UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 1-3924
MAXXAM INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 95-2078752
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5847 SAN FELIPE, SUITE 2600 77057
HOUSTON, TEXAS (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (713) 975-7600
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at
October 31, 1997: 8,277,847
<PAGE>
MAXXAM INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1997 and
December 31, 1996 3
Consolidated Statement of Operations for the three and
nine months ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 28
Signature S-1
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 197.6 $ 336.6
Marketable securities 59.2 50.3
Receivables:
Trade, net of allowance for doubtful
accounts of $4.8 and $5.2,
respectively 265.2 200.7
Other 68.0 85.9
Inventories 625.7 634.8
Prepaid expenses and other current assets 163.8 169.1
------------- -------------
Total current assets 1,379.5 1,477.4
Property, plant and equipment, net of
accumulated depreciation of $830.7 and
$769.5, respectively 1,307.7 1,297.9
Timber and timberlands, net of accumulated
depletion of $166.7 and $154.6,
respectively 298.8 301.8
Investments in and advances to unconsolidated
affiliates 169.4 179.5
Deferred income taxes 445.7 419.7
Long-term receivables and other assets 447.2 439.4
------------- -------------
$ 4,048.3 $ 4,115.7
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 171.1 $ 201.5
Accrued interest 36.6 61.5
Accrued compensation and related benefits 93.2 158.7
Other accrued liabilities 207.1 154.1
Payable to affiliates 91.4 98.1
Long-term debt, current maturities 23.9 69.6
------------- -------------
Total current liabilities 623.3 743.5
Long-term debt, less current maturities 1,880.6 1,881.9
Accrued postretirement medical benefits 724.3 731.9
Other noncurrent liabilities 610.5 589.4
------------- -------------
Total liabilities 3,838.7 3,946.7
------------- -------------
Commitments and contingencies
Minority interests 161.5 219.8
Stockholders' equity (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:
10,063,359 and 10,063,885,
respectively 5.0 5.0
Additional capital 219.9 155.9
Accumulated deficit (133.1) (185.6)
Pension liability adjustment (5.0) (5.1)
Treasury stock, at cost (shares held:
preferred - 845; common: 1,785,512
and 1,400,112, respectively) (39.0) (21.3)
------------- -------------
Total stockholders' equity
(deficit) 48.1 (50.8)
------------- -------------
$ 4,048.3 $ 4,115.7
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Aluminum operations $ 634.1 $ 553.4 $ 1,778.6 $ 1,652.1
Forest products operations 72.8 68.5 216.5 199.6
Real estate and other
operations 19.1 19.3 51.6 69.4
------------- ------------- ------------- -------------
726.0 641.2 2,046.7 1,921.1
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales and operations
(exclusive of
depreciation and
depletion):
Aluminum operations 523.7 485.0 1,473.7 1,394.8
Forest products
operations 39.8 40.1 119.9 114.6
Real estate and other
operations 12.5 16.8 31.4 57.1
Selling, general and
administrative expenses 47.3 58.7 139.0 152.9
Depreciation and depletion 28.8 31.0 87.4 92.9
Restructuring of aluminum
operations -- -- 19.7 --
------------- ------------- ------------- -------------
652.1 631.6 1,871.1 1,812.3
------------- ------------- ------------- -------------
Operating income 73.9 9.6 175.6 108.8
Other income (expense):
Investment, interest and other
income 14.3 19.6 30.5 35.1
Interest expense (52.3) (44.8) (158.3) (135.5)
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interests 35.9 (15.6) 47.8 8.4
Credit (provision) for income taxes (13.9) 23.0 13.6 27.1
Minority interests (4.0) (2.1) (10.8) (7.5)
------------- ------------- ------------- -------------
Net income $ 18.0 $ 5.3 $ 50.6 $ 28.0
============= ============= ============= =============
Net income per common and common
equivalent share $ 1.98 $ .56 $ 5.46 $ 2.96
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MAXXAM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50.6 $ 28.0
Adjustments to reconcile net income to net
cash used for operating activities:
Depreciation and depletion 87.4 92.9
Restructuring of aluminum operations 19.7 --
Non-cash benefit for income taxes (12.5) --
Net sales of marketable securities 1.2 1.0
Net gains on marketable securities (10.1) (5.7)
Minority interests 10.8 7.5
Amortization of deferred financing costs
and discounts on long-term debt 18.5 15.9
Amortization of excess investment over
equity in net assets of
unconsolidated affiliates 8.7 9.1
Equity in (earnings) loss of
unconsolidated affiliates, net of
dividends received 14.6 (7.5)
Net gain on sale of real estate, mortgage
loans and other assets (5.0) (17.4)
Increase (decrease) in cash resulting
from changes in:
Receivables (50.9) 57.1
Payable to affiliates and other
liabilities (55.2) (40.5)
Inventories 5.9 (18.2)
Accrued interest (23.9) (31.2)
Prepaid expenses and other assets (7.7) (27.4)
Accounts payable (30.3) (25.9)
Accrued and deferred income taxes 11.4 (25.9)
Other 7.0 1.7
------------- -------------
Net cash provided by operating
activities 40.2 13.5
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and
investments 34.4 35.0
Capital expenditures (120.1) (108.0)
Investment in subsidiaries and joint ventures (7.1) (2.0)
Other (2.6) (.4)
------------- -------------
Net cash used for investing
activities (95.4) (75.4)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
agreements -- 117.3
Proceeds from issuance of long-term debt 19.7 4.3
Redemptions, repurchases and principal
payments on long-term debt (76.6) (32.6)
Dividends paid to Kaiser's minority preferred
stockholders (4.2) (8.4)
Redemption of preference stock (2.0) (5.2)
Restricted cash deposits (6.5) (.5)
Treasury stock repurchases (17.7) --
Other 3.5 3.3
------------- -------------
Net cash provided by (used for)
financing activities (83.8) 78.2
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (139.0) 16.3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 336.6 104.2
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 197.6 $ 120.5
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 164.0 $ 150.9
Income taxes paid 15.2 21.7
Capital spending excluded from investing
activities 10.3 --
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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, 1996 (the "Form 10-K"). All references to the "Company"
include MAXXAM Inc. and its subsidiary companies unless otherwise indicated
or the context indicates otherwise. Any capitalized items used but not
defined in these Condensed Notes to Consolidated Financial Statements have
the same meaning given to them 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 as of and for the periods
ended September 30, 1997 and September 30, 1996 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, 1997,
the consolidated results of operations for the three and nine months ended
September 30, 1997 and 1996 and consolidated cash flows for the nine months
ended September 30, 1997 and 1996. Certain reclassifications of prior
period information have been made to conform to the current presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Aluminum Operations:
Finished fabricated aluminum products $ 95.4 $ 113.5
Primary aluminum and work in process 220.7 200.3
Bauxite and alumina 110.5 110.2
Operating supplies and repair and
maintenance parts 126.7 138.2
------------- -------------
553.3 562.2
------------- -------------
Forest Products Operations:
Lumber 50.4 55.8
Logs 22.0 16.8
------------- -------------
72.4 72.6
------------- -------------
$ 625.7 $ 634.8
============= =============
</TABLE>
3. RESTRICTED CASH
Long-term receivables and other assets include restricted cash in
the amount of $35.4 and $30.0 at September 30, 1997 and December 31, 1996,
respectively. Such restricted cash primarily represents the amount held by
the trustee under the indenture governing the Timber Notes. In addition,
cash and cash equivalents include $7.3 and $17.6 at September 30, 1997 and
December 31, 1996, respectively, which is restricted for debt service
payments on the Timber Notes.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
14% MAXXAM Senior Subordinated Reset
Notes due May 20, 2000 $ -- $ 25.0
12-1/2% MAXXAM Subordinated Debentures
due December 15, 1999,
net of discount -- 17.6
12% MGHI Senior Secured Notes due
August 1, 2003 130.0 130.0
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 113.9 104.2
10-1/2% Pacific Lumber Senior Notes due
March 1, 2003 235.0 235.0
Pacific Lumber Credit Agreement 7.0 --
7.95% Scotia Pacific Timber
Collateralized Notes due July 20,
2015 320.0 336.1
KACC Credit Agreement -- --
10-7/8% KACC Senior Notes due October
15, 2006, including premium 225.8 225.9
9-7/8% KACC Senior Notes due February
15, 2002, net of discount 224.2 224.0
12-3/4% KACC Senior Subordinated Notes
due February 1, 2003 400.0 400.0
Alpart CARIFA Loans 60.0 60.0
Other aluminum operations debt 62.0 52.0
Other notes and contracts, primarily
secured by receivables, buildings,
real estate and equipment 26.6 41.7
------------- -------------
1,904.5 1,951.5
Less: current maturities (23.9) (69.6)
------------- -------------
$ 1,880.6 $ 1,881.9
============= =============
</TABLE>
On October 9, 1997, the Pacific Lumber Credit Agreement was
amended to, among other things, extend the date on which it expires to May
31, 2000.
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.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). Under SFAS No. 128, primary earnings per share
("Primary EPS") will be replaced by basic earnings per share ("Basic EPS"),
and fully diluted earnings per share ("Fully Diluted EPS") will be replaced
by diluted earnings per share ("Diluted EPS"). Basic EPS differs from
Primary EPS in that it only includes the weighted average impact of
outstanding shares of the Company's common stock (i.e., it excludes common
stock equivalents, the dilutive effect of options, etc.). Diluted EPS is
substantially similar to Fully Diluted EPS. The provisions of SFAS No. 128
will result in the retroactive restatement of previously reported Primary
EPS and Fully Diluted EPS figures. SFAS No. 128 is effective for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. The following table shows Basic and Diluted
EPS on a pro forma basis. Pro forma Diluted EPS is the same as the amounts
reported previously for Primary and Fully Diluted EPS.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS $ 2.17 $ .61 $ 5.96 $ 3.21
Diluted EPS 1.98 .56 5.46 2.96
</TABLE>
6. CREDIT FOR INCOME TAXES
The Company's credit 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 relates 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, 1997 includes a benefit of $32.1 relating to the reversal of
reserves the Company no longer believes are necessary. There was no such
tax benefit for reversal of reserves for the three months ended September
30, 1997. The credit for income taxes for the three and nine months ended
September 30, 1996 includes a benefit of $17.0 and $30.4, respectively,
relating to the reversal of reserves the Company no longer believes are
necessary.
7. CONTINGENCIES
Environmental Contingencies
Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of such
environmental laws and regulations, and to claims and litigation based upon
such laws. KACC currently is 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, 1997, the balance of such accruals, which are
primarily included in other noncurrent liabilities, was $30.8. These
environmental accruals represent Kaiser's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology and Kaiser's assessment of
the likely remediation actions to be taken. Kaiser expects that these
remediation actions will be taken over the next several years and estimates
that annual expenditures to be charged to these environmental accruals will
be approximately $3.0 to $8.0 for the years 1997 through 2001 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
$19.0. As resolution of these matters is subject to further regulatory
review and approval, no specific assurance can be given as to when the
factors upon which a substantial portion of this estimate is based can be
expected to be resolved. However, Kaiser is currently working to resolve
certain of these matters. 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 20 years. At September 30, 1997, the number of such claims pending
was approximately 71,200 as compared with 71,100 at December 31, 1996. In
1996, approximately 21,100 of such claims were received and 9,700 were
settled or dismissed. During the quarter and nine months ended September
30, 1997, approximately 3,400 and 9,000 of such claims were received and
6,500 and 8,900 of such claims were settled or dismissed, respectively.
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 through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and
Kaiser's actual costs could exceed or be less than 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 $156.8,
before consideration of insurance recoveries, is included primarily in
other noncurrent liabilities at September 30, 1997. While Kaiser does not
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. 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 1997 through 2001, and
an aggregate of approximately $86.0 thereafter.
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 in respect of asbestos-related
claims, existing insurance policies, and the advice of Thelen, Marrin,
Johnson & Bridges LLP 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 $127.9, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-
term receivables and other assets at September 30, 1997.
Kaiser continues to monitor claims activity, the status of
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
presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, Kaiser 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.
OTS Contingency and Related Matters
On December 26, 1995, the OTS initiated formal administrative
proceedings against the Company and others by filing the Notice. The
Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz
and others (the "respondents") with respect to the failure of USAT, a
wholly owned subsidiary of 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 and Federated, civil money penalties and a removal
from, and prohibition against the Company and the other respondents
engaging in, the banking industry. On September 15, 1997, the OTS filed a
prehearing statement which purported to summarize its claims against and
the relief it seeks from the respondents. Among other things, the
prehearing statement alleges that the Company and Federated are liable for
restitution and reimbursement against loss for their pro rata portion
(allegedly 35%) of the amount of USAT's capital deficiency and all imbedded
losses as of the date of USAT's receivership ($1.6 billion) or
approximately $560 million. The respondents also submitted prehearing
statements refuting the OTS's claims and denying liability. The hearing on
the merits commenced on September 22, 1997 and is scheduled to conclude on
December 19, 1997 (although it is unclear whether the hearing will conclude
by the scheduled date).
On August 2, 1995, the FDIC filed the FDIC action in the U.S.
District Court for the Southern District of Texas (the "Court"). The
original complaint seeks damages from Mr. Hurwitz 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 original complaint
further alleges, among other things, that Mr. Hurwitz was obligated to
ensure that UFG, Federated and MAXXAM maintained the net worth of USAT.
The Court has joined the OTS as a party to the FDIC action and granted the
motions to intervene filed by the Company and three other respondents in
the OTS administrative proceeding. The OTS is seeking to be dismissed from
the FDIC action. On January 15, 1997, the FDIC filed an amended complaint
which seeks, conditioned on the OTS prevailing in its administrative
proceeding, unspecified damages from Mr. Hurwitz relating to amounts the
OTS does not collect from the Company and Federated with respect to alleged
obligations to maintain USAT's net worth.
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 these contingencies. Accordingly, it is
impossible to assess the ultimate outcome of the foregoing matters or their
potential impact on the Company's consolidated financial position, results
of operations or liquidity.
Other Matters
The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At September 30, 1997, the net unrealized loss, including
unamortized net option premiums, on KACC's position in aluminum forward
sales and option contracts, (based on an average price of $1,647 per ton,
or $.75 per pound, of primary aluminum), natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $11.6.
Alumina and Aluminum
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 fluctuations. During the period from January 1, 1993, through
September 30, 1997, the average Midwest United States transaction price for
primary aluminum has ranged from approximately $.50 to $1.00 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.
From time to time in the ordinary course of business, KACC enters
into hedging transactions to provide price risk management in respect of
the net exposure of earnings resulting from (i) anticipated sales of
alumina, primary aluminum and fabricated aluminum products, less (ii)
expected purchases of certain items, such as aluminum scrap, rolling ingot
and bauxite, whose prices fluctuate with the price of primary aluminum.
Forward sales contracts are used by KACC to effectively lock-in or fix the
price that KACC will receive for its shipments. KACC also uses option
contracts (i) to establish a minimum price for its product shipments, (ii)
to establish a "collar" or range of prices for KACC's anticipated sales,
and/or (iii) to permit KACC to realize possible upside price movements. As
of September 30, 1997, KACC had sold forward, at fixed prices,
approximately 17,300 93,600 and 24,000 tons of primary aluminum with
respect to 1997, 1998 and 1999, respectively. As of September 30, 1997,
KACC had also purchased put options to establish a minimum price for
approximately 42,100 and 52,000 tons with respect to 1997 and 1998,
respectively, and had entered into option contracts that established a
price range for an additional 51,000, 231,600 and 124,500 tons for 1997,
1998 and 1999, respectively.
As of September 30, 1997, KACC had sold forward virtually all of
the alumina available to it in excess of its projected internal smelting
requirements for 1997, 1998 and 1999 at prices indexed to future prices of
primary aluminum.
Energy
KACC is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. Accordingly,
KACC from time to time in the ordinary course of business enters into
hedging transactions with major suppliers of energy and energy related
financial instruments. As of September 30, 1997, KACC had a combination of
fixed price purchase and option contracts for the purchase of approximately
44,000 MMBtu of natural gas per day during 1997, and for 41,000 MMBtu of
natural gas per day for 1998. As of September 30, 1997, KACC also held a
combination of fixed price purchase and option contracts for an average of
228,000, 232,000 and 25,000 barrels of fuel oil per month for 1997, 1998
and 1999, respectively.
Foreign Currency
KACC enters into forward exchange contracts to hedge material
cash commitments to foreign subsidiaries or affiliates. At September 30,
1997, KACC had net forward foreign exchange contracts totaling
approximately $135.0 for the purchase of 175.5 Australian dollars from
October 1997 through December 1998, in respect of its commitments for 1997
and 1988 expenditures denominated in Australian dollars. At September 30,
1997, Kaiser also held options to purchase approximately 10.0 Australian
dollars over the last three months of 1997.
9. RESTRUCTURING OF OPERATIONS
Kaiser has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements with the full
effect planned to be realized in 1998 and beyond, measured against 1996
results. The initiative is based on Kaiser's conclusion that the level of
performance of its existing facilities and businesses would not achieve the
level of profits Kaiser considers satisfactory based upon historic long-
term average prices for primary aluminum and alumina. During the second
quarter of 1997, Kaiser recorded a $19.7 restructuring charge to reflect
actions taken and plans initiated to achieve the reduced production costs,
decreased corporate selling, general and administrative expenses, and
enhanced product mix intended to achieve this goal. The significant
components of the restructuring charge are enumerated below.
Erie Plant Disposition
During the second quarter of 1997, Kaiser formed a joint venture
with a third party related to the assets and liabilities associated with
the wheel manufacturing operations at its Erie, Pennsylvania, fabrication
plant. Kaiser's management subsequently decided to close the remainder of
the Erie plant in order to consolidate its aluminum forging operations at
two other facilities for increased efficiency. As a result of the joint
venture formation and plant closure, Kaiser recognized a net pre-tax loss
of approximately $1.4.
Other Asset Dispositions
As a part of Kaiser's profit enhancement and cost reduction
initiative, Kaiser's management made decisions regarding product
rationalization and geographical optimization, which led management to
decide to dispose of certain assets which had nominal operating
contribution. These strategic decisions resulted in Kaiser recognizing a
pre-tax charge for approximately $15.6 associated with such asset
dispositions.
Employee and Other Costs
As a part of Kaiser's profit enhancement and cost reduction
initiative, Kaiser's management concluded that certain corporate and other
staff functions could be consolidated or eliminated resulting in a second
quarter pre-tax charge of approximately $2.7 for benefit and other costs.
10. COMPLETED ACQUISITION
During June 1997, Kaiser Bellwood Corporation, a newly formed,
wholly owned subsidiary of KACC, completed the acquisition of Reynolds
Metals Company's Bellwood, Virginia, extrusion plant and its existing
inventories for a total purchase price (after post-closing adjustments) of
$41.6, consisting of cash payments of $38.4 and the assumption of
approximately $3.2 of employee related and other liabilities. Upon
completion of the transaction, Kaiser Bellwood Corporation became a
subsidiary guarantor under the indentures in respect of KACC's 9-7/8%
Senior Notes due 2002, 10-7/8% Series B and Series D Senior Notes due 2006,
and 12-3/4% Senior Subordinated Notes due 2003.
11. CONVERSION OF PRIDES TO KAISER COMMON STOCK
During August 1997, the 8,673,850 outstanding shares of PRIDES
were converted into 7,227,848 shares of Kaiser common stock pursuant to the
terms of the PRIDES Certificate of Designations. Further, in accordance
with the PRIDES Certificate of Designations no dividends were paid or
payable for the period June 30, 1997, to, but not including, the date of
conversion.
From 1993 until August 1997, cumulative losses with respect to
the results of operations attributable to Kaiser's common stockholders
exceeded cumulative earnings. However, as a result of the equity
attributable to the PRIDES being converted into equity attributable to
common stockholders, the Company recorded a $64.8 adjustment to
stockholders' equity and a reduction in minority interest of the same
amount.
12. SUBSEQUENT EVENTS
Repurchase of Treasury Stock
On October 17, 1997 the Company agreed, subject to court action,
to repurchase 1,277,250 shares of its Common Stock, consisting of 250,000
shares owned by NL Industries, Inc. ("NL") and 1,027,250 shares owned by
The Combined Master Retirement Trust ("CMRT"), an affiliate of NL. The
aggregate purchase price for these shares is $70.2 or $55 per share, of
which $35.1 would be paid in cash and the remaining $35.1 in one-year notes
bearing interest at 10% per annum. These notes are secured by the Common
Stock being repurchased. The cash, notes and Common Stock being
repurchased have been placed in escrow pending entry by the Delaware Court
of Chancery of an order which has been requested (a) determining that no
part of the consideration being paid by the Company for the repurchased
shares constitutes consideration for settlement of certain litigation
pending before such Court, and (b) dismissing CMRT and NL from such
litigation. A proposed settlement of this litigation was recently filed
with the Court. See "Rancho Mirage Litigation" below. This transaction
will be completed and reflected in the Company's financial statements should
the Delaware Court of Chancery grant the requested order.
Rancho Mirage Litigation
On April 4, 1997, the Delaware Chancery Court issued its opinion
concerning certain shareholder derivative actions brought in connection
with an exchange between Federated and MCOP of certain real estate assets
in Rancho Mirage, California. The court found, among other things, that
Federated and the director defendants, respectively, caused and allowed the
Company and MCOP to agree to terms in the Mirada transaction which were
unfair to the Company and MCOP. However, the court deferred a decision on
damages, stating that it would reconsider rescission as a possible remedy
and might await any appeal of its decision.
The parties subsequently agreed, subject to shareholder notice
and court approval, to settle and dismiss this litigation and other related
litigation. The proposed settlement provides for, among other things: (a)
payment by or for defendants of $7.5 million to MCOP, (b) transfer by
Federated to MCOP of a 23.7 acre commercial development property near the
Mirada project (together with a pending offer to buy such property for $8.5
million), (c) transfer by Federated to MCOP of approximately $3.9 million
(liquidation value) of MCOP preferred stock, but excluding the right of
Federated to purchase approximately 71,175 shares of the Company's Common
Stock at a price of approximately $55 per share, (d) payment by Federated
to MCOP of approximately $1 million in cash or cancellation of the same
dollar value of options to purchase the Company's Common Stock held by
Federated or Mr. Hurwitz, and (e) payment by MCOP to plaintiffs' counsel of
their attorneys fees and expenses (not to exceed $5.0 and $0.5 in
expenses). A hearing regarding the proposed settlement has been scheduled
for December 8, 1997. The transactions provided for in this settlement will
be completed and reflected in the Company's financial statements should the
court give its approval.
MAXXAM INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
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 several places in this Form
10-Q. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This section and the Company's Form 10-K identify other
factors that could cause such differences. No assurance can be given that
these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
RESULTS OF OPERATIONS
The Company operates in three principal industries: aluminum,
through its majority owned subsidiary, Kaiser, a fully integrated aluminum
producer; forest products, through MGI 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. MGHI owns 100%
of MGI and is a wholly owned subsidiary of the Company. All references to
the "Company," "Kaiser," "MGHI," "MGI" and "Pacific Lumber" refer to the
respective companies and their subsidiaries, unless otherwise stated or the
context indicates otherwise.
ALUMINUM OPERATIONS
Aluminum operations account for a substantial portion of the
Company's revenues and operating results. Kaiser, through its principal
subsidiary KACC, operates in two business segments: bauxite and alumina,
and aluminum processing. As an integrated aluminum producer, Kaiser uses a
portion of its bauxite, alumina and primary aluminum production for
additional processing at certain of its facilities.
Recent Events and Developments
Kaiser has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements with the full
effect planned to be realized in 1998 and beyond, measured against
1996 results. The initiative is based on Kaiser's conclusion that the
level of performance of its existing facilities and businesses would not
achieve the level of profits Kaiser considers satisfactory based upon
historic long-term average prices for primary aluminum and alumina. During
the second quarter of 1997, Kaiser recorded a $19.7 million restructuring
charge to reflect actions taken and plans initiated to achieve the reduced
production costs, decreased corporate selling, general and administrative
expenses, and enhanced product mix intended to achieve this goal. See Note
9 of the Notes to Condensed Consolidated Financial Statements.
During June 1997, Kaiser Bellwood Corporation, a newly formed,
wholly owned subsidiary of Kaiser, completed the acquisition of Reynolds
Metals Company's Bellwood, Virginia, extrusion plant and its existing
inventories for a total purchase price of $41.6. See Note 10 of Notes to
Condensed Consolidated Financial Statements.
Kaiser currently anticipates that the Volta River Authority may
partially reduce its electric power allocation to Kaiser's 90% owned Valco
smelter facility in Ghana in 1998. Informal discussions with local
officials suggest that regional rainfall has been insufficient to raise the
level of the lake, from which the facility receives its hydroelectric power to
maintain the current level of power for the coming year. Formal notice of
Valco's 1998 power allocation is expected on or about November 15, 1997.
Meetings are planned with local officials for early November to discuss the
situation.
Summary
The following table presents selected operational and financial
information for the three and nine months ended September 30, 1997 and
1996. The information presented in the table is in millions of dollars
except shipments and prices, and intracompany shipments have been excluded.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shipments: (1)
Alumina 579.2 598.6 1,457.0 1,506.7
Aluminum products:
Primary aluminum 86.4 88.1 246.9 262.9
Fabricated aluminum
products 105.2 83.1 299.5 245.4
------------- ------------- ------------- -------------
Total aluminum
products 191.6 171.2 546.4 508.3
============= ============= ============= =============
Average realized sales price:
Alumina (per ton) $ 200 $ 187 $ 196 $ 199
Primary aluminum (per pound) .76 .67 .75 .69
Net sales:
Bauxite and alumina:
Alumina $ 115.9 $ 111.7 $ 285.6 $ 300.2
Other (2) (3) 27.1 25.8 80.2 77.2
------------- ------------- ------------- -------------
Total bauxite and
alumina 143.0 137.5 365.8 377.4
------------- ------------- ------------- -------------
Aluminum processing:
Primary aluminum 145.0 130.6 409.5 402.8
Fabricated aluminum
products 341.7 282.4 990.6 861.4
Other (3) 4.4 2.9 12.7 10.5
------------- ------------- ------------- -------------
Total aluminum
processing 491.1 415.9 1,412.8 1,274.7
------------- ------------- ------------- -------------
Total net sales $ 634.1 $ 553.4 $ 1,778.6 $ 1,652.1
============= ============= ============= =============
Operating income(4) $ 56.1 $ 12.0 $ 125.6 $ 91.9
============= ============= ============= =============
Income (loss) before income taxes
and minority interests $ 30.7 $ (8.5) $ 44.0 $ 26.6
============= ============= ============= =============
Capital expenditures $ 25.9 $ 39.2 $ 94.7 $ 91.1
============= ============= ============= =============
<FN>
- ---------------
(1) Shipments are expressed in thousands of metric tons. A metric ton is
equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests
in consolidated subsidiaries.
(4) Includes a pre-tax charge of $19.7 related to restructuring of
operations recorded in the quarter ended June 30, 1997.
</TABLE>
Overview
Kaiser's operating results are sensitive to changes in the prices
of alumina, primary aluminum and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold
and on KACC's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical fluctuations. 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.
During the first nine months of 1997, the AMT Price for primary
aluminum remained relatively stable, generally in the $.75 - $.80 per pound
range. The AMT Price for primary aluminum for the week ended October 31,
1997 was approximately $.77 per pound. This compares favorably to 1996 when
the AMT Price remained fairly stable, generally in the $.70 - $.75 range
through June and then declined during the second half of the year, reaching a
low of approximately $.65 per pound for October 1996, before recovering late
in the year.
Net Sales - Bauxite and Alumina
Net sales of alumina increased by 4% for the quarter ended
September 30, 1997, from the comparable period in the prior year, as a
result of a 7% increase in average realized prices from the sale of
alumina, offset by a 3% decline in alumina shipments. Shipment volumes
were down as compared to the quarter ended September 30, 1996, primarily as
a result of the timing of shipments. For the nine month period ended
September 30, 1997, net segment sales declined by 3% from the comparable
period in the prior year. This change was due primarily to a 2% decrease
in average realized prices between periods and a 3% reduction in alumina
shipments.
Net Sales - Aluminum Processing
Net sales of primary aluminum for the quarter ended September 30,
1997, increased by 11% from the comparable prior year period as a result
of an 13% increase in average realized prices offset by a 2% decrease in
shipments. Net sales of fabricated aluminum products for the quarter ended
September 30, 1997, were up 21% as compared to the prior year period as a
result of a 27% increase in shipments offset by a 4% decrease in average
realized prices. The increase in fabricated aluminum product shipments
over the third quarter of 1996 was the result of Kaiser's June 1997
acquisition of an extrusion facility in Bellwood, Virginia, as well as
increased international sales of can sheet and increased shipments of heat-
treated products.
For the nine month period ended September 30, 1997, net sales for
the aluminum processing segment increased by approximately 11% from the
comparable prior year period primarily as a result of a 15% increase in
fabricated aluminum product net sales. The increase in fabricated product
net sales resulted from the same shipment and price factors discussed in
the preceding paragraph. Net sales of primary aluminum for the nine month
period ended September 30, 1997, were basically flat as compared to the
prior year as reduced shipments for the period were offset by an increase
in the average realized prices.
Operating Income
Operating income improved substantially on a quarter to quarter
basis and, to a lesser extent, for the comparative nine month periods as
well. In addition to the improvements in net sales discussed above,
operating income increased as a result of improved operating efficiencies
and reduced raw material, energy and supply costs and due to $2.7 million
and $7.5 million for the three and nine months ended September 30, 1997,
respectively, related to the settlement of certain issues related to energy
service contracts. Operating income for the nine months ended September
30, 1997 included a $19.7 million charge resulting from the previously
discussed restructuring charge.
FOREST PRODUCTS OPERATIONS
The Company's forest products operations are conducted by MGI
through its principal operating subsidiaries. MGI's business is seasonal
in that the forest products business generally experiences lower first
quarter sales due largely to the general decline in construction-related
activity during the winter months. Accordingly, MGI's results for any one
quarter are not necessarily indicative of results to be expected for the
full year. The following table presents selected operational and financial
information for the three and nine months ended September 30, 1997 and
1996. The information presented in the table is in millions of dollars
except shipments and prices.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 12.7 12.8 39.0 36.1
Redwood common grades 53.9 57.1 178.7 175.2
Douglas-fir upper
grades 3.3 2.8 8.3 7.8
Douglas-fir common
grades 22.5 18.8 59.0 56.7
Other 4.6 5.5 13.4 15.8
------------- ------------- ------------- -------------
Total lumber 97.0 97.0 298.4 291.6
============= ============= ============= =============
Logs (2) 4.0 4.5 10.6 16.1
============= ============= ============= =============
Wood chips (3) 63.6 55.8 185.9 157.2
============= ============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,537 $ 1,368 $ 1,427 $ 1,382
Redwood common grades 546 518 533 509
Douglas-fir upper
grades 1,243 1,108 1,205 1,138
Douglas-fir common
grades 443 489 473 435
Logs (4) 426 478 412 498
Wood chips (5) 73 74 75 76
Net sales:
Lumber, net of discount $ 64.1 $ 60.5 $ 191.8 $ 175.9
Logs 1.7 2.2 4.4 8.0
Wood chips 4.7 4.1 13.9 11.9
Cogeneration power 1.2 1.1 3.4 2.4
Other 1.1 .6 3.0 1.4
------------- ------------- ------------- -------------
Total net sales $ 72.8 $ 68.5 $ 216.5 $ 199.6
============= ============= ============= =============
Operating income $ 23.2 $ 17.6 $ 66.5 $ 53.5
============= ============= ============= =============
Operating cash flow (6) $ 29.4 $ 24.3 $ 85.9 $ 73.7
============= ============= ============= =============
Income before income taxes $ 7.3 $ .7 $ 17.1 $ 4.0
============= ============= ============= =============
Capital expenditures $ 4.3 $ 3.1 $ 16.7 $ 9.0
============= ============= ============= =============
<FN>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of
2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to
as "EBITDA."
</TABLE>
Net sales
Net sales for the quarter ended September 30, 1997 increased from
the comparable prior year quarter due to higher average realized prices for
common and upper grade redwood lumber, partially offset by lower average
realized prices for common grade Douglas-fir lumber. Overall, the volume
of lumber shipments in the 1997 third quarter was substantially unchanged
from the 1996 third quarter as an increase in shipments of common grade
Douglas-fir lumber offset a decrease in shipments of common grade redwood
lumber. Net sales for the nine months ended September 30, 1997 increased
from the comparable prior year period due to higher average realized prices
and shipments for most categories of redwood and Douglas-fir lumber.
Operating income
Operating income for the three and nine months ended September
30, 1997 increased from the comparable prior year periods, principally due
to the increase in net sales discussed above.
Income before income taxes and minority interests
Income before income taxes for the three and nine months ended
September 30, 1997 increased from the comparable 1996 periods principally
due to higher operating income discussed above.
REAL ESTATE AND OTHER OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Net sales $ 19.1 $ 19.3 $ 51.6 $ 69.4
Operating loss (0.4) (4.6) (1.8) (7.3)
Income before income taxes and
minority interests 4.3 9.0 6.1 10.2
</TABLE>
Net sales
Net sales decreased for the three and nine months ended September
30, 1997 from the same periods in 1996 primarily due to lower revenues from
resort and commercial operations reflecting various asset dispositions
during 1996 and the first quarter of 1997.
Operating loss
The operating losses for the quarter and nine months ended
September 30, 1997 decreased from the same periods in 1996 primarily due to
higher earnings from the sales of real property. Included in the operating
loss for the nine months ended September 30, 1997 is profit from two bulk
land sales at the Fountain Hills development in Arizona, one of which was
completed in the third quarter.
Income before income taxes and minority interests
The decrease in income before income taxes and minority interests
for the three and nine months ended September 30, 1997 from the same
periods in 1996 is primarily due to lower gains from RTC Portfolio sales.
This decline was partially offset by the reduction in operating losses
discussed above.
OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Operating loss $ (5.0) $ (15.4) $ (14.7) $ (29.3)
Loss before income taxes and
minority interests (6.4) (16.8) (19.4) (32.4)
</TABLE>
Operating loss
The operating losses represent corporate general and
administrative expenses that are not allocated to the Company's industry
segments. The operating loss for the third quarter of 1997 and the nine
months ended September 30, 1997 decreased from the same periods in 1996
principally due to lower accruals for certain legal contingencies.
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 the Company's industry segments. The losses for
the three and nine months ended September 30, 1997 decreased from the
comparable periods in 1996, principally due to lower operating losses
described above and higher earnings from marketable securities. These
improvements were partially offset by an increase in interest expense due
to MGHI's December 1996 borrowing of $130.0 million.
Minority interests
Minority interests represent the minority stockholders' interest
in the Company's aluminum operations and minority partners' interest in
SHRP, Ltd.
Credit for income taxes
The Company's credit for income taxes include non-recurring, non-
cash tax benefits of $32.1 million for the nine months ended September 30,
1997 and $17.0 million and $30.4 million for the three and nine months
ended September 30, 1996, respectively, relating to the settlement of
certain matters. There were no such tax benefits for the three months
ended September 30, 1997.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
PARENT COMPANY AND MGHI
The various credit instruments of MGHI, KACC, MGI, Pacific Lumber
and Scotia Pacific contain various covenants which, among other things,
limit the ability of such entities to incur additional indebtedness and
liens, to engage in transactions with affiliates, to pay dividends and to
make investments. As of September 30, 1997, $1.4 million of dividends
could be paid by MGHI and $2.5 million of dividends could be paid by MGI.
Pursuant to the terms of the KACC Credit Agreement, Kaiser is prohibited
from paying any dividends with respect to its common stock. The most
restrictive covenants governing debt of the Company's real estate and other
subsidiaries would not restrict payment to the Company of all nonrestricted
cash and unused borrowing availability for such subsidiaries (approximately
$15.6 million could be paid as of September 30, 1997).
In January 1997, the Company used the proceeds from the
Intercompany Note to redeem its 12-1/2% Subordinated Debentures and 14%
Senior Subordinated Reset Notes together with accrued interest thereon, for
$43.3 million.
Kaiser has an effective shelf registration statement covering the
offering of up to 10 million shares of Kaiser common stock owned by the
Company.
The Company has stated that from time to time it may purchase its
Common Stock on national exchanges or in privately negotiated transactions.
During the period from January 1, 1997 through October 31, 1997, the
Company purchased 385,400 shares of its Common Stock in the open market.
On October 17, 1997 the Company agreed, subject to court action, to
repurchase 1,277,250 shares of its Common Stock, consisting of 250,000
shares owned by NL Industries, Inc. (NL) and 1,027,250 shares owned by The
Combined Master Retirement Trust ("CMRT"), an affiliate of NL. The
aggregate purchase price for these shares is $70.2 million, or $55 per
share, of which $35.1 million would be paid in cash and the remaining $35.1
million in one-year notes bearing interest at 10% per annum. These notes
are secured by the Common Stock being repurchased. The cash, notes and
Common Stock being repurchased have been placed in escrow pending entry by
the Delaware Court of Chancery of an order which has been requested (a)
determining that no part of the consideration being paid by the Company for
the repurchased shares constitutes consideration for settlement of certain
litigation pending before such Court, and (b) dismissing CMRT and NL from
such litigation. A proposed settlement of this litigation was recently
filed with the Court. See below. This transaction will be completed and
reflected in the Company's financial statements should the Delaware Court
of Chancery grant the requested order.
As of September 30, 1997, the Company (excluding its
subsidiaries) had cash and marketable securities of approximately $102.7
million. The Company believes that its existing resources, together with
the cash available from subsidiaries and other sources of financing, will
be sufficient to fund its working capital requirements for the next year.
With respect to its long-term liquidity, the Company believes that its
existing cash and cash resources, together with the cash proceeds from the
sale of assets and distributions from its subsidiaries should be sufficient
to meet its working capital requirements. However, there can be no
assurance that the Company'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. Any
substantially adverse outcome of the litigation described in Note 7 to the
Condensed Notes to Consolidated Financial Statements could have a material
adverse affect on the Company's consolidated financial position, results of
operations or liquidity. See Note 7 to the Condensed Notes to Consolidated
Financial Statements for a discussion of the Company's material
contingencies.
ALUMINUM OPERATIONS
During August 1997, the 8,673,850 outstanding shares of PRIDES
were converted into 7,227,848 shares of Kaiser common stock pursuant to the
terms of the PRIDES Certificate of Designations.
Kaiser has an effective "shelf" registration statement covering
the offering from time to time of up to $150.0 million of equity
securities.
At September 30, 1997, Kaiser had long-term debt of $972.0
million, compared with $961.9 million at December 31, 1996. The change in
long-term debt between periods is primarily the result of $19.0 million of
proceeds from the Spokane County, Washington, Solid Waste Disposal Revenue
Bonds which were loaned to KACC to finance certain qualifying capital
expenditures at its Mead smelter, offset by scheduled payments of the
current portion of long-term debt.
At September 30, 1997, $273.8 million (of which $73.8 million
could have been used for letters of credit) was available to KACC under the
KACC Credit Agreement. Loans under the KACC Credit Agreement bear interest
at a spread (which varies based on the results of a financial test) over
either a base rate or LIBOR, at Kaiser's option. During the three and nine
months ended September 30,1997, the average per annum interest rates on
loans outstanding under the KACC Credit Agreement were approximately 9.0%
and 9.5%, respectively. Upon completion of the acquisition of the Bellwood
facility, Kaiser Bellwood Corporation became a subsidiary guarantor under
the indentures to KACC's 9-7/8% Senior Notes due 2002, 10-7/8% Series B and
Series D Senior Notes due 2006 and 12-3/4% Senior Subordinated Notes due
2003.
Kaiser's capital expenditures during the three and nine months
ended September 30, 1997, were $25.9 million and $94.7 million,
respectively and were used primarily to acquire the Bellwood extrusion
facility from Reynolds, improve production efficiency, reduce operating
costs, expand capacity at existing facilities, and construct new
facilities. Kaiser's micromill facility, which was constructed in Nevada
during 1996 as a demonstration and production facility, achieved
operational start-up by year-end 1996. The facility remained in a start-up
mode during the first nine months of 1997 as Kaiser continued its efforts
to implement the micromill technology on a full scale basis. While the
micromill technology has not yet been fully implemented or commercialized,
and no assurances can be given that Kaiser will ultimately be successful in
this regards, Kaiser currently expects to commence limited product
shipments to customers in the fourth quarter of 1997.
Total consolidated capital expenditures (of which approximately
7% is expected to be funded by Kaiser's minority partners in certain
foreign joint ventures) are expected to be between $70.0 million and $140.0
million per annum in each of 1997 through 1999. 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.
Subsequent to September 30, 1997, a joint decision was made by a
KACC subsidiary and its joint venture partner to terminate and dissolve
the Sino-foreign aluminum joint venture in which the subsidiary had
invested approximately $9.0 million in 1995. Under the terms of the joint
venture agreement and Chinese law, a distribution of the joint venture's
net assets is to be made to each of the parties in respect of their
individual ownership interests. The amount that will ultimately be
received upon dissolution and the associated terms of any payments are the
subject of ongoing negotiations and is subject to certain governmental
approvals by officials of the People's Republic of China.
Kaiser believes that its existing cash resources, together with
cash flow from operations and borrowings under the KACC Credit Agreement,
will be sufficient to satisfy its working capital and capital expenditure
requirements for the next year. With respect to its long-term liquidity,
Kaiser believes that operating cash flow, together with its ability to
obtain both short- and long-term financing, should provide sufficient funds
to meet its long-term working capital and capital expenditure requirements.
FOREST PRODUCTS OPERATIONS
As of September 30, 1997, $38.3 million of borrowings was
available under the Pacific Lumber Credit Agreement, of which $5.3 million
was available for letters of credit and $23.0 million was restricted to
timberland acquisitions. As of September 30, 1997, $7.0 million of
borrowings and $14.7 million in letters of credit were outstanding. On
October 9, 1997, the Pacific Lumber Credit Agreement was amended to, among
other things, extend the date on which it expires to May 31, 2000.
MGI and its subsidiaries anticipate that cash 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 (and in turn MGHI) are more
sensitive than less leveraged companies to factors affecting their
operations, including governmental regulation affecting their timber
harvesting practices (see "--Trends" below), increased competition from
other lumber producers or alternative building products and general
economic conditions.
REAL ESTATE AND OTHER OPERATIONS
As of September 30, 1997, the Company's real estate and other
subsidiaries had approximately $8.1 million available for use under the
MCOP Credit Agreement. The Company believes that the existing cash and
credit facilities of its real estate and other subsidiaries are sufficient
to fund the working capital and capital expenditure requirements of such
subsidiaries for the next year. With respect to the long-term liquidity of
such subsidiaries, the Company believes that their ability to generate cash
from the sale of their existing real estate, together with their ability to
obtain financing, should provide sufficient funds to meet their working
capital and capital expenditure requirements.
TRENDS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
FOREST PRODUCTS OPERATIONS
Regulatory and Environmental Matters
Pacific Lumber'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.
Moreover, these laws and regulations are modified from time to time and are
subject to judicial and administrative interpretation. Compliance with
such laws, regulations and judicial and administrative interpretations,
together with the cost of litigation incurred in connection with certain
timber harvesting operations of Pacific Lumber, increase its cost of
logging operations. Pacific Lumber is subject to certain pending matters
described below which could have a material adverse effect on the
consolidated financial position, results of operations or liquidity of
Pacific Lumber, and in turn MGI and MGHI. There can be no assurance that
certain pending or future governmental regulations, legislation, judicial
or administrative decisions or California ballot initiatives will not have
a material adverse affect on Pacific Lumber, and in turn MGI and MGHI.
Regulatory actions and lawsuits are commenced from time to time
seeking to have certain species listed as threatened or endangered under
the ESA and/or the CESA and, in certain instances, to designate critical
habitat for such species. In May 1996, the USFWS published the Final
Designation of critical habitat for the marbled murrelet, a coastal
seabird, 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 Pacific Lumber's timberlands are
included in the Final Designation, the substantial portion of such acreage
being young growth timberlands. In order to mitigate the impact of the
Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, Pacific Lumber 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
their timberlands had been "taken" and are seeking just compensation.
Pursuant to the Headwaters Agreement entered into by Pacific Lumber, the
Company, the United States and California on September 28, 1996 as
described below, the Takings Litigation has been stayed at the request of
the parties.
On April 25, 1997, the NMFS announced the listing of the coho
salmon as threatened under the ESA in northern California, including lands
owned by Pacific Lumber. On October 1, 1997, the Environmental Protection
Information Center, Inc. ("EPIC"), the Sierra Club and others notified
Pacific Lumber, NMFS and other regulatory agencies of their intent to file
suit against these parties to enjoin an alleged take of the coho salmon
within six watersheds on Pacific Lumber's timberlands. It is impossible
for Pacific Lumber to determine the potential adverse effect of the Final
Designation, the listing of the coho salmon and/or any related litigation
on its consolidated financial position, results of operations or liquidity
until such time as various regulatory and legal issues are resolved;
however, if Pacific Lumber is unable to harvest, or is severely limited in
harvesting, on the affected timberlands, such effect could be materially
adverse to Pacific Lumber, and in turn MGI and MGHI. 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. See "Headwaters
Agreement" below for information regarding Pacific Lumber's recent
submission of a revised draft Multi-Species HCP pursuant to the Headwaters
Agreement.
In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives. These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
Timber companies must submit an SYP demonstrating that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that their 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
which was revised and re-submitted in September 1997. As revised, the
proposed SYP sets forth an LTSY harvest level substantially the same as
Pacific Lumber's average annual timber harvest over the last six 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 10% less than
that proposed for the first decade. The SYP, when approved, will be valid
for ten years. Thereafter, revised SYPs are to 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 making corresponding amendments to the SYP; however, there
can be no assurance that Pacific Lumber would be able to do so, and the
amount of such acquisitions would be limited by Pacific Lumber's available
financial resources. Pacific Lumber is unable to predict the impact the
sustained yield regulations will have on its 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 and to its
other operations have been limited; however, no assurance can be given as
to the extent of such challenges in the future. Pacific Lumber believes
that environmentally focused challenges to its timber harvesting and other
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 Pacific Lumber'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 impact on the consolidated financial position,
results of operations or liquidity of Pacific Lumber, and in turn MGI and
MGHI.
Headwaters Agreement
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California. The
Headwaters Agreement 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 (collectively, "Headwaters Timberlands"). A
substantial portion of the Headwaters Timberlands consists of virgin old
growth timberlands. The Headwaters Timberlands would be transferred in
exchange for (a) property and other consideration from the United States
and California having an aggregate fair market value of $300 million, and
(b) approximately 7,755 acres of adjacent timberlands (the "Elk River
Timberlands") to be acquired by the United States and California from a
third party. The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands, (b) approval of an SYP (see "Regulatory and Environmental
Matters" discussed above) and a Multi-Species HCP (covering the Resulting
Pacific Lumber Timber Property and the timberlands to be acquired and
retained by the United States and California) 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.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Springs Forest to
conduct logging operations, including salvage logging (the "Moratorium").
The Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the closing conditions to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend to February 17, 1998 the period of time during which
these closing conditions must be met. No written amendment has been
executed, but the Pacific Lumber Parties have continued to observe the
Moratorium. The extension is subject to the achievement of certain
milestones toward completion of the Headwaters Agreement, including
satisfaction of the Pacific Lumber Parties with the progress of the United
States and California in providing the required consideration.
The U.S. House and Senate have each passed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds toward consummation of the Headwaters Agreement (the "Interior
Appropriations Bill"); however, it is unclear whether President Clinton
will sign the bill. The federal funding is to remain available until March
1, 1999 and is subject to several conditions, including: (a) contribution
by the State of California of its $130 million portion of funding for the
Headwaters Agreement, (b) approval by the State of California of an SYP
covering the Resulting Pacific Lumber Timber Property, (c) dismissal of the
Takings Litigation, (d) issuance by the United States of the Permit, (e)
completion of an appraisal of the lands and interests being acquired by the
United States (the "Appraisal"), (f) completion of an environmental impact
statement with respect to the Multi-Species HCP, and (g) adequate provision
having been made for access to the Headwaters Timberlands. Except for
acquisition of lands necessary for roadway access to the Headwaters
Timberlands, the Interior Appropriations Bill requires specific
Congressional authorization of acquisitions that enlarge the Headwaters
Timberlands by over five acres. The Interior Appropriations Bill also
provides that the acquisition of the Headwaters Timberlands may not be
completed prior to the earlier of (a) 180 days after enactment (extended by
one day for every day beyond 120 days that the Appraisal is not submitted
to Congress), or (b) enactment of any separate authorizing legislation
modifying the Interior Appropriations Bill.
Pacific Lumber submitted a revised draft of the Multi-Species HCP
to the USFWS, NMFS and other agencies in September 1997. The Pacific
Lumber Parties and regulatory agencies have had ongoing discussions
regarding the environmental restrictions to be contained in the Multi-
Species HCP, but significant differences remain between what is being
requested by the regulatory agencies and what the Pacific Lumber Parties
are willing to accept. The Interior Appropriations Bill requires that the
regulatory agencies report to Congress regarding (a) the scientific and
legal standards and criteria under the ESA used to develop the Multi-
Species HCP and the Permit, and (b) should application for the Permit be
denied, the precise substantive rationale for such denial. The Pacific
Lumber Parties believe that this Congressionally-supervised process may
assist the regulatory authorities and the Pacific Lumber Parties to reach
an acceptable Multi-Species HCP, but no assurances can be made in this
regard.
Although California has not enacted legislation providing funds
for its portion of the acquisition contemplated by the Headwaters
Agreement, representatives of the State of California continue to indicate
that they are considering various methods of furnishing the required
consideration.
The parties to the Headwaters Agreement are working to satisfy
the closing conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings since the date of the Form 10-K. Any capitalized or italicized
terms used but not defined in this Item have the same meaning given to them
in the Form 10-K.
MAXXAM INC. LITIGATION
With respect to the OTS action described under "USAT Matters" in
the Form 10-K, the hearing on the merits commenced on September 22, 1997
and is scheduled to continue through December 19, 1997 (although it is
uncertain whether the hearing will conclude by the scheduled date). On
September 15, 1997, the OTS filed a prehearing statement which purported to
summarize its claims against and the relief it seeks from the respondents.
Among other things, the prehearing statement alleges that the Company and
Federated are liable for restitution and reimbursement against loss for
their pro rata portion (allegedly 35%) of the amount of USAT's capital
deficiency and all imbedded losses as of the date of USAT's receivership
($1.6 billion) or approximately $560 million. The respondents also
submitted prehearing statements refuting the OTS's claims and denying
liability.
With respect to the FDIC action described under "USAT Matters" in
the Form 10-K, on September 30, 1997, Mr. Hurwitz filed a motion for
sanctions and for dismissal of this action. On October 23, 1997, the court
dismissed the OTS as a party.
As noted in the Form 10-K, it is impossible to predict the
ultimate outcome of the OTS action or the FDIC action or their potential
impact on the Company's consolidated financial position, results of
operations or liquidity.
With respect to the (consolidated) In re MAXXAM Inc./Federated
Shareholders Litigation described under "Rancho Mirage Litigation" in the
Form 10-K, on April 4, 1997, the Court issued its opinion concerning the
merits of the case. The Court found, among other things, that Federated
and the director defendants, respectively, caused and allowed the Company
and MCOP to agree to terms in the Mirada transaction which were unfair to
the Company and MCOP. The Court mentioned various theories of damages
which had been presented at the trial (ranging from $3.6 million to $49.4
million, which would be payable to the Company). However, the Court
deferred a decision on damages, stating that it would reconsider rescission
as a possible remedy and might await any appeal of its decision.
The parties subsequently agreed, subject to shareholder notice
and court approval, to settle and dismiss this litigation and the
(coordinated) NL Industries action. The parties expect the proposed
settlement, if approved, to also dispose of the claims brought in the
Thistlethwaite action and the NL Industries, Inc., et al. v. Federated
Development Company action pending in Dallas County, Texas. The proposed
settlement provides for, among other things: (a) payment by or for
defendants of $7.5 million to MCOP, (b) transfer by Federated to MCOP of a
23.7 acre commercial development property near the Mirada project (together
with a pending offer to buy such property for $8.5 million), (c) transfer
by Federated to MCOP of approximately $3.9 million (liquidation value) of
MCOP preferred stock, but excluding the right of Federated to purchase
approximately 71,175 shares of the Company's Common Stock at a price of
approximately $55 per share, (d) payment by Federated to MCOP of
approximately $1 million in cash or cancellation of the same dollar value
of options to purchase the Company's Common Stock held by Federated or Mr.
Hurwitz, and (e) payment by MCOP to plaintiffs' counsel of their attorneys
fees and expenses (not to exceed $5 million and $525,000 in expenses). A
hearing regarding the proposed settlement has been scheduled for December
8, 1997.
KAISER LITIGATION
With respect to Catellus Development Corporation v. Kaiser
Aluminum & Chemical Corporation and James L. Ferry & Son Inc. action
described under "Environmental Litigation" in the Form 10-K, on July 28,
1997, KACC and Catellus Development Corporation ("Catellus") entered into a
settlement agreement and release settling all matters pending between the
parties in the United States Court of Appeals for the Ninth Circuit. All
matters relating to the litigation have now been resolved. KACC will
remain liable to the City of Richmond for fifty percent (50%) of future
costs of cleaning up certain parts of the property formerly owned by
Catellus in accordance with the final judgment issued by the United States
District Court. KACC's share of these costs is expected to be less than
$500,000.
With respect to CID No. 11356 described under "DOJ Proceedings"
in the Form 10-K, Kaiser was informed in April 1997 that the DOJ has
officially closed its investigation and will return the documents submitted
by KACC.
PACIFIC LUMBER LITIGATION
On October 1, 1997, the Environmental Protection Information
Center, Inc. ("EPIC"), the Sierra Club and others notified Pacific Lumber,
NMFS and other regulatory agencies of their intent to file suit against
these parties to enjoin an alleged take of the coho salmon within six
watersheds on Pacific Lumber's timberlands.
With respect to the Marbled Murrelet action described in the Form
10-K, on April 18, 1997, the U.S. Ninth Circuit Court of Appeals reversed
the trial court's decision which had preliminarily enjoined eight already-
approved THPs to the extent they rely on the Federal Owl Plan. On June 18,
1997, the court granted the defendants' motions for summary judgment
disposing of the remaining issues in this case in favor of the defendants.
With respect to the Takings Litigation described in the Form 10-
K, the parties have asked the court to extend the stay of each action until
November 14, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
4.1 Loan and Pledge Agreement, dated October 21, 1997, between the
Company and Custodial Trust Company
4.2 Second Amendment, dated October 9, 1997, to the Pacific Lumber
Credit Agreement (incorporated herein by reference to Exhibit 4.1
to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, File No. 1-9204)
4.3 Eleventh Amendment, dated October 20, 1997, to the Kaiser Credit
Agreement (incorporated herein by reference to Exhibit 4.7 to
Kaiser's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 1-9447)
10.1 Stock Purchase Agreement, dated October 17, 1997, by and among
the Company, CMRT and NL
10.2 Escrow Agreement, dated as of October 17, 1997, by and among the
Company, CMRT and NL
10.3 Non-Negotiable Secured Promissory Note, dated October 17, 1997,
by the Company payable to CMRT
10.4 Non-Negotiable Secured Promissory Note, dated October 17, 1997,
by the Company payable to NL
11 Computation of Net Income Per Common and Common Equivalent Share
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
MAXXAM INC.
Date: November 5, 1997 By: /S/ PAUL N. SCHWARTZ
Paul N. Schwartz
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 197,600
<SECURITIES> 59,200
<RECEIVABLES> 270,000
<ALLOWANCES> 4,800
<INVENTORY> 625,700
<CURRENT-ASSETS> 1,379,500
<PP&E> 2,138,400
<DEPRECIATION> 830,700
<TOTAL-ASSETS> 4,048,300
<CURRENT-LIABILITIES> 623,300
<BONDS> 1,904,500
0
300
<COMMON> 5,000
<OTHER-SE> 42,800
<TOTAL-LIABILITY-AND-EQUITY> 4,048,300
<SALES> 2,046,700
<TOTAL-REVENUES> 2,046,700
<CGS> 1,644,700
<TOTAL-COSTS> 1,644,700
<OTHER-EXPENSES> 226,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,300
<INCOME-PRETAX> 47,800
<INCOME-TAX> (13,600)
<INCOME-CONTINUING> 50,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,600
<EPS-PRIMARY> 5.46
<EPS-DILUTED> 5.46
</TABLE>
LOAN AND PLEDGE AGREEMENT
AGREEMENT dated as of October 21, 1997, between CUSTODIAL TRUST
COMPANY ("Bank"), a bank and trust company organized and existing under the
laws of the State of New Jersey, and MAXXAM INC. ("Borrower"), a
corporation organized and existing under the laws of the State of Delaware.
WHEREAS, Borrower wishes to obtain, and Bank is willing to make, loans
in an aggregate principal amount of up to U.S. dollars $25,000,000 from
time to time outstanding;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINITIONS. The following terms, unless the context otherwise
requires, shall have the following meanings as used herein:
(a) "Business Day" means any day on which banks in the States of New
Jersey, New York and Texas are open for business.
(b) "Business Hour" means any hour in a Business Day.
(c) "Collateral" has the meaning given in Section 8(c) below.
(d) "Event of Default" has the meaning given in Section 16 below.
(e) "Excess Collateral" at any time means Pledged Securities having an
Initial Loan Value equal to the difference between (i) the Initial Loan
Value of all Pledged Securities at such time and (ii) the sum of the
outstanding aggregate principal amount of all Loans and the interest
accrued thereon.
(f) "Guarantee" of or by any Person means any obligation, contingent
or otherwise, of such Person guaranteeing the payment of any Indebtedness
of any other Person in any manner, whether directly or indirectly, and
including any obligation of such Person, direct or indirect, (i) to
purchase (or advance or supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds for the purchase
of) any security for the payment of such Indebtedness, or (ii) to purchase
property, securities or services for the purpose of assuring the owner of
such Indebtedness of the payment of such Indebtedness; provided, however,
that the term Guarantee shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.
(g) "Indebtedness" of any Person means, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (iii)
all obligations of such Person upon which interest charges are customarily
paid, but not including such obligations which consist of accounts payable
and other current liabilities arising in the ordinary course of business,
(iv) all obligations of such Person to repurchase securities under
repurchase agreements and all obligations of such Person issued or assumed
as the deferred purchase price of property or services which under
generally accepted accounting principles would be shown on a balance sheet
of such Person as a liability, but not including such obligations which
consist of (A) accounts payable and other current liabilities arising in
the ordinary course of business and (B) compensation, pension and other
obligations arising from employee compensation and benefit arrangements,
(v) all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien on property owned or acquired by such Person, whether or not
the obligations secured thereby have been assumed, (vi) all Guarantees by
such Person of Indebtedness of others, and (vii) all obligations of such
Person as an account party in respect of letters of credit and bankers'
acceptances.
(h) "Initial Loan Value" means the collateral value assigned to the
Collateral in accordance with Section 8(e) below.
(i) "Interest Closing Date" with respect to a Loan means the day that
such Loan is repaid in full and, prior to such day, any day next preceding
an Interest Commencement Date for such Loan.
(j) "Interest Commencement Date" with respect to any Loan means the
date on which such Loan is made and thereafter any February 21, May 21,
August 21 or November 21 occurring while such Loan is outstanding (or if
any such day is not a Business Day, then the next succeeding Business Day).
(k) "Interest Period" with respect to any Loan means each period from
and including an Interest Commencement Date for such Loan to and including
the next succeeding Interest Closing Date for such Loan.
(l) "Kaiser" means Kaiser Aluminum Corporation, a corporation
organized and existing under the laws of the State of Delaware.
(m) "Kaiser Common" means the common stock of Kaiser, including any
class thereof issued upon any reclassification or recapitalization of
Kaiser's capital stock.
(n) "Kaiser Stock" means (i) Kaiser Common, and (ii) any other capital
stock of Kaiser which is listed on a national securities exchange in the
United States and is acceptable to Bank in its sole and absolute
discretion.
(o) "Lien" means, with respect to any asset, (i) any mortgage, deed of
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset or any assignment, hypothecation or other preferential arrangement of
or with respect to such asset, and (ii) any purchase option, call or
similar right of a third party with respect to such asset.
(p) "Loan" or "Loans" means any or all of the loans provided for in
Section 2 below, which may be Revolving Loans and the Term Loan.
(q) "Maintenance Loan Value" means the collateral value assigned to
the Collateral in accordance with Section 8(e) below.
(r) "Market Value" means the value assigned to the Collateral in
accordance with Section 8(f) below.
(s) "90-day LIBOR" means the three-month London Inter Bank Offered
Rate for U.S. dollars as quoted on Page 3750 on the Telerate Service (or
such other page as may replace Page 3750 on that service or such other
service as may be designated for the time being by the British Bankers'
Association as the information vendor for the purpose of displaying British
Bankers' Association Interest Settlement Rates) as of 11:00 a.m., London
time, on an Interest Commencement Date.
(t) "Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association,
corporation, government or any agency, court or political division thereof,
or any other entity.
(u) "Pledge Account" means an account of Bank as pledgee of Borrower,
maintained at Bank and entitled "MAXXAM pledgor/CTC pledgee".
(v) "Pledged Securities" means all shares of Kaiser Stock and other
securities, which are in the Pledge Account and pledged by Borrower to Bank
as provided in this Agreement, and any securities into which such
securities are converted or for which they are exchanged.
(w) "Revolving Credit Commitment" has the meaning given in Section
2(a) below.
(x) "Revolving Loan(s)" has the meaning given in Section 2(a) below.
(y) "SEC Reports" means reports filed by Borrower under the Securities
Exchange Act of 1934.
(z) "Significant Subsidiary" has the meaning assigned to that term in
Regulation S-X of the Securities Act of 1933, as such Regulation is in
effect on the date hereof.
(aa) "Term Loan" has the meaning given in Section 2(c) below.
2. LOANS. (a) Subject to the terms and conditions of this Agreement,
Bank shall make loans to Borrower from the date of this Agreement to but
not including the first anniversary of such date (each, a "Revolving Loan",
and, collectively, the "Revolving Loans"), at such times within such period
of time and in such amounts as Borrower may request, which amounts may be
borrowed, repaid and reborrowed, provided that the Revolving Loans shall
not exceed $25,000,000 in aggregate principal amount at any one time
outstanding (the "Revolving Credit Commitment").
(b) Borrower shall request each Revolving Loan by notice to Bank,
specifying (i) the date (which shall be a Business Day) for the making of
such Revolving Loan, (ii) the principal amount of such Revolving Loan,
which shall not be less than $500,000, (iii) the Collateral for such
Revolving Loan, and (iv) such information about the use of the proceeds
from such Revolving Loan as Bank may from time to time require. Such notice
shall be received by Bank at least one Business Day prior to the date for
the making of such Revolving Loan.
(c) Subject to the terms and conditions of this Agreement, Bank shall
make a loan to Borrower on the first anniversary of the date of this
Agreement (the "Term Loan") in a principal amount equal to the aggregate
principal amount of all Revolving Loans then outstanding.
(d) The Loans shall be evidenced by the Pledge Account and the records
made therein by Bank, which shall be conclusive, absent manifest or
demonstrable error, as to the amount of the Loans and the interest and
payments thereon. Any failure so to record or any error in doing so shall
not limit or otherwise affect the obligation of Borrower under this
Agreement to pay any amount owing with respect to the Loans.
3. CONDITIONS PRECEDENT. (a) The obligation of Bank to make any Loan
shall be subject to the fulfillment of each of the following conditions
precedent: (i) that on the date of the making of such Loan no event has
occurred and is continuing which constitutes an Event of Default under this
Agreement or which, upon the giving of notice, the lapse of time, or both,
would constitute an Event of Default, (ii) that the representations and
warranties of Borrower in Sections 10, 11 and 12 below are correct and
accurate in all material respects on the date of the making of such Loan as
though made on such date, (iii) that Borrower has fulfilled, to the
satisfaction of Bank, Borrower's obligation with respect to such Loan as
set forth in Section 8(a) below, (iv) if such Loan is a Revolving Loan,
that after giving effect to the making of such Loan and any pledge of
Collateral therefor, the Collateral then held by Bank has an Initial Loan
Value equal to the sum of the principal amount of such Loan and the
aggregate principal amount of all other Loans then outstanding plus the
accrued interest thereon, (v) if such Loan is the Term Loan, that after
giving effect to the making of such Loan and any pledge of Collateral
therefor, the Collateral then held by Bank has an Initial Loan Value equal
to the principal amount of such Loan, and (vi) that after giving effect to
the making of such Loan and the pledge of Collateral therefor, the
representation and warranty of Borrower in Section 12(a) below continues to
be correct and accurate in all material respects, and (vii) that Bank has
received from Borrower such documents as Bank may have reasonably
requested.
(b) The obligation of Bank to make the first Revolving Loan shall be
subject to the fulfillment of the condition precedent that on or prior to
the date of the making of such Loan, Bank shall have received from Borrower
(i) a balance sheet and the related income statement for Borrower's most
recent quarterly fiscal period for which such financials are available as
well as audited financials for Borrower's most recent fiscal year for which
such audited financials are available, (ii) if requested by Bank, a
Statement of Purpose (Federal Reserve Form U-1) duly completed and signed
by Borrower, and (iii) such other documents as Bank may have reasonably
requested.
4. TERMS OF REPAYMENT; WAIVERS. (a) Borrower may repay any Revolving
Loan in its entirety or in part at any time prior to the first anniversary
of the date of this Agreement, without premium and without notice of any
kind but together with all accrued but unpaid interest thereon.
(b) Borrower shall repay all Revolving Loans in their entirety on the
first anniversary of the date of this Agreement. Forthwith upon the making
of the Term Loan, Bank shall apply the proceeds thereof on behalf of
Borrower to such repayment of all Revolving Loans then outstanding.
(c) Borrower shall repay the Term Loan in its entirety on the second
anniversary of the date of this Agreement.
(d) Any Loan may also become repayable by Borrower, in whole or in
part, as provided in Section 8(d) below, and shall become repayable by
Borrower in its entirety as provided in Section 16 below upon the
occurrence of an Event of Default.
(e) Borrower hereby waives presentment and protest of any instrument
and notice thereof, notice of default and, to the extent permitted by
applicable law, all other notices (except notices required by the terms of
this Agreement) to which Borrower might otherwise be entitled.
5. INTEREST AND OTHER CHARGES. (a) Borrower shall pay Bank interest on
the principal amount of each Loan from the date on which such Loan is made
pursuant to Section 2 above until (but not including) the date such Loan is
due under this Agreement, at a rate per annum during each Interest Period
equal to 90-day LIBOR on the Interest Commencement Date of such Interest
Period, plus two percent (200 basis points). Such interest shall be payable
monthly in arrears on the 10th day of each month (or, if the 10th day is
not a Business Day, on the next succeeding Business Day), upon repayment of
such Loan in full, and as otherwise provided in this Agreement.
(b) Borrower shall pay Bank interest on any amount not paid by
Borrower when due under this Agreement, from the date payment of such
amount was due until the date such amount is paid, at a rate per annum
during each Interest Period equal to 90-day LIBOR on the Interest
Commencement Date of such Interest Period, plus four percent (400 basis
points). Such interest shall be payable on demand made by Bank from time to
time.
(c) Interest payable hereunder shall be calculated by Bank on the
basis of a 360-day year and for the actual number of days elapsed. Each
determination of an interest rate by Bank pursuant to this Agreement shall
be conclusive and binding on Borrower in the absence of manifest or
demonstrable error.
(d) In no event whatsoever shall the interest rate and other charges
charged hereunder exceed the highest rate permissible under any law which a
court of competent jurisdiction shall, in a final determination, deem
applicable hereto. In the event that a court determines, in a final
determination, that Bank has received interest and other charges hereunder
in excess of such highest rate, Bank shall promptly refund such excess
amount to Borrower, and the provisions hereof shall be deemed amended to
provide for such permissible rate.
6. COMMITMENT FEE. Borrower shall pay to Bank a commitment fee
computed (on the basis of a 360-day year and for the actual number of days
elapsed) at a rate of one-quarter of one percent (25 basis points) per
annum on the average daily unused amount of the Revolving Credit
Commitment. Such commitment fee shall accrue from the date of this
Agreement to and including the first anniversary of such date, and shall be
payable on the last Business Day of each calendar month up to and including
the calendar month during which the first anniversary of the date of this
Agreement occurs.
7. PLACE AND MANNER OF PAYMENT. Borrower shall make all payments
required to be made by it under this Agreement (whether of principal,
interest or any other amount) prior to 11:00 A.M. New York time on the date
such payment is due, at such address in the United States of America as
Bank shall from time to time indicate to Borrower, in U.S. dollars and in
immediately available funds.
8. COLLATERAL SECURITY, PLEDGE AND LIMITATION ON COLLATERAL. (a) On or
before the date of the making of any Loan, Borrower shall deliver to the
Pledge Account shares of Kaiser Stock and/or other securities (which other
securities shall be acceptable to Bank in its sole and absolute
discretion), accompanied by stock powers signed in blank and having on the
date of the making of such Loan (i) an aggregate Initial Loan Value of no
less than the principal amount of such Loan, or (ii) if there is Excess
Collateral in the Pledge Account on such date, an aggregate Initial Loan
Value of no less than the difference between (A) the principal amount of
such Loan and (B) the Initial Loan Value of such Excess Collateral on such
date.
(b) If shares of Kaiser Common are delivered to the Pledge Account
pursuant to Section 8(a) above after a reclassification or recapitalization
of Kaiser Common into two or more classes of shares, then the shares so
delivered shall at all times consist of (i) a number of shares from each of
such classes that bears the same proportion to all of the shares so
delivered as (ii) the total number of shares of such class that were issued
solely by reason of such reclassification or recapitalization bears to the
total number of shares of all classes of Kaiser Common issued solely by
reason of such reclassification or recapitalization.
(c) To secure the due and punctual payment of each Loan, all accrued
interest thereon and all other amounts from time to time payable by
Borrower under this Agreement, and the performance by Borrower of all its
obligations and covenants under this Agreement, Borrower hereby pledges,
hypothecates, assigns, transfers and sets over to Bank, and grants to Bank
a continuing security interest in and lien upon, (i) all Pledged Securities
at any time in the Pledge Account, (ii) all other property of Borrower now
or at any time hereafter in Bank's actual possession including, but not
limited to, all other securities, monies, claims and credit balances, and
(iii) all proceeds, products and profits derived from any of the foregoing
(including proceeds of any insurance policies and all cash, securities,
dividends and other property at any time and from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or
all of the foregoing securities), and copies of all books and records
related to any of the foregoing (all of the foregoing Pledged Securities
and other property, together with all other property in which Borrower may
hereafter grant to Bank a lien and security interest, being herein
collectively referred to as the "Collateral").
(d) At all times while any Loan is outstanding, Borrower shall
maintain Collateral with Bank consisting of Pledged Securities having an
aggregate Maintenance Loan Value of not less than the aggregate principal
amount of all Loans outstanding hereunder and all accrued interest thereon.
Forthwith upon demand made to Borrower by Bank, Borrower shall, at its
option, either (i) deliver to Bank such shares of Kaiser Stock or such
other securities which are acceptable to Bank in its sole and absolute
discretion, all accompanied by stock powers signed in blank, or (ii) repay
so much of the aggregate principal amount of all Loans outstanding as, in
either case, may be necessary for the aggregate Maintenance Loan Value of
all Pledged Securities to be no less than the aggregate principal amount of
all Loans outstanding hereunder and all accrued interest thereon.
(e) The Initial Loan Value and the Maintenance Loan Value of any of
the Pledged Securities or other item of Collateral are each an amount
representing a percentage of the Market Value of such Pledged Security or
other item of Collateral and shall be determined (i) in accordance with
Schedule A hereto if the percentages required for such determination are
set forth therein or (ii) from time to time by Bank in its sole and
absolute discretion if such percentages are not set forth therein,
provided, however, that in no event shall Kaiser Common, irrespective of
its Market Value, be accorded a Maintenance Loan Value higher than $7.50
per share of Kaiser Common.
(f) If and for so long as any Pledged Securities are listed on a
national securities exchange in the United States of America, their Market
Value shall be determined for all purposes by the last sales price for such
Pledged Securities on any such exchange on the Business Day next preceding
the date of determination or, if there was no sale on that Business Day, by
the last sales price for such Pledged Securities on the next preceding
Business Day on which there was a sale thereof on any such exchange, all as
quoted on the Consolidated Tape or, if not quoted on the Consolidated Tape,
then as quoted by any such exchange. The Market Value of any other item of
Collateral, and the Market Value of such Pledged Securities if they are no
longer listed on any such exchange, shall be determined by Bank for all
purposes (i) based upon the prices bid (on the Business Day next preceding
the date of determination) by banks and broker/dealers which regularly
quote prices on property of the same type as such item of Collateral or
(ii) if no such quotations are available for such Business Day, based upon
such factors as Bank, in its sole and reasonable judgment, shall determine
and communicate to Borrower. Market Value, in the case of interest-bearing
Collateral, shall include accrued interest to the date on which such Market
Value is determined.
(g) Subject to Section 8(i) below, Bank shall promptly pay over to
Borrower (i) any and all cash dividends and interest paid on any of the
Collateral and received by Bank, and (ii) any other cash received by Bank
on account of the Collateral (whether upon the repayment, redemption or
exchange of any thereof or otherwise) unless, after giving effect to such
payment of cash dividends or interest or other cash to Borrower, the
aggregate Maintenance Loan Value of all Collateral then held by Bank would
be less than the sum of the aggregate principal amount of all outstanding
Loans and the interest accrued thereon, in which case Bank shall promptly
apply the amount of such cash to the repayment of such aggregate principal
amount and the payment of such interest. Any and all non-cash distributions
of property (including stock dividends) made for any reason whatsoever on
or in respect of any of the Collateral, which are received by Bank, shall
be retained by Bank and held by it as part of the Collateral subject to
this Agreement.
(h) Subject to Section 8(i) below, Borrower shall be entitled to
exercise, for any purpose not inconsistent with the terms of this
Agreement, any and all voting and/or consensual rights and powers relating
or pertaining to the Collateral. In furtherance of such exercise, Bank
shall deliver to Borrower all notices of meetings, proxy materials (other
than proxies) and other materials which it receives regarding (i) Pledged
Securities from the issuers thereof or, in the case of tender, exchange or
similar offers for Pledged Securities, from the party (or its agent) making
the offer, and (ii) Pledged Securities or any other item of Collateral from
any court having jurisdiction over (or from any Person who is a party to)
reorganization, liquidation or other similar proceedings for the issuer of
such Pledged Securities or the obligor on such other item of Collateral.
Whenever Bank or any of its agents receives a proxy with respect to
securities in the Pledge Account, Bank shall promptly request instructions
from Borrower on how such securities are to be voted, and shall give such
proxy, or cause it to be given, in accordance with such instructions. If
Borrower timely informs Bank that Borrower wishes to vote any such
securities in person, Bank shall promptly seek to have a legal proxy
covering such securities issued to Borrower.
(i) If an Event of Default occurs and for so long as it continues,
Borrower shall cease to be entitled (i) to exercise any and all voting
and/or consensual rights and powers relating or pertaining to any of the
Collateral, and (ii) to receive any cash dividends and interest, or other
cash, payable on or on account of any of the Collateral; and Bank shall
have the sole and exclusive right and authority to exercise such voting
and/or consensual rights and powers and to receive and retain such
dividends and interest and other cash. Any money or other property received
by Bank pursuant to this Section 8(i) shall be retained by Bank as
additional Collateral and applied as required in Section 17(a) below.
(j) If the aggregate Initial Loan Value of the Collateral at any time
exceeds the aggregate principal amount of all then outstanding Loans and
the interest accrued thereon, and provided that no Event of Default has
occurred and is continuing, Borrower may designate to Bank, in writing,
Pledged Securities which have an aggregate Initial Loan Value no greater
than such excess, and Bank, promptly upon such designation, shall release
such designated Pledged Securities from the lien and security interest
granted in Section 8(c) above and deliver and transfer them pursuant to
such instructions as Borrower may have given to Bank, provided that,
immediately after giving effect to such delivery and transfer, the
aggregate Initial Loan Value of all remaining Collateral is not less than
the aggregate principal amount of all such Loans and the interest accrued
thereon.
(k) Upon the payment in full of all the Loans, all accrued interest
thereon and all other amounts from time to time payable by Borrower under
this Agreement, the security interest and lien granted in Section 8(c)
above in and upon the Collateral shall terminate, and all of Bank's rights
hereunder to the Collateral shall revert to Borrower. Upon such
termination, Bank shall deliver and transfer the Collateral in the Pledge
Account to Borrower, together with all instruments and documents evidencing
the Collateral and such other documents as Borrower shall reasonably
request to evidence such termination.
9. PROTECTION OF SECURITY INTEREST. (a) Borrower shall, at its expense
and from time to time, perform all steps reasonably requested by Bank at
any time to perfect, maintain, protect and enforce Bank's security interest
in and lien upon the Collateral, including, without limitation, (i)
executing and filing financing or continuation statements and amendments
thereto, in form and substance satisfactory to Bank, and (ii) obtaining
such consents and registrations of transfer, providing such endorsements
and executing and delivering such other documents as may be required for
any sale, transfer or other disposition thereof by Bank in accordance with
the provisions of this Agreement. From time to time, Borrower shall, upon
Bank's written request, promptly execute and deliver confirmatory written
instruments pledging the Collateral to Bank, but any failure by Borrower to
do so shall not affect or limit Bank's security interest in, lien upon or
other rights in and to the Collateral. Until payment in full of all the
Loans, all accrued interest thereon and all other amounts from time to time
payable by Borrower under this Agreement, Bank's security interest in the
Collateral shall continue in full force and effect.
(b) Subject to the terms of this Agreement, Borrower hereby
irrevocably appoints Bank its true and lawful attorney in its name, place
and stead, and at its expense, in connection with the preservation and
enforcement of Bank's rights and remedies under this Agreement if an Event
of Default occurs and is continuing (i) to receive, endorse and collect all
checks and other orders for the payment of money made payable to Borrower
representing any dividend, interest or other distribution payable or
distributable in respect of any of the Collateral and to give full
discharge for the same, (ii) to give all notices, obtain all consents,
effectuate all registrations in Bank's name or that of a proposed purchaser
or other transferee and make all transfers of all or any part of the
Collateral which are necessary or appropriate in connection with any sale,
transfer or other disposition thereof pursuant to this Agreement, (iii) to
execute and deliver for value all necessary or appropriate assignments and
other instruments in connection with any such sale, transfer or other
disposition, and (iv) to execute and deliver all other documents, and do
all other acts and things, which Bank reasonably deems appropriate in such
connection. Borrower hereby ratifies and confirms all that Bank, as
Borrower's attorney, may lawfully do hereunder and pursuant hereto, but,
nevertheless, at Bank's request or that of the purchaser or other
transferee in question, Borrower shall ratify and confirm any sale,
transfer or other disposition of Collateral pursuant to this Agreement in
such manner as Bank or such purchaser or other transferee may reasonably
specify in such request.
10. OTHER LIENS. Borrower represents and warrants to Bank that all
Collateral consisting of Pledged Securities and other items of Collateral
is, and Borrower covenants that it will continue to be, owned by Borrower
free and clear of all Liens (except for (i) Liens in favor of Bank, (ii)
Liens for taxes not delinquent or being contested in good faith and in
appropriate proceedings, (iii) Liens in connection with workers'
compensation, unemployment insurance, social security or similar
obligations, and (iv) mechanics', workmen's, materialmen's, landlords',
carriers' or other like liens arising in the ordinary course of business
with respect to obligations which are not due or which are being contested
in good faith).
11. USE OF PROCEEDS. Borrower represents and warrants to Bank that
each Loan is a commercial loan the proceeds of which will be used in the
business of Borrower which is, by various means (including the purchase or
repurchase of securities issued by Borrower) to invest in, hold, acquire,
sell or divest, operate or otherwise act with respect to businesses and
business interests of various kinds, including the businesses described in
Borrower's annual report on Securities and Exchange Commission Form 10-K
for its fiscal year ended December 31, 1996.
12. OTHER REPRESENTATIONS AND WARRANTIES. Borrower further represents
and warrants to Bank that:
(a) at no time shall the Collateral include Pledged Securities, or any
class of Pledged Securities, in an amount such that solely by reason of
such Pledged Securities, either upon exercising its rights under Section 17
below or otherwise, Bank would become a holder of 10% or more of any class
of Pledged Securities or would become (or be presumed to be) an affiliate
of the issuer of such Pledged Securities (as such term "affiliate" is
defined for purposes of the Securities Act of 1933);
(b) Borrower has, for purposes of Rule 144 under the Securities Act of
1933, been the beneficial owner of the shares of Kaiser Common or other
Kaiser Stock pledged (or to be pledged) to Bank under this Agreement at all
times since May 15, 1993 or earlier;
(c) Borrower (i) is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, (ii) is qualified
to do business and is in good standing in all states in which qualification
and good standing are necessary in order for it to conduct its business and
own its property, except where the failure to so qualify or to be in good
standing could not reasonably be expected to have a material adverse effect
on the financial condition, operations or business of Borrower and its
subsidiaries considered as one enterprise and (iii) has all requisite
corporate power and authority to conduct its business, to own its property
and to execute and deliver this Agreement and to perform its obligations
hereunder;
(d) it has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement, and such
authorization, delivery and performance do not (i) violate its corporate
charter or by-laws or any material law, rule, regulation, order, judgment,
injunction, decree, determination or award presently in effect and
applicable to it, (ii) require any consent or result in a breach of or
constitute a default under any material agreement, lease or instrument to
which it is a party or by which it or any of its assets may be bound or
affected, or (iii) result in or require the creation or imposition of any
Lien (other than in favor of Bank pursuant to this Agreement) upon or with
respect to any shares of Kaiser Common or other Kaiser Stock owned by
Borrower or any material portion of Borrower's other properties;
(e) this Agreement has been duly and validly executed and delivered by
Borrower and constitutes a legal, valid and binding obligation of Borrower,
enforceable against it in accordance with its terms, subject, as to
enforceability of remedies (i) to bankruptcy, insolvency and other laws
affecting creditors' rights generally, and (ii) to the application of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law);
(f) as of the date hereof, no recording, order, authorization,
consent, license, registration, approval, exemption, filing, notice or
other similar action by or with any governmental body, governmental
official or other regulatory authority (except such as have been obtained,
made or given and copies or confirmations of which have been delivered by
Borrower to Bank) is or will be required to be obtained, made or given by
Borrower in order to (i) ensure the legality, validity, binding effect or
enforceability of this Agreement, (ii) permit the performance by Borrower
of its obligations under this Agreement in accordance with the terms
thereof, or (iii) enable Bank to enforce its rights and remedies pursuant
to the terms of this Agreement, including any sale, transfer or other
disposition by Bank of all or any part of the Collateral, except such as
may be required under the Securities Act of 1933, the regulations
promulgated thereunder and State securities laws or by any national
securities exchange;
(g) Borrower is not in default with respect to any Indebtedness of
Borrower in a principal amount greater than $500,000;
(h) except as disclosed by it in SEC Reports or otherwise disclosed in
writing by Borrower to Bank, there is no litigation or other proceeding
pending or, to its knowledge, threatened against or affecting Borrower
which could reasonably be expected to have a material adverse effect (i) on
its financial condition, operations or business, or (ii) on any of the
Collateral; and
(i) the consolidated balance sheet of Borrower and its consolidated
subsidiaries as of December 31, 1996, and the related consolidated income
statement for the twelve-month period then ended and the consolidated
balance sheet of Borrower and its consolidated subsidiaries as of June 30,
1997 and the related consolidated income statement for the six-month period
then ended, copies of all of which have heretofore been delivered to Bank
by Borrower, present fairly, in all material respects, the consolidated
financial condition of Borrower and its consolidated subsidiaries as at the
dates thereof and their consolidated results of operations for the periods
then ended, and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis; since the date of
Borrower's most recent, publicly available periodic report filed with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, which has been delivered by it to Bank, there have been no material
adverse changes in the assets or liabilities or financial condition of
Borrower or of any of its Significant Subsidiaries; and neither Borrower
nor any of its Significant Subsidiaries has entered into any commitment or
contract, or incurred any other liability, which is not reflected in said
balance sheets and could reasonably be expected to have a material adverse
effect upon its financial condition, operations or business.
13. REITERATION OF REPRESENTATIONS. The representations in Sections
10, 11 and 12 above shall be deemed to be repeated by Borrower each time a
Loan is made.
14. REPORTING. (a) As soon as available, and in any event within 60
days after the close of each of the first three quarters of each fiscal
year of Borrower, commencing with the quarter ending on September 30, 1997,
Borrower shall deliver to Bank the consolidated balance sheet of Borrower
and its consolidated subsidiaries at the end of such quarter and the
related consolidated income statement for the portion of the fiscal year
ending on the last day of such quarter, all in reasonable detail and
stating in comparative form the figures for the corresponding date and
period in the previous fiscal year, prepared in accordance with generally
accepted accounting principles applied on a consistent basis, subject,
however, to year-end audit adjustments, and unless delivered to Bank as
part of Borrower's quarterly report on Securities and Exchange Commission
Form 10-Q, certified by Borrower's chief financial or accounting officer.
(b) As soon as available, and in any event within 120 days after the
close of each fiscal year of Borrower, Borrower shall deliver to Bank the
consolidated balance sheet of Borrower and its consolidated subsidiaries as
at the close of such fiscal year and the related consolidated income
statement for such fiscal year, all in reasonable detail and stating in
comparative form the figures as at the close of and for the previous fiscal
year, audited by certified public accountants satisfactory to Bank and
accompanied by a report thereon, satisfactory to Bank, issued by such
accountants.
15. OTHER COVENANTS. Borrower covenants with Bank that until the
payment in full of all Loans, all accrued interest thereon and all other
amounts from time to time payable by Borrower under this Agreement, it
shall:
(a) maintain and preserve its existence and all rights, privileges,
approvals and other authority adequate for the conduct of its business;
(b) promptly notify Bank in writing of any violation by Borrower of
any law, statute, regulation or ordinance of any governmental entity, or of
any agency thereof, applicable to it which would likely materially and
adversely affect the Collateral or the financial condition, operations or
business of Borrower and its subsidiaries considered as one enterprise;
(c) notify Bank in writing within five (5) Business Days of any
default by Borrower with respect to any of its Indebtedness in a principal
amount of more than $1,000,000;
(d) promptly notify Bank in writing of any change in the control of
Borrower or the control of Kaiser;
(e) deliver to Bank (i) promptly after the same are available copies
of all financial statements and other reports and documents that Borrower
distributes to its shareholders or otherwise makes publicly available, and
(ii) such other documents as Bank may from time to time reasonably request,
including such Statements of Purpose (Federal Reserve Form U-1's) with
regard to any Pledged Securities as may be required under Regulation U of
the Board of Governors of the Federal Reserve System; and
(f) not create, incur, assume or permit to exist any Lien on any
shares of Kaiser Common, shares of other Kaiser Stock or any other
securities equivalent to Kaiser Common or other Kaiser Stock, whether such
shares or other securities are now owned or hereafter acquired by it, other
than (i) Liens for taxes not delinquent or being contested in good faith
and in appropriate proceedings; (ii) Liens in connection with workers'
compensation, unemployment insurance, social security or similar
obligations; (iii) mechanics', workmen's, materialmen's, landlords',
carriers' or other like liens arising in the ordinary course of business
with respect to obligations which are not due or which are being contested
in good faith; (iv) Liens granted prior to the date of this Agreement to
secure the 12-1/4% Senior Secured Discount Notes due 2003 and/or the
11-1/4% Senior Secured Notes due 2003 of MAXXAM Group Inc. and the 12%
Series B Senior Secured Notes due 2003 of MAXXAM Group Holdings Inc.; (v)
Liens granted after the date of this Agreement on no more than 10,000,000
shares of Kaiser Common, in the aggregate, to secure Indebtedness for money
borrowed of Borrowers or any of its affiliates; (vi) Liens in favor of
Bank; and (vii) such other Liens as Bank and Borrower may from time to time
agree upon in writing.
16. EVENTS OF DEFAULT. It shall constitute an Event of Default
hereunder (and, upon the occurrence thereof, all of Bank's obligations
hereunder to make any Loan shall terminate and the then outstanding
principal amount of each Loan, all accrued but unpaid interest thereon and
all accrued but unpaid commitment fee shall become immediately due and
payable, without demand, presentment or notice of any kind, all of which
are hereby expressly waived) if at any time:
(a) Borrower fails to pay in full the principal amount of any Loan
when due; or
(b) Borrower fails to make or pay when due any interest payment,
charge or other amount required to be made or paid by it under this
Agreement, and such failure continues for five Business Days after the date
on which the making of such payment or the payment of such charge or other
amount was due; or
(c) Borrower fails to deliver Collateral to Bank in accordance with
Section 8(d) above upon demand therefor made by Bank in writing at the
address for notices to Borrower specified in Section 22 below, and such
failure continues for five Business Days after the date of the making of
such demand; or
(d) Borrower fails to perform or observe in any material respect any
other term, covenant or condition to be performed or observed by it under
this Agreement, and such failure continues for a period in excess of 10
Business Days after the earlier of (i) the date an executive officer of
Borrower obtains knowledge of such failure or (ii) the date on which
written notice thereof is given by Bank to Borrower; or
(e) any representation or warranty made by Borrower in Sections 10, 11
and 12 above proves to have been incorrect in any material respect on any
of the dates as of which made or deemed to have been repeated; or
(f) Borrower defaults in the payment when due, whether at stated
maturity or when otherwise due (which shall include any applicable grace
period), of any of its Indebtedness (other than Indebtedness under this
Agreement) in a principal amount of more than $2,000,000, whether now or
hereafter existing; or
(g) Borrower fails (within the applicable grace period, if any) to
perform any term, covenant or agreement on its part to be performed under
any agreement or instrument (other than this Agreement) evidencing or
securing any of its Indebtedness (whether now or hereafter existing) in a
principal amount of more than $2,000,000, or any event occurs or condition
exists (and such event or condition is not remedied within the applicable
grace period, if any), if the effect of such failure, event or condition is
to cause, or to permit the holder or holders of such Indebtedness (with or
without the giving of notice, lapse of time or both) to
cause, such Indebtedness to become due prior to its stated maturity; or
(h) (i) Borrower as debtor commences a case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar
law, or seeks the appointment of a receiver, trustee, custodian or similar
official for itself or any substantial part of its property, (ii) any such
case or proceeding is commenced against it, or another seeks such an
appointment, which (A) is consented to or not timely contested by it, (B)
results in the entry of an order for relief, such an appointment, or the
entry of an order having a similar effect, or (C) is not dismissed within
90 days, (iii) it makes a general assignment for the benefit of creditors,
or (iv) it admits in writing its inability to pay its debts as they become
due; or
(i) one or more judgments or orders for the payment of money in an
aggregate amount in excess of $10,000,000 are rendered against Borrower and
(A) the same remain undischarged for a period of 30 or more consecutive
days during which execution thereof is not effectively stayed upon appeal
or otherwise or (B) any proceeding by a creditor to enforce the same is
pending and not effectively stayed by appeal or otherwise.
17. BANK'S RIGHTS AND REMEDIES. (a) If an Event of Default occurs and
is then continuing, Bank shall promptly apply to the payment of the
principal of, and accrued but unpaid interest on, the Loans and of any
other amounts payable by Borrower under this Agreement (in such order as
Bank in its sole and absolute discretion may determine) any cash held by
Bank as part of the Collateral pursuant to Section 8(i) above.
(b) In addition to its obligation under Section 17(a) above, if an
Event of Default occurs and is then continuing, Bank shall have the right
to exercise with respect to any or all of the Collateral any rights and
remedies available to a secured creditor under applicable law and, in
addition, (without being required to give any notice to Borrower except as
may be required in Section 17(d) below) to sell any or all of such
Collateral, publicly or privately, at a place of Bank's choosing, and (in
such order as Bank in its sole and absolute discretion may determine) to
apply the proceeds of such sale to the payment of the principal of, and
accrued but unpaid interest on, the Loans and of any other amounts payable
by Borrower under this Agreement.
(c) If any Pledged Securities forming part of the Collateral are, in
whole or in part, actually convertible into or exchangeable for other
securities, then Bank shall have the right, in its discretion, instead of
selling such Pledged Securities as provided in Section 17(b) above, to
convert or exchange them pursuant to their terms, to apply any cash
received by Bank in such conversion or exchange to the payment of the
principal of, and accrued but unpaid interest on, the Loans and of any
other amounts payable by Borrower under this Agreement, and to sell as
provided in Section 17(b) above any securities it receives in such
conversion or exchange.
(d) The Pledged Securities at any time forming part of the Collateral
are of a type customarily sold on recognized markets and no notification to
Borrower of any public sale thereof by Bank is required, provided, however,
that if any such notice is required by applicable law with respect to any
such sale, then one Business Day's notice thereof shall be reasonable
notification to Borrower. Bank shall give Borrower five Business Days'
prior notice of any private sale of the Pledged Securities.
18. NO WAIVER. No failure by Bank to exercise any right, power or
remedy under this Agreement, and no delay by Bank in exercising any such
right, power or remedy, shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise by Bank of any other
right, power or remedy. The rights and remedies of Bank provided for in
this Agreement are cumulative and not exclusive of any remedies provided at
law or in equity.
19. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement of the parties with respect to the Loans, and, except as provided
in Section 5(d) above, no amendment, modification, termination or waiver of
any provision hereof or consent to a departure herefrom by Borrower shall
be effective unless the same is in writing and signed by both Bank and
Borrower.
20. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
representatives, successors and assigns, provided, however, that except as
provided in Section 20(b) below it may not be assigned by either party
hereto without the prior written consent of the other party hereto, and any
purported assignment in violation of this provision shall be null and void.
(b) Section 20(a) above notwithstanding, Bank may from time to time,
in its sole and absolute discretion and without Borrower's further consent
(i) assign this Agreement and any Loan to any affiliate of Bank, or (ii)
sell participations in any Loan to any Person, provided, however, that in
the case of any such sale of participations Bank's obligations under this
Agreement shall remain unchanged and it shall remain solely responsible to
Borrower for its performance thereof.
21. GOVERNING LAW AND JURISDICTION. (a) This Agreement shall be
governed by and construed in accordance with the laws of the State of New
York, without regard to the conflict of law principles thereof.
(b) Any suit, action or proceeding with respect to this Agreement or
any Loan may be brought in the Supreme Court of the State of New York,
County of New York, or in the United States District Court for the Southern
District of New York, and the parties hereto hereby submit to the non-
exclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding, and hereby waive for such purpose any other
preferential jurisdiction by reason of their present or future domicile or
otherwise.
22. NOTICES. Unless otherwise specified, any notice, demand or other
communication required hereunder shall be sent, delivered or transmitted to
the recipient at the address (or, in the case of facsimile transmission,
the telephone number) set forth after its name hereinbelow:
IF TO BANK, AT:
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
Attention: Vice President -
Loan Compliance
Telephone: (609) 951-2313
Facsimile: (609) 951-2317
IF TO BORROWER, AT:
MAXXAM Inc.
5847 San Felipe, Ste 2600
Houston, Texas 77057
Attention: Paul N. Schwartz
Telephone: (713) 267-3685
Facsimile: (713) 267-3703
AND
Attention: Treasury Department
Telephone: (713) 267-3619
Facsimile: (713) 267-3704
or to such other address or telephone number as each party may designate
for itself by like notice. All notices, demands and other communications to
be given or delivered hereunder shall be in writing and shall be deemed to
have been given or delivered when personally delivered (including by
Federal Express or other reputable courier service) or sent by facsimile
transmission. A confirming copy of any facsimile transmission shall be sent
by next day delivery via Federal Express or other reputable courier
service.
23. EXPENSES. Borrower shall pay or, at the election of Bank, shall
reimburse Bank for paying (a) all reasonable costs, fees and expenses
(including reasonable attorneys' fees) incurred by Bank in connection with
the enforcement of this Agreement and Bank's security interest in the
Collateral, and (b) all transfer, stamp, documentary or other similar
taxes, assessments or charges levied by any tax or other governmental
authority in respect of this Agreement or any Loan (other than in respect
of transactions permitted by Section 20(b) above).
24. SEVERABILITY. If any provision of this Agreement is invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions of this Agreement (and the
validity, legality and enforceability of such provision in any other
jurisdiction) shall not be affected or impaired thereby.
25. MISCELLANEOUS. (a) For the avoidance of doubt, it is hereby
expressly understood that Borrower as defined in this Agreement means
MAXXAM INC. considered individually and does not refer to any subsidiary
thereof, whether accounted for on a consolidated basis with Borrower or
not, and that the rights and obligations of Borrower under this Agreement
are not rights and obligations of any such subsidiary.
(b) All agreements, representations and warranties contained in this
Agreement shall survive the execution and delivery of this Agreement and
the making of any Loan.
(c) Bank shall be held to the exercise of reasonable care in the
custody and preservation of the Collateral in its possession, and shall be
deemed to have exercised such care if such Collateral is accorded treatment
substantially equal to that which Bank accords to its own property.
(d) Except to the extent that pursuant to Section 25(c) above Bank may
be liable to Borrower for Bank's negligence in the custody and preservation
of Collateral in Bank's possession, and except as may be otherwise provided
in the matter of collateral by applicable provisions of the Uniform
Commercial Code as in effect in the State of New York, Bank shall be
without liability to Borrower for any loss, damage, cost, expense,
liability or claim which does not arise from willful misfeasance, bad faith
or gross negligence on the part of Bank in taking or omitting to take any
action under this Agreement.
(e) Bank shall have the continuing and exclusive right to apply any
and all payments to any portion of the Loans. All payments by Borrower to
Bank pursuant to this Agreement shall be made without set-off, and none of
such payments shall be subject to any counterclaim by Borrower. To the
extent that Borrower makes a payment or Bank receives any payment or
proceeds of the Collateral for Borrower's benefit, which are subsequently
invalidated, declared to be fraudulent or preferential, set aside or
required to be repaid to a trustee, debtor in possession, receiver or any
other party under any bankruptcy, reorganization or insolvency law, common
law or equitable cause, then, to such extent, the obligation hereunder of
Borrower which was to have been satisfied by such payment shall be revived
and continue as if such payment had not been received by Bank.
(f) Bank shall maintain, and shall cause its officers, directors,
employees and affiliates under its control to maintain, the confidentiality
of all information provided by Borrower to Bank pursuant to this Agreement
except to the extent that such information (i) is available in SEC Report
or otherwise becomes generally available to the public other than as a
result of disclosure by Bank, (ii) is required to be provided by Bank to
regulatory authorities or Bank's auditors, (iii) is required to be provided
pursuant to court process, provided that Bank shall promptly notify
Borrower of such process so that Borrower may seek a protective order in
connection therewith, or (iv) needs to be disclosed in connection with the
exercise, preservation and enforcement of Bank's rights and remedies under
this Agreement.
(g) The headings of sections in this Agreement are for convenience of
reference only and shall not affect the meaning or construction of any
provision of this Agreement.
(h) This Agreement may be executed in one or more counterparts and by
the parties hereto on separate counterparts, each of which shall be deemed
an original but all of which taken together shall constitute but one and
the same instrument.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed in its name and on its behalf by its representative thereunto
duly authorized, all as of the day and year first above written.
MAXXAM INC.
By: /S/ PAUL N. SCHWARTZ
Name: Paul N. Schwartz
Title: Executive Vice President
CUSTODIAL TRUST COMPANY
By: /S/ RONALD D. WATSON
Name: Ronald D. Watson
Title: President
SCHEDULE A
<TABLE>
<CAPTION>
Loan Value
(percentages are
Collateral Type % of Market Value)
- --------------- ------------------
Initial Maintenance
------- -----------
<S> <C> <C>
Common Stock of Kaiser
Aluminum Corporation 33-1/3% lower of 50%
or $7.50 per
share
Cash or cash equivalents 100% 100%
</TABLE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (which, together with the Schedules
and Exhibits attached hereto, is collectively referred to as the or this
"Agreement") dated October 19, 1997, by and among MAXXAM INC., a Delaware
corporation ("MAXXAM"), THE COMBINED MASTER RETIREMENT TRUST, a trust
organized under the laws of Texas (the "CMRT"), and NL INDUSTRIES, INC., a
New Jersey corporation ("NL").
RECITALS
WHEREAS, the CMRT and NL are holders of certain shares of common
stock of MAXXAM with a par value of $.50 per share (the "MAXXAM Shares");
and
WHEREAS, the CMRT and NL wish to sell, and MAXXAM wishes to
purchase, all of the MAXXAM Shares held by each of the CMRT and NL on the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual representations,
covenants and agreements set forth herein, the parties hereto agree as
follows:
ARTICLE 1
PURCHASE AND SALE OF THE MAXXAM SHARES
1.1 On the terms and subject to the conditions of this Agreement
and the Escrow Agreement among MAXXAM, the CMRT, NL and First Trust
National Association, as escrow agent (the "Escrow Agent"), of even date
herewith (the form of which is attached as Exhibit A, the "Escrow
Agreement"), the CMRT hereby sells and MAXXAM hereby purchases from the
CMRT the MAXXAM Shares listed opposite the CMRT's name on Schedule A to
this Agreement. On the terms and subject to the conditions of this
Agreement and the Escrow Agreement, NL hereby sells and MAXXAM hereby
purchases the MAXXAM Shares listed opposite NL's name on Schedule A to this
Agreement. The purchase price for such MAXXAM Shares is $55 per MAXXAM
Share or an aggregate amount of $56,498,750 payable to CMRT and an
aggregate amount of $13,750,000 payable to NL, in cash and notes of MAXXAM
in the amounts listed opposite CMRT's and NL's name, respectively, on
Schedule A to this Agreement.
1.2 Closing of the purchase and sale of the MAXXAM Shares shall
take place through escrow on the terms and subject to the conditions
specified in the Escrow Agreement. The CMRT and NL have delivered and
surrendered to the Escrow Agent for the benefit of MAXXAM, one or more
certificates evidencing the MAXXAM Shares set forth opposite the respective
names of CMRT and NL on Schedule A, with the MAXXAM Shares accompanied by
appropriate instruments of transfer duly endorsed by CMRT and NL, as the
case may be, transferring such MAXXAM Shares to MAXXAM. MAXXAM has
delivered to the Escrow Agent, for the benefit of the CMRT and NL, as the
case may be, (a) cash by means of wire transfer in amounts equal to those
set forth opposite the respective names of CMRT and NL on Schedule A, (b)
promissory notes in the form of Exhibit B ("Notes") in the amounts equal to
the "Principal Amount of Notes" set forth opposite the respective names of
the CMRT and NL on Schedule A, and (c) the Pledge and Custody Agreements in
the form attached as Exhibit C, for the benefit of the CMRT (the "CMRT
Pledge and Custody Agreement") and NL (the "NL Pledge and Custody
Agreement"), pledging the MAXXAM Shares purchased from CMRT and NL as
security for the obligations under the respective Notes (and accompanied by
appropriate instruments of transfer duly endorsed by MAXXAM sufficient to
transfer such MAXXAM Shares to the CMRT or NL, as the case may be, in the
form attached as Exhibit D).
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF MAXXAM
MAXXAM represents and warrants to the CMRT and NL as follows:
2.1 Authority. MAXXAM is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
MAXXAM has full corporate power and authority, without the consent or
approval of any other person, to execute and deliver this Agreement and to
consummate the transactions contemplated by this Agreement. All corporate
action required to be taken by or on behalf of MAXXAM to authorize the
execution, delivery and performance of this Agreement has been duly and
properly taken.
2.2 Validity. This Agreement is duly executed and delivered and
constitutes a lawful, valid and binding obligation of MAXXAM, enforceable
against MAXXAM in accordance with its terms. The execution and delivery of
this Agreement and the consummation of the transactions contemplated by
this Agreement by MAXXAM is not prohibited by, does not violate, conflict
with, or require consent under any provision of, and does not result in a
default under (a) the charter or bylaws of MAXXAM; (b) any material
contract, agreement or other instrument to which MAXXAM is a party or by
which MAXXAM is bound; (c) any order, writ, injunction, decree or judgment
of any court or governmental agency applicable to MAXXAM; or (d) any law,
rule or regulation applicable to MAXXAM.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE CMRT
The CMRT represents and warrants to MAXXAM:
3.1 Authority. The CMRT is a trust duly organized, validly
existing and in good standing under the laws of the State of Texas. The
CMRT has full power and authority, without the consent or approval of any
other person, to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. All action required to be
taken by or on behalf of the CMRT to authorize the execution, delivery and
performance of this Agreement has been duly and properly taken.
3.2 Validity. This Agreement is duly executed and delivered and
constitutes a lawful, valid and binding obligation of the CMRT, enforceable
against the CMRT in accordance with its terms. The execution and delivery
of this Agreement and the consummation of the transactions contemplated by
this Agreement by the CMRT is not prohibited by, does not violate, conflict
with, or require consent under any provision of, and does not result in a
default under (a) the documents under which the CMRT was formed or the
organizational documents which govern the CMRT; (b) any material contract,
agreement or other instrument to which the CMRT is a party or by which the
CMRT is bound; (c) any order, writ, injunction, decree or judgment of any
court or governmental agency applicable to the CMRT; or (d) any law, rule
or regulation applicable to the CMRT.
3.3 Ownership. The CMRT is the sole record and beneficial owner
of the MAXXAM Shares that are being transferred to MAXXAM by the CMRT
pursuant to Article I. The MAXXAM Shares being transferred to MAXXAM by
the CMRT constitute all of such shares held, directly or indirectly, by the
CMRT. The CMRT has good and marketable title to the MAXXAM Shares being
transferred to MAXXAM by the CMRT, free and clear of any lien, security
interest, encumbrance or claim of any kind or nature whatsoever. MAXXAM is
obtaining good and indefeasible title to the MAXXAM Shares, free and clear
as aforesaid, subject only to the provisions of the Escrow Agreement and
the security interest of the CMRT pursuant to the CMRT Pledge and Custody
Agreement.
3.4 Status of CMRT. The CMRT and its trustees or other persons
responsible for managing and conducting its affairs have such knowledge and
experience in financial and business matters as to enable them to evaluate
the merits and risks of the transactions contemplated by this Agreement.
3.5 Restrictive Legend. The Note issued to the CMRT has not
been registered under the Securities Act of 1933, as amended (the "Act"),
and is being acquired by the CMRT for its own account. The CMRT will not
sell, assign, transfer, pledge, hypothecate or otherwise dispose of or
encumber the Note, or any interest therein, without the express written
consent of MAXXAM. The CMRT understands that the instrument representing
the Note bears the following legend:
"The security represented by this instrument has not
been registered under the Securities Act of 1933, as
amended. Neither this instrument nor any interest
therein may be offered, sold, transferred, encumbered
or otherwise disposed of, without the express written
consent of MAXXAM Inc."
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF NL
NL represents and warrants to MAXXAM:
4.1 Authority. NL is a corporation duly organized, validly
existing and in good standing under the laws of the State of New Jersey.
NL has full corporate power and authority, without the consent or approval
of any other person, to execute and deliver this Agreement and to
consummate the transactions contemplated by this Agreement. All action
required to be taken by or on behalf of NL to authorize the execution,
delivery and performance of this Agreement has been duly and properly
taken.
4.2 Validity. This Agreement is duly executed and delivered and
constitutes a lawful, valid and binding obligation of NL, enforceable
against NL in accordance with its terms. The execution and delivery of
this Agreement and the consummation of the transactions contemplated by
this Agreement by NL is not prohibited by, does not violate, conflict with,
or require consent under any provision of, and does not result in a default
under (a) the charter or bylaws of NL; (b) any material contract, agreement
or other instrument to which NL is a party or by which NL is bound; (c) any
order, writ, injunction, decree or judgment of any court or governmental
agency applicable to NL; or (d) any law, rule or regulation applicable to
NL.
4.3 Ownership. NL is the sole record and beneficial owner of
the MAXXAM Shares that are being transferred to MAXXAM by NL pursuant to
Article I. The MAXXAM Shares being transferred to MAXXAM by NL constitute
all of such shares held, directly or indirectly, by NL. NL has good and
marketable title to the MAXXAM Shares being transferred to MAXXAM by NL,
free and clear of any lien, security interest, encumbrance or claim of any
kind or nature whatsoever. MAXXAM is obtaining good and indefeasible title
to the MAXXAM Shares, free and clear as aforesaid, subject only to the
provisions of the Escrow Agreement and the security interest of NL pursuant
to the NL Pledge and Custody Agreement.
4.4 Status of NL. NL and its officers or other persons
responsible for managing and conducting its affairs have such knowledge and
experience in financial and business matters as to enable them to evaluate
the merits and risks of the transactions contemplated by this Agreement.
4.5 Restrictive Legend. The Note issued to NL has not been
registered under the Act, and is being acquired by NL for its own account.
NL will not sell, assign, transfer, pledge, hypothecate or otherwise
dispose of or encumber the Note, or any interest therein, without the
express written consent of MAXXAM. NL understands that the instrument
representing the Note bears the following legend:
"The security represented by this instrument has not been
registered under the Securities Act of 1933, as amended.
Neither this instrument nor any interest therein may be
offered, sold, transferred, encumbered or otherwise disposed
of, without the express written consent of MAXXAM Inc."
ARTICLE 5
STANDSTILL AGREEMENT
5.1 Applicability of Article 5. Except as otherwise provided in
Section 5.1, this Article 5 shall become binding on the CMRT and NL and
their respective affiliates (as defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (the "NL parties")
on the occurrence of the Escrow Release Date (as defined in the Escrow
Agreement).
(i) Between the date of this Agreement and the Escrow Release
Date, all provisions of this Article 5 shall be binding on the NL
parties; provided, however, that (x) the CMRT and NL shall be entitled
to vote their MAXXAM Shares as each may see fit with respect to any
matter brought to a vote of security holders; and (y) if the Release
Deadline Date or the Declination Date (as each are defined in the
Escrow Agreement) occurs and MAXXAM, NL and the CRMT have not agreed
to amend the Escrow Agreement, no part of this Article 5 shall be
binding on the NL parties from and after such date.
(ii) On the occurrence of the Escrow Release Date (if it occurs),
all provisions of this Article 5 shall be binding on the NL parties
from and after such date. If following the Escrow Release Date,
however, an Event of Default (as defined in either or both of the
Notes) shall have occurred and be continuing, then no part of this
Article 5 shall be binding on the NL parties from and after such date
or until such date that such Event of Default shall no longer be
continuing and the Obligations (as defined in either or both of the
Pledge and Custody Agreements) are satisfied in full.
(iii) For purposes of this Article 5 and without prejudice to the
determination as to whether any person or entity constitutes an NL
party: (w) Harold C. Simmons shall be deemed an "affiliate" of NL; (x)
no person serving as an officer or director of any of the NL parties
(other than Mr. Simmons) shall be deemed to be an affiliate of any of
the NL parties solely by reason of his or her status as such unless
such person is directly or indirectly acting in concert with, on
behalf of, or at the request of, one or more of the NL parties with
respect to any securities of the issuers identified on Schedule B (the
"MAXXAM Entities"); provided, however, that during the period of five
years from the date of this Agreement such persons as a group may not
acquire and hold ownership (as defined in Section 5.2(i)) of more than
2% of any class of the outstanding securities of any MAXXAM Entity;
(y) except as provided in the following clause (z), no employee
benefit plan maintained by one or more of the NL parties shall be
deemed an affiliate of the NL parties, provided that the investment
decisions made on behalf of such benefit plans are made solely by
persons independent of each and all of the NL parties; and (z)
investment managers who Mr. Simmons individually has the power to
appoint or terminate the engagement of shall be deemed NL parties, and
any such investment manager shall be instructed by Mr. Simmons not to
purchase any securities of any MAXXAM Entity.
5.2 Standstill. Except as provided in Section 5.1, for a period
of five years from the date of this Agreement (the "Standstill Period"),
each of the NL parties, will not, directly or indirectly, acting alone or
in concert with others, undertake any of the following actions unless
expressly requested in writing in advance by the Board of Directors of
MAXXAM to so act:
(i) acquire, or offer, propose or agree to acquire, or otherwise
possess, ownership (including, but not limited to, beneficial
ownership as defined in Rule 13d-3 under the Exchange Act), or assist,
advise, recommend or encourage in any way any other person (including,
but not limited to, any person making investment decisions on behalf
of any employee benefit plan maintained by any NL party) to acquire
ownership, directly or indirectly, by purchase or otherwise, of any
securities issued by any MAXXAM Entity (other than rights, options or
warrants distributed on a pro rata basis to all shareholders of MAXXAM
equally), including any rights, options or warrants to acquire any
securities of any MAXXAM Entity;
(ii) acquire ownership, or assist, advise or encourage in any way
any other person to acquire ownership, directly or indirectly, of any
of the businesses or assets, or leases, mortgages or any other form of
outstanding obligations, of any MAXXAM Entity;
(iii) make, or in any way "participate" in, directly or
indirectly, any "solicitation" of "proxies" or consents to vote,
become a "participant" in any "election contest" (as such terms are
defined or used in the proxy rules of the Securities and Exchange
Commission), or seek to advise or influence any person or entity with
respect to the voting of, any securities of any MAXXAM Entity;
(iv) form, join or in any way participate in a "group" within the
meaning of Section 13(d)(3) of the Exchange Act with respect to any
securities of any MAXXAM Entity or any securities carrying the right
or option to acquire such securities;
(v) otherwise act, directly or indirectly, alone or in concert
with others, to seek to control or influence in any manner, the
management, board of directors, policies or affairs of any MAXXAM
Entity or propose to seek to effectuate any form of business
combination or merger with any MAXXAM Entity or any affiliate thereof
or any restructuring, recapitalization or similar transactions with
respect to any MAXXAM Entity;
(vi) have any securities of any MAXXAM Entity on deposit in a
voting trust or subject any securities of any MAXXAM Entity to any
arrangements with respect to the voting of such securities or other
agreement having similar effect;
(vii) initiate or propose, or induce or attempt to induce,
advise, assist or otherwise encourage any other person or entity to
initiate or propose, (a) any tender offer for any securities of any
MAXXAM Entity, (b) any shareholder proposal with respect to any MAXXAM
Entity, or (c) any other action described in this Article 5; or
(viii) enter into any discussions, negotiations, arrangements
or understandings with any third party with respect to any of the
foregoing.
5.3 No Waivers. None of the NL parties will take any action of
any form in any court, or before any governmental or administrative
tribunal or agency, or otherwise, seeking a waiver of any of the
prohibitions contained in this Article 5.
ARTICLE 6
MISCELLANEOUS
6.1 Costs, Expenses and Taxes. Except as provided below and as
set forth in Sections 3(f), (g), (h) and (i) of the Escrow Agreement, each
party shall pay all of its own costs and expenses, including its legal
fees, in connection with the performance of and compliance with this
Agreement by such party, and all transfer, documentary and similar taxes in
connection with the delivery of the MAXXAM Shares to be made hereunder. If
an action or proceeding is commenced by a party to enforce or interpret any
provisions of this Agreement, the non-prevailing party or parties shall
promptly reimburse the prevailing party or parties for the prevailing
party's or parties' reasonable costs and expenses of such action or
proceeding, including reasonable attorneys fees.
6.2 Nature and Survival of Representations. The
representations, warranties, covenants and agreements of the parties
contained in this Agreement or any schedule or any exhibit hereto shall be
deemed incorporated in this Agreement and shall constitute representations,
warranties, covenants and agreements of the respective party delivering the
same. All such representations, warranties, covenants and agreements shall
survive the consummation of the transactions contemplated by this
Agreement.
6.3 Specific Performance. The parties acknowledge that it would
be impossible to fix the amount of money damages caused by a breach of this
Agreement by any other party, and, therefore, this Agreement may be
enforced by specific performance and/or injunctive relief. The parties
hereby waive any defense that an action to enforce this Agreement by
specific performance and/or injunctive relief is inappropriate because of
an adequate remedy at law, provided, however, that nothing in this Section
6.3 is intended to prohibit any party from bringing an action for money
damages for breach of this Agreement (either in lieu of or in addition to
an action for specific performance and/or injunctive relief).
6.4 Successors and Assigns. None of MAXXAM, the CMRT or NL
shall (or shall agree to) assign, pledge, convey, hypothecate, grant a
security interest in, or grant to any other party any rights under this
Agreement, without the prior written consent of each other party to this
Agreement, and this Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and
permitted assigns.
6.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware,
without giving effect to the conflicts of laws provisions thereof.
6.6 Headings. The headings preceding the text of the sections
and subsections hereof are inserted solely for convenience of reference,
and shall not constitute a part of this Agreement, nor shall they affect
its meaning, construction or effect.
6.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
6.8 Further Assurances. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to
carry out the provisions and purposes of this Agreement and the
transactions contemplated hereby.
6.9 Amendment and Waiver. The parties may by mutual agreement
amend this Agreement in any respect, and any party, as to such party, may
(a) extend the time for the performance of any of the obligations of any
other party, (b) waive any inaccuracies in representations by any other
party, (c) waive compliance by any other party with any of the agreements
contained herein and performance of any obligations by such other party,
and (d) waive the fulfillment of any condition that is precedent to the
performance by such party of any of its obligations under this Agreement.
To be effective, any such amendment or waiver must be in writing, must
refer to this Agreement, and be signed by the party against whom
enforcement of the same is sought. No failure on the part of any party to
this Agreement to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
of any right hereunder preclude any other or future exercise thereof or any
other right.
6.10 Entire Agreement. This Agreement sets forth all of the
promises, covenants, agreements, conditions and undertakings between the
parties with respect to the subject matter hereof, and supersedes all prior
and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written.
6.11 Jurisdiction and Venue. The parties to this Agreement agree
that any and all actions arising under or in respect of this Agreement
shall be litigated exclusively in any federal or state court of competent
jurisdiction located in the State of Delaware. By execution and delivery
of this Agreement, each party to this Agreement irrevocably submits to the
personal and exclusive jurisdiction of such courts for itself and in
respect of its property which is the subject of this Agreement with respect
to such action. Each party to this Agreement agrees that venue would be
proper in any such action. Each party to this Agreement agrees that venue
would be proper in any of such courts, and hereby waives any objection that
any such court is an improper or inconvenient forum for the resolution of
any such action.
6.12 Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement
will be in writing and will be deemed to have been given when personally
delivered (including by Federal Express or other reputable courier service)
or sent by facsimile transmission (with a confirming copy to be sent by
next day delivery by Federal Express or other reputable, regularly
operating courier service). Notices, demands and communications to MAXXAM,
the CMRT, or NL will, unless another address is specified in writing, be
sent to the respective address indicated on the signature page to this
Agreement.
6.13 Severability. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year set forth opposite their respective
signatures.
"MAXXAM" MAXXAM Inc.
By: /S/ Paul N. Schwartz
Its: Executive Vice President
Address: 5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
Attention: Treasury Department
Facsimile No.: (713) 267-3704
with a copy to:
Attention: Corporate Secretary
Facsimile No.: (713) 267-3702
"THE CMRT" The Combined Master Retirement Trust
By: /S/ H. Simmons
Its: Trustee
Address: THREE LINCOLN CENTRE,
SUITE 1700, 5430 LBJ FREEWAY
DALLAS, TEXAS 75240-2697
Facsimile No.: (972) 450-4278
with a copy to:
Consulting Fiduciaries, Inc.
2745 Riverwoods Road
Riverwoods, IL 60015
Attention: David Heald
Facsimile No.: 847-945-5611
"NL" NL Industries, Inc.
By: /S/ David B. Garten
Its: Vice President, Secretary and
General Counsel
Address: 16825 NORTHCHASE DRIVE,
SUITE 1200, PO BOX 4272
HOUSTON, TEXAS 77210-4272
Facsimile No.: (281) 423-3333
with a copy to:
Corporate Treasurer:
Facsimile No.: (212) 421-7209
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
MAXXAM CASH PRINCIPAL AMOUNT OF
SHARES DEPOSITED DEPOSITED NOTES DEPOSITED
---------------- --------- -------------------
<S> <C> <C> <C>
NL 250,000 shares $6,875,000 $6,875,000
THE CMRT 1,027,250 shares $28,249,375 $28,249,375
</TABLE>
<PAGE>
SCHEDULE B
For so long as each is an affiliate of MAXXAM, the following shall be
MAXXAM Entities for purposes of the Agreement:
MAXXAM Inc.
Kaiser Aluminum Corporation
Kaiser Aluminum & Chemical Corporation
MAXXAM Group Holdings, Inc.
MAXXAM Group, Inc.
The Pacific Lumber Company
Scotia Pacific Holding Company
Sam Houston Race Park, Ltd.
SHRP Equity, Inc.
Any other direct or indirect subsidiary (as such term is defined in Rule 1-
02 of Regulation S-X promulgated by the Securities and Exchange Commission
or similar successor regulation) of MAXXAM Inc. which shall issue
securities during the Standstill Period; provided, however, that (a) the
standstill provisions of Section 5.2 shall not be effective until such time
as MAXXAM advises NL and the CMRT in writing of any such issuance and (b)
no such notification shall require the divestment of any securities
theretofore acquired.
ESCROW AGREEMENT
This Escrow Agreement ("Agreement") is made as of October 19,
1997 by and among MAXXAM INC., a Delaware corporation ("MAXXAM"), THE
COMBINED MASTER RETIREMENT TRUST, a trust organized under the laws of Texas
(the "CMRT"), NL INDUSTRIES, INC., a New Jersey corporation ("NL"), and
FIRST TRUST NATIONAL ASSOCIATION, as escrow agent (the "Escrow Agent").
RECITAL
MAXXAM, the CMRT, and NL are parties to a Stock Purchase
Agreement, dated October 19, 1997 (the "Stock Purchase Agreement"),
pursuant to which the CMRT and NL severally have sold to MAXXAM, and MAXXAM
has purchased, the MAXXAM Shares held severally by the CMRT and NL, on the
terms and subject to the conditions set forth in the Stock Purchase
Agreement. Capitalized terms used but not otherwise defined herein shall
have the respective meanings given such terms in the Stock Purchase
Agreement.
AGREEMENT
In consideration of the premises and the respective mutual
agreements, covenants, representations and warranties herein contained, the
parties hereto agree as follows:
1. Appointment of Escrow Agent. MAXXAM, the CMRT, and NL hereby
designate and appoint the Escrow Agent to serve in accordance with the
terms and conditions of this Agreement, and the Escrow Agent hereby agrees
to act as such, upon the terms and conditions provided in this Agreement.
2. Escrow.
a. Escrow Deposit by the CMRT. Concurrently with the execution
and delivery of this Agreement, the CMRT hereby delivers or causes to be
delivered to the Escrow Agent for the benefit of MAXXAM in accordance with
the terms of the Stock Purchase Agreement one or more certificates
evidencing the MAXXAM Shares held by the CMRT accompanied by appropriate
instruments of transfer duly endorsed transferring such MAXXAM Shares to
MAXXAM (the "CMRT Escrow Deposit", which term shall include adjustments for
stock splits, stock dividends, and similar events), and a Pledge and
Custody Agreement in the form annexed as Exhibit C to the Stock Purchase
Agreement executed by the CMRT and certain other parties (the "CMRT Pledge
and Custody Agreement").
b. Escrow Deposit by NL. Concurrently with the execution and
delivery of this Agreement, NL hereby delivers or causes to be delivered to
the Escrow Agent for the benefit of MAXXAM in accordance with the terms of
the Stock Purchase Agreement one or more certificates evidencing the MAXXAM
Shares held by NL accompanied by appropriate instruments of transfer duly
endorsed transferring such MAXXAM Shares to MAXXAM (the "NL Escrow
Deposit", which term shall include adjustments for stock splits, stock
dividends, and similar events), and a Pledge and Custody Agreement in the
form annexed as Exhibit C to the Stock Purchase Agreement executed by NL
and certain other parties (the "NL Pledge and Custody Agreement").
c. Escrow Deposits by MAXXAM. Concurrently with the execution
and delivery of this Agreement, MAXXAM hereby delivers to the Escrow Agent
(1) for the benefit of the CMRT in accordance with the terms of the Stock
Purchase Agreement cash by way of wire transfer in the amount of
$28,249,375 (the "CMRT Cash Deposit"), a promissory note payable to the
order of the CMRT in the original principal amount of $28,249,375 (the
"CMRT Promissory Note"), the CMRT Pledge and Custody Agreement executed by
MAXXAM and an appropriate instrument of transfer duly endorsed by MAXXAM
sufficient to transfer such MAXXAM Shares to the CMRT (collectively, the
"MAXXAM/CMRT Escrow Deposit"), and (2) for the benefit of NL in accordance
with the terms of the Stock Purchase Agreement cash by way of wire transfer
in the amount of $6,875,000 (the "NL Cash Deposit"), a promissory note
payable to the order of NL in the original principal amount of $6,875,000
(the "NL Promissory Note"), the NL Pledge and Custody Agreement executed by
MAXXAM and an appropriate instrument of transfer duly endorsed by MAXXAM
sufficient to transfer such MAXXAM Shares to NL (collectively, the
"MAXXAM/NL Escrow Deposit" and, together with the MAXXAM/CMRT Escrow
Deposit, the "MAXXAM Deposit"). The promissory notes referred to in
clauses (1) and (2) of this Section 2(c) (the "Notes") and the Pledge and
Custody Agreements delivered to the Escrow Agent pursuant to the foregoing
sentence have been executed by the applicable parties and dated as of the
date of this Agreement.
d. Investment of Cash by Escrow Agent. The Escrow Agent shall
invest and reinvest the cash referred to in Sections 2(c)(1) and 2(c)(2),
together with any interest on the Notes received by the Escrow Agent
pursuant to the terms of such Notes, in each case as MAXXAM directs from
time to time by written notice to the Escrow Agent; provided, however, that
such investments and reinvestments shall be limited to:
(i) time deposits, certificates of deposit and acceptances,
not to exceed $5 million with any one institution, maturing within ninety
(90) days from the date of acquisition thereof, issued by banks or non-bank
brokerage firms located in the United States of America, including the
Escrow Agent or any of its affiliates, and having capital, surplus and
undivided profits of at least five hundred million dollars ($500,000,000);
(ii) short term obligations of, or guaranteed by, the United
States of America or any state or agency thereof;
(iii) commercial paper rated A-1 by Standard & Poors or P-1
by Moody's Investors Service;
(iv) repurchase agreements fully collateralized by
obligations described in clauses (d)(i), (d)(ii) or (d)(iii) hereof; or
(v) shares of investment companies (such as money market
funds) registered under the Investment Company Act of 1940 which invest
primarily in any obligations described under (d)(i), (ii) or (iii) above,
including those for which the Escrow Agent or any of its affiliates provide
services for a fee, whether as an investment advisor, custodian, transfer
agent, registrar, sponsor, distributor, manager or otherwise.
In the absence of any directions from MAXXAM, the Escrow Agent
shall invest and reinvest such cash in First American Fund - Government
Obligations.
e. Net Earnings. All earnings or other income received from
the investments and reinvestments provided in Section 2(d), less losses and
commissions, if any, incurred on or in making such investments and
reinvestments (such net amount being herein referred to as "Net Earnings"),
shall become part of the MAXXAM/CMRT Escrow Deposit or the MAXXAM/NL Escrow
Deposit, as the case may be, and shall be disbursed as part of the
MAXXAM/CMRT Escrow Deposit and the MAXXAM/NL Escrow Deposit in accordance
with Section 2(i) hereof. Without limiting the foregoing, the Escrow Agent
will not make any payment or distribution of the Net Earnings or the Escrow
Deposits referred to in Section 2(a), Section 2(b) and Section 2(c), above,
(collectively referred to as the "Escrow Deposits"), except as and in the
manner expressly provided by this Agreement. Each party to this Agreement
other than the Escrow Agent has provided a taxpayer identification number
to the Escrow Agent on the signature page to this Agreement.
f. Right to Escrow Deposits. Until the Escrow Deposits are
released from the escrow provided herein, the Escrow Agent shall be in sole
possession of the Escrow Deposits and will not act or be deemed to act as
custodian for any party for purposes of perfecting a security interest
therein.
g. Cash Payments from Escrow. Any distribution of cash to be
made by the Escrow Agent pursuant to this Agreement shall be made by wire
transfer (upon receipt of written wire transfer instructions of the
recipient).
h. Status of the Escrow Deposits. It is the intent of MAXXAM,
the CMRT, and NL that each of their respective interests in the Escrow
Deposits is merely a contingent right to receipt of the Escrow Deposits,
and that neither a voluntary or involuntary case under any applicable
bankruptcy, insolvency or similar law nor the appointment of a receiver,
trustee, custodian or similar official in respect of MAXXAM, the CMRT or NL
(any of which is referred to herein as a "Bankruptcy Event") shall increase
its respective interest in the Escrow Deposits or affect, modify, convert
or otherwise change the contingent nature of its respective right to
receipt of the Escrow Deposits in accordance with the terms of this
Agreement.
i. Procedures for Release of Escrow Deposits. The Escrow
Deposits shall be held and disposed of only as follows:
A. Subject to Section 2(i)(B), the Escrow Agent, upon
written notice by MAXXAM, the CMRT and NL shall (i) release to MAXXAM the
CMRT Escrow Deposit and the NL Escrow Deposit from the escrow provided for
pursuant to this Agreement and retain the CMRT Escrow Deposit and the NL
Escrow Deposit, as custodian, pursuant to the terms of the CMRT Pledge and
Custody Agreement and the NL Pledge and Custody Agreement, as the case may
be, (ii) release from the escrow provided for pursuant to this Agreement
and deliver to the CMRT the CMRT Cash Deposit and any payments of interest
which have been delivered to the Escrow Agent in respect of the CMRT
Promissory Note (together with all Net Earnings on such deposits and
payments), (iii) release from the escrow provided for pursuant to this
Agreement and deliver to NL the NL Cash Deposit and any payments of
interest which have been delivered to the Escrow Agent in respect of the NL
Promissory Note (together with all Net Earnings on such deposits and
payments), (iv) release to the CMRT from the escrow provided for pursuant
to this Agreement and retain, as custodian, the CMRT Promissory Note, the
CMRT Pledge and Custody Agreement and an appropriate instrument of transfer
duly endorsed by MAXXAM sufficient to transfer such MAXXAM Shares to the
CMRT, pursuant to the terms of the CMRT Pledge and Custody Agreement, (v)
release to NL from the escrow provided for pursuant to this Agreement and
retain, as custodian, the NL Promissory Note, the NL Pledge and Custody
Agreement and an appropriate instrument of transfer duly endorsed by MAXXAM
sufficient to transfer such MAXXAM Shares to NL, pursuant to the terms of
the NL Pledge and Custody Agreement, and (vi) promptly cause the transfer
agent for the MAXXAM Shares to issue certificates evidencing MAXXAM's
ownership of the MAXXAM Shares and to record in the transfer agent's
customary fashion on the certificates and/or in the stockholders' list or
similar share registry for the Common Stock of MAXXAM the interest of NL
under the NL Pledge and Custody Agreement and the interest of the CMRT
under the CMRT Pledge and Custody Agreement, and upon such issuance to hold
such certificates, respectively, for the benefit of NL as secured party
under the NL Pledge and Custody Agreement and the for the benefit of the
CMRT as secured party under the CMRT Pledge and Custody Agreement.
MAXXAM, the CMRT and NL shall be obligated to give such written notice as
provided in this Section 2(i)(A) (the "Escrow Release Notice") within three
business days after the occurrence of both of the following events: (A) the
conclusion of a hearing, following notice to the stockholders of MAXXAM
(the "Hearing"), on the defendants' motion to dismiss NL and CMRT from
Consolidated Civil Action Nos. 12111 and 12353 (the "Consolidated Action")
pending in the Court of Chancery, in and for New Castle County, Delaware
(the "Court"), and (B) the entry by the Court of an order (the "Order"), in
response to a motion to dismiss the CMRT and NL from the Consolidated
Action, determining (the "Determination") that no part of the consideration
for the sale of the MAXXAM Shares contemplated by the Stock Purchase
Agreement constitutes consideration for settlement of the claims (the
"Claims") that are the subject of the Consolidated Action. The parties
(other than the Escrow Agent) agree to recommend to the Court the entry of
the Order and the making of the Determination. The parties (other than the
Escrow Agent) acknowledge that an agreement in principle to settle the
Claims has been reached; however, release of the Escrow Deposits shall not
be subject to approval of any such settlement as may be presented to the
Court. Upon the release of the CMRT Escrow Deposit, the NL Escrow Deposit,
the MAXXAM/CMRT Escrow Deposit and the MAXXAM/NL Escrow Deposit as provided
in this Section 2(i)(A) (the "Escrow Release Date"), the closing of the
purchase and the sale of the MAXXAM Shares shall be deemed to have occurred
as contemplated by Section 1.2 of the Stock Purchase Agreement.
B. If the Court (i) has not signed the Order within 150
days after the date of the Stock Purchase Agreement or such later date as
the parties may mutually agree ("Release Deadline Date"), or (ii) has made
a ruling rejecting the Determination or has declined to make the
Determination, and such decision is final and not subject to further
consideration by the Court (the "Declination Date"), then the Escrow Agent
shall, upon written notice from MAXXAM, the CMRT and NL, (a) release from
the escrow provided for pursuant to this Agreement and deliver to MAXXAM
the MAXXAM Deposit and any payments of interest which have been delivered
to the Escrow Agent in respect of the CMRT Promissory Note and/or the NL
Promissory Note (along with all Net Earnings on such deposits and
payments), (b) release from the escrow provided for pursuant to this
Agreement and deliver to the CMRT the CMRT Escrow Deposit and the CMRT
Pledge and Custody Agreement, and (c) release from the escrow provided for
pursuant to this Agreement and deliver to NL the NL Escrow Deposit and the
NL Pledge and Custody Agreement. MAXXAM, the CMRT and NL shall be
obligated to give such notice within three business days after the
occurrence of the Release Deadline Date or the Declination Date, as the
case may be, whichever occurs earlier.
C. If at any time (a) MAXXAM and the CMRT shall instruct
the Escrow Agent to release the MAXXAM/CMRT Escrow Deposit and the CMRT
Escrow Deposit, or any portion of any of such Escrow Deposits, or (b)
MAXXAM and NL shall instruct the Escrow Agent to release the MAXXAM/NL
Escrow Deposit and the NL Escrow Deposit, or any portion of any of such
Escrow Deposits, then the Escrow Agent shall promptly release such Escrow
Deposits (or any portion thereof) in accordance with such instructions.
3. Protection of Escrow Agent. The parties agree that:
a. Escrow Agent's duties and responsibilities as escrow agent
in connection with this Agreement shall be purely ministerial and shall be
limited to those expressly set forth in this Agreement. Escrow Agent is
not a principal, participant or beneficiary in any transaction underlying
this Agreement and shall have no duty to inquire beyond the terms and
provisions hereof. Escrow Agent shall have no responsibility or obligation
of any kind in connection with this Agreement or the Escrow Deposits, other
than to receive, hold, invest, reinvest and deliver the Escrow Deposits as
herein provided. Without limiting the generality of the forgoing, it is
hereby expressly agreed and stipulated by the parties hereto that Escrow
Agent shall not be required to exercise any discretion hereunder and shall
have no investment or management responsibility and, accordingly, shall
have no duty to or liability for its failure to provide investment
recommendations or investment advice to any of the other parties to this
Agreement. Escrow Agent shall not be liable for any error in judgment, any
act or omission, any mistake of law or fact, or for anything it may do or
refrain from doing in connection herewith, except for, subject to paragraph
d. hereinbelow, its own willful misconduct or gross negligence (it being
understood that gross negligence shall include loss (other than investment
loss) by Escrow Agent of all or any part of the items escrowed pursuant to
this Agreement or failure to follow any investment or other instructions of
any of the other parties hereto provided herein). It is the intention of
the parties hereto that Escrow Agent shall never be required to use,
advance or risk its own funds or otherwise incur financial liability in the
performance of any of its duties or the exercise of any of its rights and
powers hereunder;
b. the Escrow Agent makes no representation as to the validity,
value, genuineness or collectibility of any document or instrument held by
or delivered to it;
c. the Escrow Agent shall not be called upon to advise any
party as to taking or refraining from taking any action with respect to any
property deposited hereunder;
d. Escrow Agent may rely on, and shall not be liable for acting
or refraining from acting upon, any written notice, instruction or request
or other paper furnished to it hereunder or pursuant hereto and reasonably
believed by it to have been signed or presented by the proper party or
parties. Escrow Agent shall be responsible for holding, investing,
reinvesting and disbursing the Escrow Deposits pursuant to this Agreement;
provided, however, that in no event shall Escrow Agent be liable for any
lost profits, lost savings or other special, exemplary, consequential or
incidental damages in excess of Escrow Agent's fee hereunder (except those
arising from its own willful misconduct or gross negligence) and provided,
further, that Escrow Agent shall have no liability for any loss arising
from any cause beyond its control including, but not limited to, the
following: (a) acts of God, force majeure, including, without limitation,
war (whether or not declared or existing), revolution, insurrection, riot,
civil commotion, accident, fire explosion, stoppage of labor, strikes and
other differences with employees; (b) the act, failure or neglect of any
other party to this Agreement; (c) any delay, error, omission or default of
any mail, courier, telegraph, cable and wireless agency or operator; or (d)
the acts or edicts of any government or governmental agency or other group
or entity exercising governmental powers. Escrow Agent is not responsible
or liable in any manner whatsoever for the (i) sufficiency, correctness,
genuineness or validity of the subject matter of this Agreement or any part
hereof , (ii) transaction or transactions requiring or underlying the
execution of this Agreement or the form or execution hereof or (iii)
identity or authority of any person executing this Agreement or any part
hereof, or depositing the Escrow Deposits;
e. if the Escrow Agent shall be uncertain as to its duties or
rights hereunder or shall receive instructions from any of the undersigned
with respect to any property held by it in escrow pursuant to this
Agreement which, in the opinion of the Escrow Agent, are in conflict with
any of the provisions of this Agreement or any instructions received from
any other of the undersigned, the Escrow Agent shall be entitled to refrain
from taking any action until it shall be directed otherwise by the parties
pursuant to an amendment or waiver to this Agreement in accordance with
Section 4(g) below, or by order of a court of competent jurisdiction
specified in Section 4(c) below;
f. should any controversy arise involving the parties hereto or
any of them or any other person, firm or entity with respect to this
Agreement or the Escrow Deposits, or should a substitute escrow agent fail
to be designated as provided in paragraph g., or if Escrow Agent should be
in doubt as to what action to take, the Escrow Agent shall have the right,
but not the obligation, to institute a petition for interpleader in any
court of competent jurisdiction specified in Section 4(c) below to
determine the rights of the parties hereto. Should a petition for
interpleader be instituted, or should the Escrow Agent be threatened with,
or become involved in, litigation or binding arbitration in connection with
this Agreement or the Escrow Deposits, then the other parties agree,
jointly and severally, to reimburse the Escrow Agent for its reasonable
attorney's fees and any and all other reasonable out of pocket expenses,
losses, costs and damages incurred by the Escrow Agent in connection with
such threatened or actual litigation prior to any disbursement hereunder
(subject, as to MAXXAM, NL and the CMRT, to the Allocation Provision, as
such term is defined in Section 3(h) below);
g. MAXXAM, the CMRT and NL may jointly remove and replace the
Escrow Agent at any time. If the Escrow Agent shall be removed as escrow
agent by the parties or shall resign or otherwise cease to act as escrow
agent, MAXXAM, the CMRT and NL shall mutually agree upon a successor which
successor shall be deemed to be the Escrow Agent for all purposes of this
Agreement. If a successor Escrow Agent has not been appointed and accepted
such appointment by the end of the thirty (30) day period following such
removal, resignation or cessation, the Escrow Agent may apply to any court
in which it is permitted to commence litigation pursuant to Section 4(c),
for the appointment of a successor Escrow Agent and deposit the Escrow
Deposits with the then chief or presiding judge of such court (and upon so
depositing such property and filing its complaint in interpleader, it shall
be relieved of all liability under the terms hereof as to the property so
deposited), and the reasonable costs and expenses and reasonable attorneys'
fees which the Escrow Agent incurs in connection with such a proceeding
shall be borne one-half by MAXXAM, one-quarter by the CMRT, and one-quarter
by NL. The removal, resignation or other ceasing to act as escrow agent by
the Escrow Agent or any successor thereto shall have no effect on this
Agreement or any of the rights of the parties hereunder, all of which shall
remain in full force and effect;
h. the other parties to this Agreement hereby jointly and
severally indemnify Escrow Agent, its officers, directors, partners,
employees and agents (each herein called an "Indemnified Party") against,
and hold each Indemnified Party harmless from, any and all expenses,
including, without limitation, reasonable attorneys' fees and court costs,
losses, costs, damages and claims, including but not limited to, costs of
investigation, litigation and arbitration, tax liability and loss on
investments suffered or incurred by any Indemnified Party in connection
with or arising from or out of this Agreement, except such acts or
omissions as may result from the willful misconduct or gross negligence of
such Indemnified Party; provided that the foregoing joint and several
indemnity shall not affect the liability of MAXXAM, the CMRT and NL, as
among themselves, for the specified items for which the Escrow Agent is to
be indemnified (which in the absence of fault by any of MAXXAM, the CMRT
and/or NL, shall be one-half to MAXXAM, one-fourth to the CMRT and one-
fourth to NL, and in the presence of fault by any of MAXXAM, the CMRT
and/or NL, shall be as any court of competent jurisdiction specified in
Section 4(c) decides; the "Allocation Provision"). IT IS EXPRESS INTENT OF
EACH OTHER PARTY TO THIS AGREEMENT TO INDEMNIFY AND HOLD HARMLESS THE
INDEMNIFIED PARTIES FROM THEIR OWN NEGLIGENT ACTS OR OMISSIONS WHERE
PERMITTED TO DO SO BY APPLICABLE LAW;
i. MAXXAM, as to one half, the CMRT, as to one quarter, and NL,
as to one quarter, hereby agree, upon execution by Escrow Agent of this
Agreement, to pay Escrow Agent (A) an annual fee of $4,000.00 for its
services hereunder in accordance with the fee schedule attached hereto, the
first payment to be paid on the date hereof and successive payments being
due on each anniversary date hereof, such fees being completely earned when
due; and (B) all of Escrow Agent's out-of-pocket expenses reasonably
incurred in connection with the performance of its duties and enforcement
of its rights hereunder and otherwise in connection with the preparation,
operation, administration and enforcement of this Agreement, including,
without limitation, reasonable attorneys' fees, brokerage costs and related
expenses incurred by Escrow Agent; and
j. Escrow Agent may consult with its counsel or other counsel
satisfactory to it concerning any question relating to its duties or
responsibilities hereunder or otherwise in connection herewith, and shall
not be liable for any action taken, suffered or omitted by it in good faith
upon the advice of such counsel.
4. Miscellaneous.
a. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement
will be in writing and will be deemed to have been given when personally
delivered (including by Federal Express or other reputable courier service)
or sent by facsimile transmission (with a confirming copy to be sent by
next day delivery by Federal Express or other reputable, regularly
operating courier service). Notices, demands and communications to MAXXAM,
the CMRT, NL or the Escrow Agent will, unless another address is specified
in writing, be sent to the respective address indicated on the signature
page to this Agreement.
b. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware,
without giving effect to the conflicts of laws provisions thereof.
c. Jurisdiction and Venue. The parties to this Agreement agree
that any and all actions arising under or in respect of this Agreement
(including, without limitation, the resolution of any dispute regarding the
Escrow Deposits) shall be litigated exclusively in any federal or state
court of competent jurisdiction located in the State of Delaware. By
execution and delivery of this Agreement, each party to this Agreement
irrevocably submits to the personal and exclusive jurisdiction of such
courts for itself and in respect of the property escrowed hereunder with
respect to such action. Each party to this Agreement agrees that venue
would be proper in any of such courts, and hereby waives any objection that
any such court is an improper or inconvenient forum for the resolution of
any such action. The Escrow Agent need not be a party to any proceeding
involving MAXXAM, the CMRT and/or NL. In any action in which the Escrow
Agent asserts that one or more of MAXXAM, the CMRT or NL are jointly and
severally liable for the obligations of MAXXAM, the CMRT or NL to the
Escrow Agent under this Agreement, the Escrow Agent shall join in such suit
all of MAXXAM, the CMRT and NL as a prerequisite for recovery against any
one of them, and MAXXAM, the CMRT and NL agree to contribute to any other
party against which such recovery is made in the proportions specified in
the Allocation Provisions.
d. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same agreement.
e. Successors and Assigns. None of MAXXAM, the CMRT and NL
shall (or shall agree to) assign, pledge, convey, hypothecate, grant a
security interest in, or grant to any other party any rights under this
Agreement, including without limitation any rights in or to the Escrow
Deposits, without the prior written consent of the other parties, and this
Agreement shall be binding upon, and inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
f. Specific Performance. The obligations of the parties hereto
(including the Escrow Agent) are unique in that time is of the essence, and
any delay in performance hereunder by any party will result in irreparable
harm to the other parties hereto. Accordingly, any party may seek specific
performance and/or injunctive relief before any court of competent
jurisdiction specified in Section 4(c) hereof in order to enforce this
Agreement or to prevent violations of the provisions hereof, and no party
shall object to specific performance or injunctive relief as an appropriate
remedy; provided, however, that nothing in this Section 4(f) is intended to
prohibit any party from bringing an action for money damages for breach of
this Agreement (either in lieu of or in addition to an action for specific
performance and/or injunctive relief). The Escrow Agent acknowledges that
its obligations, as well as the obligations of MAXXAM, the CMRT and NL
hereunder, are subject to the equitable remedy of specific performance
and/or injunctive relief.
g. Amendment, Waiver, etc. This Agreement may only be amended,
modified, altered or revoked by a written instrument, signed by MAXXAM, the
CMRT, and NL, provided that no amendment or modification to Section 3
hereof or which increases the duties or liabilities of the Escrow Agent
will be made without the written consent of the Escrow Agent. MAXXAM, the
CMRT and NL agree to give the Escrow Agent advance notice of any amendment
or modification to this Agreement and to provide the Escrow Agent promptly
with copies of any such amendment or modification. No failure on the part
of any party to this Agreement to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right hereunder preclude any other or future
exercise thereof or any other right.
h. Headings. The headings preceding the text of the sections
and subsections hereof are inserted solely for convenience of reference,
and shall not constitute a part of this Agreement, nor shall they affect
its meaning, construction or effect
i. Costs, Expenses and Taxes. Except as set forth in Section
3(f), (g), (h) and (i) hereof, each party (other than the Escrow Agent)
shall pay all of its own costs and expenses, including its legal fees, in
connection with the performance of and compliance with this Agreement by
such party. If an action or proceeding is commenced by a party to enforce
or interpret any provision of this Agreement, the non-prevailing party or
parties (other than the Escrow Agent) shall promptly reimburse the
prevailing party or parties for the prevailing party or parties' reasonable
costs and expenses of such action or proceeding, including reasonable
attorneys fees. In all cases arising under this Agreement where any one or
more or MAXXAM, the CMRT or NL have been held jointly and severally liable
with some but less than all of the other parties to this Agreement to the
Escrow Agent for any obligation under this Agreement, each other party to
this Agreement (other to Escrow Agent) shall contribute to such liability
in accordance with the Allocation Provision. The party or parties
receiving any Net Earnings shall be responsible for any taxes owed in
respect thereof.
j. Further Assurances. Each party shall cooperate and take
such action as may be reasonably requested by any other party in order to
carry out the provisions and purposes of this Agreement and the
transactions contemplated hereby.
k. Entire Agreement. This Agreement sets forth all of the
promises, covenants, agreements, conditions and undertakings between the
parties with respect to the subject matter hereof, and supersedes all prior
and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written.
l. Severability. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
m. Termination. This Agreement shall terminate upon release of
the Escrow Deposits pursuant to Section 2(i) hereof; provided that Sections
3 and 4 shall survive such termination.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
"ESCROW AGENT" First Trust National Association
By: /S/ R. Prokosch
Its: Asst. Vice President
First Trust National Association
180 East 5th Street, 2nd Floor
St. Paul, Minnesota 55101
Attention: Rick Prokosch
Facsimile No.: (612) 244-0711
"MAXXAM" MAXXAM Inc.
By: /S/ Paul N. Schwartz
Its: Executive Vice President
5847 San Felipe, Suite 2600
Houston, TX 77057
Attention: Treasury Department
Facsimile No.: (713) 267-3704
with a copy to:
Attention: Corporate Secretary
Facsimile No.: (713) 267-3702
Taxpayer I.D. No.: 95-2078752
"THE CMRT" The Combined Master Retirement Trust
By: /S/ H. Simmons
Its: Trustee
Three Lincoln Centre, Suite 1700
5430 LBJ Freeway
Dallas, TX 75240-2697
Facsimile No.: (972) 450-4278
Taxpayer I.D. No.: 75-2202890
with a copy to:
Consulting Fiduciaries, Inc.
2745 Riverwoods Road
Riverwoods, IL 60015
Attention: David Heald
Facsimile No.: 847-945-5611
"NL" NL Industries, Inc.
By: /S/ David B. Garten
Its: Vice President, Secretary and
General Counsel
16825 Northchase Drive, Suite 1200
P.O. Box 4272
Houston, TX 77210-4272
Attention: General Counsel
Facsimile No.: (281) 423-3333
Taxpayer I.D. No.: 13 5267260
with a copy to:
Corporate Treasurer
Facsimile No.: (212) 421-7209
THE SECURITY REPRESENTED BY THIS INSTRUMENT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NEITHER THIS INSTRUMENT NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF, WITHOUT THE EXPRESS WRITTEN CONSENT OF
MAXXAM INC.
NON-NEGOTIABLE SECURED PROMISSORY NOTE
Principal Amount
US $28,249,375 October 19, 1997
FOR VALUE RECEIVED, MAXXAM INC., a Delaware corporation (the "Maker"),
hereby promises to pay to COMBINED MASTER RETIREMENT TRUST, a trust
organized under the laws of Texas (the "Holder"), at its principal
executive offices, Three Lincoln Centre, Suite 1700, 5430 LBJ Freeway,
Dallas, TX 75240-2697 the principal sum of Twenty-Eight Million Two Hundred
Forty Nine Thousand Three Hundred Seventy Five Dollars ($28,249,375), with
interest thereon, which shall be due and payable as hereinafter provided.
This Note is being issued and delivered by the Maker to the Holder as
partial consideration for the Maker's purchase of 1,027,250 shares (the
"Shares") of the Maker's common stock, $.50 par value, pursuant and subject
to that certain Stock Purchase Agreement, dated the date hereof between the
Maker and the Holder, and is secured under and subject to the Pledge and
Custody Agreement, dated the date hereof among the Maker, the Holder and
certain other parties (the "Pledge Agreement") in the form annexed hereto
as Exhibit A. Capitalized terms not defined herein have the meanings given
them in the Pledge Agreement.
1. Interest. (A) Except as provided in Section 1(B) and
subject to the next succeeding sentence, the Maker agrees to pay to the
Holder interest from the date hereof accrued on the unpaid principal amount
of this Note from time to time outstanding at the rate of 10% per annum,
payable quarterly in arrears on December 31, 1997, March 31, 1998 and June
30, 1998 (each a "Payment Date") and upon the final payment in full of all
unpaid principal of this Note; provided that interest in respect of the
first interest period shall accrue as if this Note had been executed on
September 30, 1997. Any interest due and payable on this Note prior to the
Escrow Release Date (as such term is defined in that certain Escrow
Agreement, dated the date hereof by the Maker, the Holder and certain other
parties; the "Escrow Agreement") shall be paid to, and held by, the Escrow
Agent (as such term is defined in the Escrow Agreement) pursuant to the
terms of the Escrow Agreement. After the Principal Payment Date (as
hereinafter defined), all past due principal and past due interest owed
under this Note will bear interest at the rate of fifteen percent (15%) per
annum.
(B)(i) Pursuant to the Pledge Agreement, the Maker has agreed
that (a) it will, at the Maker's expense, within 210 days after the date of
the Pledge Agreement, use its reasonable best efforts to file the Shelf
Registration Statement, covering the issuance or delivery and resales of
the Pledged Shares, (b) it shall use its reasonable best efforts to cause
such Shelf Registration Statement to be declared effective by the
Securities and Exchange Commission within 300 days after the date of the
Pledge Agreement and (c) it will use its reasonable best efforts to
maintain such Shelf Registration Statement continuously effective under the
Securities Act until the Obligations have been satisfied in full. If the
Maker fails to file the Shelf Registration Statement within 210 days after
the date of the Pledge Agreement then, at such time, the per annum interest
rate on this Note otherwise payable pursuant to Section 1(A) of this Note
will increase by 100 basis points. Such increase will remain in effect
until the date on which the Shelf Registration Statement is filed, on which
date the interest rate on this Note will revert to the interest rate
specified in Section 1(A) of this Note plus any increase in such interest
rate pursuant to Section 2(B)(ii).
(B)(ii) If the Shelf Registration Statement is not declared
effective within 300 days after the date of the Pledge Agreement (including
by reason of the Maker's failure to file the Shelf Registration Statement,
then, at such time, the per annum interest rate on this Note (otherwise
payable pursuant to Section 1(A) and 1(B)(i)) will increase by an
additional 100 basis points. Such increase or increases will remain in
effect until the date on which the Shelf Registration Statement is declared
effective, on which date the interest rate on this Note will revert to the
interest rate specified in Section 1(A) of this Note. However, if the
Maker fails to keep the Shelf Registration Statement continuously effective
pursuant to Section 7 of the Pledge Agreement, then at such time as the
Shelf Registration Statement is no longer effective and until the earlier
of (i) such date that the Shelf Registration Statement is again deemed
effective or (ii) the Obligations are satisfied in full, the per annum
interest rate on this Note otherwise payable pursuant to Section 1(A) of
this Note will increase by an additional 100 basis points. The Maker will
be permitted, however, to suspend the use of the Prospectus which forms a
part of the Shelf Registration Statement as provided in the Pledge
Agreement.
(C) Notwithstanding Sections 1(A) and 1(B), in no event shall
the rate of interest exceed the maximum rate permitted by applicable usury
laws.
2. Principal Payment. The Maker agrees to pay to the Holder
the principal amount of this Note then outstanding, together with all
unpaid interest accrued to that date, on the first anniversary date hereof
(the "Principal Payment Date").
3. Business Day. If the Principal Payment Date or any other
Payment Date is not a business day, the payment due on that date shall be
made on the next succeeding day that is a business day. For the purposes
of this Note, the phrase "business day" means any day other than a
Saturday, a Sunday or a day on which banking institutions in Texas are
authorized or required by law to be closed.
4. Optional Prepayments. The Maker may, at its option, prepay
the principal amount of this Note at any time in whole, or from time to
time in such part as the Maker shall elect, with accrued interest on the
amount prepaid to the date of prepayment, in each case without penalty or
premium therefor. All prepayments shall be first applied to accrued and
unpaid interest and then to principal.
5. Methods of Payment. All payments of principal and interest
on this Note shall be made in lawful money of the United States of America.
6. Defaults. Any of the following shall constitute an Event of
Default hereunder:
(a) The Maker shall fail to pay any principal or interest due
hereunder, which failure shall remain uncured for a period of five (5)
business days after the same is due;
(b) If any voluntary proceeding shall be commenced by the Maker
under any chapter of the Federal Bankruptcy Code (the "Bankruptcy Code") or
other law relating to bankruptcy, bankruptcy reorganization, insolvency or
relief of debtors, or if the Maker has a proceeding commenced against it
under the provisions of the Bankruptcy Code, which proceeding is not
dismissed within ninety (90) days from the date on which it is commenced.
(c) If the Maker admits in writing its inability to pay its
debts as they become due or makes a general assignment for the benefit of
its creditors;
(d) The dissolution or other winding up of the Maker; or
(e) The failure of Maker to perform in any material respect any
of its obligations as Pledgor under the Pledge Agreement and the
continuance of such failure for a period of (i) more than five (5) business
days in the event of its obligations under Sections 4(b) and 8 of the
Pledge Agreement, and (ii) more than twenty (20) business days in the event
of any of its other obligations under the Pledge Agreement, after written
notice is given to the Maker by the Holder, specifying such failure and
requesting that it be remedied; provided, however, that with respect to any
provision of the Pledge Agreement for which the Pledgor's performance is
specified to occur on a stated day or within a stated number of days (other
than Section 4(a) of the Pledge Agreement), then such day or number of days
specified in the Pledge Agreement shall apply without enlargement by the
grace periods provided in this Section 6(e).
If any of the foregoing Events of Default shall occur and shall
not have been remedied, the Holder may, at the sole option of the Holder,
declare this Note to become immediately due and payable. The failure of
the Holder to exercise the option described in the preceding sentence at
any time shall not constitute a waiver of the Holder's right to exercise
such option at any other time.
7. Waiver of Notices, etc. The Maker hereby waives
presentment, notice of demand for payment, protest, notice of dishonor and
any other notice of any kind with respect to nonpayment of this Note.
8. Governing Law. This Note shall be governed by and construed
in accordance with the internal laws of the State of Delaware, without
giving effect to the conflict of laws provisions thereof.
9. Binding Effect; Assignment. All of the covenants,
obligations, promises and agreements contained in this Note made by the
Maker shall be binding upon its successors and assigns; notwithstanding the
foregoing, neither the Holder nor the Maker shall assign, transfer,
encumber or otherwise dispose of this Note or any portion thereof without
the prior written consent of the other.
10. Costs of Collection. In the event the Holder incurs costs
in collecting on this Note, this Note is placed in the hands of any
attorney for collection, suit is filed on this Note or if proceedings are
had in bankruptcy, receivership, reorganization or other legal or judicial
proceedings for collection, the Maker agrees to pay on demand to the Holder
all reasonable expenses and costs of collection, including, but not limited
to, reasonable attorneys' fees incurred in connection with any such
collection, suit or proceeding, in each case to the extent that the Holder
prevails in any such action for collection, suit or proceeding which is
final and not subject to appeal or other reconsideration.
IN WITNESS WHEREOF, the Maker has caused this instrument to be duly
executed as of the day and year set forth above.
MAXXAM INC.
By: /S/ Paul N. Schwartz
Name: Paul N. Schwartz
Title: Executive Vice President
THE SECURITY REPRESENTED BY THIS INSTRUMENT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NEITHER THIS INSTRUMENT NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF, WITHOUT THE EXPRESS WRITTEN CONSENT OF
MAXXAM INC.
NON-NEGOTIABLE SECURED PROMISSORY NOTE
Principal Amount
US $6,875,000 October 19, 1997
FOR VALUE RECEIVED, MAXXAM INC., a Delaware corporation (the "Maker"),
hereby promises to pay to NL INDUSTRIES, INC., a New Jersey corporation
(the "Holder"), at its principal executive offices, 16825 Northchase Drive,
Suite 1200, Houston, TX 77060 (subject to Section 1 below), the principal
sum of Six Million Eight Hundred and Seventy-Five Thousand Dollars
($6,875,000), with interest thereon, which shall be due and payable as
hereinafter provided.
This Note is being issued and delivered by the Maker to the Holder as
partial consideration for the Maker's purchase of 250,000 shares (the
"Shares") of the Maker's common stock, $.50 par value, pursuant and subject
to that certain Stock Purchase Agreement, dated the date hereof between the
Maker and the Holder, and is secured under and subject to the Pledge and
Custody Agreement, dated the date hereof among the Maker, the Holder and
certain other parties (the "Pledge Agreement") in the form annexed hereto
as Exhibit A. Capitalized terms not defined herein have the meanings given
them in the Pledge Agreement.
1. Interest. (A) Except as provided in Section 1(B) and
subject to the next succeeding sentence, the Maker agrees to pay to the
Holder interest from the date hereof accrued on the unpaid principal amount
of this Note from time to time outstanding at the rate of 10% per annum,
payable quarterly in arrears on December 31, 1997, March 31, 1998 and June
30, 1998 (each a "Payment Date") and upon the final payment in full of all
unpaid principal of this Note; provided that interest in respect of the
first interest period shall accrue as if this Note had been executed on
September 30, 1997. Any interest due and payable on this Note prior to the
Escrow Release Date (as such term is defined in that certain Escrow
Agreement, dated the date hereof by the Maker, the Holder and certain other
parties; the "Escrow Agreement") shall be paid to, and held by, the Escrow
Agent (as such term is defined in the Escrow Agreement) pursuant to the
terms of the Escrow Agreement. After the Principal Payment Date (as
hereinafter defined), all past due principal and past due interest owed
under this Note will bear interest at the rate of fifteen percent (15%) per
annum.
(B)(i) Pursuant to the Pledge Agreement, the Maker has agreed
that (a) it will, at the Maker's expense, within 210 days after the date of
the Pledge Agreement, use its reasonable best efforts to file the Shelf
Registration Statement, covering the issuance or delivery and resales of
the Pledged Shares, (b) it shall use its reasonable best efforts to cause
such Shelf Registration Statement to be declared effective by the
Securities and Exchange Commission within 300 days after the date of the
Pledge Agreement and (c) it will use its reasonable best efforts to
maintain such Shelf Registration Statement continuously effective under the
Securities Act until the Obligations have been satisfied in full. If the
Maker fails to file the Shelf Registration Statement within 210 days after
the date of the Pledge Agreement then, at such time, the per annum interest
rate on this Note otherwise payable pursuant to Section 1(A) of this Note
will increase by 100 basis points. Such increase will remain in effect
until the date on which the Shelf Registration Statement is filed, on which
date the interest rate on this Note will revert to the interest rate
specified in Section 1(A) of this Note plus any increase in such interest
rate pursuant to Section 2(B)(ii).
(B)(ii) If the Shelf Registration Statement is not declared
effective within 300 days after the date of the Pledge Agreement (including
by reason of the Maker's failure to file the Shelf Registration Statement,
then, at such time, the per annum interest rate on this Note (otherwise
payable pursuant to Section 1(A) and 1(B)(i)) will increase by an
additional 100 basis points. Such increase or increases will remain in
effect until the date on which the Shelf Registration Statement is declared
effective, on which date the interest rate on this Note will revert to the
interest rate specified in Section 1(A) of this Note. However, if the
Maker fails to keep the Shelf Registration Statement continuously effective
pursuant to Section 7 of the Pledge Agreement, then at such time as the
Shelf Registration Statement is no longer effective and until the earlier
of (i) such date that the Shelf Registration Statement is again deemed
effective or (ii) the Obligations are satisfied in full, the per annum
interest rate on this Note otherwise payable pursuant to Section 1(A) of
this Note will increase by an additional 100 basis points. The Maker will
be permitted, however, to suspend the use of the Prospectus which forms a
part of the Shelf Registration Statement as provided in the Pledge
Agreement.
(C) Notwithstanding Sections 1(A) and 1(B), in no event shall
the rate of interest exceed the maximum rate permitted by applicable usury
laws.
2. Principal Payment. The Maker agrees to pay to the Holder
the principal amount of this Note then outstanding, together with all
unpaid interest accrued to that date, on the first anniversary date hereof
(the "Principal Payment Date").
3. Business Day. If the Principal Payment Date or any other
Payment Date is not a business day, the payment due on that date shall be
made on the next succeeding day that is a business day. For the purposes
of this Note, the phrase "business day" means any day other than a
Saturday, a Sunday or a day on which banking institutions in Texas are
authorized or required by law to be closed.
4. Optional Prepayments. The Maker may, at its option, prepay
the principal amount of this Note at any time in whole, or from time to
time in such part as the Maker shall elect, with accrued interest on the
amount prepaid to the date of prepayment, in each case without penalty or
premium therefor. All prepayments shall be first applied to accrued and
unpaid interest and then to principal.
5. Methods of Payment. All payments of principal and interest
on this Note shall be made in lawful money of the United States of America.
6. Defaults. Any of the following shall constitute an Event of
Default hereunder:
(a) The Maker shall fail to pay any principal or interest due
hereunder, which failure shall remain uncured for a period of five (5)
business days after the same is due;
(b) If any voluntary proceeding shall be commenced by the Maker
under any chapter of the Federal Bankruptcy Code (the "Bankruptcy Code") or
other law relating to bankruptcy, bankruptcy reorganization, insolvency or
relief of debtors, or if the Maker has a proceeding commenced against it
under the provisions of the Bankruptcy Code, which proceeding is not
dismissed within ninety (90) days from the date on which it is commenced.
(c) If the Maker admits in writing its inability to pay its
debts as they become due or makes a general assignment for the benefit of
its creditors;
(d) The dissolution or other winding up of the Maker; or
(e) The failure of Maker to perform in any material respect any
of its obligations as Pledgor under the Pledge Agreement and the
continuance of such failure for a period of (i) more than five (5) business
days in the event of its obligations under Sections 4(b) and 8 of the
Pledge Agreement, and (ii) more than twenty (20) business days in the event
of any of its other obligations under the Pledge Agreement, after written
notice is given to the Maker by the Holder, specifying such failure and
requesting that it be remedied; provided, however, that with respect to any
provision of the Pledge Agreement for which the Pledgor's performance is
specified to occur on a stated day or within a stated number of days (other
than Section 4(a) of the Pledge Agreement), then such day or number of days
specified in the Pledge Agreement shall apply without enlargement by the
grace periods provided in this Section 6(e).
If any of the foregoing Events of Default shall occur and shall
not have been remedied, the Holder may, at the sole option of the Holder,
declare this Note to become immediately due and payable. The failure of
the Holder to exercise the option described in the preceding sentence at
any time shall not constitute a waiver of the Holder's right to exercise
such option at any other time.
7. Waiver of Notices, etc. The Maker hereby waives
presentment, notice of demand for payment, protest, notice of dishonor and
any other notice of any kind with respect to nonpayment of this Note.
8. Governing Law. This Note shall be governed by and construed
in accordance with the internal laws of the State of Delaware, without
giving effect to the conflict of laws provisions thereof.
9. Binding Effect; Assignment. All of the covenants,
obligations, promises and agreements contained in this Note made by the
Maker shall be binding upon its successors and assigns; notwithstanding the
foregoing, neither the Holder nor the Maker shall assign, transfer,
encumber or otherwise dispose of this Note or any portion thereof without
the prior written consent of the other.
10. Costs of Collection. In the event the Holder incurs costs
in collecting on this Note, this Note is placed in the hands of any
attorney for collection, suit is filed on this Note or if proceedings are
had in bankruptcy, receivership, reorganization or other legal or judicial
proceedings for collection, the Maker agrees to pay on demand to the Holder
all reasonable expenses and costs of collection, including, but not limited
to, reasonable attorneys' fees incurred in connection with any such
collection, suit or proceeding, in each case to the extent that the Holder
prevails in any such action for collection, suit or proceeding which is
final and not subject to appeal or other reconsideration.
IN WITNESS WHEREOF, the Maker has caused this instrument to be duly
executed as of the day and year set forth above.
MAXXAM INC.
By: /S/ Paul N. Schwartz
Name: Paul N. Schwartz
Title: Executive Vice President
EXHIBIT 11
MAXXAM INC.
COMPUTATION OF NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common and common
equivalent shares outstanding
during each period 8,958,578 9,377,029 9,160,220 9,376,812
Common equivalent shares attributable
to stock options and convertible
securities 135,661 89,465 110,761 91,871
------------- ------------- ------------- -------------
Weighted average common and
common equivalent shares 9,094,239 9,466,494 9,270,981 9,468,683
============= ============= ============= =============
Net income $ 18.0 $ 5.3 $ 50.6 $ 28.0
============= ============= ============= =============
Net income per common and common
equivalent share $ 1.98 $ .56 $ 5.46 $ 2.96
============= ============= ============= =============
</TABLE>
