reference to Exhibit B to Schedule 13D dated November 24, 1987,
filed by MGI relating to MAXXAM's common stock).
10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam
Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated
herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter
10-Q).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29,
1994; "MAXXAM's 1994 Proxy Statement").
10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee
Incentive Plan (incorporated herein by reference to Exhibit 10.30 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by
reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement).
</TABLE>
<PAGE> 378
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.32 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee
Director Plan (incorporated herein by reference to Exhibit 10.1 to
MAXXAM's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
Exhibit 99 to MAXXAM's 1994 Proxy Statement).
10.34 -- Revised Capital Accumulation Plan effective January 1, 1988
(incorporated herein by reference to Exhibit 10.27 to MAXXAM's
Registration Statement on Form S-4, Registration No. 33-20096).
10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom
Share Plan") (incorporated herein by reference to Exhibit 10.6 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1990; MAXXAM's 1990 Form 10-K").
10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom
Share Plan (incorporated herein by reference to Exhibit 10.7 to
MAXXAM's 1990 Form 10-K).
10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share
Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10(ii) to the 1991 MGI Registration Statement).
**10.39 -- Form of MAXXAM and Pacific Lumber Deferred Compensation Agreement.
10.40 -- Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.1 to KACC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993, File No. 1-3605).
10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.41 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1994).
10.42 -- KACC's Bonus Plan (incorporated herein by reference to Exhibit 10.25
to Amendment No. 6 to the Registration Statement of KACC on Form S-1,
Registration No. 33-30645).
10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated
herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995
First Quarter Form 10-Q").
10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated
herein by reference to Exhibit 99 to the Proxy Statement, dated April
26, 1995, filed by Kaiser, File No. 1-9447).
10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and
Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated
herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K).
10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note
(incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM
(the "1990 Pierno Note") (incorporated herein by reference to Exhibit
10.31 to MAXXAM's 1990 Form 10-K).
</TABLE>
<PAGE> 379
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note
(incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.49 -- Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara
M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54
to MAXXAM's 1990 Form 10-K).
10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert
E. Cole (incorporated herein by reference to Exhibit 10.63 to
MAXXAM's Annual Report on Form 10-K for the year ended December 31,
1993).
**10.51 -- Letter Agreement dated as of March 10, 1995 between Pacific Lumber
and John A. Campbell.
**10.52 -- Employment Agreement dated as of July 1, 1991 between Pacific Lumber
and John A. Campbell.
**10.53 -- The Pacific Lumber and Britt Lumber Companies Management Incentive
Compensation Plan 1996.
**10.54 -- The Pacific Lumber and Britt Lumber Companies Management Incentive
Compensation Plan 1995.
**10.55 -- Letter Agreement dated November 10, 1992 between MAXXAM, KACC and
Gary L. Clark.
*12.1 -- Computation of consolidated ratio of earnings to fixed charges of the
Company.
*12.2 -- Computation of consolidated ratio of earnings to fixed charges of
MAXXAM.
*21.1 -- Subsidiaries of the Company.
*21.2 -- Subsidiaries of MAXXAM.
**23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in
Exhibit 5).
*23.3 -- Consent of Thelen, Marrin, Johnson & Bridges.
*23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash.
*25 -- Form T-1 Statement of Eligibility of First Trust National
Association, as trustee.
*27 -- Financial Data Schedule
*99.1 -- Form of Letter of Transmittal.
*99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith
<PAGE> 1
EXHIBIT 4.33
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of December 23, 1996, between CUSTODIAL
TRUST COMPANY (the "Bank"), a bank and trust company organized and existing
under the laws of the State of New Jersey, and MAXXAM Inc. (the "Borrower"), a
corporation organized and existing under the laws of the State of Delaware.
The Bank and the Borrower are parties to a Loan and Pledge Agreement
dated as of June 28, 1996 (the "Agreement").
The Bank and the Borrower wish to amend the Agreement in certain
respects.
NOW, THEREFORE, the parties hereto agree as follows:
1. Clause (f) of Section 16 of the Agreement is hereby amended by
deleting the words "granted prior to the date of this Agreement" from clause
(iv) thereof.
2. Clause (f) of Section 16 of the Agreement is hereby amended by
(a) deleting the word "and" at the end of clause (v) thereof, and (b) deleting
the period at the end of clause (vi) thereof and substituting for such period
the following:
"; and (vii) Liens granted subsequent to the date of this
Agreement to secure the 12% Series A Senior Secured Notes due
2003 of MAXXAM Group Holdings Inc. and the 12% Series B Senior
Secured Notes due 2003 of MAXXAM Group Holdings Inc."
3. Except to the extent amended hereby, the provisions of the
Agreement shall remain unmodified, and the Agreement as amended hereby is
confirmed as being in full force and effect. This Amendment Agreement may be
executed in any number of counterparts which together shall constitute one and
the same.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have executed this
Amendment Agreement as of the date first above written.
CUSTODIAL TRUST COMPANY
By: /s/ Ronald D. Watson
----------------------------------
Name: Ronald D. Watson
Title: President
MAXXAM INC.
By: /s/ Paul N. Schwartz
----------------------------------
Name: Paul N. Schwartz
Title: Executive Vice President &
Chief Financial Officer
2
<PAGE> 1
EXHIBIT 4.35
- --------------------------------------------------------------------------------
MAXXAM GROUP INC.
$126,720,000 12 1/4% Senior Secured Discount Notes due 2003
$100,000,000 11 1/4% Senior Secured Notes due 2003
FIRST SUPPLEMENTAL INDENTURE
Dated as of December 17, 1996
to
INDENTURE
Dated as of August 4, 1993
-------------------------------
Fleet National Bank, Trustee
- --------------------------------------------------------------------------------
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of December 17, 1996,
between MAXXAM Group Inc., a Delaware corporation (the "Company"), and Fleet
National Bank, a national banking association, as Trustee (the "Trustee").
WHEREAS, the Company and Shawmut Bank, N.A., as trustee, executed
an Indenture, dated as of August 4, 1993 (the "Indenture"), in respect of
$126,720,000 aggregate principal amount of 12 1/4% Senior Secured Discount
Notes due 2003 and $100,000,000 aggregate principal amount of 11 1/4% Senior
Secured Notes due 2003;
WHEREAS, the Trustee is the successor to Shawmut Bank, N.A., as
trustee under the Indenture;
WHEREAS, the Indenture was also executed by MAXXAM Inc., a
Delaware corporation ("MAXXAM"), and by MAXXAM Properties Inc., a Delaware
corporation, to confirm their respective agreements set forth in Article 10 of
the Indenture;
WHEREAS, for all purposes of this First Supplemental Indenture,
except as otherwise defined or unless the context otherwise requires, terms
used in capitalized form in this First Supplemental Indenture and defined in
the Indenture have the meanings specified in the Indenture;
WHEREAS, Section 9.02 of the Indenture permits the Company and
the Trustee, with the written consent of the Holders of at least 66 2/3% of the
aggregate Accreted Value of Securities then outstanding, to amend, supplement
or otherwise modify the Indenture or the Securities as hereinafter provided;
WHEREAS, all conditions and requirements necessary to make this
First Supplemental Indenture a valid, binding and legal instrument in
accordance with its terms have been performed and fulfilled and the execution
and delivery hereof have been in all respects duly authorized.
NOW, THEREFORE, in consideration of the above premises, each
party agrees, for the benefit of the other and for the equal and ratable
benefit of the Holders of the Securities, as follows:
1
<PAGE> 3
ARTICLE I
AMENDMENTS
The Indenture is hereby amended as follows:
1. Article 10 of the Indenture is hereby amended by adding
thereto a new Section 10.14 reading in its entirety as follows:
"SECTION 10.14. TRANSFERS OF PLEDGED KAISER SHARES. (a)
Notwithstanding any other provision of this Indenture, MAXXAM may on one
occasion only transfer all (but not less than all) of the Pledged Kaiser Shares
to MGHI, and MGHI may on one occasion only transfer to MAXXAM the Pledged
Kaiser Shares then subject to the Lien of this Indenture, if:
(i) such transfer is expressly made subject to the Lien of this
Indenture;
(ii) MAXXAM or MGHI, as the case may be, shall have granted a
security interest (of like tenor to the security interest granted on the
Issue Date pursuant to Section 10.01(c)) in such Pledged Kaiser Shares
(which security interest shall, for purposes of this Indenture, be
deemed to have been granted pursuant to each of Section 10.01(c) and
this Section 10.14) and shall have expressly assumed, by supplemental
indenture hereto, executed and delivered to the Trustee, in form stated
in an Opinion of Counsel to be sufficient to effectuate such grant and
assumption, all the obligations with respect to such Pledged Kaiser
Shares applicable to MAXXAM or MGHI, as the case may be, under this
Article 10;
(iii) no Default exists or would exist immediately following
such transfer after giving effect thereto;
(iv) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel stating that clause
(iii) above is satisfied and that all requirements of this Section 10.14
and, to the extent applicable, the TIA have been satisfied;
(v) such transfer is effected concurrently with the
consummation of a financing transaction by MGHI (the "Potential
Offering");
(vi) the obligations of MGHI with respect to any securities
issued in the Potential Offering are guaranteed by MAXXAM; and
2
<PAGE> 4
(vii) no such securities are secured by any Pledged Kaiser
Shares at any time when such Pledged Kaiser Shares constitute Collateral
under this Indenture;
provided, however, that the conditions set forth in clauses (v) and (vi) above
shall not be applicable in the case of a transfer to MAXXAM pursuant to this
Section 10.14. In the case of a transfer to MGHI pursuant to this Section
10.14, the supplemental indenture referred to in clause (ii) above shall be in
substantially the form of Exhibit D to this Indenture, with such changes, if
any, therein as do not adversely affect the rights of any Securityholder. In
the case of a transfer to MAXXAM pursuant to this Section 10.14, the
supplemental indenture referred to in clause (ii) above shall be in
substantially the form of Exhibit D to this Indenture, with such changes
therein as shall be necessary or appropriate to reflect that the transfer is
being made to MAXXAM and such other changes therein (including any change in
the number of shares of Pledged Kaiser Shares then included in the Collateral)
as do not adversely affect the rights of any Securityholder.
(b) Notwithstanding any other provision of this Indenture, or
any supplemental indenture hereto, the Trustee shall not have a security
interest in any consideration received by MAXXAM or MGHI in connection with any
transfer of Pledged Kaiser Shares pursuant to this Section 10.14 and no such
consideration shall be deemed to be proceeds of Collateral, or Collateral, for
purposes of this Indenture.
(c) Upon satisfaction of the requirements of this Section 10.14,
the Trustee may, if so requested, surrender the certificates for the Pledged
Kaiser Shares then held by it against delivery to it in the State of New York
of a new certificate or certificates for the Pledged Kaiser Shares, registered
in the name of MAXXAM or MGHI, as the case may be, accompanied by duly executed
and undated instruments of transfer or assignment in blank (with signatures
appropriately guaranteed)."
2. The definition of the term "MAXXAM" is hereby amended by
deleting the period at the end thereof and substituting the following therefor:
; provided, however, that, in the event of a transfer of Pledged Kaiser
Shares pursuant to the provisions of Section 10.14, the term "MAXXAM",
wherever such term is used in the definition of Net Proceeds or in
Article 10 (other than in clause (v) of Section 10.12(c) or in Section
10.14), shall mean the transferee of such Pledged Kaiser Shares, and any
successor corporation of such transferee, by way of merger,
consolidation, purchase of all or substantially all of its assets, or
otherwise.
3
<PAGE> 5
3. The definition of "Pledged Share Sale" is hereby amended by
deleting the word "or" at the end of clause (ii) thereof, substituting for such
word a comma, deleting the period at the end of clause (iii) thereof and
substituting for such period the following:
or (iv) a transfer of Pledged Kaiser Shares pursuant to
and in accordance with Section 10.14, in which the
transferee becomes a Pledgor with respect to such Pledged
Kaiser Shares pursuant to Section 10.14.
4. The definition of "Pledgor" is hereby amended by deleting the
word "or" immediately following "10.02(e)," substituting a comma for such word
and inserting the words "or 10.14" immediately following "10.13".
5. The following definition is hereby inserted in Section 1.01
of the Indenture in the appropriate alphabetical order:
"MGHI" means MAXXAM Group Holdings Inc., a Delaware
corporation, and any successor corporation, by way of
merger, consolidation, purchase of all or substantially
all of its assets, or otherwise. So long as MGHI is an
owner of Pledged Kaiser Shares, MGHI shall be a Subsidiary
of MAXXAM Inc. organized under the laws of any State of
the United States.
6. Section 9.01(2) of the Indenture is hereby amended by
deleting the word "or" immediately following "10.02(e)", substituting a comma
for such word and inserting the words "or Section 10.14 to, in the case of
Section 10.14, allow execution and delivery of the supplemental indenture(s)
referred to in Section 10.14(a)(ii)" immediately following "10.13".
7. Annex A hereto is hereby included as Exhibit D to the
Indenture.
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1. Indenture. Except as amended hereby, the Indenture
and the Securities are in all respects ratified and confirmed and all their
terms shall remain in full force and effect.
4
<PAGE> 6
Section 2.2. Governing Law. THE LAWS OF THE STATE OF NEW YORK
SHALL GOVERN THIS FIRST SUPPLEMENTAL INDENTURE WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY, EXCEPT THAT THE
LAWS OF THE STATE OF MASSACHUSETTS SHALL GOVERN MATTERS CONCERNING THE VALIDITY
AND PERFECTION OF SECURITY INTERESTS OF THE TRUSTEE IN FAVOR OF THE HOLDERS IN
THE ACCOUNTS, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF
LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
WOULD BE REQUIRED THEREBY.
Section 2.3. Successors. All agreements of the Company in this
First Supplemental Indenture shall bind its successors. All agreements of the
Trustee in this First Supplemental Indenture shall bind its successors.
Section 2.4. Multiple Counterparts. This First Supplemental
Indenture may be executed in any number of counterparts, each of which shall be
an original; but such counterparts shall together constitute but one and the
same instrument.
Section 2.5. Effectiveness and Operativeness. The provisions of
this First Supplemental Indenture shall become effective immediately upon its
execution and delivery by the Trustee in accordance with the provisions of
Article 9 of the Indenture; provided, however, that the amendments provided for
in Article I shall only become operative concurrently with the consummation of
the Potential Offering (as such term is defined in Article I).
Section 2.6. Termination. If the amendments provided for in
Article I have not become operative on or prior to December 31, 1996, such
amendments shall be deemed to have been rescinded and this Supplemental
Indenture shall be of no force or effect.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
5
<PAGE> 7
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the date first written
above.
Attest: MAXXAM GROUP INC.
By: _________________________ By: _________________________
Name: Name:
Title: Title:
Attest: FLEET NATIONAL BANK
By: _________________________ By: _________________________
Name: Name:
Title: Title:
6
<PAGE> 8
<TABLE>
<S> <C>
MAXXAM PROPERTIES INC. hereby
consents to the execution and delivery
of this Second Supplemental Indenture and
Attest: confirms its agreements set forth in Article
10 of the Indenture
By:________________________ By: ___________________________
Name: Name:
Title: Title:
MAXXAM INC. hereby consents to
the execution and delivery of this
Attest: Second Supplemental Indenture
By:________________________ By: ___________________________
Name: Name:
Title: Title:
</TABLE>
7
<PAGE> 1
EXHIBIT 4.36
- --------------------------------------------------------------------------------
MAXXAM GROUP INC.
$126,720,000 12 1/4% Senior Secured Discount Notes due 2003
$100,000,000 11 1/4% Senior Secured Notes due 2003
SECOND SUPPLEMENTAL INDENTURE
Dated as of December 23, 1996
to
INDENTURE
Dated As of August 4, 1993
------------------------------
Fleet National Bank, Trustee
- --------------------------------------------------------------------------------
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of December 23, 1996,
between MAXXAM Group Inc. (the "Company") and Fleet National Bank, a national
banking association, as Trustee (the "Trustee").
WHEREAS, the Company and Shawmut Bank, N.A., as trustee,
executed an Indenture, dated as of August 4, 1993, in respect of $126,720,000
aggregate principal amount of 12 1/4% Senior Secured Discount Notes due 2003
and $100,000,000 aggregate principal amount of 11 1/4% Senior Secured Notes due
2003;
WHEREAS, the Trustee is the successor to Shawmut Bank, N.A.,
as trustee, under such Indenture;
WHEREAS, such Indenture was supplemented and amended by a
First Supplemental Indenture dated as of December 17, 1996;
WHEREAS, such Indenture, as supplemented and amended by such
First Supplemental Indenture, is hereinafter referred to as the "Indenture";
WHEREAS, the Indenture was also executed by MAXXAM Inc. and by
MAXXAM Properties Inc. to confirm their respective agreements set forth in
Article 10 of the Indenture;
WHEREAS, for all purposes of this Second Supplemental
Indenture, except as otherwise defined or unless the context otherwise
requires, terms used in capitalized form in this Second Supplemental Indenture
and defined in the Indenture have the meanings specified in the Indenture;
WHEREAS, Section 9.01 of the Indenture permits the Company and
the Trustee to amend, supplement or otherwise modify the Indenture or the
Securities as hereinafter provided;
WHEREAS, all conditions and requirements necessary to make
this Second Supplemental Indenture a valid, binding and legal instrument in
accordance with its terms have been performed and fulfilled and the execution
and delivery hereof have been in all respects duly authorized.
NOW, THEREFORE, in consideration of the above premises, each
party agrees, for the benefit of the other and for the equal and ratable
benefit of the Holders of the Securities, as follows:
- 1 -
<PAGE> 3
ARTICLE I
TRANSFER OF PLEDGED KAISER SHARES
Simultaneously with the execution and delivery of this Second
Supplemental Indenture, MAXXAM is transferring the Pledged Kaiser Shares to
MAXXAM Group Holdings Inc., a Delaware corporation ("MGHI"), pursuant to
Section 10.14 of the Indenture. To secure the full and punctual payment of
Accreted Value and premium of and interest on the Securities and all other
amounts payable pursuant to the Indenture, MGHI hereby grants to the Trustee,
for the benefit of the Holders and the Trustee, a first priority and (except
for Liens permitted under Section 4.16 of the Indenture) exclusive security
interest in all its right, title and interest in and to the following:
(i) the 27,938,250 shares of Common Stock, par value $.01
per share, of Kaiser described on the revised Exhibit C to the
Indenture being delivered to the Trustee pursuant to Section 10.04 of
the Indenture simultaneously with the execution and delivery of this
Second Supplemental Indenture;
(ii) all certificates whether now owned or hereafter
acquired representing any of the shares referred to in clause (i) of
this Article I;
(iii) all dividends, cash, instruments and other property
and proceeds from time to time received, receivable or otherwise
distributed on or in exchange for any of the foregoing after the Issue
Date, including, without limitation, any stocks, bonds or other
securities, options, warrants, or other such rights, cash or other
property payable or distributable on any of the shares referred to in
clause (i) of this Article I at any time, including, without
limitation, any distribution on any such shares upon the dissolution
or liquidation, in whole or in part, of the issuer of such shares or
the consolidation or merger of such issuer with any other person or
persons, or the reorganization of such issuer, or any distribution on
any such shares of the capital or paid-in capital surplus or any part
thereof of the issuer of such shares, in any form, or any subdivision,
combination, reclassification or redemption of any such shares; and
(iv) to the extent not included in clauses (i), (ii) and
(iii) of this Article I, all proceeds (as defined in the Uniform
Commercial Code as in effect on the date of the Indenture) of any and
all of the foregoing (arising after the Issue Date).
The security interest granted pursuant to this Article I shall, for purposes of
the Indenture, be deemed to have been granted pursuant to each of Section 10.14
and Section 10.01(c) of the
- 2 -
<PAGE> 4
Indenture. MGHI hereby assumes all of the obligations with respect to the
Pledged Kaiser Shares applicable to MAXXAM under Article 10 of the Indenture.
The Trustee has, pursuant to Section 10.14 of the Indenture, been requested to
surrender, and is, simultaneously with the execution and delivery of this
Second Supplemental Indenture, surrendering, the certificate held by it for the
Pledged Kaiser Shares registered in the name of MAXXAM Inc. against delivery to
it of a certificate for the Pledged Kaiser Shares registered in the name of
MGHI, accompanied by duly executed and undated instruments of transfer or
assignment in blank.
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1. Indenture. Except as amended hereby, the
Indenture and the Securities are in all respects ratified and confirmed and all
their terms shall remain in full force and effect.
Section 2.2. Governing Law. THE LAWS OF THE STATE OF NEW
YORK SHALL GOVERN THIS SECOND SUPPLEMENTAL INDENTURE WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY, EXCEPT THAT THE
LAWS OF THE STATE OF MASSACHUSETTS SHALL GOVERN MATTERS CONCERNING THE VALIDITY
AND PERFECTION OF SECURITY INTERESTS OF THE TRUSTEE IN FAVOR OF THE HOLDERS IN
THE ACCOUNTS, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF
LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
WOULD BE REQUIRED THEREBY.
Section 2.3. Successors. All agreements of the Company and
MGHI in this Second Supplemental Indenture shall bind their successors. All
agreements of the Trustee in this Second Supplemental Indenture shall bind its
successors.
Section 2.4. Multiple Counterparts. This Second Supplemental
Indenture may be executed in any number of counterparts, each of which shall be
an original; but such counterparts shall together constitute but one and the
same instrument.
Section 2.5. Effectiveness. The provisions of this Second
Supplemental Indenture shall become effective immediately upon its execution
and delivery by the Trustee in accordance with the provisions of Article 9 of
the Indenture.
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<PAGE> 5
(REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
- 4 -
<PAGE> 6
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, all as of the date first written
above.
<TABLE>
<S> <C>
Attest: MAXXAM GROUP INC.
By:________________________ By: ___________________________
Name: Byron L. Wade Name:
Title: Secretary Title:
Attest: FLEET NATIONAL BANK
By:________________________ By: ___________________________
Name: Name:
Title: Title:
MAXXAM GROUP HOLDINGS INC.
hereby confirms its agreements set forth
in Article I of this Second Supplemental
Attest: Indenture and in Article 10 of the Indenture
By:________________________ By: ___________________________
Name: Name:
Title: Title:
</TABLE>
- 5 -
<PAGE> 7
<TABLE>
<S> <C>
MAXXAM PROPERTIES INC. hereby
consents to the execution and delivery
of this Second Supplemental Indenture and
Attest: confirms its agreements set forth in Article
10 of the Indenture
By:________________________ By: ___________________________
Name: Name:
Title: Title:
MAXXAM INC. hereby consents to
the execution and delivery of this
Attest: Second Supplemental Indenture
By:________________________ By: ___________________________
Name: Name:
Title: Title:
</TABLE>
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<PAGE> 1
EXHIBIT 5
Kramer, Levin, Naftalis & Frankel
919 Third Ave.
New York, NY 10022
January 7, 1997
MAXXAM Group Holdings Inc.
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
Re: MAXXAM Group Holdings Inc.
Registration Statement on Form S-4
(Registration No. 333-18723)
Ladies and Gentlemen:
We have acted as counsel to MAXXAM Group Holdings Inc., a Delaware
corporation (the "Company"), and MAXXAM Inc., a Delaware corporation (the
"Guarantor"), in connection with the preparation and filing of the above-
captioned Registration Statement on Form S-4 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the proposed offer by the Company (the "Exchange Offer") to exchange
$130,000,000 aggregate principal amount of its 12% Series B Senior Secured
Notes due 2003 (the "New Notes") for a like amount of its outstanding 12%
Senior Secured Notes due 2003 (the "Old Notes"). The New Notes will be
guaranteed (the "Guaranty") on a senior unsecured basis by the Guarantor. The
New Notes will be issued pursuant to an Indenture, dated December 23, 1996,
among the Company, the Guarantor, and First Bank National Association, as
trustee (the "Indenture").
As such counsel, we have examined such corporate records, certificates
and other documents and such questions of law as we have considered necessary
or appropriate for the purposes of this opinion. In rendering this opinion, we
have (a) assumed (i) the genuineness of all signatures on all documents
examined by us, (ii) the authenticity of all documents submitted to us as
originals, and (iii) the conformity to original documents of all documents
submitted to us as photostatic or conformed copies and the authenticity of the
originals of such copies; and (b) relied on (i) certificates of public
officials and (ii) as to matters of fact, statements and certificates of
officers of the Company.
<PAGE> 2
We are attorneys admitted to the Bar of the State of New York, and we
express no opinion as to the laws of any other jurisdiction other than the laws
of the United States of America, the State of New York and the General
Corporation Law of the State of Delaware.
Based upon the foregoing, we are of the opinion that:
1. The New Notes have been duly authorized by the Company and,
when issued and delivered in exchange for the Old Notes in the manner
set forth in the Registration Statement and executed and authenticated
in accordance with the terms and conditions of the Indenture (and
assuming the due authorization, execution and delivery of the
Indenture by each of the parties thereto), will constitute legal,
valid and binding obligations of the Company.
2. The Guaranty of the Guarantor, when issued and delivered in
connection with the exchange of the New Notes for the Old Notes in the
manner described in the Registration Statement and when such New Notes
are executed and authenticated as specified in the Indenture, will be
duly issued and delivered and will constitute a legal, valid and
binding obligation of the Guarantor.
The above opinion is subject to and limited by bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance or transfer or
other laws and court decisions, now or hereafter in effect, relating to or
affecting the rights of creditors generally.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving such consent we do not thereby concede that we are within the category
of persons whose consent is required under Section 7 of the Securities Act or
the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
<PAGE> 1
EXHIBIT 10.39
FORM OF
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, dated as of ____________________, is by and between
__________________________________________, a Delaware corporation (the
"Company"), and _______________________________ (the "Employee"), currently
residing at __________________________________________________________________.
WITNESSETH:
WHEREAS, the Employee currently serves as ____________________________
of the Company and receives compensation in that capacity; and
WHEREAS, the Employee desires to enter into an arrangement providing
for the deferral of certain salary and/or bonus compensation which may
otherwise be paid in the year following the year in which this Agreement is
made; 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 and/or B]:
A. _______ percent of gross salary per pay period otherwise
payable to the Employee during calendar year _______, not to
exceed $___________________ for the year [the aggregate amount
of income deferred pursuant to A and/or B may not exceed 20%
of the aggregate amount of Employee's salary and bonus]; and
B. _____ percent of any bonus which may otherwise become payable
to the Employee in respect of services rendered during the
calendar year _____, not to exceed $___________ for the year.
[the aggregate amount of income deferred pursuant to A and/or
B may not exceed 20% of the aggregate amount of Employee's
salary and bonus]
<PAGE> 2
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 concerning the employee's Deferred Compensation
Account 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
-2-
<PAGE> 3
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
-3-
<PAGE> 4
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 of any
subsidiary or affiliate 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 Policy Committee of the
Board of Directors (or the Section 162(m) Compensation Committee in the case of
deferral of any part of or bonus awarded under a plan administered by such
Committee) 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.
-4-
<PAGE> 5
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, as of the date first written above.
----------------------------------------
[Name of Company]
ATTEST: By:
-------------------------------------
Byron L. Wade, Vice President,
Secretary & Deputy General Counsel
- ------------------------------------
Nawasa Lafferty, Assistant Secretary
----------------------------------------
[Employee]
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<PAGE> 6
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 ___________________, 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.
<PAGE> 1
EXHIBIT 10.51
[Pacific Lumber Letterhead]
March 10, 1995
VIA CERTIFIED MAIL
Mr. John A. Campbell
The Pacific Lumber Company
125 Main Street
Scotia, California 95565
Dear John:
In accordance with Section 2.b. of the Employment Agreement dated as
of July 1, 1991 (the "Employment Agreement"), between you and The Pacific
Lumber Company (the "Company"), this letter (the "Letter Agreement") will serve
as evidence of the agreement between you and the Company to extend the
termination date of the Employment Agreement from June 30, 1995, to June 30,
1998.
Please sign the enclosed second original of this Letter Agreement and
return it to me at 5847 San Felipe, Suite 2600, Houston, Texas 77057, to
signify your approval of the extension of the term of the Employment Agreement.
Very truly yours,
THE PACIFIC LUMBER COMPANY
/s/ Byron L. Wade
Byron L. Wade
Vice President, Secretary
and Deputy General Counsel
I, John A. Campbell, do hereby agree to extend the termination date of
the Employment Agreement dated as of July 1, 1991 (the "Agreement"), between
The Pacific Lumber Company (the "Company") and myself from June 30, 1995, to
June 30, 1998. All
<PAGE> 2
other terms of said Agreement remain unchanged and in full force and effect.
This extension shall not constitute any waiver or agreement to any further
extension by the Company.
/s/ John A. Campbell
---------------------------
John A. Campbell
<PAGE> 1
EXHIBIT 10.52
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement), effective as of the first day of
July, 1991, by and between JOHN A. CAMPBELL (the "Employee") and THE PACIFIC
LUMBER COMPANY, a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Employee has been an executive officer of the Company since
1982 and has been an employee of the Company since December 15, 1969; and
Employee and the Company are parties to an EMPLOYMENT
AGREEMENT executed and effective as of January 1, 1987 (the "Prior Agreement")
and desire that this Agreement shall supersede the Prior Agreement in certain
respects as hereinafter provided; and
WHEREAS, the Company and the Employee wish to provide for the
continued employment of the Employee upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the parties hereto do hereby agree as follows:
1. Scope of Employment.
a. Employee shall serve as the President of the Company
or in such other positions as the Board of Directors in its discretion may
determine.
b. Employee hereby accepts such employment and shall
perform to the best of his ability all duties reasonably assigned to Employee
by the Board of Directors of the Company and devote his full working time and
attention to the performance of such duties.
<PAGE> 2
2. Term of Employment.
a. The term of this Agreement shall commence as of July
1, 1991 and shall continue until June 30, 1995 (the "Employment Period").
b. The Company shall have the option of extending the
Employment Period for a period of three (3) additional years ending June 30,
1998, by giving Employee written notice of the Company's election to so extend
the Employment Period, such notice to be sent on or before March 31, 1995 or be
null and void.
3. Compensation.
a. The Company shall pay to Employee a minimum annual
base compensation of Two Hundred Thousand Dollars ($200,000) payable in
accordance with the Company's regular payroll practices.
b. At least once annually during each twelve (12) month
period during the Employment Period, the Company shall review Employee's
performance and may increase but not decrease Employee's base compensation
hereunder.
4. Other Benefits.
a. Except as hereinafter set forth in paragraph 5.,
nothing contained herein shall be deemed to limit, reduce or amend Employee's
rights during the Employment Period to participate in and receive benefits from
all other employee benefits generally available to other officers, directors
and employees of the Company, including, without limitation, any group health
and life insurance benefits, vacation benefits, participation in the life
insurance benefits, vacation benefits, participation in the Company's
retirement or other executive compensation plans or programs maintained by the
Company.
b. It is understood and agreed that Employee during the
Employment Period may be considered for a cash or other bonus from time to time
but that both decisions as to payment of
2
<PAGE> 3
bonuses and the amount and/or from thereof shall be within the sole discretion
of the Company.
c. During the Employment Period, Employee will be
provided with the use of an automobile, in accordance with the then prevailing
personnel policies of the Company.
d. During the Employment Period, Employee will be
reimbursed for all reasonable business traveling and business related
out-of-pocket expenses in accordance with the then prevailing personnel
policies of the Company.
5. Prior Agreement.
This Agreement shall and does hereby supersede each and every
executory provision of the Prior Agreement except Sections 5.a. and except that
the provisions thereof shall continue to govern the obligations of the parties
arising during the period of time for which such Prior Agreement was effective.
6. Illness or Incapacity.
If during the Employment Period, Employee should be prevented
from performing his duties by reason of illness or incapacity for an aggregate
of six (6) consecutive months, then the Company may, on ninety (90) days' prior
notice terminate Employee's employment under this Agreement without further
obligation or liability except as may be provided by reason of Employee's
participation in any benefit plan sponsored by the Company.
7. Death During Employment Period.
In addition to such other benefits as may be provided under
the Company's benefit plans, if Employee dies during the Employment Period, the
Company shall pay to the estate of Employee the lesser of: (i) the annual base
compensation which would be otherwise payable to Employee during the twelve
(12) consecutive months following his death, or (ii) the compensation which
would be otherwise payable to Employee throughout the remainder of the
Employment Period.
3
<PAGE> 4
8. Termination For Cause.
a. If the Company determines that Employee, during the
Employment Period was guilty of an act of Material Misconduct, then the Company
may elect, upon notice to the Employee, effective immediately, to terminate the
Employment Period hereunder ("Termination For Cause") and Employee's entire
unpaid balance due under this Employment Agreement including but not limited to
the Special Bonus Payments provided under paragraph 5.b. hereof shall be
forfeited.
b. The term "Material Misconduct" means any act or
omission which materially and adversely affects the best interests of the
Company or its affiliated companies. Without limiting the generality of the
foregoing, Employee shall be deemed to have committed Material Misconduct if he
(i) commits or has committed any act of theft, fraud or embezzlement; (ii)
commits any act of gross insubordination; (iii) habitually neglects his duties;
(iv) commits any act which materially damages the reputation of the Employee,
the Company or its affiliated companies; or (v) willfully breaches any of the
terms or conditions of this Employment Agreement. The determination of
whether the Participant is guilty of Material Misconduct shall be made by the
Board of Directors of the Company in the sole absolute discretion of the
Company's Directors.
9. Certain Obligations.
a. During his employment with the Company or any of its
affiliates and at all times thereafter, Employee will not disclose to others,
directly or indirectly, any unpublished confidential or secret information
relating to the business or research activities or other interests of the
Company or any of its affiliates (including, without limitation, any
confidential designs, processes, surveys, programs, techniques or work
products, any trade secrets, any reports, recommendations or conclusions or any
information as to present or future business plans or finances, or with respect
to any products, services, suppliers, customers or prospective customers) or
use any such information, except in furtherance of his duties as an officer,
and solely on behalf, of the Company. At such time as he is no longer
employed by the Company or any of its affiliates, Employee
4
<PAGE> 5
shall promptly surrender to the Company any and all reports, surveys, work
papers, drawings, blueprints, manuals, programs, documents, photographs and the
like (including all negatives, originals and copies, whether in document form,
on computer discs of otherwise, thereof) in his possession, custody or control
which relate in any way to the business of the Company or any of its
affiliates, whether prepared by him or by others.
b. Employee hereby assigns and agrees to assign to the
Company, its successors and assigns, his entire right, title and interest in
and to any and all work product or copyrightable material (hereinafter referred
to as "said material") and to any and all inventions, developments or
innovations whether patented, patentable or unpatentable (hereinafter referred
to as "said inventions"), developed, conceived of, made or acquired by him,
either solely or jointly with others, either prior to the effective date of
this Agreement or during the term of his employment, and which in any way
relate to the business of the Company or any of its affiliates. Said
material and said inventions shall be the property of the Company. Employee
will not disclose to any person or entity (other than in the ordinary course of
the business of the Company and its affiliates) any information concerning any
of said material and said inventions. Employee shall, without further
compensation, do all lawful things, including, without limitation, rendering
assistance and executing necessary documents, as requested, which may be
convenient or necessary or proper to enable the Company or any of its nominees
or designees to perfect title in said material and in said inventions and to
obtain and maintain effective patent and copyright protection thereon in the
United States and foreign countries.
c. During the period payments are being made to Employee
pursuant to this Employment agreement, Employee will not, without the written
consent of the Board of Directors of the Company, directly or indirectly,
engage or become interested (whether as an owner, stockholder, partner, lender
or other investor, director, officer, employee, consultant or otherwise) in any
business or enterprise that shall, at the time, being whole or in part
competitive with any part of the business conducted by the Company or any of
its affiliates during the period of the Employee's employment with the Company
or any of
5
<PAGE> 6
its affiliates (except that ownership of not more than 1% of the outstanding
securities of any class of any corporation that are listed on a national
securities exchange or traded in the over-the-counter market shall not be
considered a breach of this paragraph 9.c.). The Employee will not accept
appointment as a member of the Board of Directors of any entity not affiliated
with the Company (other than an eleemosynary institution) without the prior
consent of the Board of Directors of the Company.
d. Without limiting the generality of the foregoing, so
long as he is employed by the Company or any of its affiliates, Employee will
observe and fulfill proper standards of fiduciary responsibility attendant upon
his service and office.
e. Employee covenants and agrees that so long as he is
employed by the Company, he shall observe the rules, regulations and policies
of the Company, including, but not limited to the Guidelines For Employee
Conduct and conflict of interest guidelines of MAXXAM Inc. as they may exist
from time to time.
10. Assignment of Employee's Interest.
Employee may not assign, pledge or encumber his interest in
this Employment Agreement without the written consent of the Company.
11. Remedies.
Since the Company will be irreparably damaged if the
provisions hereof (other than those providing directly for the performance by
Employee of his services hereunder) are not specifically enforced, the Company
shall be entitled to an injunction restraining any violation of this Employment
Agreement by Employee (without any bond or other security being required), or
any other appropriate decree of specific performance, without showing any
actual damage or that monetary damages would not provide an adequate remedy.
Such remedies shall not be exclusive and shall be in addition to any other
remedy which the Company may have.
6
<PAGE> 7
12. Notices.
Any and all notices or consents required or permitted to be
given under any of the provisions of this Employment Agreement shall be in
writing and shall be deemed to have been fully given three (3) days after
mailing, if mailed by registered or certified mail, return receipt requested;
if to the Employee, at his address appearing in the personnel records of the
Company, and if to the Company, at its principal office as maintained at that
time. Employee may change his mailing address for the purposes of this
Employment Agreement by notice to the Company as herein provided.
13. Definition of Affiliate.
As used in this Employment Agreement, the term "affiliate"
shall mean any corporation of which the Company, MAXXAM Inc., a Delaware
corporation and subsidiaries of MAXXAM Inc. or the Company shall own at such
date more than 25% of the outstanding capital stock having voting power for the
election of at least a majority of the members of the Board of Directors.
14. Severability.
In the event that any provision of this Employment Agreement
is held to be invalid, prohibited or unenforceable in any jurisdiction for any
reason (including, but not limited to, any provisions of paragraph 9. which may
be held unenforceable because of the scope, duration or area of its
applicability), unless narrowed by construction, this Employment Agreement
shall, as to such jurisdiction, be construed as if such invalid, prohibited or
unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable (and the court making any such determination as to
any provision of paragraph 9. shall have the power to modify such scope,
duration or area or all of them, and such provision shall then be applicable in
such modified form). If, notwithstanding the foregoing, any provision of this
Employment Agreement would be held to be invalid, prohibited or unenforceable
in any jurisdiction for any reason, such provision, as to such jurisdiction,
shall be ineffective to the extent of such invalidity, prohibition or
unenforceability, without invalidating
7
<PAGE> 8
the remaining provisions of this Employment Agreement or affecting the validity
or enforceability of such provision in any other jurisdiction.
15. Mergers, Consolidations. Liquidations.
In the event that the Company shall at any time be merged,
consolidated or liquidated with or into any corporation or corporations or in
the event that all or substantially all of the business and assets of the
Company shall be sold or otherwise transferred to another corporation, the
provisions of this Employment Agreement, including the provisions of this
paragraph, shall be binding upon and inure to the benefit of the successor of
the Company resulting from such merger, consolidation, liquidation or sale of
assets.
16. Binding Effect.
Except as otherwise provided herein, this Employment Agreement
shall be binding upon and shall inure to the benefit of the parties hereto, and
their respective heirs, successors, aligns and personal representatives.
17. Governing Laws.
This Employment Agreement shall be governed in all respects
by the internal laws of the State of California without giving effect to
principles of conflict of laws.
18. Entire Agreement: Modifications.
This Employment Agreement constitutes the entire understanding
between the parties hereto relating to the services to be performed by Employee
hereunder and supersedes all prior agreements and undertakings, oral and
written, between the parties hereto with respect to the subject matter hereof.
Except as otherwise specifically provided herein, no change, modification or
addition hereto shall be valid unless in writing and signed by or on behalf of
the parties hereto.
8
<PAGE> 9
19. Section Headings.
The headings contained in the Employment Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of the Employment Agreement.
20. Counterparts.
This Employment Agreement may be executed in one or more
counterparts, all of which taken together shall be deemed one original.
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement as of the date first above written.
THE PACIFIC LUMBER COMPANY
By: /s/ John M. Seidl
---------------------------
John M. Seidl
Chairman
EMPLOYEE
By: /s/ John A. Campbell
---------------------------
John A. Campbell
9
<PAGE> 1
EXHIBIT 10.53
THE PACIFIC LUMBER AND
BRITT LUMBER COMPANIES
MANAGEMENT
INCENTIVE COMPENSATION PLAN
1996
A. PURPOSE
1. The intent of the plan is to encourage outstanding performance
by key executives related to successful and profitable
operations of The Pacific Lumber Company and Britt Lumber
Company (the "Company") for calendar year 1996.
2. The plan is designed to act as a major motivating force in
influencing a significantly higher level of sales and income
and to provide an equitable means of reward for individual
contributions to such improvement.
B. PARTICIPANTS
Participants are selected and approved from among The Pacific Lumber
and Britt Lumber management group (excluding the lumber sales group)
by the president of The Pacific Lumber Company. The plan has two
levels of participation (i) Tier I with a target range for payout from
five percent to 80 percent of base salary and (ii) Tier II with a
target range for payout from three percent to 45 percent of base
salary.
C. INCENTIVE COMPENSATION
There are two components to the total award:
1. The first component of the total award will be based upon
achieving the Company's 1996 operating income before
depletion, depreciation, amortization and corporate
administration charges ("adjusted Company operating income")
of $106.3 million. No incentive
<PAGE> 2
compensation based on adjusted Company operating income will be earned
unless 75 percent of the target is achieved. Incentive compensation
will be calculated as a percentage of the annual base salary of
eligible participants as of January 1, 1996, adjusted for months
worked during the year, based on the following table (interpolated as
necessary):
<TABLE>
<CAPTION>
Actual adjusted 1996
annual operating Percent of 1-01-96
income annual salary
--------------------- -----------------------
% of plan ($ millions) Tier I Tier II
--------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
75 79.7 16.5 3.0
80 85.0 18.0 4.0
85 90.3 19.0 5.0
90 95.6 21.0 6.0
95 101.0 23.0 7.0
100 106.3 (1996 plan) 25.0 8.0
105 111.6 40.0 15.0
110 116.9 55.0 (max.) 25.0
</TABLE>
2. The second component of the total award will be based upon
achieving critical performance objectives during the year. The
award for each participant will be determined by the president
on a discretionary basis, based upon his evaluation of
relative contributions. For 1996, the following objectives are
targeted:
a. Development and implementation of a THP management
plan such that THP submissions for 1996 total at
least _______ gross MMBF and unlitigated THP
approvals at year end 1996 constitute a balance equal
to 100 percent of the 1997 requirements for logs to
mill.
b. Attainment of net lumber production goal of 367.8
MMBF (PALCO/Britt).
c. Net lumber sales of $228.0 million for 1996.
d. Implementation of the 1996 capital budget at less
than 110 percent of approved expenditures.
2
<PAGE> 3
e. Continue downward trend in lost-time injuries.
f. Development and implementation of a
marketing/distribution plan as outlined in the Sales
Incentive Compensation Plan (paragraph C.2.b-h)
These Company goals will be individualized for each participant as appropriate
and outlined in an attached memorandum.
Incentive compensation will be paid in accordance with achieving the above
objectives as follows:
<TABLE>
<CAPTION>
Percent of 1-01-96
annual salary
--------------------------------
Achievement of objectives Tier I Tier II
---------------------------- ---------- ------------
<S> <C> <C> <C>
15% 5.0 3.0
30% 10.0 7.0
45% 15.0 8.5
60% 20.0 15.0
75% 21.0 16.0
80% 22.0 16.5
85% 23.0 17.0
90% 24.0 18.0
95% 24.5 19.0
100% 25.0 (max.) 20.0
105% 25.0 20.0
110% 25.0 20.0
</TABLE>
D. PAYMENT PROVISIONS
1. The allocation of the incentive compensation must be approved
by the president of The Pacific Lumber Company and the
Compensation Committee of MAXXAM Inc.
3
<PAGE> 4
2. As soon as practicable after December 31, 1996, the amount of
incentive compensation will be calculated by the vice
president-finance and administration. The final number will be
available in January.
3. Incentive compensation will be paid in cash as soon as
practicable after December 31, 1996.
4. A participant whose employment is discontinued, for any reason
other than normal retirement, total disability, or death
before the end of the plan period, shall automatically forfeit
any claim to incentive compensation for the period. There are
no rights vested in any employee during the plan period.
5. A participant who retires, suffers total disability, or dies
during the course of 1996 will receive incentive compensation
prorated through the date of retirement, total disability, or
death. The incentive payment will be issued after the close
of the year along with all other payments from the plan.
6. In the event of the death of a participant following the end
of the plan year but before payment of any incentive
compensation which may be due, 100 percent of the applicable
incentive compensation shall be paid to the participant's
designated beneficiary, if one has been named, or else to the
participant's estate as outlined in the plan.
E. ADMINISTRATION
1. All provisions of the plan shall be subject to the approval of
the president of The Pacific Lumber Company.
2. The vice president-finance and administration of The Pacific
Lumber Company shall be responsible for general administration
of the plan.
3. Final decisions on all questions of computations, policy, or
interpretations of provisions of the plan shall be made by the
president of The Pacific Lumber Company.
4
<PAGE> 1
EXHIBIT 10.54
THE PACIFIC LUMBER AND
BRITT LUMBER COMPANIES
MANAGEMENT
INCENTIVE COMPENSATION PLAN
1995
A. PURPOSE
1. The intent of the plan is to encourage outstanding performance
by key executives related to successful and profitable
operations of The Pacific Lumber Company and Britt Lumber
Company (the "Company") for calendar year 1995.
2. The plan is designed to act as a major motivating force in
influencing a significantly higher level of sales and income
and to provide an equitable means of reward for individual
contributions to such improvement.
B. PARTICIPANTS
Participants are selected and approved from among The Pacific Lumber
and Britt Lumber management group (excluding the lumber sales group)
by the president of The Pacific Lumber Company. The plan has two
levels of participation (i) Tier I with a target range for payout from
ten percent to 80 percent of base salary and (ii) Tier II with a
target range for payout from six percent to 45 percent of base salary.
C. INCENTIVE COMPENSATION
There are two components to the total award:
1. 50 percent of the total award will be based upon achieving the
Company's 1995 operating income before depletion,
depreciation, amortization and corporate administration
charges ("adjusted Company operating income") of $112.6
million. No incentive compensation based on adjusted Company
operating income will be earned unless 75 percent of the
target is achieved. Incentive compensation will be calculated
as a
<PAGE> 2
percentage of the annual base salary of eligible participants as of
January 1, 1995, adjusted for months worked during the year, based on
the following table (interpolated as necessary):
<TABLE>
<CAPTION>
Actual adjusted 1995
annual operating Percent of 01-01-95
income annual salary
--------------------- -----------------------
% of plan ($ millions) Tier I Tier II
--------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
75 84.45 5.0 3.0
80 90.08 12.5 7.0
85 95.71 15.0 8.5
90 101.34 27.5 15.0
95 106.97 32.5 17.5
100 112.60 (1995 plan) 37.5 20.0
105 118.23 40.0 (max.) 22.5
</TABLE>
2. 50 percent of the total award will be based upon achieving
critical performance objectives during the year. The award for
each participant will be determined by the president on a
discretionary basis, based upon his evaluation of relative
contributions. For 1995, the following objectives are
targeted:
a. Development and implementation of a THP management
plan such that THP submissions for 1995 total at
least 425 gross MMBF and unlitigated THP approvals at
year end 1995 constitute a balance equal to 100
percent of the 1996 requirements for logs to mill.
b. Attainment of net lumber production goal of 379
MMBF(PALCO/Britt).
c. Produce and ship 32 MMBF of PALCO-Loc in 1995.
d. Net lumber sales of $247.1 million for 1995.
e. Implementation of the 1995 capital budget at less
than 110 percent of approved expenditures.
f. Continue downward trend in lost-time injuries.
<PAGE> 3
g. Development and implementation of a
marketing/distribution plan as outlined in
the Sales Incentive Compensation Plan
(paragraph C.2.a-f).
These Company goals will be individualized for each participant as appropriate
and outlined in an attached memorandum.
Incentive compensation will be paid in accordance with achieving the above
objectives as follows:
<TABLE>
<CAPTION>
Percent of 01-01-95
annual salary
--------------------------------
Achievement of objectives Tier I Tier II
---------------------------- ---------- ------------
<S> <C> <C> <C>
15% 5.0 3.0
30% 12.5 7.0
45% 15.0 8.5
60% 27.5 15.0
75% 32.5 17.5
90% 37.5 20.0
100% 40.0 (max.) 22.5
</TABLE>
D. PAYMENT PROVISIONS
1. The allocation of the incentive compensation must be approved
by the president of The Pacific Lumber Company and the
Compensation Committee of MAXXAM Inc.
2. As soon as practicable after December 31, 1995, the amount of
incentive compensation will be calculated by the vice
president finance and administration. The final number will be
available in January.
3. Incentive compensation will be paid in cash as soon as
practicable after December 31, 1995.
<PAGE> 4
4. A participant whose employment is discontinued, for any
reason other than normal retirement, total disability, or
death before the end of the plan period, shall automatically
forfeit any claim to incentive compensation for the period.
There are no rights vested in any employee during the plan
period.
5. A participant who retires, suffers total disability, or dies
during the course of 1995 will receive incentive compensation
prorated through the date of retirement, total disability, or
death. The incentive payment will be issued after the close of
the year along with all other payments from the plan.
6. In the event of the death of a participant following the end
of the plan year but before payment of any incentive
compensation which may be due, 100 percent of the applicable
incentive compensation shall be paid to the participant's
designated beneficiary, if one has been named, or else to the
participant's estate as outlined in the plan.
E. ADMINISTRATION
1. All provisions of the plan shall be subject to the approval of
the president of The Pacific Lumber Company.
2. The vice president - finance and administration of The Pacific
Lumber Company shall be responsible for general administration
of the plan.
3. Final decisions on all questions of computations, policy, or
interpretations of provisions of the plan shall be made by the
president of The Pacific Lumber Company.
<PAGE> 1
EXHIBIT 10.55
November 10, 1992
Mr. Gary L. Clark
Kaiser Aluminum & Chemical Corporation/MAXXAM Inc.
5847 San Felipe, Suite 2600
Houston, TX 77057
Dear Gary:
When countersigned by you and delivered to me, this letter shall
witness and constitute an agreement between you, Kaiser Aluminum & Chemical
Corporation ("KACC"), and MAXXAM Inc. ("MAXXAM") upon the terms herein stated.
KACC and MAXXAM are collectively referred to herein as the "Company."
You have agreed to transfer to and serve, beginning January 1, 1993 as
the Vice President-Finance and Administration of The Pacific Lumber Company
(PL), an affiliate of KACC and MAXXAM, and to otherwise render services in
accordance with the terms of that certain Employment Agreement between PL and
you which became effective as of October 1, 1992.
You have agreed to resign all of your officer positions at KACC and
MAXXAM and all of their non-PL subsidiaries and affiliates as of September 30,
1992 or such other dates on or prior to December 31, 1992 as such respective
corporations may prefer.
You have also agreed during your employment with PL, to consult with
the Company concerning its treasury functions and other financial functions
with which you have experience and expertise, from time to time, on a part time
basis not to exceed 15 hours in any one calendar month.
In consideration for your consultancy to the Company, KACC and MAXXAM
hereby respectively agree as follows:
1. KACC agrees to advance the cost of your move to Scotia,
California and such other benefits as are provided in
accordance with KACC's executive relocation policy for
transferred employees plus, if not otherwise provided
<PAGE> 2
for, your out of pocket costs of reasonable travel and
temporary lodging expenses directly caused by your move to
Scotia, subject to the reimbursement to KACC of such advances
by PL;
2. KACC shall treat your KACC pension and Plan B benefits in
accordance with and otherwise adhere to the terms of that
certain memorandum dated December 21, 1992 to you from Joe
Bonn, a copy of which is hereto attached;
3. The Company agrees to permit you to move to Scotia, California
in October, 1992 and to then begin to become acquainted with
your new duties at PL and to begin to reduce your KACC and
MAXXAM duties;
4. KACC agrees to continue your employment by KACC through
December 31, 1992 for all benefit plan purposes, and to pay
you appropriately for all accrued and unused vacation carried
through December 31, 1992, and to consider payment of a bonus
for the 1992 employment year as if you were a continuing
employee of KACC;
5. KACC agrees to pay your accrued benefits under the KACC Middle
Management Incentive Plan ("MM Plan") following termination of
your participation therein on December 31, 1992, subject to
any amendment to such plan made as of December 31, 1992 or
earlier;
6. KACC agrees to pay you $7,000 per annum and MAXXAM agrees to
pay you $7,000 per annum for an aggregate of $14,000 per annum
payable by KACC and MAXXAM, in respective lump sum payments,
in advance on or about January 1 of each year during the term
hereof; provided, however, that as respects each of KACC and
MAXXAM, you shall return a prorata portion of such annual
payment for any calendar year in which, for any reason other
than your death, this consulting agreement is terminated prior
to year end;
It is understood that your KACC and MAXXAM consultancy shall be
severable and shall be coterminous with your employment at PL unless otherwise
agreed in writing. I have executed two originals of this letter Agreement. If
acceptable, please sign both, retain one for your records and return the other
to me.
<PAGE> 3
Yours truly,
KAISER ALUMINUM & CHEMICAL
CORPORATION
By: /s/ John M. Seidl
--------------------------------
John M. Seidl, Chairman
MAXXAM INC.
By: /s/ John M. Seidl
--------------------------------
John M. Seidl, President
Understood and Agreed to
/s/ Gary L. Clark
- ----------------------------------
Gary L. Clark
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
January 7, 1997
