-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GqD5UMsjyaI0xLJQ/W8V4wVfplrwimkoou+ck9gwFLudYvrnHH8anHUT4MTGgB3N zkEBzlqd3lh9kOe9OuplNw== 0000900421-97-000056.txt : 19971106 0000900421-97-000056.hdr.sgml : 19971106 ACCESSION NUMBER: 0000900421-97-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971105 SROS: AMEX SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03924 FILM NUMBER: 97708288 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673669 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: MCO HOLDINGS INC DATE OF NAME CHANGE: 19881115 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP DATE OF NAME CHANGE: 19800630 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP OF CALIFORNIA DATE OF NAME CHANGE: 19691118 10-Q 1 MXM 3RD QUARTER 10-Q 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 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 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- (UNAUDITED) ASSETS 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 ============= ============= The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (UNAUDITED) 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 ============= ============= ============= ============= The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1996 ------------- ------------- (UNAUDITED) 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 -- The accompanying notes are an integral part of these financial statements.
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:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- 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 ============= =============
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:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- 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 ============= =============
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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Basic EPS $ 2.17 $ .61 $ 5.96 $ 3.21 Diluted EPS 1.98 .56 5.46 2.96
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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- 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 ============= ============= ============= ============= - --------------- (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.
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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- 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 ============= ============= ============= ============= - --------------- (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."
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
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (IN MILLIONS OF DOLLARS) 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
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
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (IN MILLIONS OF DOLLARS) 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)
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 EX-27 2 MXM 3RD QUARTER FDS
5 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. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-1-1997 SEP-30-1997 1 197,600 59,200 270,000 4,800 625,700 1,379,500 2,138,400 830,700 4,048,300 623,300 1,904,500 0 300 5,000 42,800 4,048,300 2,046,700 2,046,700 1,644,700 1,644,700 226,400 0 158,300 47,800 (13,600) 50,600 0 0 0 50,600 5.46 5.46
EX-4.1 3 LOAN AND PLEDGE AGREEMENT 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
Loan Value (percentages are Collateral Type % of Market Value) - --------------- ------------------ Initial Maintenance ------- ----------- Common Stock of Kaiser Aluminum Corporation 33-1/3% lower of 50% or $7.50 per share Cash or cash equivalents 100% 100%
EX-10.1 4 STOCK PURCHASE AGREEMENT 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] 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 SCHEDULE A
NUMBER OF MAXXAM CASH PRINCIPAL AMOUNT OF SHARES DEPOSITED DEPOSITED NOTES DEPOSITED ---------------- --------- ------------------- NL 250,000 shares $6,875,000 $6,875,000 THE CMRT 1,027,250 shares $28,249,375 $28,249,375
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. EX-10.2 5 ESCROW AGREEMENT 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] 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 EX-10.3 6 NON-NEGOTIABLE SECURED PROMISSORY NOTE 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 EX-10.4 7 NON-NEGOTIABLE SECURED PROMISSORY NOTE 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 EX-11 8 COMPUTATION OF NET INCOME EXHIBIT 11 MAXXAM INC. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- 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 ============= ============= ============= =============
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