-----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, H7JRe+pLfvfj6+Tpf50QWnSKmScHrvvavMLpAi4IbLAvnd6zQ5PJ9fxn9C/QPzOw Wew3ecO8sirGF8LLXqOxhw== 0000950129-96-003555.txt : 19961225 0000950129-96-003555.hdr.sgml : 19961225 ACCESSION NUMBER: 0000950129-96-003555 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19961224 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM GROUP HOLDINGS INC CENTRAL INDEX KEY: 0001029500 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 760518669 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18723 FILM NUMBER: 96685653 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18723-01 FILM NUMBER: 96685654 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 S-4 1 MAXXAM GROUP HOLDINGS INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- MAXXAM GROUP HOLDINGS INC. (Exact name of registrant as specified in its charter) DELAWARE 3334 76-0518669 (State of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification No.) 5847 SAN FELIPE, SUITE 2600 ANTHONY R. PIERNO HOUSTON, TEXAS 77057-3010 VICE PRESIDENT AND GENERAL COUNSEL (713) 975-7600 MAXXAM GROUP HOLDINGS INC. (Address, including zip code, and telephone 5847 SAN FELIPE, SUITE 2600 number, including area code, of HOUSTON, TEXAS 77057-3010 registrant's principal executive offices) (713) 975-7600 (Name, address including zip code, and telephone number, including area code, of agent for service)
SEE TABLE OF ADDITIONAL REGISTRANT --------------------- Copies of all communications to: BERNARD L. BIRKEL HOWARD A. SOBEL, ESQ. SENIOR CORPORATE COUNSEL KRAMER, LEVIN, NAFTALIS & FRANKEL MAXXAM GROUP HOLDINGS INC. 919 THIRD AVENUE 5847 SAN FELIPE, SUITE 2600 NEW YORK, NEW YORK 10022 HOUSTON, TEXAS 77057 (212) 715-9100 (713) 267-3669
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the registration statement becomes effective and all other conditions to the exchange offer described in the enclosed Prospectus have been satisfied or waived. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================ TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------------ 12% Series B Senior Secured Notes due 2003.................. $130,000,000 100%(1) $130,000,000(1) $39,393.94 - ------------------------------------------------------------------------------------------------ Guarantees of the 12% Series B Senior Secured Notes due 2003.................. $130,000,000 -- (2) -- -- ================================================================================================
(1) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(f)(2) under the Securities Act of 1933. (2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate consideration is payable for the Guarantees. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 ADDITIONAL REGISTRANT
PRIMARY EXACT NAME STATE OR OTHER STANDARD ADDRESS, INCLUDING ZIP CODE, AND OF REGISTRANT JURISDICTION OF INDUSTRIAL IRS EMPLOYER TELEPHONE NUMBER, INCLUDING AREA AS SPECIFIED IN CORPORATION OR CLASSIFICATION IDENTIFICATION CODE, OF REGISTRANT'S PRINCIPAL ITS CHARTER ORGANIZATION CODE NUMBER NUMBER EXECUTIVE OFFICES - --------------- -------------- --------------- ------------ -------------------------------- MAXXAM Inc. Delaware 3334 95-2078752 5847 San Felipe, Suite 2600 Houston, Texas 77057-3010 (713) 975-7600
3 *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH * * SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO * * REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH * * STATE. * * * *************************************************************************** SUBJECT TO COMPLETION, DATED DECEMBER 24, 1996 PROSPECTUS MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ANY AND ALL OUTSTANDING 12% SENIOR SECURED NOTES DUE 2003 ($130,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR 12% SERIES B SENIOR SECURED NOTES DUE 2003 GUARANTEED BY MAXXAM INC. The Exchange Offer (defined below) and withdrawal rights will expire at 5:00 p.m., New York City time, on , 1997 (as such date may be extended, the "Expiration Date"). MAXXAM Group Holdings Inc. (the "Company") hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal amount of its 12% Series B Senior Secured Notes due 2003 (the "New Notes") for each $1,000 in principal amount of its outstanding 12% Senior Secured Notes due 2003 (the "Old Notes") (the Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes") held by Eligible Holders (defined below). An aggregate principal amount of $130.0 million of Old Notes is outstanding. See "The Exchange Offer." For purposes of the Exchange Offer, "Eligible Holder" shall mean the registered owner of any Old Notes that remain Registrable Securities (defined below) as reflected on the records of First Bank National Association, as registrar for the Old Notes (in such capacity, the "Registrar"), or any person whose Old Notes are held of record by the depository of the Old Notes. For purposes of the Exchange Offer, "Registrable Securities" means each Old Note until the earliest to occur of (i) the date on which such Old Note has been exchanged for a New Note in the Exchange Offer and is thereafter freely tradeable by the holder thereof not an affiliate of the Company or MAXXAM Inc. ("MAXXAM" or the "Guarantor"), (ii) the date on which such Old Note is registered under the Securities Act of 1933, as amended (the "Securities Act"), and disposed of in accordance with a registration statement, (iii) the date on which such Old Note is distributed to the public pursuant to Rule 144 under the Securities Act, or (iv) the date on which such Old Note shall have ceased to be outstanding. The Company will accept for exchange any and all Old Notes that are validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions, which may be waived by the Company, and to the terms and provisions of the Registration Rights Agreement, dated as of December 23, 1996 (the "Registration Rights Agreement") among the Company, the Guarantor (which has guaranteed the Old Notes and has agreed to guarantee the New Notes), and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (collectively, the "Initial Purchasers"). The Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." (continued on next page) --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 19 HEREIN FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Prospectus is , 1997. 4 The Old Notes were issued in a transaction (the "Offering") pursuant to which the Company issued an aggregate of $130,000,000 principal amount of the Old Notes to the Initial Purchasers on December 23, 1996 (the "Closing Date") pursuant to a purchase agreement, dated December 17, 1996 (the "Purchase Agreement"), among the Company, the Guarantor, and the Initial Purchasers. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act and certain other exemptions under the Securities Act. The Company, the Guarantor, and the Initial Purchasers also entered into the Registration Rights Agreement, pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer -- Purpose and Effect." The Old Notes were issued under an indenture, dated as of December 23, 1996 (the "Indenture"), among the Company, the Guarantor, and First Bank National Association, as trustee (in such capacity, the "Trustee"). The New Notes will be issued under the Indenture as it relates to the New Notes. The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) subject to certain limited exceptions, holders of New Notes will not be entitled to Additional Interest (as defined in the Registration Rights Agreement) otherwise payable under the terms of the Registration Rights Agreement in respect of Old Notes held by such holders during any period in which a Registration Default (as defined in the Registration Rights Agreement) is continuing, and (iii) holders of New Notes will not be, and upon the consummation of the Exchange Offer Eligible Holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description of New Notes." The New Notes will bear interest at a rate equal to 12% per annum from and including their date of issuance. Interest on the New Notes is payable semi-annually on February 1 and August 1 of each year (each, an "Interest Payment Date"). Eligible Holders whose Old Notes are accepted for exchange will have the right to receive interest accrued thereon from the date of their original issuance or the last Interest Payment Date, as applicable, to, but not including, the date of issuance of the New Notes, such interest to be payable with the first interest payment on the New Notes. Interest on the Old Notes accepted for exchange will cease to accrue on the day prior to the issuance of the New Notes. The New Notes will mature on August 1, 2003. See "Description of New Notes." The New Notes are redeemable at the option of the Company, in whole or in part, on or after August 1, 2000, at the redemption prices set forth herein, plus accrued and unpaid interest, or at the Make-Whole Price (as defined herein), plus accrued and unpaid interest, if redeemed prior to August 1, 2000. Upon the first occurrence of a Change of Control (as defined herein), the Company will be required to make an offer to purchase from each holder all or any part of the holder's Notes for which a Change of Control Purchase Notice (as defined herein) shall have been delivered as provided in the Indenture and not withdrawn at 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. See "Description of New Notes -- Offer to Purchase the Notes." The New Notes will be secured by a pledge of all of the capital stock of the Company's wholly owned subsidiary, MAXXAM Group Inc. ("MGI"). In addition, concurrently with the consummation of the Offering, MAXXAM transferred to the Company 27,938,250 shares of the common stock (the "Kaiser Shares") of Kaiser Aluminum Corporation ("Kaiser"). The Kaiser Shares are pledged to secure the $225.7 million aggregate principal amount of public indebtedness of MGI. The Company has agreed that if any Kaiser Shares are released as security for MGI's public indebtedness by reason of early retirement of such indebtedness (other than by reason of a refinancing of such indebtedness), it will pledge up to 16,055,000 of such shares as security for the Notes. The Notes will be guaranteed on a senior unsecured basis by MAXXAM. 2 5 The New Notes will be senior indebtedness of the Company and will rank pari passu in right and priority of payment with any future senior indebtedness of the Company. The Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. As of September 30, 1996, the outstanding indebtedness of such subsidiaries was $772.9 million and the other outstanding liabilities of such subsidiaries, including trade payables and accrued expenses, was $65.0 million. See "Risk Factors -- Substantial Indebtedness; Structural Subordination and Asset Encumbrances -- The Company" and "Description of New Notes." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities." The Indenture permits the Company and its subsidiaries to incur additional Indebtedness, including additional secured Indebtedness, subject to certain limitations. See "Description of New Notes." Based on positions of the staff of the Securities and Exchange Commission (the "Commission") enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in the Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such Eligible Holder, other than as set forth below, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the Eligible Holder is not an affiliate of the Company or the Guarantor within the meaning of Rule 405 under the Securities Act, is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Eligible Holders wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. If any Eligible Holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such Eligible Holder cannot rely on the position of the staff of the Commission set forth in the above no-action and interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that acquired Old Notes directly from the Company and that receives New Notes for its own account pursuant to the Exchange Offer must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction (unless an exemption from registration is otherwise available). See "The Exchange Offer -- Resales of the New Notes." Each broker-dealer that receives New Notes in exchange for Old Notes that were acquired by such broker-dealer as a result of market-making or other trading activities must, in connection with any resale of such New Notes, comply with the prospectus delivery requirements of the Securities Act and must acknowledge that it will deliver a prospectus in connection with any such resale. The Company has agreed that, for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus, as it may be amended or supplemented from time to time, available for use by any broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities. As of , 1997, Cede & Co. ("Cede"), as nominee for The Depository Trust Company, New York, New York ("DTC"), was the registered holder of $ million aggregate principal amount of the Old Notes and held such Old Notes for of its participants. The Company believes that no such participant is an affiliate (as such term is defined in Rule 405 of the Securities Act) of the Company or the Guarantor. There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. There can be no assurance as to the liquidity of the trading market for either the New Notes or the Old Notes. The New Notes constitute securities for which there is no established trading market, and the Company does not currently intend to list the New Notes on any securities exchange. If such a trading market develops for the New Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, the New Notes may trade at a discount from their face value. See "Risk Factors -- Absence of Public Market for the New Notes." 3 6 The Company will not receive any proceeds from this Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will bear all expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. $124,750,000 aggregate principal amount of the Old Notes were issued originally in global form (the "Global Old Note"). The Global Old Note was deposited with, or on behalf of, DTC, as the initial depository with respect to the Old Notes (in such capacity, the "Depository"). The Global Old Note is registered in the name of Cede, as nominee of DTC, and beneficial interests in the Global Old Note are shown on, and transfers thereof are effected only through, records maintained by the Depository and its participants. The use of the Global Old Note to represent certain of the Old Notes permits the Depository's participants, and anyone holding a beneficial interest in an Old Note registered in the name of such a participant, to transfer interests in the Old Notes electronically in accordance with the Depository's established procedures without the need to transfer a physical certificate. Except as provided below, the New Notes will also be issued initially as a note in global form (the "Global New Note", and together with the Global Old Note, the "Global Notes") and deposited with, or on behalf of, the Depository. Notwithstanding the foregoing, holders of Old Notes that are held, at any time, by a person that is not a qualified institutional buyer under Rule 144A under the Securities Act (a "Qualified Institutional Buyer"), and any Eligible Holder that is not a Qualified Institutional Buyer that exchanges Old Notes in the Exchange Offer, will receive the New Notes in certificated form and is not, and will not be, able to trade such securities through the Depository unless the New Notes are resold to a Qualified Institutional Buyer. After the initial issuance of the Global New Note, New Notes in certificated form will be issued in exchange for a holder's proportionate interest in the Global New Note only as set forth in the Indenture. TABLE OF CONTENTS
PAGE ---- Available Information................................................................. 5 Prospectus Summary.................................................................... 6 Risk Factors.......................................................................... 19 The Exchange Offer.................................................................... 33 Capitalization of the Company......................................................... 41 Capitalization of MAXXAM.............................................................. 42 Selected Historical and Pro Forma Consolidated Financial Data of the Company.......... 44 Selected Historical and Pro Forma Consolidated Financial Data of MAXXAM............... 50 Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company...................................................................... 56 Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM........................................................................... 67 Business of the Company............................................................... 86 Business of MAXXAM.................................................................... 97 Legal Proceedings..................................................................... 116 Management............................................................................ 125 Executive Compensation................................................................ 131 Certain Transactions.................................................................. 138 Description of Principal Indebtedness................................................. 142 Description of New Notes.............................................................. 150 Certain Federal Income Tax Consequences............................................... 190 Plan of Distribution.................................................................. 192 Incorporation of Certain Documents By Reference....................................... 193 Legal Matters......................................................................... 193 Experts............................................................................... 193 Index to Consolidated Financial Statements............................................ F-1
4 7 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement (which term shall include any amendments thereto) on Form S-4 under the Securities Act (the "Registration Statement") with respect to the securities offered by this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. Each statement made in this Prospectus referring to a document filed as an exhibit or schedule to the Registration Statement is not necessarily complete and is qualified in its entirety by reference to the exhibit or schedule for a complete statement of its terms and conditions. In addition, the Guarantor is subject to, and upon the effectiveness of the Registration Statement the Company will become subject to, the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, the Company and the Guarantor will file periodic reports and other information with the Commission relating to its business, financial statements and other matters. Any interested parties may inspect and/or copy the Registration Statement, its schedules and exhibits, and the periodic reports and other information filed in connection therewith, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained at prescribed rates by addressing written requests for such copies to the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a site on the World Wide Web, the address of which is http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the Commission. The obligations of the Company under the Exchange Act to file periodic reports and other information with the Commission may, to the extent that such obligations arise from the registration of the New Notes, be suspended, under certain circumstances, if the New Notes are held of record by fewer than 300 holders at the beginning of any fiscal year and are not listed on a national securities exchange. The Company and the Guarantor have agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, they will (i) furnish to the holders of the Notes and file with the Commission (unless the Commission will not accept such a filing) all annual, quarterly and current reports that the Company is or would be required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act and (ii) furnish to the holders of the Notes and to securities analysts and prospective investors, upon request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE COMPANY, INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT CHARGE FROM MAXXAM GROUP HOLDINGS INC., 5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057, ATTENTION: GENERAL COUNSEL. TELEPHONE REQUESTS MAY BE DIRECTED TO THE COMPANY AT (713) 975-7600. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY , 1997. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. 5 8 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the Notes thereto) appearing elsewhere in this Prospectus. MAXXAM Group Holdings Inc. (the "Company") is a newly formed holding company and a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company engages in forest products operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI"), and MGI's wholly owned subsidiaries, The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"). Pacific Lumber's principal wholly owned subsidiaries are Scotia Pacific Holding Company ("Scotia Pacific") and Salmon Creek Corporation ("Salmon Creek"). As used herein, the terms "Company," "MGI," "MAXXAM," "Pacific Lumber" and "Kaiser" refer to the respective companies and their subsidiaries, unless otherwise noted or the context otherwise requires. For example, reference to "MAXXAM" in connection with the guaranty of the Notes, the issuance, pledge of and payments with respect to the Intercompany Note (as defined herein), and the transfer of Kaiser shares to the Company are references to MAXXAM Inc. THE COMPANY The Company's operations are conducted principally by Pacific Lumber and Britt. Pacific Lumber, which has been in continuous operation for over 125 years, engages in all principal aspects of the lumber industry -- the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Pacific Lumber is the largest producer of redwood lumber in the world, including upper grade redwood lumber. Pacific Lumber owns and manages approximately 192,000 acres of commercial timberlands and other real property in northern California. Approximately 75% of Pacific Lumber's timber consists of redwood, with the balance consisting substantially of Douglas fir. Redwood lumber, particularly in the upper (defect-free) grades, is a premium wood product that generally commands higher prices and has been more resistant to cyclical demand and price fluctuations than most other lumber products. Old growth redwood trees (trees which have been growing for approximately 200 years or longer) currently constitute a principal source of upper grade redwood lumber. The industry-wide inventory of commercially harvestable old growth redwood trees has been decreasing due to the expansion of national and state redwood parks, increasing restrictions on timber harvesting on publicly and privately owned lands and harvesting by the industry. The Company believes that Pacific Lumber owns more old growth redwood timber than any of its competitors. Pacific Lumber's timberlands are virtually contiguous, are located in close proximity to its mills and contain an extensive network of roads. These factors significantly reduce harvesting costs and facilitate the implementation of Pacific Lumber's forest management techniques, including its extensive program of replanting redwood and Douglas-fir seedlings to supplement natural forest regeneration. Pacific Lumber believes that its timberlands have an average volume per acre (on a gross board foot basis) approximately twice that of the composite average volume of all other privately and publicly held timber properties in California. Pacific Lumber believes that the relatively large amount of timber on its timberlands is principally attributable to the species mix, favorable soil and climate conditions along the northern California coast and the forest stewardship techniques which Pacific Lumber has historically employed. Pacific Lumber owns and operates four sawmills which are supplied almost entirely by Pacific Lumber's own timberlands and contain highly mechanized log and lumber milling systems. In addition, Pacific Lumber owns and operates 34 kilns which dry certain of its lumber, a finishing plant, an end and edge glue facility which manufactures longer, wider and more valuable lumber from short and narrow boards, a lumber remanufacturing facility, and a highly modernized cogeneration power plant which is fueled almost entirely by residue from Pacific Lumber's milling and production operations and generates a substantial portion of Pacific Lumber's energy requirements. In a continuing effort to increase the efficiency of its operations, improve the yield from harvested trees and enhance the value of its lumber products, Pacific Lumber has invested over $132.3 million in capital expenditures during the past ten years. On September 28, 1996, Pacific Lumber and MAXXAM (the "Pacific Lumber Parties") entered into an agreement (the "Headwaters Agreement") which provides the framework for acquisition by the United States 6 9 of America ("United States") and the State of California ("California") of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands consist of "virgin old growth" timberlands (those which have never been harvested). The Headwaters Agreement provides that the Headwaters Timberlands would be transferred to the government in exchange for (a) property or other consideration (possibly including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands (the "Elk River Timberlands") to be acquired by the United States and California from a third party. The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The Headwaters Agreement requires the United States and/or California to furnish Pacific Lumber a list of property interests owned or controlled by the United States and/or California with a good faith estimated fair market value equal to or in excess of $300 million which are available and acceptable to Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be accompanied by sufficient background information (including valuation information) to enable Pacific Lumber to determine the commercial viability and the ability to monetize such property interests. On December 5, 1996, the United States and California each furnished a list of properties. Neither list was accompanied by the requisite background information, although both lists did indicate that additional information would be made available. The list of United States properties consisted of oil and gas interests in Kern County, California, approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and Trinity counties in California, and surplus acreage next to a federal building in Laguna Niguel, California. The California list contained a variety of properties located throughout the state. On December 10, 1996, Pacific Lumber wrote to the United States and California, stating, among other things, that the requisite background information had not been furnished, requesting the missing information and indicating that certain of the properties did not appear to be "available," as legislative action would be required for the exchange of certain of the properties. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon a multi-species habitat conservation plan ("Multi-Species HCP") which is to cover all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of a Sustained Yield Plan ("SYP"). The Company expects that receipt of the Permit would expedite the approval time and reduce the costs associated with its timber harvesting plans ("THPs"). The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions over a ten month period. The parties to the Headwaters Agreement are working to satisfy these conditions; however, there can be no assurance that the Headwaters Agreement will be consummated. See "Risk Factors -- Risk Factors Relating to Pacific Lumber -- The Headwaters Agreement" and "Business of the Company -- Pacific Lumber Operations -- Headwaters Agreement." Britt is a leading producer of redwood fence stock and is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters in Scotia, California. Britt manufactures a variety of fencing and decking products principally from small diameter redwood logs purchased from Pacific Lumber and other timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" X 6" fence stock, 4" X 4" fence posts and other fencing products. In 1995, Britt sold approximately 78 million board feet of lumber products to approximately 100 different customers in California, Arizona, Colorado and Hawaii. Britt's manufacturing operations are conducted in a 46,000 square foot mill constructed in 1980. Concurrent with the consummation of the Offering on December 23, 1996, MAXXAM transferred to the Company 27,938,250 shares (the "Kaiser Shares") of the common stock of Kaiser. The Kaiser Shares are pledged to secure the $225.7 million aggregate principal amount of public indebtedness of MGI, consisting of $100.0 million principal amount of 11 1/2% Senior Secured Notes (the "MGI Senior Notes") and $125.7 million principal amount of 12 1/2% Senior Secured Discount Notes (the "MGI Discount Notes," and together with the MGI Senior Notes, the "MGI Notes"). The Company has agreed that if any Kaiser Shares are released as security for MGI's public indebtedness by reason of early retirement of such indebtedness (other 7 10 than by reason of a refinancing of such indebtedness), it will pledge up to 16,055,000 of such shares as security for the Notes. See "Description of New Notes -- Security." The Company beneficially owns 34.7% of Kaiser's common equity (after giving pro forma effect to the conversion of each share of Kaiser's outstanding 8.255% PRIDES, Convertible Preferred Stock, par value $.05 per share (the "PRIDES"), into one share of Kaiser's common stock (the "Kaiser Common Stock")). The Company does not expect its investment in the Kaiser Shares will provide a significant source of cash dividends during the next several years. The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz and a wholly owned subsidiary of Federated Development Company ("Federated") collectively own 61.1% of the aggregate voting power of MAXXAM. Mr. Hurwitz is Chairman of the Board, Chief Executive Officer and President of the Company and of MAXXAM. Federated is a New York business trust of which Mr. Hurwitz is Chairman of the Board and Chief Executive Officer and which is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. The principal executive offices of the Company are located at 5847 San Felipe, Suite 2600, Houston, Texas 77057. The telephone number of the Company is (713) 975-7600. THE GUARANTOR The New Notes will be guaranteed on a senior unsecured basis by MAXXAM. MAXXAM engages in aluminum operations through Kaiser, forest products operations through the Company, real estate operations principally through various wholly owned subsidiaries, and other operations, including operation of the Sam Houston Race Park horse racing facility in Houston, Texas. KAISER ALUMINUM Concurrently with the consummation of the Offering, MAXXAM transferred to the Company 27,938,250 shares of the common stock of Kaiser. As a result of the contribution of the Kaiser Shares, MAXXAM owns directly 22,061,750 shares of Kaiser Common Stock, and as a result of the Company's ownership of the Kaiser Shares, MAXXAM beneficially owns 62% of Kaiser's common equity (after giving pro forma effect to the conversion of each share of Kaiser's outstanding PRIDES, into one share of Kaiser's Common Stock). Kaiser accounts for a substantial portion of MAXXAM's revenues and operating results. Kaiser, through its wholly owned subsidiary Kaiser Aluminum & Chemical Corporation ("KACC"), engages in all principal aspects of the aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum and the manufacture of fabricated and semi-fabricated aluminum products. Kaiser is one of the largest U.S. aluminum producers in terms of primary smelting capacity and is the Western world's second largest producer/seller of alumina, accounting for approximately 7% of the Western world's alumina capacity in 1995. Kaiser's production levels of alumina and primary aluminum exceed its internal processing needs, which allows it to be a major net seller of alumina (approximately 2.0 million tons in 1995 or 72% of production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of production). See "Business of MAXXAM -- Aluminum Operations." Kaiser is also a major domestic supplier of fabricated aluminum products, shipping approximately 6% of domestic tonnage of such products in 1995 (approximately 368,200 tons). REAL ESTATE AND OTHER OPERATIONS MAXXAM, principally through its wholly owned subsidiaries, is also engaged in the business of residential and commercial real estate investment and development, primarily in Arizona, California, Texas and Puerto Rico. MAXXAM derives revenue and cash flow from the sale of its real estate properties, rental income and payments received on real estate receivables. As of September 30, 1996, MAXXAM's real estate subsidiaries had a combined net worth of approximately $122.3 million. See "Business of MAXXAM -- Real Estate and Other Operations." MAXXAM, through wholly owned subsidiaries, is also the general partner of 8 11 and holds directly or indirectly approximately 78.8% of the equity in Sam Houston Race Park, Ltd. ("SHRP, Ltd."). SHRP, Ltd. is the owner and operator of Sam Houston Race Park, a Texas Class 1 horse racing facility located in Houston, Texas. See "Business of MAXXAM -- Real Estate and Other Operations -- Sam Houston Race Park." CORPORATE ORGANIZATION Organizational Chart showing that (i) Maxxam Inc. owns 100% of its real estate operations, 78.8% of Sam Houston Race Park, Ltd., 100% of the Company, and 27.3% of Kaiser, (ii) the Company owns 100% of MGI, (iii) MGI owns 100% of Britt and Pacific Lumber, and (iv) Pacific Lumber owns 100% of Scotia Pacific and Salmon Creek. - --------------- (1) Reflects fully diluted ownership assuming conversion of each share of Kaiser's PRIDES into one share of Kaiser Common Sock. Also gives effect to the transfer of the Kaiser Shares to the Company by MAXXAM. ISSUANCE OF THE OLD NOTES $130.0 million principal amount of the Old Notes were sold by the Company to the Initial Purchasers on the Closing Date pursuant to a Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act and other available exemptions under the Securities Act. The Company also entered into the Registration Rights Agreement, pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. Under the Registration Rights Agreement, the Company agreed, for the benefit of the holders of the Old Notes that it would, at its own cost, (i) within 60 days after the Closing Date file a registration statement with the Commission with respect to a registered offer to exchange the Old Notes for New Notes, which will have terms substantially identical to the Old Notes and (ii) use its reasonable best efforts to cause such registration statement to be declared effective under the Securities Act within 150 days after the Closing Date. If the Company is unable to effect such an Exchange Offer or if for any other reason the Exchange Offer is not consummated within 180 days after the Closing Date, the Company is obligated under the Registration Rights Agreement to file a shelf registration statement with the Commission covering resales of the Old Notes. If the Company defaults with respect to its obligations under the Registration Rights Agreement (as defined herein, a "Registration Default"), the Company will be obligated to pay Additional Interest of 0.25% per annum for the first 90-day period and an additional 0.25% per annum for each subsequent 90-day period (up to a maximum aggregate of 9 12 1.00% per annum) until all Registration Defaults have been cured. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "-- The Exchange Offer" and "The Exchange Offer -- Purpose and Effect." THE EXCHANGE OFFER The Exchange Offer......... The Company is offering, upon the terms and subject to the conditions set forth herein and in the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal amount of the New Notes, for each $1,000 in principal amount of the outstanding Old Notes (the "Exchange Offer"). As of the date of this Prospectus, $130.0 million in aggregate principal amount of the Old Notes is outstanding, the maximum amount authorized by the Indenture for all Notes. As of , 1997, there were registered holders of the Old Notes, including Cede which held $ million aggregate principal amount of the Old Notes for of its participants. See "The Exchange Offer -- Terms of the Exchange Offer." Expiration Date............ 5:00 p.m., New York City time, on , 1997, as the same may be extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." Conditions of the Exchange Offer.................... The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the condition that it does not violate any applicable law or interpretation of the staff of the Commission. See "The Exchange Offer -- Conditions of the Exchange Offer." Termination of Certain Rights................... Pursuant to the Registration Rights Agreement and the Old Notes, Eligible Holders of Old Notes (i) have rights to receive the Additional Interest and (ii) have certain rights intended for the holders of unregistered securities. "Additional Interest" means the increase in the interest rate borne by Registrable Securities during the period in which a Registration Default is continuing pursuant to the terms of the Registration Rights Agreement (in general, one-quarter of one percent (0.25%) per annum for the first 90-day period immediately after the first such Registration Default and an additional one-quarter of one percent (0.25%) per annum for each subsequent 90-day period until all Registration Defaults have been cured, provided that the aggregate increase in such interest rate shall not exceed one percent (1.00%) per annum). Holders of New Notes generally will not be and, upon consummation of the Exchange Offer, Eligible Holders of Old Notes will generally no longer be, entitled to (i) the right to receive the Additional Interest, except in certain limited circumstances, and (ii) certain other rights under the Registration Rights Agreement intended for holders of unregistered securities. See "The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for Tendering Old Notes." Accrued Interest on the Old Notes.................... The New Notes will bear interest at a rate equal to 12% per annum from and including their date of issuance. Eligible Holders whose Old Notes are accepted for exchange will have the right to receive interest accrued thereon from the date of original issuance of the Old Notes or the last Interest Payment Date, as applicable, to, but not including, the date of 10 13 issuance of the New Notes, such interest to be payable with the first interest payment on the New Notes. Interest on the Old Notes accepted for exchange, which accrues at the rate of 12% per annum, will cease to accrue on the day prior to the issuance of the New Notes. Procedures for Tendering Old Notes................ Unless a tender of Old Notes is effected pursuant to the procedures for book-entry transfer as provided herein, each Eligible Holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined) of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such Beneficial Owner's behalf. See "The Exchange Offer -- Procedures for Tendering Old Notes." By tendering Old Notes for exchange, each registered holder will represent to the Company that, among other things, (i) neither the Eligible Holder nor any Beneficial Owner is an affiliate of the Company or the Guarantor within the meaning of Rule 405 under the Securities Act, (ii) any New Notes to be received by the Eligible Holder or any Beneficial Owner are being acquired in the ordinary course of business, (iii) neither the Eligible Holder nor any Beneficial Owner has an arrangement or understanding with any person to participate in the distribution of the New Notes, and (iv) if the Eligible Holder or Beneficial Owner, as applicable, is a broker-dealer that acquired Old Notes for its own account as a result of market making or other trading activities, such Eligible Holder or Beneficial Owner must comply with the prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and must agree that it will deliver a prospectus in connection with any such resale. Guaranteed Delivery Procedures............... Eligible Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer -- Procedures for Tendering Old Notes -- Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes.... Upon satisfaction or waiver of all conditions of the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the 11 14 Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered as soon as practicable after acceptance of the Old Notes. See "The Exchange Offer -- Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer -- Withdrawal Rights." Certain Federal Income Tax Considerations........... Generally, the exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Consequences -- The Exchange Offer." The Exchange Agent......... First Bank National Association is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer -- The Exchange Agent; Assistance." Fees and Expenses.......... All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company. See "The Exchange Offer -- Solicitation of Tenders; Fees and Expenses." Resales of the New Notes... Based on positions of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in the Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such Eligible Holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company or the Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the Eligible Holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. If any Eligible Holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such Eligible Holder cannot rely on the position of the staff of the Commission set forth in the above no-action and interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer -- Resales of the New Notes" and "Plan of Distribution." 12 15 DESCRIPTION OF NEW NOTES The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) holders of the New Notes, except in limited circumstances, will not be entitled to Additional Interest, and (iii) holders of the New Notes will not be, and upon consummation of the Exchange Offer, Eligible Holders of the Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. See "Exchange Offer -- Termination of Certain Rights." The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description of New Notes." Maturity................... August 1, 2003. Interest................... 12% payable in cash semi-annually in arrears, from , 1997, calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest Payment Dates..... February 1 and August 1, commencing on February 1, 1997. Optional Redemption........ The New Notes will be redeemable at the option of the Company, in whole or in part, on or after August 1, 2000, upon not less than 15 or more than 60 days notice, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the redemption date, or at the Make-Whole Price, plus accrued and unpaid interest, if any, to the redemption date if redeemed prior to August 1, 2000. In addition, until August 1, 2000, upon any Public Equity Offering (as defined) with respect to the Company or MGI, the New Notes may be redeemed at the option of the Company, in part, with cash in the amount of the proceeds of such Public Equity Offering, at the Call Price (110% of the principal amount of the New Notes), plus accrued and unpaid interest, if any, to the redemption date; provided, however, that after any such redemption the aggregate principal amount of Notes outstanding must be equal to at least 65% of such principal amount upon consummation of the Offering. See "Description of New Notes -- Optional Redemption." MAXXAM Guaranty............ The New Notes will be guaranteed on a senior unsecured basis by MAXXAM. Security................... The Notes will be secured by a pledge of all of the capital stock of MGI. In addition, concurrently with the closing of the Offering, MAXXAM transferred to the Company the 27,938,250 Kaiser Shares. The Kaiser Shares are pledged to secure the $225.7 million aggregate principal amount of the MGI Notes. The Company has agreed that if any Kaiser Shares are released as security for the MGI Notes by reason of early retirement of such indebtedness (other than by reason of a refinancing of such indebtedness), it will pledge up to 16,055,000 of such shares as security for the Notes. Ranking.................... The New Notes will be senior indebtedness of the Company and will rank pari passu in right and priority of payment with any future senior indebtedness of the Company. The New Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. As of September 30, 1996, the outstanding indebtedness of such subsidiaries was $772.9 million and the other outstanding liabilities 13 16 of such subsidiaries, including trade payables and accrued expenses, were $65.0 million. The Company's consolidated cash flow has historically been utilized in substantial part to service the indebtedness of these subsidiaries, and the Company therefore expects that its ability to service the New Notes will be largely dependent on cash interest payments received from MAXXAM pursuant to an intercompany note payable by MAXXAM to the Company (the "Intercompany Note") and, to a considerably lesser extent, dividends received from MGI and capital contributions from MAXXAM. See "Risk Factors -- Ability to Service Indebtedness." Change of Control.......... In the event of a Change of Control (as defined), the holders of the New Notes will have the right to require the Company to purchase their New Notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase. See "Description of New Notes -- Change of Control." Principal Covenants........ The Indenture restricts, among other things, the ability of the Company and its Restricted Subsidiaries (as defined) to (a) incur additional Indebtedness (as defined), (b) grant Liens (as defined) on their assets, (c) make distributions on and repurchases of the Company's capital stock, (d) redeem or repurchase Indebtedness of the Company subordinate to the New Notes which is scheduled to mature subsequent to the final maturity date of the New Notes, (e) make Investments (as defined) in Unrestricted Subsidiaries (as defined), (f) engage in transactions with Affiliates (as defined) of the Company, (g) make Asset Sales (as defined), (h) merge or consolidate with, or transfer all or substantially all of its assets to, another entity, (i) make Restricted Investments (as defined), and (j) issue or otherwise dispose of any Capital Stock or Redeemable Stock (each as defined) or assets of any Restricted Subsidiary, except under certain circumstances. Absence of a Public Market for the New Notes.......... The New Notes are a new issue of securities with no established market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes. However, none of the Initial Purchasers is obligated to do so, and any market making with respect to the New Notes may be discontinued at any time without notice. The Company does not intend to apply for listing of the New Notes on a securities exchange. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS." 14 17 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF THE COMPANY The following summary of historical consolidated financial data for the nine months ended September 30, 1996 and 1995 and each of the years in the three year period ended December 31, 1995 are derived from the Selected Historical and Pro Forma Consolidated Financial Data of the Company appearing elsewhere in this Prospectus, and should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" appearing elsewhere herein. The Company was formed on November 4, 1996 to facilitate the offering of the Old Notes. Subsequent to its formation, the Company received from MAXXAM, as a capital contribution, 100% of the capital stock of MGI. Concurrently with the consummation of the Offering, MAXXAM transferred the Kaiser Shares to the Company as an additional capital contribution. The contribution of MGI's capital stock has been accounted for as a reorganization of entities under common control, which requires the Company to record the assets and liabilities of MGI at MAXXAM's historical cost. Accordingly, the Company is the successor entity to all of MGI's historical operations. The contribution of the Kaiser Shares has been reflected in the following consolidated financial information of the Company as if such contribution occurred as of January 1, 1991 (the beginning of the earliest period presented) at MAXXAM's historical cost using the equity method of accounting. The following historical consolidated financial information of the Company reflects the historical operating results of MGI, the equity in earnings (losses) attributable to its investment in the Kaiser Shares and MAXXAM's purchase accounting adjustments attributable to MGI's timber and depreciable assets for each period presented. The purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The following consolidated pro forma operating data for the nine months ended September 30, 1996 and for the year ended December 31, 1995 give effect to the issuance of the Old Notes and the loan of the net proceeds therefrom to MAXXAM (collectively the "Transactions") as if they occurred on January 1, 1995. The consolidated pro forma balance sheet data gives effect to the Transactions as if they occurred on September 30, 1996.
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, --------------- ------------------------- 1996 1995 1995 1994 1993 ------ ------ ------ ------ ------- (IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA) Historical Operating Data: Net sales................................................................. $199.6 $180.9 $242.6 $249.6 $ 233.4 Cost of sales (exclusive of depreciation and depletion)................... 114.6 96.0 127.1 129.6 134.6 Gross profit.............................................................. 85.0 84.9 115.5 120.0 98.8 Selling, general and administrative expenses.............................. 11.3 12.2 15.9 16.3 20.1 Depreciation and depletion................................................ 20.2 19.0 25.3 24.7 24.5 Operating income.......................................................... 53.4 53.7 74.3 79.1 54.2 Investment, interest and other income (expense)........................... 8.4 6.8 9.4 14.4 10.0 Interest expense.......................................................... 58.4 58.2 77.8 77.4 81.9 Interest expense, net of earnings on invested cash, cash equivalents and marketable securities................................................... 51.2 51.9 69.0 72.6 72.5 Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles.............................................................. 3.4 2.3 5.9 16.1 (17.7) Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles................... 4.5 1.6 4.2 19.2 (286.1) Net income (loss)(1)(2)(3)................................................ 4.5 1.6 4.2 4.4 (538.0) Other Historical Data: Fixed charge coverage deficiency.......................................... -- -- -- -- 17.7 Ratio of earnings to fixed charges........................................ 1.1x 1.0x 1.1x 1.2x -- Capital expenditures...................................................... 9.0 6.6 9.9 11.3 11.1 Summary of cash flow information(4): Cash provided by operating activities................................... 30.7 18.0 25.4 34.9 19.3 Cash provided (used) by investing activities............................ (8.9) (4.1) (7.3) (10.2) (22.6) Cash provided (used) by financing activities............................ (17.1) (18.5) (18.2) (15.2) (12.0) EBITDA(4)(5).............................................................. 73.6 72.7 99.6 103.8 78.7 Pro Forma Operating Data(6): Investment, interest and other income (expense)........................... 18.7 23.2 Interest expense.......................................................... 70.7 94.2 Interest expense, net of earnings on the Intercompany Note, invested cash, cash equivalents and marketable securities.............................. 53.2 71.6 Income from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles............... 1.3 3.2 Ratio of earnings to fixed charges........................................ 1.0x 1.0x EBITDA(4)(5).............................................................. 73.5 99.5
SEPTEMBER 30, 1996 DECEMBER 31, ---------------------- --------------------------- ACTUAL PRO FORMA(6) 1995 1994 1993 ------- ------------ ------- ------- ------- (IN MILLIONS OF DOLLARS) Balance Sheet Data: Cash, cash equivalents and marketable securities(7)............. $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8 Working capital................................................. 126.6 126.6 126.2 104.5 83.9 Total assets.................................................... 713.3 843.3 740.9 744.5 743.0 Total indebtedness.............................................. 772.9 902.9 778.5 782.5 788.4 Stockholder's deficit(3)........................................ (125.9) (125.9) (126.5) (125.9) (130.3)
(footnotes are on the following page) 15 18 - --------------- (1) In August 1993, MGI executed a number of transactions (the "Forest Products Group Formation") pursuant to which substantially all of its non-forest products related assets and liabilities were transferred to MAXXAM. The Forest Products Group Formation required MGI to restate its financial statements to present the historical results of operations relating to the net assets transferred to MAXXAM in a manner similar to that which would be presented as if MGI had discontinued the operations relating to such net assets. See Note 1 to the Company's Audited Consolidated Financial Statements for a description of the transactions referred to as the Forest Products Group Formation. (2) The extraordinary loss for 1994 of $14.9 million (net of tax benefits of $6.3 million), relates to the settlement of litigation which arose from MGI's acquisition of Pacific Lumber in February 1986. The extraordinary loss for 1993 of $31.5 million (net of tax benefits of $16.2 million), arose from the early extinguishment of debt for both MGI and Pacific Lumber. See Notes 6 and 10 to the Company's Audited Consolidated Financial Statements for a description of these transactions. (3) As of January 1, 1993, the Company adopted SFAS 109 and SFAS 106 as more fully described in Notes 7 and 8 to the Company's Audited Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased results of operations by $22.8 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $2.3 million, net of related benefits for income taxes of $1.6 million. The accounting standards had no effect on the Company's cash outlays for postretirement and postemployment benefits, nor did the cumulative effect of the changes in accounting principles affect the Company's compliance with its debt covenants. The Company recorded aggregate charges of $204.8 million, net of related income taxes and minority interests as of January 1, 1993, attributable to the net assets transferred to MAXXAM resulting from the adoption of the new accounting standards described above. Additionally, as a result of the contribution of the Kaiser Shares, the Company incurred charges of $240.9 million as of January 1, 1993 in respect of its equity investment in Kaiser resulting from the adoption of the new accounting standards. See Notes 2 and 5 to the Company's Audited Consolidated Financial Statements. (4) Reference is made to the Statement of Cash Flows contained in the Company's Consolidated Financial Statements contained elsewhere in this Prospectus for a complete presentation of cash flows from operating, investing and financing activities prepared in accordance with generally accepted accounting principles. EBITDA means operating income plus depreciation and depletion. EBITDA is not intended to represent cash flow, an alternative to net income or any other measure of performance in accordance with generally accepted accounting principles; it is included because the Company believes that certain investors find it a useful tool for measuring the ability of the Company to service its consolidated debt. This definition of EBITDA differs from the definition of EBITDA contained in the Indenture. See "Description of New Notes -- Certain Definitions." (5) Because the Company operates through subsidiaries and limits exist on dividends payable by such subsidiaries to the Company, earnings and cash flows of such subsidiaries would generally not be available to service the Company's obligations on the Notes. The Company's ability to service its indebtedness will be largely dependent on cash interest payments received from MAXXAM pursuant to the terms of the Intercompany Note and, to a considerably lesser extent, dividends received from MGI and capital contributions from MAXXAM. See "Risk Factors -- Ability to Service Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities." (6) The pro forma information for the Company reflects the issuance of $130.0 million aggregate principal amount of Notes, and that the net proceeds from the Offering of approximately $125.0 million were loaned to MAXXAM. MAXXAM will use approximately $42.6 million of the proceeds of such loan to repay approximately $17.6 million aggregate principal amount of its 12 1/2% Subordinated Debentures due December 15, 1999 (the "Subordinated Debentures") and approximately $25.0 million aggregate principal amount of its 14% Senior Subordinated Reset Notes due May 20, 2000 (the "Reset Notes," and together with the Subordinated Debentures, the "Old MAXXAM Notes"), together with accrued interest thereon through the date of redemption and the remaining net proceeds will be used for general corporate purposes including possible repurchases of its common stock. The pro forma operating data for: (a) the nine months ended September 30, 1996 reflects (i) the incurrence of $11.7 million of interest expense on the Notes and $0.6 million of amortization related to deferred financing costs associated with the Offering, and (ii) interest income from the Intercompany Note of $10.3 million, and (b) the year ended December 31, 1995 reflects (i) the incurrence of $15.6 million of interest expense on the Notes and $0.8 million of amortization related to deferred financing costs associated with the Offering, and (ii) interest income from the Intercompany Note of $13.8 million. The pro forma balance sheet data reflects that: (a) the net proceeds from the Offering of approximately $125.0 million was loaned to MAXXAM pursuant to the Intercompany Note, and (b) the $5.0 million of estimated costs associated with the Offering will be capitalized. (7) Cash, cash equivalents and marketable securities of the Company at September 30, 1996 includes the following amounts held by each of the following subsidiaries of the Company in the amounts indicated: MGI -- $72.5 million; Scotia Pacific -- $6.8 million; Pacific Lumber -- $5.5 million; and Britt -- $0.2 million. Further, Scotia Pacific had $30.5 million of restricted cash deposits held for the benefit of its 7.95% Timber Collateralized Notes (the "Timber Notes") which is classified as a noncurrent asset in the Company's Consolidated Financial Statements. Cash held by the Company's subsidiaries is generally not available to service the obligations on the Notes. See "Risk Factors -- Ability to Service Indebtedness." 16 19 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF MAXXAM The following summary historical consolidated financial data for the nine months ended September 30, 1996 and 1995 and each of the years in the three year period ended December 31, 1995 are derived from the Selected Historical and Pro Forma Consolidated Financial Data of MAXXAM appearing elsewhere in this Prospectus, and should be read in conjunction with the Consolidated Financial Statements of MAXXAM and the Notes thereto (including the unconsolidated Parent only, condensed financial information of MAXXAM) and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM" appearing elsewhere herein. The following consolidated pro forma operating data for the nine months ended September 30, 1996 and for the year ended December 31, 1995 give effect to the Transactions and KACC's issuance of $175.0 million aggregate principal amount of 10 7/8% Senior Notes due 2006 (the "KACC New Senior Notes") and $50.0 million aggregate principal amount of 10 7/8% Series C Senior Notes due 2006 ("KACC New Series C Senior Notes" and together with the KACC New Senior Notes, the "KACC New Notes") and the application of the net proceeds therefrom, as if they occurred on January 1, 1995. The consolidated pro forma balance sheet data gives effect to the Transactions and the issuance of the KACC New Notes and the application of the net proceeds therefrom as if they occurred on September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------- ---------------------------------- 1996 1995 1995 1994 1993 -------- -------- -------- -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA) Historical Operating Data: Net sales.................................................. $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1 Cost of sales (exclusive of depreciation and depletion).... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6 Gross profit............................................... 354.6 418.4 574.3 297.8 243.5 Selling, general and administrative expenses............... 152.9 140.5 195.8 169.4 183.0 Depreciation and depletion................................. 92.9 91.0 120.9 121.1 120.8 Operating income (loss).................................... 108.8 186.9 257.6 7.3 (96.1) Investment, interest and other income (expense)............ 35.1 8.7 18.2 (2.2) 69.8 Interest expense........................................... 135.5 136.1 181.3 176.9 185.1 Interest expense, net of earnings on invested cash, cash equivalents and marketable securities.................... 125.1 125.1 166.3 166.5 174.0 Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles.................................... 8.4 59.5 94.5 (171.8) (211.4) Income (loss) before extraordinary item and cumulative effect of changes in accounting principles............... 28.0 35.1 57.5 (116.7) (131.9) Net income (loss)(1)(2).................................... 28.0 35.1 57.5 (122.1) (600.2) Other Historical Data: Fixed charge coverage deficiency........................... 5.6 -- -- 213.1 225.8 Ratio of earnings to fixed charges......................... -- 1.1x 1.2x -- -- Capital expenditures....................................... 108.0 54.9 97.7 89.3 86.2 Summary of cash flow information(3): Cash provided by operating activities.................... 13.5 53.0 137.9 4.5 52.1 Cash provided (used) by investing activities............. (75.4) (39.7) (75.4) (67.9) 44.6 Cash provided (used) by financing activities............. 78.2 2.3 (42.9) 64.1 (94.7) EBITDA(3)(4)............................................... 201.7 277.9 378.5 128.4 24.7 Pro Forma Operating Data(5): Investment, interest and other income (expense)............ 35.1 16.3 Interest expense........................................... 157.6 211.7 Interest expense, net of earnings on invested cash, cash equivalent and marketable securities..................... 147.2 196.7 Income (loss) from continuing operations before extraordinary item and cumulative effect of changes in accounting principles.................................... (13.7) 62.2 Fixed charge coverage deficiency........................... 27.7 -- Ratio of earnings to fixed charges......................... -- 1.1x EBITDA(3)(4)............................................... 201.7 378.5
SEPTEMBER 30, 1996 DECEMBER 31, ------------------------- --------------------------------- ACTUAL PRO FORMA(5) 1995 1994 1993 -------- ------------ -------- -------- -------- (IN MILLIONS OF DOLLARS) Balance Sheet Data: Cash, cash equivalents and marketable securities(6).... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6 Working capital........................................ 624.5 794.0 546.8 413.5 414.3 Total assets........................................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0 Long-term debt, less current portion................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9 Minority interests..................................... 217.9 217.9 223.2 344.3 224.3 Total stockholders' equity (deficit)(2)................ (55.2) (55.8) (83.8) (275.3) (167.9)
(footnotes are on the following page) 17 20 - --------------- (1) The extraordinary loss for 1994 of $5.4 million (net of tax benefits of $2.9 million), arose from the early extinguishment of debt for Kaiser. The extraordinary loss for 1993 of $50.6 million (net of minority interests and tax benefits of $2.8 million and $27.5 million, respectively), arose from the early extinguishment of debt for Kaiser, MGI and Pacific Lumber. See Note 4 to MAXXAM's Audited Consolidated Financial Statements for a description of these transactions. (2) As of January 1, 1993, MAXXAM adopted SFAS 109, SFAS 106 and SFAS 112 as more fully described in Notes 5 and 6 to MAXXAM's Audited Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased results of operations by $26.6 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $437.9 million, net of related benefits for minority interests of $63.6 million and income taxes of $236.8 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 reduced results of operations by $6.4 million, net of related benefits for minority interests of $1.0 million and income taxes of $3.4 million. These accounting standards had no effect on MAXXAM's cash outlays for postretirement and postemployment benefits, nor does the cumulative effect of the changes in accounting principles affect MAXXAM's compliance with its existing debt covenants. (3) Reference is made to the Statement of Cash Flows contained in MAXXAM's Consolidated Financial Statements contained elsewhere in this Prospectus for a complete presentation of cash flows from operating, investing and financing activities prepared in accordance with generally accepted accounting principles. EBITDA means operating income plus depreciation and depletion. EBITDA is not intended to represent cash flow, an alternative to net income or any other measure of performance in accordance with generally accepted accounting principles; it is included because MAXXAM believes that certain investors find it a useful tool for measuring the ability to service debt. This definition of EBITDA differs from the definition of EBITDA contained in the Indenture. See "Description of New Notes -- Certain Definitions." (4) Because MAXXAM operates through subsidiaries and limits exist on dividends payable by the Company and Kaiser to MAXXAM, earnings and cash flows of such subsidiaries will generally not be available to service MAXXAM's obligations on the Intercompany Note and its guaranty. See "Risk Factors -- Ability to Service Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities." See MAXXAM's parent only financial statements included elsewhere herein. (5) The pro forma information for MAXXAM reflects: (a) the issuance of $130.0 million aggregate principal amount of the Notes, (b) the net proceeds from the Offering, of approximately $125.0 million, were loaned to MAXXAM, and (c) the issuance of Kaiser's $225.0 million aggregate principal amount of the KACC New Notes and the application of the net proceeds therefrom. MAXXAM will use approximately $42.6 million of the proceeds of the loan from the Company to repay the Old MAXXAM Notes, together with accrued interest thereon through the date of redemption and the remaining net proceeds will be used for general corporate purposes including possible repurchases of MAXXAM's common stock. The pro forma operating data for: (a) the nine months ended September 30, 1996 reflects, (i) the incurrence of $11.7 million of interest expense on the Notes and $0.7 million of amortization related to deferred financing costs associated with the Notes and the consent fee paid by MAXXAM in connection with an amendment to the Indenture governing the MGI Notes, which amendment was related to the Offering (the "Consent Fee"), (ii) the incurrence of $18.4 million of interest expense and $0.5 million of amortization related to deferred financing costs associated with the KACC New Notes, (iii) the elimination of $4.4 million of interest expense associated with the Old MAXXAM Notes, and (iv) the elimination of $4.8 million of interest expense associated with the reduction of outstanding borrowings under the 1994 KACC Credit Agreement (as amended, the "1994 KACC Credit Agreement"), and (b) for the year ended December 31, 1995 reflects (i) the incurrence of $15.6 million of interest expense on the Notes and $0.9 million of amortization related to deferred financing costs associated with the Notes and the Consent Fee paid by MAXXAM, (ii) the incurrence of $24.3 million of interest expense and $0.7 million of amortization related to deferred financing costs associated with the KACC New Notes, (iii) the elimination of $6.0 million of interest expense associated with the Old MAXXAM Notes, (iv) the elimination of $5.1 million of interest expense associated with the reduction of outstanding borrowing under the 1994 KACC Credit Agreement and, (v) the write off of $1.7 million of debt discount and $0.2 million of unamortized deferred financing costs attributable to the Old MAXXAM Notes. The pro forma balance sheet data reflects that: (a) the estimated net proceeds from the Offering, of approximately $125.0 million, were loaned to MAXXAM pursuant to the Intercompany Note and the estimated costs associated with the Offering of $5.0 million and the Consent Fee of approximately $1.0 million paid by MAXXAM will be capitalized, and reflects: (i) the redemption of $42.6 million aggregate principal amount of the Old MAXXAM Notes, (ii) the payment of $1.9 million of accrued interest thereon, and, (iii) the write off of approximately $0.9 million of debt discount and $0.1 million of unamortized deferred financing costs, net of estimated income tax benefits of $0.4 million, attributable to the Old MAXXAM Notes and, (b) the sale of the KACC New Notes which reflects: (i) the receipt of $219.3 million of net proceeds, (ii) the repayment of borrowings outstanding under the 1994 KACC Credit Agreement, and (iii) the capitalization of approximately $6.6 million of costs related to that transaction. MAXXAM did not receive any of the net proceeds from the sale of the KACC New Notes. (6) Cash, cash equivalents and marketable securities of MAXXAM at September 30, 1996, excluding cash, cash equivalents and marketable securities held by subsidiaries, was $56.6 million. 18 21 RISK FACTORS Holders of the Notes should carefully consider the following risk factors, as well as the other information contained in, and incorporated by reference in, this Prospectus, before making an investment in the New Notes. Information contained or incorporated by reference in this Prospectus contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company," "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM," "Business of the Company," "Business of MAXXAM" and "Legal Proceedings." No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. SUBSTANTIAL INDEBTEDNESS; STRUCTURAL SUBORDINATION AND ASSET ENCUMBRANCES The Company The Company is a newly formed holding company with no business operations or source of income of its own, and conducts all of its operations through its subsidiaries. As of September 30, 1996, the Company's assets, on a pro forma basis after giving effect to (i) the formation of the Company, (ii) the transfer of the capital stock of MGI and the Kaiser Shares to the Company, and (iii) the consummation of the Offering, consist solely of the capital stock of MGI (which are pledged as collateral for the Notes), the 27,938,250 Kaiser Shares (subject to a pledge securing the MGI Notes) and the Intercompany Note. The Notes will not be obligations of, or guaranteed by, any of the Company's subsidiaries. Accordingly, in the event of a default under the Indenture, only the assets of the Company and MAXXAM (to the extent available after satisfaction of the obligations of MAXXAM's other subsidiaries and creditors as discussed below) will be available to satisfy the Company's obligations under the Notes and MAXXAM's obligations under its guaranty and the Intercompany Note, respectively. The holders of the Notes will not have claims as creditors of the Company's subsidiaries. Any indebtedness of the Company's subsidiaries, including but not limited to indebtedness evidenced by the MGI Notes, Pacific Lumber's 10 1/2% Senior Notes (the "Pacific Lumber Senior Notes"), Pacific Lumber's credit agreement (the "Pacific Lumber Credit Agreement") and Scotia Pacific's Timber Notes, will be effectively senior to the claims of the holders of the Notes with respect to the assets of such subsidiaries, and the rights of the Company and its creditors, including holders of the Notes, to realize upon the assets of any subsidiary upon such subsidiary's liquidation or reorganization (and the consequent right of holders of the Notes to participate in those assets) will be subject to the prior claims of such subsidiary's creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary. In such case, the Company's claims would still be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to the claims of the Company. As of September 30, 1996, and after giving effect to the Offering, the indebtedness of the Company and its subsidiaries reflected on the Company's consolidated balance sheet (the "Company's Consolidated Indebtedness") would have been approximately $902.9 million, of which approximately $772.9 million consists of indebtedness of subsidiaries of the Company. Approximately $391.8 million aggregate principal amount of such indebtedness is scheduled to mature prior to the maturity of the Notes, assuming the Timber Notes are paid in accordance with Scheduled Amortization (see "Description of Principal Indebtedness -- The Company -- Timber Notes"). Approximately $286.9 million aggregate principal amount of such indebtedness is scheduled to mature prior to the maturity of the Notes assuming the Timber Notes are paid in accordance with Rated Amortization (see "Description of Principal Indebtedness -- The Company -- Timber Notes"). The $225.7 million aggregate principal amount of the MGI Notes is scheduled to mature 19 22 contemporaneously with the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities." The MGI Notes aggregated approximately $201.0 million as of September 30, 1996, and are scheduled to accrete to approximately $225.7 million aggregate principal amount at August 1, 1998. A substantial majority of the Company's consolidated assets are owned by MGI, substantially all of MGI's consolidated assets are owned by Pacific Lumber, and a significant portion of Pacific Lumber's assets are owned by Scotia Pacific. As of September 30, 1996, Pacific Lumber had outstanding $235.0 million of Pacific Lumber Senior Notes and Scotia Pacific had outstanding approximately $336.1 million aggregate principal amount of Timber Notes. The Timber Notes are senior secured obligations of Scotia Pacific, secured by a pledge of Scotia Pacific's timberlands (subject to certain harvesting rights by Pacific Lumber) and other property, which constitutes substantially all of Scotia Pacific's assets. See "Description of Principal Indebtedness -- The Company -- Timber Notes." In addition, the Pacific Lumber Credit Agreement is secured by Pacific Lumber's trade accounts receivable and inventories. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities" and Note 6 to the Company's Audited Consolidated Financial Statements. Concurrently with the closing of the Offering, MAXXAM transferred to the Company the 27,938,250 Kaiser Shares. The Kaiser Shares were previously pledged, and after the transfer continue to be pledged, as security for the MGI Notes. The Company has agreed that if any Kaiser Shares are released as security for the MGI Notes by reason of early retirement of such indebtedness (other than by reason of a refinancing of such indebtedness), it will pledge up to 16,055,000 of such shares as security for the Notes. There can be no assurance that any Kaiser Shares will be released from the lien of the indenture governing the MGI Notes (the "MGI Indenture") or will be pledged as collateral to secure the Notes at any time. Further, in order for the maximum amount of Kaiser Shares to be pledged as collateral for the Notes, all of the MGI Notes would have to be repaid (other than by means of a refinancing) prior to scheduled maturity. The MGI Notes mature concurrently with the Notes, and there can be no assurance that any MGI Notes will be retired early. See "Description of Principal Indebtedness -- The Company -- MGI Notes." The Guarantor MAXXAM also conducts substantially all of its operations through its subsidiaries. As of September 30, 1996, MAXXAM's assets (exclusive of deferred income tax assets and other miscellaneous assets) consisted of (i) $56.6 million in cash, cash equivalents and marketable securities, excluding amounts attributable to subsidiaries, (ii) 50,000,000 shares of Kaiser Common Stock, 27,938,250 of which are pledged to secure the MGI Notes and were transferred to the Company concurrently with the closing of the Offering, (iii) the capital stock of the Company, (iv) the capital stock of certain other direct wholly owned subsidiaries engaged in real estate operations (the "Real Estate Subsidiaries"), and (v) the interests in SHRP, Ltd. held by wholly owned subsidiaries of MAXXAM. See "Business of MAXXAM." Any indebtedness of MAXXAM's subsidiaries will be effectively senior to the claims of the holders of the Notes with respect to the assets of such subsidiaries, and the rights of MAXXAM and its creditors, including holders of the Notes, to realize upon the assets of any subsidiary upon such subsidiary's liquidation or reorganization (and the consequent right of holders of the Notes to participate in those assets) will be subject to the prior claims of such subsidiary's creditors and of the holders of certain minority interests, except to the extent that MAXXAM may itself be a creditor with recognized claims against such subsidiary. In such case, MAXXAM's claims would still be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to the claims of MAXXAM. As of September 30, 1996, the indebtedness of MAXXAM and its subsidiaries reflected on MAXXAM's consolidated balance sheet was approximately $1,710.3 million, of which approximately $1,668.6 million consisted of indebtedness of the subsidiaries of MAXXAM, and minority interests were approximately $217.9 million. Additionally, at September 30, 1996, Kaiser was unconditionally obligated for $93.3 million of indebtedness of a foreign joint venture. Approximately $774.6 million of such indebtedness of MAXXAM's subsidiaries is secured. The Kaiser Shares and the capital stock of Pacific Lumber and Britt are pledged as security for the MGI Notes pursuant to the MGI Indenture. In addition, MAXXAM has guaranteed a $14.0 20 23 million credit facility of one of its real estate subsidiaries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities." MAXXAM and its subsidiaries frequently review acquisition and investment opportunities, some of which may be material. MAXXAM and/or its subsidiaries could, in connection with such opportunities or otherwise, incur additional indebtedness, which indebtedness could be material in amount. Indebtedness incurred by MAXXAM could rank pari passu in right and priority of payment with the Intercompany Note and MAXXAM's guaranty of the Notes, and could also be secured by assets of MAXXAM (including approximately 22 million unpledged shares of Kaiser Common Stock). Any such secured indebtedness would effectively rank senior to the Intercompany Note and MAXXAM's guaranty of the Notes. ABILITY TO SERVICE INDEBTEDNESS The Company's ability to service its indebtedness will be largely dependent on cash interest payments received from MAXXAM pursuant to the terms of the Intercompany Note and, to a considerably lesser extent, dividends received from MGI and capital contributions from MAXXAM. The MGI Indenture contains various covenants which, among other things, limit the payment of dividends and restrict transactions between MGI and its affiliates. Under the MGI Indenture, MGI was permitted to pay no dividends in respect of the period from August 31, 1993 to December 31, 1993, $4.9 million of dividends in respect of the 1994 fiscal year, $1.8 million of dividends in respect of the 1995 fiscal year, and $2.0 million of dividends in respect of the nine months ended September 30, 1996. MGI did not pay any dividends from August 1993 to December 31, 1994. MGI paid dividends of $4.8 million during 1995 and an additional $3.9 million during the nine months ended September 30, 1996. As of September 30, 1996, no additional dividends could be paid by MGI. The Company does not expect to receive a significant amount of cash dividends from MGI for the next several years. Moreover, MGI is itself a holding company and is dependent upon dividends distributed to it from its subsidiaries, Pacific Lumber and Britt. Pacific Lumber is restricted by the terms of the indenture governing the Pacific Lumber Senior Notes (the "Pacific Lumber Indenture") and the Pacific Lumber Credit Agreement as to the amount of funds that can be paid in the form of dividends or loans to MGI. Pacific Lumber is dependent upon its principal subsidiary, Scotia Pacific, for the log requirements from which Pacific Lumber generates a substantial portion of its operating cash flow. Pacific Lumber harvests and purchases logs from Scotia Pacific's timberlands at prices established pursuant to a Master Purchase Agreement (see "Business of the Company -- Pacific Lumber Operations -- Relationships with Scotia Pacific and Britt"). Under the terms of the indenture governing the Timber Notes (the "Timber Note Indenture"), Scotia Pacific will not have cash available for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Once Scotia Pacific has made appropriate provision for expenditures for operating and capital costs and current debt service, as provided in the Timber Note Indenture, and in the absence of certain Trapping Events (as described in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from Scotia Pacific to Pacific Lumber. However, in the event Scotia Pacific's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes, to service its other indebtedness and to pay dividends to MGI would be materially impaired, and therefore MGI's ability to pay interest on the MGI Notes and to pay dividends to the Company would also be materially impaired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities" and "Description of Principal Indebtedness -- The Company." The operating performance of Pacific Lumber and Scotia Pacific are also subject to certain regulatory developments that could adversely affect such performance. See "Risk Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Trends." 21 24 Cash flows from operations of the Company and its subsidiaries are unlikely to be sufficient to pay principal on the Notes. The ability of the Company and its subsidiaries to refinance their respective indebtedness at or prior to the respective maturities thereof will depend on a number of factors, including their respective financial condition, results of operations and cash flows, and then-prevailing interest rates and market conditions. There can be no assurance that such refinancing will be available, or available on reasonable terms. The failure of any of the Company's subsidiaries to refinance their indebtedness could materially adversely affect the ability of the Company to satisfy its obligations under the Notes. MAXXAM is also a holding company and its ability to satisfy its financial obligations will be largely dependent on dividends distributed to MAXXAM from its real estate subsidiaries (the "Real Estate Subsidiaries") and the sale of assets. The debt agreements of Kaiser contain significant restrictions on the amounts of funds that could be paid as dividends from Kaiser to MAXXAM or the Company. The KACC 1994 Credit Agreement (see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations") does not permit Kaiser to pay any dividends on its common stock. In addition, the indentures governing the KACC New Senior Notes, KACC's 9 7/8% Senior Notes due 2002 (the "KACC Senior Notes") and KACC's 12 3/4% Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Notes" and, together with the KACC New Notes and the KACC Senior Notes, the "KACC Notes") contain covenants which, among other things, limit KACC's ability to pay cash dividends and restrict transactions between KACC and its affiliates. In addition, under certain circumstances, dividends paid by Kaiser will be required to remain pledged as security for the MGI Notes. See "Description of Principal Indebtedness -- The Company -- MGI Notes." Kaiser has paid no dividends on the Kaiser Common Stock since 1992 and is not certain when or if Kaiser will resume the payment of dividends in respect of its common stock. Because the substantial portion of MAXXAM's consolidated results of operations and cash flows are attributable to the operations of Kaiser and MGI, the substantial portion of MAXXAM's consolidated results of operations and cash flows are generally not available to the Company or MAXXAM (and therefore are generally unavailable to service MAXXAM's obligations to the Company under the Intercompany Note or MAXXAM's guaranty of the Notes). As of September 30, 1996, MAXXAM (excluding its subsidiaries) had cash, cash equivalents and marketable securities of approximately $56.6 million and approximately $12.1 million available from its subsidiaries. Based upon the limited amount of cash that MAXXAM expects will be available to the Company from MGI on an annual basis, MAXXAM anticipates that it will be required to make cash interest payments on the Intercompany Note of approximately $13.8 million per year for the next several years. There can be no assurance that MAXXAM's cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries and other sources of financing, will be sufficient for such purposes or that MAXXAM would be able to refinance or pay at maturity the aggregate principal amount of the Intercompany Note. During the three years ended December 31, 1995, MAXXAM's corporate general and administrative expenses, net of cost reimbursements from its subsidiaries, have ranged between $11.0 million and $19.0 million per year. During the nine months ended September 30, 1996, MAXXAM's corporate general and administrative expenses were $28.8 million, of which $21.9 million represented an accrual for certain legal contingencies of which a substantial portion relates to legal fees and expenses that MAXXAM may incur in connection with matters related to (i) a civil action filed by the Federal Deposit Insurance Corporation (the "FDIC") against Mr. Charles Hurwitz seeking damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of United Savings Association of Texas ("USAT"), and was involved in certain decisions which contributed to the insolvency of USAT and (ii) formal administrative proceedings initiated by the United States Department of Treasury's Office of Thrift Supervision (the "OTS") against MAXXAM and others alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and the other respondents with respect to the failure of USAT. The OTS seeks, among other things, unspecified damages in excess of $138.0 million from MAXXAM and Federated and civil penalties. See "Legal Proceedings -- USAT Matters." Although MAXXAM cannot predict when or whether the expenses represented by such accrual will be incurred, there can be no assurance that such accrual will be adequate or that MAXXAM's recurring corporate general and administrative expenses will not increase. Any 22 25 adverse outcome of this litigation could materially adversely affect MAXXAM's ability to make payments under the Intercompany Note and satisfy its obligations under its guaranty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Results of Operations." MAXXAM expects that for at least the next two to three years, the Real Estate Subsidiaries will continue to constitute the primary source of dividends to MAXXAM. As of September 30, 1996, the Real Estate Subsidiaries had approximately $11.0 million available for borrowing under a credit agreement. All of such amount could be distributed to MAXXAM. As of September 30, 1996, the Real Estate Subsidiaries had total assets of approximately $173.1 million, total liabilities of approximately $50.8 million (including total indebtedness of approximately $12.5 million) and combined net worth of approximately $122.3 million. The Real Estate Subsidiaries had significant operating losses in each of the last several years; however the ability of the Real Estate Subsidiaries to distribute dividends to MAXXAM is not currently dependent upon their ability to generate any specified level of income or cash flows from operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Real Estate and Other Operations." In June 1991, a wholly owned subsidiary of MAXXAM purchased from the Resolution Trust Corporation ("RTC") at an auction, for approximately $122.3 million, the RTC portfolio, which consisted of 27 parcels of income producing real property and 28 loans secured by real property. MAXXAM has realized a substantial portion of its cash flow over the last several years from the sale of properties by the Real Estate Subsidiaries and the sale or repayment of loans and the sale of properties from its RTC portfolio, as described under "Business of MAXXAM -- Real Estate and Other Operations." The remaining assets in the RTC Portfolio consist of two loans and eight properties with an aggregate net book value of $18.2 million. Consequently, MAXXAM does not expect the Real Estate Subsidiaries will be able to generate cash flow distributable to MAXXAM at or near recent historical levels. SECURITY FOR THE NEW NOTES The New Notes will be, and the Old Notes are, secured, among other things, by a first priority pledge (subject only to a lien in favor of the Trustee) of: (i) all outstanding shares of capital stock of MGI, (ii) all dividends distributed with respect to and property received in exchange for any of the Pledged MGI Shares (other than distributions in respect of Salmon Creek's property), provided that, in the absence of certain defaults, the Company will be entitled to receive and retain certain distributions on Pledged MGI Shares, and (iii) the Intercompany Note. There can be no assurance that the proceeds from the sale of all of the Pledged MGI Shares or any other collateral would be sufficient to satisfy the amounts due on the Notes in the event of a default under the Indenture. Although the Trustee may require the Company to use its best efforts to register the Pledged MGI Shares in the event of foreclosure, currently there is no market for the Pledged MGI Shares. The Indenture provides that the proceeds of sales of Pledged MGI Shares (and the proceeds that are distributed to the Company of issuances of shares by MGI) and any dividends constituting Extraordinary Distributions (as defined) will be released from the lien of the Indenture if an offer to purchase the Notes is made, in accordance with the terms of the Indenture, at a price of 110% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to (but not including) the date of purchase. The proceeds of such a sale (or issuance) may also be released from the lien of the Indenture to the extent such proceeds are actually utilized to purchase Notes in an offer that is made at a price of at least 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, or, in certain circumstances, to purchase or redeem Notes. See "Description of New Notes -- Security -- Offers to Purchase Notes with Certain Proceeds of Collateral." If the Trustee were to foreclose upon, or obtain voting rights with respect to, the Pledged MGI Shares, such foreclosure, or the obtaining of such voting rights, would constitute a change of control under instruments governing certain indebtedness of MGI and Pacific Lumber. Such occurrence would enable the holders of such indebtedness to require the issuer to repurchase such indebtedness. There can be no assurance that the assets of MGI and Pacific Lumber would be sufficient to enable them to effect such a repurchase. In such event, there is a substantial risk that assets of MGI would not be available to the holders of the Notes and the 23 26 value of the Collateral represented by the Pledged MGI Shares would be substantially diminished or eliminated. As discussed above, the Kaiser Shares are pledged to secure the payment of the MGI Notes, and the holders of the Notes will have no security interest therein, unless and until the Kaiser Shares are released from the lien of the MGI Indenture by reason of early retirement of MGI's public indebtedness (other than by reason of a refinancing of such indebtedness). There can be no assurance that any Kaiser Shares will be released from the lien of the MGI Indenture, or will become collateral securing the Notes at any time. Any early retirement of the MGI Notes will be at the option of MGI. The MGI Notes mature contemporaneously with the Notes, and holders of the Notes should be aware that the Kaiser Shares may never be pledged to secure the Notes at any time. See "Description of Principal Indebtedness -- The Company -- MGI Notes." FRAUDULENT CONVEYANCE CONSIDERATIONS The net proceeds received by the Company from the sale of the Old Notes in the Offering were utilized to make an intercompany loan to MAXXAM (the "Intercompany Loan"), which proceeds MAXXAM will use to retire existing indebtedness and for general corporate purposes, including possible repurchases of its common stock. Under applicable provisions of the United States Bankruptcy Code (the "Bankruptcy Code") or comparable provisions of state law, if, at the time the Company incurs indebtedness from the sale of the Old Notes in the Offering and/or makes the Intercompany Loan to MAXXAM, the Company (a) does so with the intent of hindering, delaying or defrauding current or future creditors or (b) receives less than reasonably equivalent value or fair consideration therefor and either (i) is or is rendered insolvent by reason thereof, (ii) is engaged in a business or transaction for which the assets remaining with the Company constitute unreasonably small capital or (iii) intends to incur, or believes that it would incur, debts beyond its ability to pay such debts as they mature, then some or all of the Notes, payments of principal and interest thereon and/or pledges securing the Notes could be either avoided or subordinated to the claims of future creditors of the Company. Similarly, if after giving effect to the transfer of the 27,938,250 Kaiser Shares to the Company, the borrowing from the Company evidenced by the Intercompany Note and MAXXAM's use of the proceeds of such borrowing, including possible repurchases of its common stock, (a) MAXXAM either (i) is or is rendered insolvent by reason thereof, (ii) is engaged in a business or transaction for which the assets remaining with MAXXAM constitute unreasonably small capital or (iii) intends to incur, or believes that it would incur debts beyond its ability to pay such debts as they mature or (b) MAXXAM has effected such transactions with the intent of hindering, delaying or defrauding current or future creditors, then some or all of MAXXAM's obligations under the Intercompany Note, its guaranty of the Notes and/or payments of such obligations could be either avoided or subordinated to the claims of future creditors of MAXXAM. The measure of insolvency for purposes of the foregoing will vary depending upon the law applied in any such case. Generally, however, the Company or MAXXAM would be considered insolvent if the sum of its debts, including contingent liabilities, was greater than all of its assets at a fair valuation or if the present fair saleable value of its assets was less than the amount that would be required to pay the probable liability on its existing debts, including contingent liabilities, as they may become absolute and mature. In addition, an entity may be presumed insolvent under some fraudulent transfer laws if it is not generally paying its debts as they become due. The Company and MAXXAM believe that the indebtedness represented by the Old Notes and the Intercompany Note and MAXXAM's guaranty of the Old Notes were incurred for proper purposes and in good faith. The Company and MAXXAM also believe that neither MAXXAM nor the Company was, at the time of or as a result of the incurrence of indebtedness represented by the Old Notes or the use of the proceeds thereof, insolvent, that neither MAXXAM nor the Company was at such time engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, and that neither MAXXAM nor the Company at such time intended to or believed that it would incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, that a court passing on such questions would agree with the above. 24 27 PREFERENCE CONSIDERATIONS Since the holders of the Notes will not, at the time the Notes are issued, possess any lien upon the Kaiser Shares, any subsequent pledge of the Released Kaiser Shares to secure the Notes may be subject to avoidance as a "preference" pursuant to Section 547 of the Bankruptcy Code. Under Section 547(b) of the Bankruptcy Code, the granting of a lien upon property of a debtor to or for the benefit of a creditor for or on account of an antecedent debt owed by the debtor before such transfer was made is avoidable to the extent that it is: (i) made while the debtor was insolvent, (ii) made on or within 90 days (one year if the creditor was an insider at the time of the transfer) before the date of the filing of the debtor's bankruptcy petition, and (iii) enables such creditor to receive more than such creditor would receive if (a) the case were a case under Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made and (c) such creditor received payment of such debt to the extent provided by the provisions of the Bankruptcy Code. RISK FACTORS RELATING TO PACIFIC LUMBER Leverage Pacific Lumber is the Company's principal operating subsidiary. Pacific Lumber is highly leveraged, with total consolidated indebtedness of $571.9 million and stockholder's deficit of $15.2 million at September 30, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company." As a result, Pacific Lumber will be more sensitive than less leveraged companies to factors affecting its operations, including governmental regulations and litigation affecting its timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. Pacific Lumber's high leverage could have important consequences, including: impairment of Pacific Lumber's ability to obtain additional financing in the future for working capital, capital expenditures or general corporate purposes; restrictions on Pacific Lumber's flexibility in responding to changing business and economic conditions; and a requirement that Pacific Lumber dedicate a significant portion of its cash flow from operations to the payment of the principal of and interest on its indebtedness (including the monthly reservation by Scotia Pacific of funds to make required semiannual principal amortization payments on the Timber Notes). In addition, due to the dividend restrictions contained in Pacific Lumber's indebtedness, such consequences could further limit the availability of cash flow to MGI, and consequently to the Company, from Pacific Lumber's operations. Regulatory and Environmental Factors Regulatory and environmental issues play a significant role in Pacific Lumber's forest products operations. Pacific Lumber's forest products operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. These laws include the California Forest Practice Act (the "Forest Practice Act"), which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the California Board of Forestry (the "BOF"). The federal Endangered Species Act (the "ESA") and California Endangered Species Act (the "CESA") provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. The California Environmental Quality Act ("CEQA") provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. The ability of Pacific Lumber to harvest timber depends upon its ability to obtain regulatory approval of its THPs. THPs are required to be developed by registered professional foresters and must be filed with, and approved by, the California Department of Forestry (the "CDF") prior to the harvesting of timber. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs by several California and federal agencies and public comments received with respect to such THPs. Pacific Lumber regularly operates under numerous THPs governing various timber parcels and applies for new THPs on a continuous basis. 25 28 Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future legislation, government regulations or judicial or administrative decisions would not materially adversely affect the Company. In March 1992, the marbled murrelet (a sea bird that nests in coastal timberlands) was approved for listing as endangered under the CESA. In October 1992, the United States Fish and Wildlife Service (the "USFWS") issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. Pacific Lumber has incorporated, and will continue to incorporate as required, mitigation measures into its THPs to protect and maintain habitat for the marbled murrelet on its timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide certain site specific mitigations in connection with THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during a portion of the murrelet's nesting and breeding season, which extends from April through mid-September. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the areas designated as critical habitat for the marbled murrelet (see below). Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In May 1996, the USFWS published the final designation of critical habitat for the marbled murrelet (the "Final Designation"), designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timber. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") alleging that certain portions of its timberlands have been "taken" and seeking just compensation (see, "Legal Proceedings -- Pacific Lumber" for a description of the Takings Litigation, which is currently stayed pursuant to the Headwaters Agreement). It is impossible to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as the material regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. For example, the National Marine Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would make a final determination whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a long-term sustained yield ("LTSY") harvest level that takes into account environmental and economic considerations. The SYP must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 26 29 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last five years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and submitting corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or which challenge other operations by Pacific Lumber. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to Pacific Lumber's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated operating results, financial position or liquidity of the Company. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber. It is impossible to predict the content of any such bills, the likelihood of any of the bills passing or the impact of any of these bills on the future liquidity, consolidated financial position or operating results of the Company. See also "Business of the Company -- Pacific Lumber Operations -- Regulatory and Environmental Factors." Risk of Loss from Earthquakes, Fire or Other Casualties In April 1992, an earthquake and a series of aftershocks occurred in northern California which produced a significant amount of damage in and around the area where Pacific Lumber's forest products operations are located. A large number of kilns used to dry upper grade redwood lumber and one of Pacific Lumber's sawmills were not operational for a period of approximately six weeks. In order to recover some of this lost production time, Pacific Lumber initiated additional shifts at two of its other sawmills. Although certain of Pacific Lumber's production facilities were temporarily idled as a result of such earthquake, standing timber 27 30 on Pacific Lumber's timberlands suffered virtually no damage. Pacific Lumber believes that it possesses adequate insurance coverage relating to damage to its facilities and equipment and the disruption of its business from earthquakes. Consistent with the past practices of Pacific Lumber and the owners of most other timber tracts in the United States, Pacific Lumber does not intend to maintain earthquake insurance in respect of standing timber. See "Business of the Company -- Pacific Lumber Operations -- Production Facilities." Pacific Lumber assumes substantially all risks of loss from fire and other casualties on its timberlands, similar to the risks currently assumed by the owners of most other timber tracts in the United States. The risk of forest fire damage to Pacific Lumber's timberlands is relatively low as a result of the foggy climate along the northern California coast and the natural fire resistance of redwood timber. Pacific Lumber is a participant with the CDF and other timberland owners in cooperative fire fighting and aerial fire surveillance programs. The extensive roads on Pacific Lumber's timberlands also serve as fire breaks and facilitate implementation of fire control techniques and utilization of fire fighting equipment. The last forest fire of any significance affecting Pacific Lumber's timberlands occurred in 1990 and resulted in damage to approximately 2,000 acres, which were salvaged during 1992 with minimal loss and the area has been replanted. Consistent with the past practices of Pacific Lumber and the owners of most other timber tracts in the United States, Pacific Lumber does not intend to acquire fire insurance in respect of standing timber. Industry Conditions The demand for lumber products is influenced by conditions in the housing, construction and remodeling industries. The housing, construction and remodeling industries are highly cyclical and are affected by numerous factors, including real estate prices, interest rates, credit availability, property taxes, federal and state income tax policy, energy costs and general economic conditions, all of which are beyond the control of the Company. Headwaters Agreement MAXXAM and Pacific Lumber have entered into the Headwaters Agreement (see "Business of the Company -- Pacific Lumber Operations -- Headwaters Agreement"). A substantial portion of the timberlands which would be transferred to the government pursuant to the Headwaters Agreement are part of the timberlands owned by Salmon Creek (the "Salmon Creek Property"). The Pacific Lumber Indenture permits Pacific Lumber to distribute to MGI the proceeds of any sale or other disposition of the Salmon Creek Property; however, the MGI Indenture contains limitations on the ability of MGI to distribute any such proceeds to the Company (generally, 50% of the proceeds in excess of $62 million received as distributions in respect of the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property). The Indenture will permit the Company to distribute to MAXXAM approximately 50% of such distributions from MGI in respect of the Salmon Creek Property. See "Description of New Notes -- Limitations on Restricted Payments." If consummated, the Headwaters Agreement could expedite the approval time and reduce the costs associated with Pacific Lumber's THPs. There can be no assurance that the Headwaters Agreement will be consummated. LITIGATION MAXXAM and certain of its subsidiaries, affiliates, directors and officers (the "MAXXAM Parties") are defendants (or threatened defendants) in a variety of pending or threatened actions, including, but not limited to (a) actions by and on behalf of the federal government relating to the insolvency of USAT (see "-- Ability to Service Indebtedness"), (b) actions with respect to certain transactions between certain Real Estate Subsidiaries and Federated, a principal shareholder of MAXXAM, (c) lawsuits relating to Pacific Lumber's THPs and other timber harvesting operations (see "-- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors"), (d) environmental and asbestos litigation involving Kaiser (see "-- Risk Factors Relating to Kaiser -- Environmental Matters and Litigation"), and (e) federal antitrust investigations with respect to Kaiser. Certain of these actions make claims for substantial damages against the MAXXAM Parties, including subsidiaries of the Company. Adverse determinations and/or unfavorable settlements with respect to one or more of such actions in respect of the Company's subsidiaries could 28 31 materially impair the Company's ability to satisfy its obligations under the Notes. Adverse determinations and/or unfavorable settlements with respect to one or more of such actions in respect of MAXXAM itself could materially and adversely affect the financial condition, results of operations and liquidity of MAXXAM and MAXXAM's ability to pay principal and interest on the Intercompany Note and to honor its guaranty of the Notes. See "-- Ability to Service Indebtedness." For information concerning these litigation matters, see "Legal Proceedings" and Notes 9 and 7 to the Audited and Unaudited Consolidated Financial Statements of MAXXAM, respectively. RISK FACTORS RELATING TO KAISER Sensitivity to Prices Kaiser accounts for the substantial portion of MAXXAM's revenues and operating results. Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products and also depend to a significant degree upon the volume and mix of all products sold. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Trends -- Aluminum Operations -- Sensitivity to Prices and Hedging Programs," "-- Recent Trends and Developments," and "-- Fourth Quarter Results," and "Business of MAXXAM -- Aluminum Operations -- Industry Overview." Primary aluminum prices have historically been subject to significant cyclical price fluctuations. During the period January 1, 1993 through December 13, 1996, the average Midwest U.S. transaction price (the "AMT Price") for primary aluminum has ranged from approximately $.50 to $1.00 per pound. For the week ended December 13, 1996, the AMT Price for primary aluminum was approximately $.72 per pound. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum. Leverage Kaiser is highly leveraged, with total consolidated indebtedness of $867.3 million and stockholders' equity of $63.4 million at September 30, 1996. On a pro forma basis, as of September 30, 1996, after giving effect to the issuance of the KACC New Senior Notes (on October 23, 1996) and the issuance of the KACC New Series C Senior Notes (on December 23, 1996) and the application of the proceeds therefrom, Kaiser would have had total consolidated indebtedness of $962.0 million. Kaiser's ability to generate sufficient cash to meet its debt service obligations is subject to many factors, certain of which are beyond its control, including economic conditions, aluminum prices, and competition. While Kaiser believes that, based on current levels of operations, its cash generated from operations, together with other sources of liquidity, will be adequate to meet such obligations, there can be no assurance that such sources of funds will in fact be sufficient to service such obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations." Kaiser's leverage is substantially greater than the leverage of most of its North American competitors, which generally have greater financial resources than Kaiser. Due to its highly leveraged condition, Kaiser is more sensitive than less leveraged companies to factors affecting its operations, including changes in the prices for its products, the rates charged for power at its various facilities, and general economic conditions. Environmental Matters and Litigation Kaiser and KACC are subject to a wide variety of international, federal, state and local environmental laws and regulations (the "Environmental Laws"). From time to time, Kaiser and KACC are subject, with respect to their current and former operations, to fines or penalties assessed for alleged breaches of the Environmental Laws and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). Under 29 32 CERCLA and other related laws, past disposal of wastes, whether on-site or at other locations, may result in the imposition of clean-up obligations by federal or state regulatory authorities. KACC's Mead, Washington, facility has been listed on the National Priorities List under CERCLA. In addition, KACC, along with numerous other entities, has been named as a potentially responsible party ("PRP") for remedial costs at certain third-party sites listed on the National Priorities List. In certain instances, KACC may be exposed to joint and several liability for remedial action or damages to natural resources, which could effectively expose KACC to liability for all costs associated with any such remedial actions irrespective of its degree of culpability for the environmental damages related thereto. Further, future environmental regulations are expected to impose stricter compliance requirements on the aluminum industry. For a discussion of certain KACC environmental litigation and other environmental matters, including the reserves established with respect thereto, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations," "Business of MAXXAM -- Aluminum Operations -- Environmental Matters" and "Legal Proceedings -- Kaiser Litigation -- Environmental Litigation" and Notes 9 and 7, respectively, to the Audited and Unaudited Consolidated Financial Statements of MAXXAM. In addition, KACC is subject to a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC (which products have generally not been manufactured by KACC for at least 15 years). While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, Kaiser currently believes that, based on the factors discussed below under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations," the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on KACC's consolidated financial position, results of operations, or liquidity. For a discussion of KACC's asbestos related litigation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations" Financial Condition and Investing and Financing Activities -- Aluminum Operations" and Notes 9 and 7, respectively, of the Notes to the Audited and Unaudited Consolidated Financial Statements of MAXXAM. Power Supply Electric power represents an important production cost for KACC at its aluminum smelters. In 1995, KACC successfully restructured electric power purchase agreements for its smelting facilities in the Pacific Northwest, which has resulted in significantly lower electric power costs in 1996 for the Mead and Tacoma, Washington, smelters compared with 1995 electric power costs. A number of lawsuits challenging the restructuring have been filed and the effect, if any, of such lawsuits on KACC's power purchase and transmission arrangements is not known at the current time. In addition, while KACC has entered into long term arrangements with respect to the power supply for its 90%-owned Volta Aluminium Company Limited ("Valco") smelter in Ghana, there can be no assurance that the requisite power supply will be available. For a discussion of KACC's power supply arrangements, see "Business of MAXXAM -- Aluminum Operations -- Production Operations." Foreign Activities Kaiser's operations are located in many foreign countries, including Australia, Canada, China, Ghana, Jamaica and the United Kingdom. Foreign operations in general may be more vulnerable than domestic operations due to a variety of political and other risks. See "Business of MAXXAM -- Aluminum Operations -- Production Operations" and "-- International Business Development." 30 33 CONTROL OF THE COMPANY The Company is a wholly owned subsidiary of MAXXAM. Mr. Charles E. Hurwitz, the Chairman of the Board, Chief Executive Officer and President of MAXXAM, together with Federated Development Inc. ("FDI"), collectively own 2,735,219 shares of MAXXAM's common stock and 680,574 shares of MAXXAM's Class A $.05 Non-Cumulative Participating Convertible Preferred Stock (the "Preferred Stock"), which has ten votes per share, aggregating approximately 61.1% of the aggregate voting power of MAXXAM. FDI is a wholly owned subsidiary of Federated, a New York business trust of which Mr. Hurwitz is Chairman of the Board and Chief Executive Officer and which is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. Accordingly, Mr. Hurwitz will be able to control the election of the directors of the Company and to determine the corporate and management policies of the Company, including decisions relating to any merger or acquisition of the Company, the sale of substantially all of the assets of the Company and other significant corporate transactions. HIGHLY LEVERAGED TRANSACTIONS The Indenture does not contain any provisions specifically intended to protect holders of the Notes in the event of a future highly leveraged transaction involving the Company. The Indenture will limit the Company's ability to incur additional Indebtedness and to grant liens on its assets to secure Indebtedness, limit the Company from selling its assets under certain circumstances, restrict transactions with Affiliates and require the Company to make a Change of Control Offer (as defined), each under certain circumstances described herein. These provisions could limit the ability of the Company to engage in a highly leveraged transaction (including a leveraged buyout initiated or supported by the Company, the management of the Company or an affiliate of the Company or its management). These provisions may not be waived or amended without the consent of a majority in aggregate principal amount of the Notes. See "Description of the New Notes -- Change of Control" and "-- Certain Covenants." CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any such holder which is an "affiliate" of the Company or the Guarantor within the meaning of Rule 405 under the Securities Act and other than any broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. Each broker-dealer that acquired Old Notes for its own account as a result of market making or other trading activities and that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that, by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the securities laws of 31 34 certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes will be adversely affected. ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES The New Notes are a new issue of securities, have no established trading market, and may not be widely distributed. The Company does not intend to list the New Notes on any national securities exchange or the Nasdaq Stock Market or to seek the admission thereof to trading on any automated quotation system. No assurance can be given that an active public or other market will develop for the New Notes or as to the liquidity of or the trading market for the New Notes. If a trading market does not develop or is not maintained, holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a market for the New Notes develops, any such market may be discontinued at any time. If a public trading market develops for the New Notes, future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities, and the price at which the holders of New Notes will be able to sell such New Notes is not assured and the New Notes could trade at a premium or discount to their purchase price or face value. Depending on prevailing interest rates, the market for similar securities and other facts, including the financial condition of the Company, the New Notes may trade at a discount from their principal amount. 32 35 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by the Company to the Initial Purchasers on December 23, 1996, pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act and certain other exemptions under the Securities Act. The Company and the Initial Purchasers also entered into the Registration Rights Agreement, pursuant to which the Company agreed, with respect to the Old Notes and subject to the Company's determination that the Exchange Offer is permitted under applicable law, to (i) cause to be filed, on or prior to February 21, 1997, a registration statement with the Commission under the Securities Act concerning the Exchange Offer, (ii) use its reasonable best efforts to cause such registration statement to be declared effective by the Commission on or prior to May 22, 1997, and (iii) to cause the Exchange Offer to remain open for a period of not less than 30 days. This Exchange Offer is intended to satisfy the Company's exchange offer obligations under the Registration Rights Agreement. TERMS OF THE EXCHANGE OFFER The Company hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange $1,000 in principal amount of the New Notes for each $1,000 in principal amount of the outstanding Old Notes. The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the conditions, terms and provisions of the Registration Rights Agreement. The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) subject to certain limited exceptions, holders of New Notes will not be entitled to Additional Interest, and (iii) holders of New Notes will not be, and upon consummation of the Exchange Offer, Eligible Holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for holders of unregistered securities. See "-- Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, Holders may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes (or so indicate pursuant to the procedures for book-entry transfer). As of the date of this Prospectus, $130.0 million in aggregate principal amount of the Old Notes is outstanding, the maximum amount authorized by the Indenture for all Notes. As of , 1997, there were registered holders of the Old Notes, including Cede, which held $ million of aggregate principal amount of the Old Notes for of its participants. Solely for reasons of administration (and for no other purpose), the Company has fixed the close of business on , 1997, as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only an Eligible Holder of the Old Notes (or such Eligible Holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining Eligible Holders of the Old Notes entitled to participate in the Exchange Offer. The Company believes that, as of the date of this Prospectus, no such Eligible Holder is an affiliate (as defined in Rule 405 under the Securities Act) of the Company or of the Guarantor. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible Holders of Old Notes and for the purposes of receiving the New Notes from the Company. 33 36 If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering Eligible Holder thereof as promptly as practicable after the Expiration Date. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Expiration Date shall be , 1997 at 5:00 p.m., New York City time, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such notice and public announcement shall set forth the new Expiration Date of the Exchange Offer. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under "Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension, or termination to the Exchange Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will, in accordance with applicable law, file a post-effective amendment to the Registration Statement (a "Post-effective Amendment") and resolicit the registered holders of the Old Notes. If the Company files a Post-effective Amendment, it will notify the Exchange Agent of an extension of the Exchange Offer by oral or written notice, and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the effectiveness of such Post-effective Amendment. Such notice and public announcement shall set forth the new Expiration Date, which new Expiration Date shall be no less than five days after the then applicable Expiration Date. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, notwithstanding any other provisions of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue the New Notes in exchange for, any Old Notes, if the Exchange Offer violates any applicable law or interpretation of the staff of the Commission. The Company expects that the foregoing conditions will be satisfied. TERMINATION OF CERTAIN RIGHTS The Registration Rights Agreement provides that, subject to certain exceptions, in the event of a Registration Default (as defined below), Eligible Holders of Old Notes are entitled to receive Additional Interest. Additional Interest means the increase in the interest rate borne by Registrable Securities during the period in which a Registration Default is continuing pursuant to the terms of the Registration Rights Agreement (in general, one-quarter of one percent (0.25%) per annum for the first 90-day period immediately after the first such Registration Default and an additional one-quarter of one percent (0.25%) per annum for each subsequent 90-day period until all Registration Defaults have been cured, provided that the aggregate increase in such interest rate shall not exceed one percent (1.00%) per annum). A "Registration Default" with respect to the Exchange Offer shall generally occur if: (i) the registration statement concerning the exchange offer (the "Registration Statement") has not been filed with the Commission on or prior to February 21, 1997; (ii) the Registration Statement is not declared effective on or prior to May 22, 1997, or (iii) the Exchange Offer is not consummated on or prior to June 21, 1997. Holders of New Notes will not be and, upon consummation of the Exchange Offer, Holders of Old Notes will no longer be, entitled to (i) the right to receive Additional Interest, except in certain limited circumstances, and (ii) certain other rights under the Registration Rights Agreement intended for holders of Registrable Securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the 34 37 Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. ACCRUED INTEREST ON THE OLD NOTES The New Notes will bear interest at a rate equal to 12% per annum from and including their date of issuance. Eligible Holders whose Old Notes are accepted for exchange will have the right to receive interest accrued thereon from the date of their original issuance or the last Interest Payment Date, as applicable, to, but not including, the date of issuance of the New Notes, such interest to be payable with the first interest payment on the New Notes. Interest on the Old Notes accepted for exchange, which interest accrued at the rate of 12% per annum, will cease to accrue on the day prior to the issuance of the New Notes. See "Description of New Notes -- General." PROCEDURES FOR TENDERING OLD NOTES The tender of an Eligible Holder's Old Notes as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering Eligible Holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, an Eligible Holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit such Old Notes, together with a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by an Eligible Institution (as defined below). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution or (ii) be accompanied by a bond power, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer 35 38 (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. By tendering, each registered holder will represent to the Company that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes are being acquired by the Eligible Holder and each Beneficial Owner in the ordinary course of business of the Eligible Holder and each Beneficial Owner, (ii) the Eligible Holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the Eligible Holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in the Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, (iv) that if the Eligible Holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the Eligible Holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Commission, and (vi) neither the Eligible Holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or the Guarantor except as otherwise disclosed to the Company in writing. In connection with a book-entry transfer, each participant will confirm that it makes the representations and warranties contained in the Letter of Transmittal. Guaranteed Delivery Procedures. Eligible Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the Eligible Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Eligible Holder, the certificate number or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing 36 39 that, within three (3) business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent, and (iii) such properly completed and executed documents required by the Letter of Transmittal and the tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC) must be received by the Exchange Agent within three (3) business days after the Expiration Date. Any Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. Book-Entry Delivery. The Exchange Agent will establish an account with respect to the Old Notes at DTC (the "Book-Entry Transfer Facility") for purposes of the Exchange Offer promptly after the date of this Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of the Old Notes by causing such facility to transfer Old Notes into the Exchange Agent's account in accordance with such facility's procedure for such transfer. Even though delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantees, or an Agent's Message (as defined below) in connection with a book-entry transfer, and other documents required by the Letter of Transmittal, must, in any case, be transmitted to and received by the Exchange Agent at one of its addresses set forth on the back cover of this Prospectus before the Expiration Date, or the guaranteed delivery procedure set forth above must be followed. Delivery of the Letter of Transmittal and any other required documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The term "Agent's Message" means a message transmitted by the Book-Entry Transfer Facility to, and received by, the Exchange Agent and forming a part of a book-entry confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Old Notes that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered as soon as practicable after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes, when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents (or of confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC); provided, however, that the Company reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering Eligible Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent, at its address set forth on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the Eligible Holder in the same manner as the original signature on the Letter of Transmittal by 37 40 which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with the other documents required by the Indenture upon transfer, and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depositor, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the Eligible Holder thereof without cost to such Eligible Holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer -- Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. THE EXCHANGE AGENT; ASSISTANCE First Bank National Association is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: By Mail: By Hand/Overnight Express: Facsimile First Bank National Association First Bank National Association Transmission: 180 E. 5th Street 180 E. 5th Street (612) 244-0711 St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Rick Prokosch Attention: Rick Prokosch To confirm receipt: Trust Officer Trust Officer (612) 244-0721
SOLICITATION OF TENDERS; FEES AND EXPENSES No person has been authorized to give any information or to make any representation in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will offers be accepted from or on behalf of) holders of Old Notes in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. However, the Company may, at its discretion, take such action as it may deem necessary to make the Exchange Offer in any such jurisdiction permissible and extend the Exchange Offer to holders of Old Notes in such jurisdiction. All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company, including, without limitation: (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for the New Notes in a form eligible for deposit with DTC and of printing copies of the Prospectus), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and the Guarantor, (v) fees and disbursements of independent certified public accountants, (vi) rating agency fees, (vii) internal expenses of the Company and the Guarantor (including, without limitation, all salaries and expenses of officers and employees of the Company and the Guarantor performing legal or accounting duties), and (ix) fees and expenses incurred in connection with the listing, if any, of the New Notes on a securities exchange. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, 38 41 however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by the Company for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. RESALES OF THE NEW NOTES Based on interpretations by the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in the Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such Eligible Holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act, or (ii) a person that is an affiliate of the Company or the Guarantors within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the Eligible Holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Commission staff with respect to this Exchange Offer, and the Company and the Eligible Holders are not entitled to rely on interpretive advice provided by the staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any Eligible Holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such Eligible Holder cannot rely on the position of the staff of the Commission set forth in the above no-action and interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Company has agreed that for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus, as amended and supplemented, available to any broker-dealer who receives New Notes in the Exchange Offer for use in connection with any such resale. See "Plan of Distribution." CONSEQUENCE OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the offer or sale of the Old Notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exception from, or in a transaction not subject to, the Securities Act and applicable states securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. See "Risk Factors -- Consequences of Failure to Exchange." 39 42 OTHER Participation in the Exchange Offer is voluntary, and holders of Old Notes should carefully consider whether to participate. Holders of the Old Notes are urged to consult their financial and tax advisers in making their own decisions on what action to take. As a result of the making of, and upon acceptance for exchange of all validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the Company will have fulfilled a covenant contained in the Registration Rights Agreement. Holders of Old Notes who do not tender their Old Notes in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights, and limitations applicable thereto, under the Indenture, except for any such rights under the Registration Rights Agreement that by their terms terminate or cease to have further effectiveness as a result of the making of this Exchange Offer. See "Description of New Notes." All untendered Old Notes will continue to be subject to the restrictions on transfer set forth in the Indenture. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered Old Notes could be adversely affected. The Company may in the future seek to acquire untendered Old Notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plan to acquire any Old Notes which are not tendered in the Exchange Offer. 40 43 CAPITALIZATION OF THE COMPANY The following table summarizes the unaudited consolidated capitalization of the Company at September 30, 1996, and as adjusted to give effect to the Offering and the application of the proceeds therefrom. This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto appearing elsewhere herein.
SEPTEMBER 30, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN MILLIONS OF DOLLARS) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1).................... $ 85.0 $ 85.0 ======= ======= SHORT-TERM DEBT: Current maturities of long-term debt(2).............................. $ 16.3 $ 16.3 ------- ------- LONG-TERM DEBT: 12% MAXXAM Group Holdings Inc. Senior Secured Notes due August 1, 2003.................................................... -- 130.0 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015... 320.0 320.0 10 1/2% Pacific Lumber Senior Notes due March 1, 2003................ 235.0 235.0 11 1/4% MGI Senior Secured Notes due August 1, 2003.................. 100.0 100.0 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount(3)....................................................... 101.0 101.0 Other................................................................ .6 .6 ------- ------- Total long-term debt.............................................. 756.6 886.6 ------- ------- STOCKHOLDER'S DEFICIT: Common stock......................................................... -- -- Additional capital................................................... 89.8 89.8 Accumulated deficit(4)............................................... (215.7) (215.7) ------- ------- Total Stockholder's Deficit....................................... (125.9) (125.9) ------- ------- Total Capitalization......................................... $ 647.0 $ 777.0 ======= =======
- --------------- (1) Cash, cash equivalents and marketable securities of the Company includes the following amounts held by each of the following subsidiaries of the Company in the amounts indicated: MGI -- $72.5 million; Scotia Pacific -- $6.8 million; Pacific Lumber -- $5.5 million; and Britt -- $0.2 million. Further, Scotia Pacific had $30.5 million of restricted cash deposits held for the benefit of the Timber Notes which is classified as a noncurrent asset in the Company's Consolidated Financial Statements. Cash held by the Company's subsidiaries is generally not available to service its obligations on the Notes. See "Risk Factors -- Ability to Service Indebtedness." (2) Reflects current maturities of $16.1 million relating to the Timber Notes and $0.2 million of other debt of Pacific Lumber. (3) Net of discount of $24.7 million. The MGI Discount Notes will accrete to an aggregate principal amount of $125.7 million on August 1, 1998, and for periods thereafter MGI will be required to make cash interest payments of approximately $7.7 million in respect of this indebtedness each February 1 and August 1 thereafter. (4) Stockholder's deficit reflects aggregate one time charges (recorded in 1993) relating to the implementation of SFAS 106 and SFAS 109. See Note 2 to the Summary Historical and Pro Forma Consolidated Financial Data of the Company. 41 44 CAPITALIZATION OF MAXXAM The following table summarizes the unaudited consolidated capitalization of MAXXAM at September 30, 1996, and as adjusted to give effect to the retirement of the Old MAXXAM Notes (the "Retirement"), the issuance of the Notes (collectively with the Retirement, the "Refinancing"), the issuance of $225.0 million aggregate principal amount of the KACC New Notes, and the application of the net proceeds therefrom. (See Note 6 to the Summary Historical and Pro Forma Financial Data of MAXXAM). This table should be read in conjunction with the Consolidated Financial Statements of MAXXAM and the Notes thereto appearing elsewhere herein.
SEPTEMBER 30, 1996 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (IN MILLIONS OF DOLLARS) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES(1)..................................... $ 171.1 $ 338.7 ======== ======== SHORT-TERM DEBT: Current maturities of long-term debt(2)............................................... $ 26.4 $ 26.4 -------- -------- LONG-TERM DEBT: MAXXAM: Old MAXXAM Notes: 14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000......................... 25.0 -- 12 1/2% MAXXAM Subordinated Debentures due December 15, 1999(3)..................... 16.7 -- Aluminum Operations: 1994 KACC Credit Agreement.......................................................... 131.2 -- 9 7/8% KACC Senior Notes due February 15, 2002(4)................................... 224.0 224.0 10 7/8% KACC New Notes due October 15, 2006(5)...................................... -- 225.9 Alpart CARIFA Loan.................................................................. 60.0 60.0 12 3/4% KACC Senior Subordinated Notes due February 1, 2003......................... 400.0 400.0 Other............................................................................... 43.2 43.2 Forest Products Operations: 12% MAXXAM Group Holdings Inc. Senior Secured Notes due August 1, 2003.................................................................... -- 130.0 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015.................. 320.0 320.0 10 1/2% Pacific Lumber Senior Notes due March 1, 2003............................... 235.0 235.0 11 1/4% MGI Senior Secured Notes due August 1, 2003................................. 100.0 100.0 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount....... 101.0 101.0 Other............................................................................... .6 .6 Real Estate and Other Operations: 11% SHRP, Ltd. Senior Secured Extendible Notes due September 1, 2001, net of discount................................................ 15.6 15.6 RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3%........ 3.8 3.8 Other notes and contracts, secured by receivables, buildings, real estate and equipment.......................................................................... 7.8 7.8 -------- -------- Total long-term debt.............................................................. 1,683.9 1,866.9 -------- -------- MINORITY INTERESTS...................................................................... 217.9 217.9 STOCKHOLDERS' DEFICIT: Preferred stock....................................................................... $ .3 $ .3 Common stock.......................................................................... 5.0 5.0 Additional capital.................................................................... 155.6 155.6 Accumulated deficit(6)................................................................ (180.5) (181.1)(7) Pension liability adjustment.......................................................... (16.1) (16.1) Treasury stock........................................................................ (19.5) (19.5) -------- -------- Total Stockholders' Deficit....................................................... (55.2) (55.8) -------- -------- Total Capitalization............................................................ $1,873.0 $ 2,055.4 ======== ========
- --------------- (footnotes are on the following page) 42 45 - --------------- (1) Cash, cash equivalents and marketable securities held by MAXXAM, excluding amounts held by subsidiaries, was $56.6 million and, on a pro forma basis $136.1 million after the retirement of the Old MAXXAM Notes but prior to any other use of proceeds from the Offering. (2) Reflects current maturities of approximately $8.9 million, $16.3 million and $1.2 million, relating to the Company's aluminum operations, forest products operations, and real estate and other operations, respectively. (3) Net of discount of $0.9 million. (4) Net of discount of $1.0 million. (5) The KACC New Notes include the KACC New Senior Notes of $175.0 million aggregate principal amount, net of discount of $0.9 million, and the KACC New Series C Senior Notes of $50.0 million aggregate principal amount including a premium of $1.8 million. The net proceeds from the sale of the KACC New Notes were used to repay the outstanding borrowings under the 1994 KACC Credit Agreement. The remaining net proceeds are held by KACC for general corporate purposes. MAXXAM did not receive any proceeds from the sale of the KACC New Notes. (6) Stockholders' deficit reflects aggregate one time charges (recorded in 1993) of approximately $417.7 million relating to the implementation of SFAS 106, SFAS 109 and SFAS 112. See Note 1 to the Summary Historical and Pro Forma Financial Data of MAXXAM. (7) Assumes the write-off of approximately $0.9 million of unamortized discount and $0.1 million of deferred financing costs attributable to the Old MAXXAM Notes, net of an estimated income tax benefit of $0.4 million. 43 46 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF THE COMPANY The following selected historical consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" appearing elsewhere in this Prospectus. The Company was formed on November 4, 1996 to facilitate the offering of the Old Notes. Subsequent to its formation, the Company received from MAXXAM, as a capital contribution, 100% of the capital stock of MGI. Further, concurrently with the consummation of the Offering, MAXXAM transferred to the Company the Kaiser Shares as an additional capital contribution. The contribution of MGI's capital stock has been accounted for as a reorganization of entities under common control, which requires the Company to record the assets and liabilities of MGI at MAXXAM's historical cost. Accordingly, the Company is the successor entity to all of MGI's historical operations. The contribution of the Kaiser Shares has been reflected in the following consolidated financial information of the Company as if such contribution occurred as of January 1, 1991 (the beginning of the earliest period presented) at MAXXAM's historical cost using the equity method of accounting. The following historical consolidated financial information of the Company reflects the historical operating results of MGI, the equity in earnings (losses) attributable to its investment in the Kaiser Shares and MAXXAM's purchase accounting adjustments (principally relating to MGI's timber and depreciable assets) for each accounting period presented. The purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The selected historical consolidated financial data as of and for the five years ended December 31, 1995 are derived from the Consolidated Financial Statements of the Company which have been audited by independent public accountants. The selected historical consolidated financial data as of and for the nine months ended September 30, 1996 and 1995 has not been audited, but in the opinion of management contain all adjustments (including those of a normal recurring nature) necessary to present fairly the financial position and results of operations of the Company as of such dates and for such periods. The following consolidated pro forma operating data for the nine months ended September 30, 1996 and for the year ended December 31, 1995 give effect to the Transactions as if they occurred on January 1, 1995. The consolidated pro forma balance sheet data gives effect to the Transactions as if they occurred on September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------- ------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------- ------ ------ (IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA) HISTORICAL OPERATING DATA: Net sales..................................... $199.6 $180.9 $242.6 $249.6 $ 233.4 $223.3 $205.7 Cost of sales (exclusive of depreciation and depletion).................................. 114.6 96.0 127.1 129.6 134.6 113.8 103.3 Gross profit.................................. 85.0 84.9 115.5 120.0 98.8 109.5 102.4 Selling, general and administrative expenses.................................... 11.3 12.2 15.9 16.3 20.1 17.1 16.6 Depreciation and depletion.................... 20.2 19.0 25.3 24.7 24.5 28.4 30.4 Operating income.............................. 53.4 53.7 74.3 79.1 54.2 64.1 55.3 Investment, interest and other income (expense)................................... 8.4 6.8 9.4 14.4 10.0 16.6 81.0 Interest expense.............................. 58.4 58.2 77.8 77.4 81.9 91.4 94.2 Interest expense, net of earnings on invested cash, cash equivalents and marketable securities.................................. 51.2 51.9 69.0 72.6 72.5 93.6 77.6 Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................................. 3.4 2.3 5.9 16.1 (17.7) (10.7) 42.1 Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles.................................. 4.5 1.6 4.2 19.2 (14.1) (12.0) 36.4 Income (loss) from the net assets transferred to MAXXAM, net of minority interests and related income taxes(1)..................... -- -- -- -- (272.0) 17.5 40.0
44 47
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------- ------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA) Extraordinary items, net of related income taxes(2).................................... $ -- $ -- $ -- $(14.9) $ (31.5) $ -- $ -- Cumulative effect of changes in accounting principles(3)............................... -- -- -- -- (220.4) -- -- Net income (loss)............................. 4.5 1.6 4.2 4.4 (538.0) 5.5 76.4 OTHER HISTORICAL DATA: Fixed charge coverage deficiency.............. -- -- -- -- 17.7 10.7 -- Ratio of earnings to fixed charges............ 1.1x 1.0x 1.1x 1.2x -- -- 1.5x Capital expenditures.......................... 9.0 6.6 9.9 11.3 11.1 8.7 6.4 Summary of cash flow information(4): Cash provided (used) by operating activities................................ 30.7 18.0 25.4 34.9 19.3 32.5 (1.6) Cash provided (used) by investing activities................................ (8.9) (4.1) (7.3) (10.2) (22.6) (32.4) 149.8 Cash provided (used) by financing activities................................ (17.1) (18.5) (18.2) (15.2) (12.0) (5.3) (129.4) EBITDA(4)(5).................................. 73.6 72.7 99.6 103.8 78.7 92.5 85.7 PRO FORMA OPERATING DATA(6): Investment, interest and other income (expense)................................... 18.7 23.2 Interest expense.............................. 70.7 94.2 Interest expense, net of earnings on the Intercompany Note, invested cash, cash equivalents and marketable securities....... 53.2 71.6 Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................................. 1.3 3.2 Ratio of earnings to fixed charges............ 1.0x 1.0x EBITDA(4)(5).................................. 73.5 99.5
SEPTEMBER 30, 1996 ---------------------- DECEMBER 31, PRO ------------------------------------------------- ACTUAL FORMA(6) 1995 1994 1993 1992 1991 ------- ------------ ------- ------- ------- -------- -------- (IN MILLIONS OF DOLLARS) BALANCE SHEET DATA (AT END OF PERIOD): Cash, cash equivalents and marketable securities(7)......... $ 85.0 $ 85.0 $ 85.0 $ 68.1 $ 56.8 $ 77.0 $ 113.6 Working capital.................... 126.6 126.6 126.2 104.5 83.9 107.4 147.2 Total assets....................... 713.3 843.3 740.9 744.5 743.0 1,200.5 1,212.1 Total indebtedness................. 772.9 902.9 778.5 782.5 788.4 677.9 677.7 Stockholder's equity (deficit)(3)..................... (125.9) (125.9) (126.5) (125.9) (130.3) 458.5 468.2
- --------------- See "Summary Historical and Pro Forma Consolidated Financial Data of the Company" for the text of footnotes (1) through (7). 45 48 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY SEPTEMBER 30, 1996 (IN MILLIONS OF DOLLARS)
TRANSACTIONS ------------------------ ISSUANCE OF INTERCOMPANY AS ACTUAL NOTES NOTE ADJUSTED ------ -------- ------------ -------- Current assets: Cash and cash equivalents........................... $ 53.1 $125.0 $(125.0) $ 53.1 Marketable securities............................... 31.9 -- -- 31.9 Receivables......................................... 13.9 -- -- 13.9 Inventories......................................... 78.1 -- -- 78.1 Prepaid expenses and other current assets........... 5.6 -- -- 5.6 ------ ------ -------- ------ Total current assets........................ 182.6 125.0 (125.0) 182.6 ------ ------ -------- ------ Property, plant and equipment, net.................... 101.2 -- -- 101.2 Timber and timberlands, net........................... 303.0 -- -- 303.0 Receivable from MAXXAM................................ -- -- 125.0 125.0 Restricted cash....................................... 30.5 -- -- 30.5 Deferred income taxes................................. 65.2 -- -- 65.2 Deferred financing costs and other assets............. 30.8 5.0 -- 35.8 ------ ------ ------- ------ $713.3 $130.0 $ -- $843.3 ====== ====== ======= ====== Current liabilities: Accounts payable.................................... $ 5.4 $ -- $ -- $ 5.4 Accrued interest.................................... 9.2 -- -- 9.2 Accrued compensation and related benefits........... 9.8 -- -- 9.8 Deferred income taxes............................... 11.5 -- -- 11.5 Other accrued liabilities........................... 3.8 -- -- 3.8 Current maturities of long-term debt................ 16.3 -- -- 16.3 ------ ------ ------- ------ Total current liabilities................... 56.0 -- -- 56.0 ------ ------ ------- ------ Long-term debt, less current maturities............... 756.6 130.0 -- 886.6 Other noncurrent liabilities.......................... 26.6 -- -- 26.6 ------ ------ ------- ------ Total liabilities........................... 839.2 130.0 -- 969.2 ------ ------ ------- ------ Contingencies Stockholder's deficit: Common stock........................................ -- -- -- -- Additional capital.................................. 89.8 -- -- 89.8 Accumulated deficit................................. (215.7) -- -- (215.7) ------ ------ ------- ------ Total stockholder's deficit................. (125.9) -- -- (125.9) ------ ------ ------- ------ $713.3 $130.0 $ -- $843.3 ====== ====== ======= ======
The Unaudited Pro Forma Consolidated Balance Sheet of the Company should be read in conjunction with the accompanying Notes. 46 49 NOTE TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY SEPTEMBER 30, 1996 The Unaudited Pro Forma Consolidated Balance Sheet reflects the Transactions as if they occurred on September 30, 1996. The Transactions reflect the issuance of $130.0 million aggregate principal amount of the Notes, the loan of $125.0 million to MAXXAM pursuant to the Intercompany Note and the capitalization of $5.0 million of estimated costs associated with the Offering. MAXXAM will use a portion of the proceeds from the Intercompany Note to repay the Old MAXXAM Notes together with accrued interest thereon through the date of redemption; the remaining amounts will be used for general corporate purposes including possible repurchases of MAXXAM Common Stock. 47 50 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN MILLIONS OF DOLLARS)
TRANSACTIONS ESTIMATED --------------------------- GENERAL AND ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS ACTUAL NOTES NOTE EXPENSES ADJUSTED ------ ----------- ------------ -------------- -------- Net sales.............................. $199.6 $ -- $ -- $ -- $199.6 Costs and expenses..................... (146.2) -- -- (0.1) (146.3) ------ ------ ------ ------ ------ Operating income....................... 53.4 -- -- (0.1) 53.3 Other income (expense): Investment, interest and other....... 8.4 -- 10.3 -- 18.7 Interest expense..................... (58.4) (12.3) -- -- (70.7) ------ ------ ------ ------ ------ Income before income taxes............. $ 3.4 $ (12.3) $ 10.3 $ (0.1) $ 1.3 ====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1995 (IN MILLIONS OF DOLLARS)
TRANSACTIONS ESTIMATED --------------------------- GENERAL AND ISSUANCE OF INTERCOMPANY ADMINISTRATIVE AS ACTUAL NOTES NOTE EXPENSES ADJUSTED ------ ----------- ------------ -------------- -------- Net sales.............................. $242.6 -- -- -- $242.6 Costs and expenses..................... 168.3 -- -- 0.1 168.4 ------ ------ ------ ------ ------ Operating income....................... 74.3 -- -- (0.1) 74.2 Other income (expense): Investment, interest and other....... 9.4 -- 13.8 -- 23.2 Interest expense..................... (77.8) (16.4) -- -- (94.2) ------ ------ ------ ------ ------ Income before income taxes, minority interests and extraordinary item..... $ 5.9 $ (16.4) $ 13.8 $ (0.1) $ 3.2 ====== ====== ====== ====== ======
The Unaudited Pro Forma Consolidated Statements of Operations for the Company should be read in conjunction with the accompanying notes. 48 51 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY The Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended September 30, 1996, and the Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995, reflect the Transactions as if they occurred on January 1, 1995. I. The Transactions reflect the issuance of $130.0 million aggregate principal amount of the Notes, the loan of $125.0 million to MAXXAM pursuant to the Intercompany Note and the capitalization of $5.0 million of estimated costs associated with the Offering. MAXXAM will use a portion of the proceeds from the Intercompany Note to repay the Old MAXXAM Notes together with accrued interest thereon through the date of redemption; the remaining amounts will be used for general corporate purposes including possible repurchases of MAXXAM Common Stock. The Unaudited Consolidated Statements of Operations of the Company reflect the following adjustments: a. The incurrence of $11.7 million and $15.6 million of interest expense on the Notes and $0.6 million and $0.8 million of amortization related to deferred financing costs associated with the Offering for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. b. Interest income of $10.3 million and $13.8 million from the Intercompany Note for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. c. The incurrence of estimated general and administrative costs for the Company of approximately $0.1 million annually. 49 52 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF MAXXAM The following selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements of MAXXAM and the Notes thereto (including the unconsolidated Parent only, condensed financial information of MAXXAM) and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM" appearing elsewhere in this Prospectus. The selected historical financial data as of and for the five years ended December 31, 1995 are derived from the Consolidated Financial Statements of MAXXAM which have been audited by independent public accountants. The selected historical consolidated financial data as of and for the nine months ended September 30, 1996 and 1995 have not been audited, but in the opinion of management contain all adjustments (including those of a normal recurring nature) necessary to present fairly the financial position and results of operations of MAXXAM as of such dates and for such periods. The following consolidated pro forma operating data for the nine months ended September 30, 1996 and for the year ended December 31, 1995 give effect to the Transactions and the issuance of the KACC New Notes and the application of the net proceeds therefrom (none of which were received by MAXXAM), as if they occurred on January 1, 1995. The consolidated pro forma balance sheet data give effect to the Transactions, the issuance of the KACC New Notes, and the application of the net proceeds therefrom, as if they occurred on September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------------- ------------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 -------- ------------ -------- -------- -------- -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT RATIO DATA) HISTORICAL OPERATING DATA: Net sales.......................... $1,921.1 $1,892.6 $2,565.2 $2,115.7 $2,031.1 $2,202.6 $2,254.5 Cost of sales (exclusive of depreciation and depletion)...... 1,566.5 1,474.2 1,990.9 1,817.9 1,787.6 1,786.9 1,735.6 Gross profit....................... 354.6 418.4 574.3 297.8 243.5 415.7 518.9 Selling, general and administrative expenses......................... 152.9 140.5 195.8 169.4 183.0 173.5 177.3 Depreciation and depletion......... 92.9 91.0 120.9 121.1 120.8 111.4 106.1 Restructuring of aluminum operations....................... -- -- -- -- 35.8 -- -- Operating income (loss)............ 108.8 186.9 257.6 7.3 (96.1) 130.8 235.5 Investment, interest and other income (expense)................. 35.1 8.7 18.2 (2.2) 69.8 51.6 42.8 Interest expense................... 135.5 136.1 181.3 176.9 185.1 195.6 210.9 Interest expense, net of earnings on invested cash, cash equivalents and marketable securities....................... 125.1 125.1 166.3 166.5 174.0 197.4 196.7 Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles....................... 8.4 59.5 94.5 (171.8) (211.4) (13.2) 67.4 Income (loss) before extraordinary item and cumulative effect of changes in accounting principles....................... 28.0 35.1 57.5 (116.7) (131.9) (7.3) 57.5 Extraordinary items, net of related income taxes(1).................. -- -- -- (5.4) (50.6) -- -- Cumulative effect of changes in accounting principles(2)......... -- -- -- -- (417.7) -- -- Net income (loss).................. 28.0 35.1 57.5 (122.1) (600.2) (7.3) 57.5 OTHER HISTORICAL DATA: Fixed charge coverage deficiency... 5.6 -- -- 213.1 225.8 21.1 -- Ratio of earnings to fixed charges.......................... -- 1.1x 1.2x -- -- -- 1.3x Capital expenditures............... 108.0 54.9 97.7 89.3 86.2 132.7 130.9 Summary of cash flow information(3): Cash provided by operating activities..................... 13.5 53.0 137.9 4.5 52.1 30.6 125.0 Cash provided (used) by investing activities..................... (75.4) (39.7) (75.4) (67.9) 44.6 (84.7) (138.0) Cash provided (used) by financing activities..................... 78.2 2.3 (42.9) 64.1 (94.7) 30.9 51.8 EBITDA(3)(4)....................... 201.7 277.9 378.5 128.4 24.7 242.2 341.6
50 53 PRO FORMA OPERATING DATA(5): Investment, interest and other income (expense)................. $ 35.1 $ 16.3 Interest expense................... 157.6 211.7 Interest expense, net of earnings on invested cash, cash equivalents and marketable securities....................... 147.2 196.7 Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles....................... (13.7) 62.2 Fixed charge coverage deficiency... 27.7 -- Ratio of earnings to fixed charges.......................... -- 1.1x EBITDA(3)(4)....................... 201.7 378.5
SEPTEMBER 30, 1996 DECEMBER 31, ------------------------- ------------------------------------------------------------ ACTUAL PRO FORMA(5) 1995 1994 1993 1992 1991 -------- ------------ -------- -------- -------- -------- -------- (IN MILLIONS OF DOLLARS) CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Cash, cash equivalents and marketable securities(6)......... $ 171.1 $ 338.7 $ 150.1 $ 124.9 $ 128.6 $ 152.5 $ 159.2 Working capital.................... 624.5 794.0 546.8 413.5 414.3 466.0 424.2 Total assets....................... 3,883.1 4,063.6 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0 Long-term debt, less current portion.......................... 1,683.9 1,866.9 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9 Minority interests................. 217.9 217.9 223.2 344.3 224.3 176.7 179.2 Stockholders' equity (deficit)(2)..................... (55.2) (55.8) (83.8) (275.3) (167.9) 443.9 459.6
- --------------- See "Summary Historical and Pro Forma Consolidated Financial Data of MAXXAM" for the text of notes (1) through (6). 51 54 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF MAXXAM SEPTEMBER 30, 1996 (IN MILLIONS OF DOLLARS)
ISSUANCE REPAYMENT PAYMENT OF OF KACC OF CONSENT NEW OLD MAXXAM AS ACTUAL TRANSACTIONS FEE NOTES NOTES ADJUSTED -------- ------------ ---------- ----------- ---------- -------- Current assets: Cash and cash equivalents......... $ 120.5 $125.0 $ (1.0) $88.1 $(44.5) $ 288.1 Marketable securities............. 50.6 -- -- -- -- 50.6 Receivables....................... 288.6 -- -- -- -- 288.6 Inventories....................... 623.6 -- -- -- -- 623.6 Prepaid expenses and other current assets......................... 156.5 -- -- -- -- 156.5 -------- ------ ----- ----- ------ -------- Total current assets...... 1,239.8 125.0 (1.0) 88.1 (44.5) 1,407.4 -------- ------ ----- ----- ------ -------- Property, plant and equipment, net............................... 1,252.4 -- -- -- -- 1,252.4 Timber and timberlands.............. 303.0 -- -- -- -- 303.0 Investments in and advances to unconsolidated affiliates......... 186.3 -- -- -- -- 186.3 Deferred income taxes............... 435.5 -- -- -- 0.4 435.9 Long-term receivables and other assets............................ 466.1 5.0 1.0 6.6 (0.1) 478.6 -------- ------ ----- ----- ------ -------- $3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6 ======== ====== ===== ===== ====== ======== Current liabilities: Accounts payable.................. $ 170.7 $ -- $ -- $ -- $ -- $ 170.7 Accrued interest.................. 24.8 -- -- -- (1.9) 22.9 Accrued compensation and related benefits....................... 126.2 -- -- -- -- 126.2 Other accrued liabilities......... 170.6 -- -- -- -- 170.6 Payable to affiliates............. 96.6 -- -- -- -- 96.6 Current maturities of long-term debt........................... 26.4 -- -- -- -- 26.4 -------- ------ ----- ----- ------ -------- Total current liabilities............. 615.3 -- -- -- (1.9) 613.4 -------- ------ ----- ----- ------ -------- Long-term debt, less current maturities........................ 1,683.9 130.0 -- 94.7 (41.7) 1,866.9 Other noncurrent liabilities........ 1,421.2 -- -- -- -- 1,421.2 -------- ------ ----- ----- ------ -------- Total liabilities......... 3,720.4 130.0 -- 94.7 (43.6) 3,901.5 -------- ------ ----- ----- ------ -------- Minority interests.................. 217.9 -- -- -- -- 217.9 Stockholders' deficit: Preferred stock................... 0.3 -- -- -- -- 0.3 Common stock...................... 5.0 -- -- -- -- 5.0 Additional capital................ 155.6 -- -- -- -- 155.6 Accumulated deficit............... (180.5) -- -- -- (0.6) (181.1) Pension liability adjustment...... (16.1) -- -- -- -- (16.1) Treasury stock.................... (19.5) -- -- -- -- (19.5) -------- ------ ----- ----- ------ -------- Total stockholders' deficit................. (55.2) -- -- -- (0.6) (55.8) -------- ------ ----- ----- ------ -------- $3,883.1 $130.0 $ -- $94.7 $(44.2) $4,063.6 ======== ====== ===== ===== ====== ========
The Unaudited ProForma Consolidated Balance Sheet of MAXXAM should be read in conjunction with the accompanying notes. 52 55 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF MAXXAM SEPTEMBER 30, 1996 The Unaudited Pro Forma Consolidated Balance Sheet reflects that the following each occurred on September 30, 1996: (i) the Transactions, (ii) the payment of the Consent Fee, (iii) the issuance of the KACC New Notes, and (iv) the repayment of the Old MAXXAM Notes. I. MAXXAM will use a portion of the proceeds from the Intercompany Note to repay the Old MAXXAM Notes together with accrued interest thereon through the date of redemption; the remaining amounts will be used for general corporate purposes including the possible repurchases of MAXXAM Common Stock. The Unaudited Pro Forma Consolidated Balance Sheet of MAXXAM reflects the following adjustments: a. The estimated net proceeds from this Offering, of approximately $125.0 million, will be loaned to MAXXAM pursuant to the Intercompany Note and the estimated costs associated with the Offering of $5.0 million will be capitalized. b. The payment by MAXXAM of the Consent Fee to the holders of the MGI Notes of approximately $1.0 million will be capitalized. c. The issuance of Kaiser's $225.0 million aggregate principal amount of the KACC New Notes which reflects the receipt of $219.3 million of net proceeds, the repayment of borrowings outstanding under the 1994 KACC Credit Agreement, and the capitalization of approximately $6.6 million of estimated costs related to those transactions. MAXXAM did not receive any of the net proceeds from the sale of the KACC New Notes. d. A portion of the net proceeds from the Intercompany Note will be applied to the redemption of $42.6 million aggregate principal amount of the Old MAXXAM Notes and the payment of approximately $1.9 million of accrued interest thereon. The repayment of the Old MAXXAM Notes will result in the write off of approximately $0.9 million of debt discount and $0.1 million of unamortized deferred financing costs, net of estimated income tax benefits of $0.4 million, attributable to the Old MAXXAM Notes. 53 56 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN MILLIONS OF DOLLARS)
REPAYMENT ISSUANCE OF OF OLD KACC NEW MAXXAM AS ACTUAL TRANSACTIONS SENIOR NOTES NOTES ADJUSTED -------- ------------ ------------ ------ -------- Net sales................................. $1,921.1 $ -- $ -- $ -- $1,921.1 Costs and expenses........................ (1,812.3) -- -- -- (1,812.3) -------- ------ ------ ---- -------- Operating income.......................... 108.8 -- -- -- 108.8 Other income (expense): Investment, interest and other.......... 35.1 -- -- -- 35.1 Interest expense........................ (135.5) (12.4) (14.1) 4.4 (157.6) -------- ------ ------ ---- -------- Income (loss) before income taxes and minority interests...................... $ 8.4 $(12.4) $(14.1) $ 4.4 $ (13.7) ======== ====== ====== ==== ========
YEAR ENDED DECEMBER 31, 1995 (IN MILLIONS OF DOLLARS)
REPAYMENT ISSUANCE OF OF OLD KACC NEW MAXXAM AS ACTUAL TRANSACTIONS SENIOR NOTES NOTES ADJUSTED -------- ------------ ------------ ------ -------- Net sales................................. $2,565.2 $ -- $ -- $ -- $2,565.2 Costs and expenses........................ 2,307.6 -- -- -- 2,307.6 -------- ------ ------ ---- -------- Operating income.......................... 257.6 -- -- -- 257.6 Other income (expense): Investment, interest and other.......... 18.2 -- -- (1.9) 16.3 Interest expense........................ (181.3) (16.5) (19.9) 6.0 (211.7) -------- ------ ------ ---- -------- Income before income taxes and minority interests............................... $ 94.5 $(16.5) $(19.9) $ 4.1 $ 62.2 ======== ====== ====== ==== ========
The Unaudited Pro Forma Consolidated Statements of Operations of MAXXAM should be read in conjunction with the accompanying notes. 54 57 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF MAXXAM The Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended September 30, 1996 and Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995 reflects that the following each occurred on January 1, 1995: (i) the Transactions, (ii) the payment of the Consent Fee, (iii) the issuance of the KACC New Notes, and (iv) the repayment of the Old MAXXAM Notes. I. MAXXAM will use approximately $42.6 million of the proceeds from the Intercompany Note to repay the Old MAXXAM Notes, together with accrued interest thereon through the date of redemption; the remaining net proceeds will be used for general corporate purposes including possible repurchases of MAXXAM's Common Stock. The Unaudited Pro Forma Consolidated Statements of Operations of MAXXAM reflect the following adjustments: a. The incurrence of $11.7 million and $15.6 million of interest expense on the Notes and $0.7 million and $0.9 million of amortization related to deferred financing costs associated with the Notes (including the Consent Fee paid by MAXXAM to the holders of the MGI Notes) for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. b. The incurrence of $18.4 million and $24.3 million of interest expense and $0.5 million and $0.7 million of amortization related to deferred financing costs associated with the KACC New Notes for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. c. The elimination of $4.4 million and $6.0 million of interest expense associated with the Old MAXXAM Notes for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. d. The elimination of $4.8 million and $5.1 million of interest expense associated with the reduction of outstanding borrowings under the 1994 KACC Credit Agreement for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively. e. The write off of $1.7 million of debt discount and $0.2 million of unamortized deferred financing costs attributable to the Old MAXXAM Notes for the year ended December 31, 1995. 55 58 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers primarily with respect to the future operating performance of the Company. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. This section and "Risk Factors" identify important factors that could cause such differences. BACKGROUND The Company was formed on November 4, 1996, to facilitate the offering of the Old Notes. Subsequent to its formation, the Company received, as a capital contribution, 100% of the capital stock of MGI. Concurrently with the consummation of the Offering, MAXXAM transferred to the Company as an additional capital contribution the Kaiser Shares, subject to the lien of the MGI Indenture. The contribution of MGI's capital stock has been accounted for as a reorganization of entities under common control, which requires the Company to record the assets and liabilities of MGI at MAXXAM's historical cost. Accordingly, the Company is the successor entity to MGI and as such, the accompanying financial statements of the Company reflect both the historical operating results of MGI and MAXXAM's purchase accounting adjustments which principally relate to MGI's timber and depreciable assets. The purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The contribution of the Kaiser Shares has been reflected in the Consolidated Financial Statements of the Company as if such contribution occurred as of the beginning of the earliest period presented at MAXXAM's historical cost using the equity method of accounting. The Company engages in forest products operations through MGI and MGI's principal operating subsidiaries, Pacific Lumber and Britt. MGI's business is seasonal in that its business generally experiences lower first quarter sales due largely to the general decline in construction-related activity during the winter months. The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto which are contained elsewhere herein. Old growth trees constitute Pacific Lumber's principal source of upper grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability to harvest virgin old growth timber on its property (see "-- Trends"), Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. Pacific Lumber has been able to lessen the impact of these decreases by augmenting its production facilities to increase its recovery of upper grade lumber from smaller diameter logs and increasing production capacity for manufactured upper grade lumber products through its end and edge glue facility (which was expanded during 1994). However, unless Pacific Lumber is able to sustain the harvest level of old growth trees, Pacific Lumber expects that its production of premium upper grade lumber products will decline and that its manufactured lumber products will constitute a higher percentage of its shipments of upper grade lumber products. See also "-- Trends," "Risk Factors -- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors" and "Business of the Company -- Pacific Lumber -- Regulatory and Environmental Factors." Logging costs have increased primarily due to the harvest of smaller diameter logs and, to a lesser extent, compliance with environmental regulations relating to the harvesting of timber and litigation costs incurred in connection with certain timber harvesting plans filed by Pacific Lumber. See " -- Trends." During the past few years, Pacific Lumber has significantly increased its production capacity for manufactured lumber products by assembling knot-free pieces of common grade lumber into wider and longer pieces in Pacific Lumber's end and edge glue facility. This manufactured lumber results in a significant increase in lumber recovery and produces a standard size upper grade product which is sold at a premium price compared to common grade products of similar dimensions. Pacific Lumber has instituted a number of measures at its 56 59 sawmills during the past several years designed to enhance the efficiency of its operations such as expansion of its manufactured lumber facilities and other improvements in lumber recovery, automated lumber handling and the modification of its production scheduling to maximize cogeneration power revenues, and installation of a lumber remanufacturing facility at its Fortuna lumber mill. RESULTS OF OPERATIONS The following table presents selected operational and financial information for the nine months ended September 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ----------------- ---------------------------- 1996 1995 1995 1994 1993 ------ ------ ------ ------ ------ Shipments: Lumber:(1) Redwood upper grades................................ 36.1 35.0 46.5 52.9 68.3 Redwood common grades............................... 175.2 164.2 216.7 218.4 184.7 Douglas-fir upper grades............................ 7.8 5.0 7.4 8.6 10.7 Douglas-fir common grades........................... 56.7 43.7 64.6 54.2 41.6 Other............................................... 15.8 9.6 11.4 12.1 4.8 ------ ------ ------ ------ ------ Total lumber................................... 291.6 257.5 346.6 346.2 310.1 ====== ====== ====== ====== ====== Logs(2)............................................. 16.1 6.9 12.6 17.7 18.6 ====== ====== ====== ====== ====== Wood chips(3)....................................... 157.2 166.8 214.0 210.3 156.8 ====== ====== ====== ====== ====== Average sales price: Lumber:(4) Redwood upper grades................................ $1,382 $1,510 $1,495 $1,443 $1,275 Redwood common grades............................... 509 476 477 460 469 Douglas-fir upper grades............................ 1,138 1,308 1,301 1,420 1,218 Douglas-fir common grades........................... 435 395 392 444 447 Logs(4)............................................... 498 462 440 615 704 Wood chips(5)......................................... 76 102 102 83 81 Net sales: Lumber, net of discount............................... $175.9 $158.0 $211.3 $216.5 $202.6 Logs.................................................. 8.0 3.2 5.6 10.9 13.1 Wood chips............................................ 11.9 17.0 21.7 17.4 12.7 Cogeneration power.................................... 2.4 1.7 2.5 3.5 3.8 Other................................................. 1.4 1.0 1.5 1.3 1.2 ------ ------ ------ ------ ------ Total net sales................................ $199.6 $180.9 $242.6 $249.6 $233.4 ====== ====== ====== ====== ====== Operating income........................................ $ 53.4 $ 53.7 $ 74.3 $ 79.1 $ 54.2 ====== ====== ====== ====== ====== Operating cash flow(6).................................. $ 73.6 $ 72.7 $ 99.6 $103.8 $ 78.7 ====== ====== ====== ====== ====== Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................................. $ 3.4 $ 2.3 $ 5.9 $ 16.1 $(17.7) ====== ====== ====== ====== ====== Capital expenditures.................................... $ 9.0 $ 6.6 $ 9.9 $ 11.3 $ 11.1 ====== ====== ====== ====== ======
- --------------- (1) Lumber shipments are expressed in millions of board feet. (2) Log shipments are expressed in millions of feet, net Scribner scale. (3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4) Dollars per thousand board feet. (5) Dollars per bone dry unit. (6) Operating income plus depletion and depreciation, also referred to as "EBITDA." See Note 5 of the Notes to Summary Historical and Pro Forma Consolidated Financial Data of the Company. 57 60 NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Shipments Lumber shipments to third parties for the nine months ended September 30, 1996 increased from the nine months ended September 30, 1995 due primarily to increased shipments of both common and upper grade Douglas-fir and redwood lumber. Log shipments for the nine months ended September 30, 1996 were 16.1 million feet, an increase of 9.2 million feet from the nine months ended September 30, 1995. Net sales Net sales for the nine months ended September 30, 1996 increased from the nine months ended September 30, 1995. This increase was principally due to higher shipments of common and upper grade Douglas-fir and redwood lumber and increased log shipments and to higher average realized prices for redwood and Douglas-fir common lumber. These increases were partially offset by lower average realized prices for upper grade redwood and Douglas-fir lumber, resulting primarily from manufactured lumber products which constitute a significant percentage of upper grade lumber shipments, and wood chips. Shipments of fencing and other value-added common lumber products from the Company's new remanufacturing facility were a contributing factor in the improved redwood common lumber realizations. See also "-- Trends". Operating income Operating income for the nine month period, excluding a one time gain in 1995 of $1.5 million related to business interruption proceeds for the settlement of claims related to an April 1992 earthquake, increased in 1996 due to the increase in net sales discussed above. Costs of goods sold reflect both the impact of additional manufacturing costs attributable to the increased shipments of remanufactured lumber and the increasing regulatory compliance for the Company's timber harvesting operations. Income before income taxes Income before income taxes for the nine months ended September 30, 1996 increased from the same period in 1995, primarily as a result of the increase in investment, interest and other income relating to cash equivalents and other non-recurring items. Credit (provision) in lieu of income taxes The credit in lieu of income taxes for the nine month period ended September 30, 1996 includes a benefit of $2.6 million relating to the refund of taxes previously paid in connection with a settlement of certain federal income tax matters in June 1996. THREE YEARS ENDED DECEMBER 31, 1995 Shipments Lumber shipments to third parties in 1995 were essentially unchanged from 1994. Increased shipments of common grade Douglas-fir lumber were mostly offset by decreased shipments of both upper and common grades of redwood lumber. Log shipments in 1995 were 12.6 million feet (net Scribner scale), a decrease of 5.1 million feet from 1994 shipments. Lumber shipments to third parties in 1994 increased by 12% compared to 1993. Increased shipments of redwood common lumber and common grade Douglas-fir and other lumber were partially offset by decreased shipments of upper grade redwood lumber. Log shipments in 1994 were 17.7 million feet, a decrease of .9 million feet from 1993 shipments. 58 61 Net Sales Net sales for 1995 decreased compared to 1994. Decreased shipments of upper grade redwood lumber, lower average realized prices for common grade Douglas-fir lumber and logs, decreased shipments of logs and redwood common lumber and lower sales of electrical power were largely offset by increased shipments of common grade Douglas-fir lumber, increased sales of wood chips and higher average realized prices for both common and upper grades of redwood lumber. Net sales for 1994 increased compared to 1993. This increase was principally due to increased shipments of redwood common lumber, an increase in the average realized price of upper grade redwood lumber, increased shipments of common grade Douglas-fir and other lumber and increased sales of wood chips, partially offset by decreased shipments of upper grade redwood lumber, a decrease in the average realized price of redwood common lumber and a decrease in the average realized price of log sales. The increase in sales of wood chips reflects higher demand from pulp mills. Operating Income Operating income for 1995 decreased compared to 1994. This decrease was primarily due to lower sales of lumber, higher cost of lumber sales and lower sales of logs and electrical power, partially offset by increased sales of wood chips and higher gross margins on wood chip sales. Cost of lumber sales for 1995 was unfavorably impacted by higher purchases of logs from third parties, partially offset by improved sawmill productivity. Cost of goods sold for 1995 and 1993 was reduced by $1.5 million and $1.2 million, respectively, of business interruption insurance proceeds for the settlement of claims related to an earthquake in April 1992. Operating income for 1994 increased compared to 1993. This increase was principally due to higher sales of lumber and wood chips, lower purchases of lumber and logs from third parties, improved sawmill productivity and reduced overhead costs. Pacific Lumber arranged for the purchase of a significant number of logs early in 1993 in response to concerns regarding inclement weather conditions hindering logging activities on Pacific Lumber's timberlands during the first five months of 1993. The cost associated with the purchase of logs from third parties significantly exceeds the Company's cost to harvest its own timber. As a result of the Company's last-in, first-out ("LIFO") methodology of accounting for inventories, a substantial portion of the additional cost associated with the purchased logs was charged to cost of sales in the third quarter of 1993. Income before income taxes and extraordinary item Income before income taxes and extraordinary item decreased for 1995 as compared to 1994. This decrease was primarily due to lower investment, interest and other income and the decrease in operating income. Investment, interest and other income for 1995 includes net gains on marketable securities of $4.2 million. Investment, interest and other income for 1994 includes the receipt of a franchise tax refund of $7.2 million (as described in Note 12 to the Company's Audited Consolidated Financial Statements) and net gains on marketable securities of $1.7 million. Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles increased for 1994 as compared to 1993. This increase resulted from the increase in operating income, higher investment, interest and other income and decreased interest expense. Investment, interest and other income for 1994 includes the receipt of a franchise tax refund net gains on marketable securities as described above. Investment, interest and other income for 1993 includes net gains on marketable securities of $6.4 million. Interest expense decreased due to lower interest rates resulting from the refinancing of the long-term debt of Pacific Lumber and MGI in March and August of 1993, respectively. Concurrently with the consummation of the Offering, MAXXAM will contribute the Kaiser Shares to the Company. The Kaiser Shares are pledged to secure the MGI Notes. The Company's consolidated financial statements reflect the contribution of the Kaiser Shares as if such contribution occurred as of the earliest period presented at MAXXAM's historical cost. As of the date of this Prospectus, the contribution of the Kaiser Shares would represent, on a fully diluted basis, an equity interest in Kaiser of approximately 34.7%. The Company follows the equity method of accounting for its investment in Kaiser. During the 59 62 first quarter of 1993, losses exhausted Kaiser's equity with respect to its common stockholders principally due to the implementation of new accounting standards for postretirement benefits and income taxes (see Note 5 to the Company's Audited Consolidated Financial Statements). The Company recorded its share of such loss in January 1993 up to the amount of its investment in Kaiser. Since January 1993, cumulative losses with respect to the results of operations attributable to Kaiser's common stockholders have exceeded cumulative earnings. The Company is under no obligation to provide any economic support to Kaiser, and accordingly, has not recorded any amounts attributable to its equity in Kaiser's results of operations for any period subsequent to January 1993. The Company will not record its equity in Kaiser's results of operations until such time as cumulative earnings exceed the cumulative losses incurred. Credit (provision) in lieu of income taxes The credit in lieu of income taxes for 1994 includes a credit relating to reserves the Company no longer believed were necessary. Extraordinary item The litigation settlement in the second quarter of 1994 (as described in Note 10 to the Company's Audited Consolidated Financial Statements) resulted in an extraordinary loss of $14.9 million, net of related income taxes of $6.3 million. The extraordinary loss consists of Pacific Lumber's $14.8 million cash payment to the settlement fund, a $2.0 million accrual for additional contingent claims and $4.4 million of related legal fees. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES The Company conducts its operations through MGI, its wholly owned subsidiary. MGI conducts its operations primarily through its subsidiaries, Pacific Lumber and Britt. Creditors of MGI's subsidiaries have priority with respect to the assets, cash flows and earnings of such subsidiaries over the claims of the creditors of MGI, including the holders of the MGI Notes, with respect to the assets, cash flows and earnings of MGI. Moreover, the creditors of MGI have priority over the claims of the Company's creditors, including the holders of the Notes. See "Risk Factors -- Substantial Indebtedness; Structural Subordination and Asset Encumbrances" and "-- Ability to Service Indebtedness." As of September 30, 1996, the indebtedness of MGI was $201.0 million and the indebtedness of MGI's subsidiaries was $571.9 million. The Company is a holding company, and as such its ability to service its indebtedness will be largely dependent on cash interest payments received from MAXXAM pursuant to the terms of the Intercompany Note, and to a considerably lesser extent, dividends received from MGI and capital contributions from MAXXAM. The MGI Indenture contains various covenants which, among other things, limit the payment of dividends and restricts transactions between MGI and its affiliates. Under the MGI Indenture, MGI was permitted to pay no dividends in respect of the period from August 31, 1993 to December 31, 1993, $4.9 million of dividends in respect of the 1994 fiscal year, $1.8 million of dividends in respect of the 1995 fiscal year, and $2.0 million of dividends in respect of the nine months ended September 30, 1996. MGI did not pay any dividends from August 1993 to December 31, 1994. MGI paid dividends of $4.8 million during 1995 and $3.9 million during the nine months ended September 30, 1996. As of September 30, 1996, no additional dividends could be paid by MGI. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes and the Pacific Lumber Credit Agreement contain various covenants which, among other things, restrict transactions between Pacific Lumber and its affiliates and the payment of dividends. Pacific Lumber can pay dividends in an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from Scotia Pacific, exclusive of the net income and depletion of Scotia Pacific for as long as any Timber Notes are outstanding. As of September 30, 1996, under the most restrictive of these covenants, approximately $15.4 million of dividends could be paid by Pacific Lumber. Pacific Lumber paid an aggregate of $16.5 million, $22.0 million and $24.5 million of dividends during the nine months ended September 30, 1996 and for the years ended December 31, 1995 and 1994, respectively. 60 63 Substantially all of MGI's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's consolidated assets are owned by Scotia Pacific. The Company expects that Pacific Lumber will provide a major portion of MGI's future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for the log requirements from which Pacific Lumber generates a substantial portion of its operating cash flow. Pacific Lumber harvests and purchases logs from Scotia Pacific's timberlands at prices established pursuant to a Master Purchase Agreement (see "Business of the Company -- Pacific Lumber Operations -- Relationships with Scotia Pacific and Britt"). The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and the holders of the Pacific Lumber Senior Notes have priority over the claims of creditors of MGI with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, Scotia Pacific will not have cash available for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Once Scotia Pacific has made appropriate provisions for current debt service on the Timber Notes and expenditures for operating and capital costs, and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from Scotia Pacific to Pacific Lumber. Accordingly, the Company expects that, once Scotia Pacific's debt service and operating and capital expenditure requirements have been met, substantially all of Scotia Pacific's available cash will be periodically distributed to Pacific Lumber. Scotia Pacific paid $59.6 million, $59.0 million, $88.9 million and $58.3 million of dividends to Pacific Lumber during the nine months ended September 30, 1996 and during the years ended December 31, 1995 and 1994 and during the period from March 23, 1993 to December 31, 1993, respectively. In the event Scotia Pacific's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes and to service its other indebtedness would be materially impaired and MGI's ability to pay interest on the MGI Notes and to make distributions to the Company would also be materially impaired, which could impair the Company's ability to make the required interest payments on the Notes. See Note 6 to the Company's Audited Consolidated Financial Statements for a description of the principal payment requirements of the Timber Notes. During the nine months ended September 30, 1996, and during the years ended December 31, 1995, 1994 and 1993, Pacific Lumber's operating income plus depletion and depreciation ("operating cash flow") amounted to $67.8 million, $90.5 million, $95.9 million and $76.6 million, respectively, which exceeded interest expense in respect of all of its indebtedness in those periods by $26.9 million, $35.0 million, $39.8 million and $17.4 million, respectively. The Company believes that Pacific Lumber's level of operating cash flow and other available sources of financing will enable it to meet the debt service requirements on the Pacific Lumber Senior Notes and the Timber Notes for the next year. With respect to its long-term liquidity, Pacific Lumber believes that its ability to generate sufficient levels of cash from operations, and its ability to obtain both short and long-term financing, should provide sufficient funds to meet its long-term working capital and capital expenditure requirements. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors." As of September 30, 1996, MGI (excluding its subsidiary companies) had cash and marketable securities of approximately $72.5 million. The Company believes, although there can be no assurance, that the aggregate dividends which will be available to MGI from Pacific Lumber and Britt, during the period in which cash interest will not be payable on the MGI Discount Notes, will exceed the cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, the Company believes that MGI should be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Risk Factors Relating to Pacific Lumber -- Regulatory and Environmental Factors." On August 4, 1993, MGI issued $100.0 million aggregate principal amount of the MGI Senior Notes and $126.7 million aggregate principal amount (approximately $70.0 million net of original issue discount) of the MGI Discount Notes. The MGI Notes are secured by, among other things, the capital stock of Pacific 61 64 Lumber and Britt and the Kaiser Shares, which MAXXAM transferred to the Company concurrently with the consummation of the Offering. See "Principal Indebtedness" and Note 6 to the Company's Audited Consolidated Financial Statements for a description of the terms of the MGI Notes and the use of proceeds from their issuance. The MGI Notes are senior indebtedness of MGI and are effectively senior to the indebtedness of the Company; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. On March 23, 1993, Pacific Lumber issued $235.0 million of the Pacific Lumber Senior Notes and Scotia Pacific issued $385.0 million of the Timber Notes. See "Principal Indebtedness" and Note 6 to the Company's Audited Consolidated Financial Statements for a description of the terms of the Pacific Lumber Senior Notes and the Timber Notes and the use of proceeds from their issuance. Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31, 1998, are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for borrowings of up to $60.0 million, of which $15.0 million may be used for standby letters of credit and $30.0 million is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of September 30, 1996, $45.4 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $4.7 million was available for letters of credit and $30.0 million was restricted to timberland acquisitions. No borrowings were outstanding as of September 30, 1996, and letters of credit outstanding amounted to $10.3 million. The Pacific Lumber Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. See "-- Description of Principal Indebtedness -- Pacific Lumber Senior Notes." Pacific Lumber's and Britt's capital expenditures were made to improve production efficiency, reduce operating costs and, to a lesser degree, acquire additional timberlands. Pacific Lumber's and Britt's capital expenditures were $9.0 million, $9.9 million, $11.3 million and $11.1 million for the nine months ended September 30, 1996 and for the years ended December 31, 1995, 1994 and 1993, respectively. Capital expenditures for 1996 are expected to be $12-$15 million and for the 1997-1998 period are estimated to be between $10.0 million and $15.0 million per year. Pacific Lumber may purchase additional timberlands from time to time as appropriate opportunities arise. Moreover, such purchases could exceed historical levels. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by an earthquake in April 1992 were approximately $1.9 million for 1993 and $2.6 million for 1994, when construction was completed. As of September 30, 1996, MGI and its subsidiaries had consolidated working capital of $124.5 million and long-term debt of $726.2 million (net of current maturities and restricted cash deposited in a liquidity account for the benefit of the holders of the Timber Notes). MGI and its subsidiaries anticipate that cash flow from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, MGI and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash from operations, and their ability to obtain both short and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, MGI and its subsidiaries are more sensitive than less leveraged companies to factors affecting their operations, including governmental regulation affecting their timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. See also "-- Trends" and "Risk Factors -- Risk Factors Relating to Pacific Lumber." As of September 30, 1996, on a pro forma basis, after giving effect to the issuance of the Old Notes and the loan of the net proceeds therefrom to MAXXAM, the Company would have had working capital of $126.6 million and consolidated indebtedness of $856.2 million (net of current maturities and restricted cash held for the benefit of the Timber Notes). The Company expects that the cash interest payments received from MAXXAM pursuant to the Intercompany Note and, to a considerably lesser extent, dividends received from 62 65 MGI and capital contributions from MAXXAM will be sufficient to fund its debt service requirements for the next year and for the next several years thereafter. Cash flows from operations of the Company and its subsidiaries are unlikely to be sufficient to pay principal on the Notes. The ability of the Company and its subsidiaries to refinance their respective indebtedness at or prior to the respective maturities thereof will depend on a number of factors, including their respective financial condition, results of operations and cash flows, and then prevailing interest rates and market conditions. There can be no assurance that such refinancing will be available, or available on reasonable terms. The failure of any of the Company's subsidiaries to refinance its indebtedness could materially adversely affect the ability of the Company to satisfy its obligations under the Notes. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Litigation." TRENDS The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. Compliance with such laws and regulations together with the cost of litigation incurred in connection with certain timber harvesting operations of Pacific Lumber have increased the cost of logging operations. These laws include the Forest Practice Act, which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the BOF. The ESA and the CESA provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. CESA provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions would not materially and adversely affect the Company. In March 1992, the marbled murrelet was approved for listing as endangered under the CESA. In October 1992, the USFWS issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. Pacific Lumber has incorporated, and will continue to incorporate as required, mitigation measures into its THPs to protect and maintain habitat for the marbled murrelet on its timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide certain site specific mitigations in connection with THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during a portion of the murrelet's nesting and breeding season, which extends from April through mid-September. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat, the majority of which is located within the Headwaters Timberlands. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the areas designated as critical habitat for the marbled murrelet (see below). Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In May 1996, the USFWS published the Final Designation of critical habitat for the marbled murrelet, which designated over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timber. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop the Murrelet HCP. Due to, among 63 66 other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed the Takings Litigation alleging that certain portions of its timberlands have been "taken" and seeking just compensation (see "Legal Proceedings -- Pacific Lumber" for a description of the Takings Litigation). Pursuant to the Headwaters Agreement described below, the Takings Litigation has been stayed by the court at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as all of the material regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. For example, the NMFS recently announced that by April 25, 1997, it would make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. See "-- Headwaters Agreement" below for a description of the Headwaters Agreement relating to processing and approval of the Multi-Species HCP covering Pacific Lumber's timberlands. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish an LTSY harvest level that takes into account environmental and economic considerations. The SYP must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last five years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, the Company is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and submitting corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. Accordingly, the Company is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. See "-- Headwaters Agreement" below for a description of certain terms of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's THPs and other timber harvesting 64 67 operations, and the Company expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent the Company from implementing certain of its approved THPs or which challenge other operations by the Company. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to the Company's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the Company's consolidated financial position, results of operations or liquidity of the Company. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. Judicial or regulatory actions adverse to Pacific Lumber, increased regulatory delays and inclement weather in northern California, independently or collectively, could impair Pacific Lumber's ability to maintain adequate log inventories and force Pacific Lumber to temporarily idle or curtail operations at certain of its lumber mills from time to time. With respect to the foregoing, see also "Risk Factors -- Risk Factors Relating to Pacific Lumber." HEADWATERS AGREEMENT On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement, which provides the framework for the acquisition by the United States and California of the approximately 5,600 acres of Headwaters Timberlands. A substantial portion of the Headwaters Timberlands consist of "virgin old" growth timberlands (those which have never been harvested). The Headwaters Timberlands would be transferred in exchange for (a) property and other consideration (possibly including cash) from the United States and California having an aggregate fair market value of $300 million and (b) the Elk River Timberlands, consisting of approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California from a third party. The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions, including completion within ten months of specified closing items. The Headwaters Agreement requires the United States and/or California to furnish Pacific Lumber a list of property interests owned or controlled by the United States and/or California with a good faith estimated fair market value equal to or in excess of $300 million which are available and acceptable to Pacific Lumber for exchange. The Headwaters Agreement requires these lists to be accompanied by sufficient background information (including valuation information) to enable Pacific Lumber to determine the commercial viability and the ability to monetize such property interests. On December 5, 1996, the United States and California each furnished a list of properties. Neither list was accompanied by the requisite background information, although both lists did indicate that additional information would be made available. The list of United States properties consisted of oil and gas interests in Kern County, California, approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and Trinity Counties in California, and surplus acreage next to a federal office building in Laguna Niguel, California. The California list contained a variety of properties located throughout the state. On December 10, 1996, Pacific Lumber wrote to the United States and California, stating, among other things, that the requisite background information had not been furnished, requesting the missing information and indicating that certain of the properties did not appear to be "available," as legislative action would be required for exchange of certain of the properties. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP which is to cover all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of an SYP. Closing of the Headwaters Agreement is subject to various conditions, including: (a) acquisition by the government of 65 68 the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP, and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. The parties to the Headwaters Agreement are working to satisfy these conditions; however, there can be no assurance that the Headwaters Agreement will be consummated. See "Business of the Company -- Pacific Lumber -- Headwaters Agreement" for further information concerning the Headwaters Agreement. 66 69 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MAXXAM This section contains statements which constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers primarily with respect to the future operating performance of the Company. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. This section and "Risk Factors" identify important factors that could cause such differences. RESULTS OF OPERATIONS MAXXAM operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser, a fully integrated aluminum producer; forest products, through the Company and its wholly owned subsidiaries, principally Pacific Lumber and Britt; real estate investment and development, managed through MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. The following should be read in conjunction with MAXXAM's Consolidated Financial Statements and the Notes thereto which are contained elsewhere herein. ALUMINUM OPERATIONS Aluminum operations account for the substantial portion of MAXXAM's revenues and operating results. Kaiser's operating results are sensitive to changes in prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold and on hedging strategies. Kaiser, through its principal subsidiary, KACC, operates in two business segments: bauxite and alumina, and aluminum processing. The following table presents selected operational and financial information for the nine months ended September 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993. The information presented in the table is in millions of dollars except shipments and prices.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------- ------------------------------ 1996 1995 1995 1994 1993 -------- -------- -------- -------- -------- Shipments:(1) Alumina.............................. 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5 Aluminum Products: Primary aluminum.................. 262.9 184.5 271.7 224.0 242.5 Fabricated aluminum products...... 245.4 284.3 368.2 399.0 373.2 -------- -------- -------- -------- -------- Total aluminum products...... 508.3 468.8 639.9 623.0 615.7 ======== ======== ======== ======== ======== Average realized sales price: Alumina (per ton).................... $ 199 $ 203 $ 208 $ 169 $ 169 Primary aluminum (per pound)......... .69 .82 .81 .59 .56 Net sales: Bauxite and alumina: Alumina........................... $ 300.2 $ 303.8 $ 424.8 $ 352.8 $ 338.2 Other (2)(3)...................... 77.2 65.3 89.4 79.7 85.2 -------- -------- -------- -------- -------- Total bauxite and alumina.... 377.4 369.1 514.2 432.5 423.4 -------- -------- -------- -------- --------
67 70
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, 1996 1995 1995 1994 1993 -------- -------- -------- -------- -------- Aluminum processing: Primary aluminum.................. 402.8 335.0 488.0 292.0 301.7 Fabricated aluminum products...... 861.4 929.0 1,218.6 1,043.0 981.4 Other(3).......................... 10.5 13.6 17.0 14.0 12.6 -------- -------- -------- -------- -------- Total aluminum processing.... 1,274.7 1,277.6 1,723.6 1,349.0 1,295.7 -------- -------- -------- -------- -------- Total net sales.............. $1,652.1 $1,646.7 $2,237.8 $1,781.5 $1,719.1 ======== ======== ======== ======== ======== Operating income (loss)................ $ 91.9 $ 153.9 $ 216.5 $ (50.3) $ (117.4) ======== ======== ======== ======== ======== Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles............. $ 26.6 $ 73.0 $ 108.7 $ (145.8) $ (201.7) ======== ======== ======== ======== ======== Capital expenditures and investments in unconsolidated joint ventures(4)..... $ 91.1 $ 53.2 $ 88.4 $ 70.0 $ 67.7 ======== ======== ======== ======== ========
- --------------- (1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries. (4) The nine months ended September 30, 1995 and the year ended December 31, 1995 include investments in unconsolidated joint ventures of $9.0 million. NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Summary Kaiser's net sales for the first nine months of 1996 were $1,652.1 million, compared to $1,646.7 million for the same period in 1995. For the first nine months of 1996, Kaiser's operating income was $91.9 million, compared to operating income of $153.9 million in the first nine months of 1995. Results for the nine months ended September 30, 1996, reflect the substantial reduction in market prices for primary aluminum more fully discussed below (see "-- Trends -- Aluminum Operations"). Alumina prices, which are significantly influenced by changes in primary aluminum prices, also declined from period to period. The decrease in product prices more than offset the positive impact of increases in shipments in several segments of Kaiser's business, as more fully discussed below. Results for the first nine months of 1995 include approximately $17.0 million of first-quarter 1995 pre-tax expenses associated with an eight-day strike at five major U.S. locations, a six-day strike at Kaiser's Alumina Partners of Jamaica ("Alpart") alumina refinery, and a four-day disruption of alumina production at Alpart caused by a boiler failure. Bauxite and Alumina Net sales for the bauxite and alumina segment for the nine months ended September 30, 1996, were basically unchanged from the same period in 1995 as, on a year to date basis, nominal alumina price declines were offset by a modest increase in alumina shipments. The reduction in prices realized reflects the decline in primary aluminum prices experienced in 1996 discussed above, as well as the impact of certain short term sales of previously uncommitted alumina production. Operating income (loss) for this segment of the Kaiser's business declined significantly from the prior year period as a result of: (i) reduced gross margins from alumina sales resulting from the price declines 68 71 referred to above; (ii) high operating costs associated with disruptions in the power supply at Alpart; and (iii) increased natural gas costs at Kaiser's Gramercy, Louisiana alumina refinery. Operating income for the nine months ended September 30, 1996, was also unfavorably impacted by a temporary raw material quality problem experienced at Kaiser's Gramercy, Louisiana facility during the second quarter of 1996. Aluminum Processing For the first nine months of 1996 increases in shipments of 42.5% more than offset a 16% decline in product prices from period to period. The increase in shipments during the nine months ended September 30, 1996, is the result of increased shipments of primary aluminum to third parties as a result of a decline in intracompany transfers. Net sales of fabricated aluminum products were down 7% for the nine months ended September 30, 1996 as compared to the prior year period as a result of a decrease in shipments (primarily related to can sheet activities) resulting from reduced growth in demand and the reduction of consumer inventories. The impact of reduced product shipments was to a limited degree offset by a 7% increase in prices realized from the sale of fabricated aluminum products for the nine months ended September 30, 1996, resulting from a shift in product mix (to higher-end value added products), due to reduced can sheet shipments. THREE YEARS ENDED DECEMBER 31, 1995 Net Sales Bauxite and alumina. Revenue from net sales to third parties for the bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2% higher in 1994 than in 1993. Revenue from alumina increased 20% in 1995 from 1994 due to higher average realized prices, partially offset by lower shipments. Revenue from alumina increased 4% in 1994 compared to 1993 because of increased shipments. The remainder of the segment's sales revenues was from sales of bauxite, which remained about the same throughout the three-year period, and the portion of sales of alumina attributable to the 35% minority interest in Alpart. Aluminum processing. Revenue from net sales to third parties for the aluminum processing segment was 28% higher in 1995 than in 1994 and 4% higher in 1994 than in 1993. The bulk of the segment's sales represents Kaiser's primary aluminum and fabricated aluminum products, with the remainder representing the portion of sales of primary aluminum attributable to the minority interest in Valco. Revenue from primary aluminum increased 67% in 1995 from 1994 due primarily to higher average realized prices and higher shipments. In 1995, Kaiser's average realized price from sales of primary aluminum was approximately $.81 per pound, compared to the AMT price of approximately $.86 per pound. The higher shipments of primary aluminum were due to increased production at Kaiser's smelters in the Pacific Northwest and Valco, and reduced intracompany consumption of primary aluminum at Kaiser's fabricated products units. The increase in revenue for 1995 was partially offset by decreased shipments caused by a strike of the United Steelworkers of America (the "USWA") discussed below. Revenue from primary aluminum decreased 3% in 1994 from 1993 as higher average realized prices were more than offset by lower shipments. Average realized prices in 1994 reflected the defensive hedging of primary aluminum prices in respect to 1994 shipments, which was initiated prior to improvements in metal prices that had recently occurred. Shipments in 1994 reflected production curtailments at Kaiser's smelters in the Pacific Northwest and Valco. Shipments of primary aluminum to third parties were approximately 42% of total aluminum products shipments in 1995 compared with approximately 36% in 1994 and 39% in 1993. Revenue from fabricated aluminum products increased 17% in 1995 from 1994 due to higher average realized prices partially offset by lower shipments for most of these products. Revenue from fabricated aluminum products increased 6% in 1994 from 1993, principally due to increased shipments of most of these products. Operating Income (Loss) Improved operating results for 1995 were partially offset by expenses related to Kaiser's smelting joint venture in China (see "-- Financial Condition and Investing and Financing Activities -- Aluminum Opera- 69 72 tions"), accelerated expenses on Kaiser's micromill technology, maintenance expenses as a result of an electrical lightning strike at Kaiser's Trentwood, Washington, facility, and a work slowdown at Kaiser's 49%-owned Kaiser Jamaica Bauxite Company prior to the signing of a new labor contract. The combined impact of these expenditures on the results for 1995 was approximately $6.0 million (on a pre-tax basis). Operating results for 1995 were further impacted by (i) an eight-day strike of the USWA at Kaiser's five major domestic locations, (ii) a six-day strike of the National Workers Union at Kaiser's 65%-owned Alpart alumina refinery, and (iii) a four-day disruption of alumina production at Alpart caused by a boiler failure. The combined impact of these events on the results for 1995 was approximately $17.0 million (on a pre-tax basis), principally from lower production volume and other related costs. In 1993, Kaiser recorded pre-tax charges of $35.8 million relating to the restructuring of aluminum operations (see "-- Aluminum Processing" below) and approximately $19.4 million in the fourth quarter of 1993 because of reductions in the carrying value of its inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated aluminum products. Kaiser's corporate general and administrative expenses of $82.3 million, $67.6 million and $72.6 million in 1995, 1994 and 1993, respectively, were allocated by MAXXAM to the bauxite and alumina and aluminum processing segments based upon those segments' ratio of sales to unaffiliated customers. Bauxite and alumina. Operating income for the bauxite and alumina segment was $37.2 million in 1995, compared to operating income of $5.6 million in 1994 and an operating loss of $20.1 million in 1993. In 1995 compared to 1994, operating income increased principally due to higher revenue, partially offset by the effect of the strikes and boiler failure. In 1994 compared to 1993, operating income was favorably affected by increased shipments and lower manufacturing cost. Aluminum processing. Operating income for the aluminum processing segment was $179.3 million in 1995, compared to an operating loss of $55.9 million in 1994 and an operating loss of $97.3 million in 1993. Operating results improved in 1995 compared to 1994, principally due to higher revenue, partially offset by the effect of the USWA strike. The decrease in operating loss in 1994 compared to 1993 was caused principally by a nonrecurring $35.8 million restructuring charge recorded in 1993, as described below, increased shipments of fabricated aluminum products, and higher average realized prices of primary aluminum, partially offset by lower shipments of primary aluminum. In October 1993, KACC announced that it was restructuring its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs by at least $50.0 million after full implementation. Additionally, KACC implemented a plan to streamline its casting operations, which included the shutdown of two facilities located in Ohio. This entire restructuring was successfully completed by the end of 1995. The pre-tax charge for this restructuring of $35.8 million included $25.2 million for pension, severance and other termination benefits at Trentwood; $8.0 million related to casting facilities; and $2.6 million for various other items. Other contributing factors to the 1993 operating results were lower production at Kaiser's smelters in the Pacific Northwest as a result of the removal of three reduction potlines from production in January 1993 in response to the reduction by the BPA during the first quarter of 1993 of the amount of power it had normally provided to Kaiser, and the increased cost of substitute power in such quarter. Additionally, during 1993, Kaiser realized above-market prices for significant quantities of primary aluminum sold forward in prior periods under long-term contracts. Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item and Cumulative Effect of Changes in Accounting Principles Income before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1995, as compared to the loss for 1994, resulted from the improvement in operating income previously described, partially offset by other charges, principally related to the establishment of additional litigation reserves. See "-- Financial Condition and Investing and Financing Activities -- Aluminum Operations." The decrease in the loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles in 1994 compared to 1993 resulted from the reduction in operating losses previously described. 70 73 As described in Note 1 to MAXXAM's Audited Consolidated Financial Statements, Kaiser's cumulative losses in the first and second quarters of 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions as described in Note 6 to MAXXAM's Audited Consolidated Financial Statements, eliminated Kaiser's equity with respect to its common stock; accordingly, MAXXAM recorded 100% of Kaiser's losses in the third and fourth quarters of 1993 and all of 1994, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7 to MAXXAM's Audited Consolidated Financial Statements). MAXXAM recorded 100% of Kaiser's earnings in 1995 and will continue to do so until such time as the cumulative losses recorded by MAXXAM with respect to Kaiser's minority common stockholders are recovered. Information concerning net sales, operating income (loss) and assets attributable to certain geographic areas and industry segments is set forth in Note 11 to MAXXAM's Audited Consolidated Financial Statements. FOREST PRODUCTS OPERATIONS For information concerning the results of MAXXAM's forest products operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Results of Operations." Information concerning net sales, operating income (loss) and assets attributable to certain geographic areas and industry segments is set forth in Note 11 to MAXXAM's Audited Consolidated Financial Statements. REAL ESTATE AND OTHER OPERATIONS The following table presents selected operational and financial information for the nine months ended September 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993. The information presented in the table is in millions of dollars.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------- ---------------------------- 1996 1995 1995 1994 1993 ----- ----- ------ ------ ------ Net sales............................... $69.4 $65.0 $ 84.8 $ 84.6 $ 78.5 Operating loss.......................... (7.3) (6.4) (13.6) (10.0) (13.5) Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................. 10.2 (.9) (.8) (1.5) 38.1
Net sales includes revenues from (i) sales of developed lots, bulk acreage and real property associated with MAXXAM's real estate developments, (ii) resort and other commercial operations conducted at certain of MAXXAM's real estate developments, (iii) rental revenues associated with the real properties purchased from the Resolution Trust Corporation in June 1991 (the "RTC Portfolio"), and (iv) beginning in the fourth quarter of 1995, revenues from SHRP, Ltd., a Texas limited partnership which owns and operates a Class 1 horse racing facility in Houston, Texas (see "-- Financial Condition and Investing and Financing Activities -- Real Estate and Other Operations"). Net sales do not include any amounts from the sale of RTC Portfolio properties and loans, which are recorded net of costs as investment, interest and other income. As of September 30, 1996 the RTC Portfolio consisted of two loans and eight properties which had an aggregate net book value of $18.2 million. For a description of the holdings of the Real Estate Subsidiaries, see "Business of MAXXAM -- Real Estate and Other Operations." NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Net sales Net sales for the nine months ended September 30, 1996 increased over the same period in 1995 as the inclusion in 1996 results of $15.1 million of revenues attributable to SHRP, Ltd. more than offset lower real 71 74 estate revenues. Operating results with respect to SHRP, Ltd. were not consolidated prior to October 6, 1995. Net sales attributable to real estate operations of $54.3 million for the nine months ended September 30, 1996 decreased from $65.0 million in the same period in 1995 due to lower sales of real property in the Fountain Hills development in Arizona and lower revenues from the RTC Portfolio due to the sale of a substantial number of these properties in 1996 and prior periods. Operating loss The operating loss increased for the nine months ended September 30, 1996 from the same period in 1995, principally due to lower margins on sales of real property and $1.6 million of operating losses attributable to SHRP, Ltd. for the nine months ended September 30, 1996. Income (loss) before income taxes and minority interests Income before income taxes and minority interests for the nine months ended September 30, 1996 increased compared to the income (loss) for the same period in 1995. Investment, interest and other income for the nine months ended September 30, 1996 includes a pre-tax gain of $16.9 million from the sale of three multi-family properties and the remaining mortgage notes from the RTC Portfolio for $32.4 million in net proceeds. Additionally, investment income for the nine months ended September 30, 1996 includes income derived from lot sales and operations at SunRidge Canyon, the Company's 50%-owned joint venture in Arizona. Interest expense for the nine months ended September 30, 1996 includes interest on SHRP Ltd.'s Senior Secured Extendible Notes (See Note 4 to MAXXAM's Audited Consolidated Financial Statements). THREE YEARS ENDED DECEMBER 31, 1995 Net Sales Net sales for 1995 were essentially unchanged from 1994. The inclusion of revenues in the fourth quarter of 1995 from SHRP, Ltd. and a bulk sale of acreage in Texas were offset by a decrease in rental revenues from the RTC Portfolio due to the sale of some of those properties. Net sales for 1994 increased as compared to 1993. This increase was primarily due to bulk acreage sales in New Mexico and increased lot sales at MAXXAM's Fountain Hills development in Arizona, partially offset by a decrease in rental revenues resulting from the sale of sixteen apartment complexes from the RTC Portfolio in December 1993. Operating Loss The operating loss for 1995 increased as compared to 1994, primarily due to a $4.0 million writedown of certain real property to its estimated net realizable value, partially offset by a bulk sale of acreage in Texas. The operating loss for 1994 decreased as compared to 1993. The operating results for 1994 were favorably impacted by the bulk acreage sales and the increased sales at Fountain Hills, offset by decreased revenues from the RTC Portfolio as a result of the sale of the sixteen apartment complexes in December 1993. The operating loss for 1993 also included a $5.9 million writedown of certain of MAXXAM's nonstrategic real estate holdings to their estimated net realizable value. Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item and Cumulative Effect of Changes in Accounting Principles The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1995 decreased as compared to 1994. This decrease was primarily due to higher investment, interest and other income and lower interest expense, partially offset by the increased operating loss discussed above. Investment, interest and other income for 1995 includes a pre-tax gain of $10.5 million resulting from the sale of five real properties and one loan from the RTC Portfolio for $25.5 million. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1994 was $1.5 million, as compared to income of $38.1 million for 1993. The loss for 1994 reflects a decrease in investment, interest and other income, offset by a decrease in interest expense and the decreased operating loss discussed above. Investment, interest and other income for 1994 includes pre-tax 72 75 gains of $7.3 million resulting from the sale of two real properties and one loan from the RTC Portfolio for $14.2 million. The decrease in interest expense for 1994 compared to 1993 resulted primarily from repayments on debt attributable to the sixteen apartment complexes sold from the RTC Portfolio in December 1993. Investment, interest and other income for 1993 includes a pre-tax gain of $47.8 million attributable to the sale of these properties for $113.6 million. Also included in investment, interest and other income for 1993 are the sales of two other real properties and three loans from the RTC Portfolio resulting in pre-tax gains of $5.1 million. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ----------------- ---------------------------- 1996 1995 1995 1994 1993 ------ ------ ------ ------ ------ (IN MILLIONS OF DOLLARS) Operating loss............................ $(29.3) $(14.3) $(19.6) $(11.5) $(19.5) Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................... (32.4) (15.2) (19.8) (19.3) (30.1)
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1995 Operating loss The operating losses represent corporate general and administrative expenses that are not attributable to MAXXAM's industry segments. The operating losses for the nine months ended September 30, 1996 increased from the same period in 1995. This increase was principally due to accruals of $21.9 million for certain legal contingencies of which a substantial portion relates to legal fees and expenses that the Company may incur in connection with matters related to (i) a civil action filed by the FDIC against Mr. Charles E. Hurwitz seeking damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT and (ii) formal administrative proceedings initiated by the OTS against MAXXAM and others (the "Notice") alleging misconduct by MAXXAM, Federated, Mr. Hurwitz and the other respondents with respect to the failure of USAT. The OTS seeks, among other things, unspecified damages in excess of $138.0 million from MAXXAM and Federated and civil penalties. See "Legal Proceedings -- USAT Matters." Loss before income taxes and minority interests The loss before income taxes and minority interests includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, that are not attributable to MAXXAM's industry segments. The losses for the nine months ended September 30, 1996 increased from the same period in 1995 principally due to increased operating losses discussed above. Credit (Provision) for Income Taxes MAXXAM's credit for income taxes for the nine months ended September 30, 1996 and the provision for income taxes for the nine months ended September 30, 1995 include the reversal of reserves MAXXAM no longer believed were necessary (See Note 6 of the Condensed Notes to MAXXAM's Unaudited Consolidated Financial Statements). Minority interests Minority interests represent the minority stockholders' interest in MAXXAM's aluminum operations and, with respect to periods after October 6, 1995, the minority partners' interest in SHRP, Ltd. 73 76 THREE YEARS ENDED DECEMBER 31, 1995 Operating Loss The operating losses represent corporate general and administrative expenses that are not attributable to MAXXAM's industry segments. The operating loss for 1995 increased compared to 1994, primarily due to a $2.5 million increase in costs attributable to phantom share rights granted to certain employees and a $6.1 million charge for the cost of certain litigation. These phantom share rights, together with rights granted to certain employees of MAXXAM's real estate subsidiaries, were exercised in 1995. See Note 8 to MAXXAM's Audited Consolidated Financial Statements. The operating loss for 1994 decreased compared to 1993, primarily due to a $6.5 million charge related to litigation contingencies in 1993 and lower overhead costs. Loss Before Income Taxes, Minority Interests, Extraordinary Item and Cumulative Effect of Changes in Accounting Principles The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, that are not attributable to MAXXAM's industry segments. The loss for 1995 increased compared to 1994, primarily due to the increased operating loss, partially offset by higher investment, interest and other income. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1994 was significantly less than the loss for 1993. This decrease was primarily due to the decreased operating losses discussed above and a decrease in interest expense. The decrease in interest expense resulted primarily from the redemption in August 1993 of $20.0 million aggregate principal amount of MAXXAM's Reset Notes. Investment, interest and other income (expense) for 1994 includes the equity in losses of affiliates attributable to MAXXAM's equity interest in SHRP, Ltd., offset by net gains on marketable securities. Affiliates of MAXXAM held an equity interest in SHRP, Ltd. of approximately 29.7% until October 1994, when, as a result of an additional capital contribution of $5.6 million, MAXXAM's interest increased to approximately 45%. MAXXAM obtained a majority interest in SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy proceedings on October 6, 1995. See "-- Financial Condition and Investing and Financing Activities -- Real Estate and Other Operations." Credit (Provision) for Income Taxes MAXXAM's credit (provision) for income taxes differs from the federal statutory rate due principally to (i) revision of prior years' tax estimates and other changes in valuation allowances, (ii) percentage depletion, and (iii) foreign, state and local taxes, net of related federal tax benefits. MAXXAM's provision for income taxes as reflected in MAXXAM's Audited Consolidated Statement of Operations for the year ended December 31, 1995 reflects a benefit of $24.2 million relating to the revision of prior years' tax estimates and other changes in valuation allowances. See Note 5 to MAXXAM's Audited Consolidated Financial Statements. Minority Interests Minority interests represent the minority stockholders' interest in MAXXAM's aluminum operations and, with respect to periods after October 6, 1995, minority partners' interest in SHRP, Ltd. Extraordinary Item The refinancing activities of Kaiser during the first quarter of 1994, as described in Note 4 to MAXXAM's Audited Consolidated Financial Statements, resulted in an extraordinary loss of $5.4 million, net of benefits for income taxes of $2.9 million. The extraordinary loss consists primarily of the write-off of unamortized deferred financing costs on Kaiser's previous credit agreement (the "1989 KACC Credit Agreement"). 74 77 The refinancing activities of KACC and Pacific Lumber in the first quarter of 1993 and MGI in the third quarter of 1993, as described in Note 4 to MAXXAM's Audited Consolidated Financial Statements, resulted in an extraordinary loss of $50.6 million, net of benefits for minority interests of $2.8 million and income taxes of $27.5 million. The extraordinary loss consists primarily of the respective tender and redemption premiums paid and the write-off of unamortized discount and deferred financing costs on Pacific Lumber's retired 12% Series A Senior Notes, 12.2% Series B Senior Notes and 12 1/2% Senior Subordinated Debentures, MGI's retired 12 3/4% Notes and KACC's retired 14 1/4% Senior Subordinated Notes. Cumulative Effect of Changes in Accounting Principles As of January 1, 1993, MAXXAM adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"), Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") as more fully described in Notes 5 and 6 to MAXXAM's Audited Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased 1993 results of operations by $26.6 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced 1993 results of operations by $437.9 million, net of related benefits for minority interests of $63.6 million and income taxes of $236.8 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 reduced 1993 results of operations by $6.4 million, net of related benefits for minority interests of $1.0 million and income taxes of $3.4 million. The new accounting methods have no effect on MAXXAM's cash outlays for postretirement and postemployment benefits, nor does the cumulative effect of the changes in accounting principles affect MAXXAM's compliance with its existing debt covenants. Postretirement benefits other than pensions are generally provided through contracts with various insurance carriers. MAXXAM has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. MAXXAM reserves the right, subject to applicable collective bargaining agreements and applicable legal requirements, to amend or terminate these benefits. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES Since 1993, subsidiaries of MAXXAM's aluminum operations and forest products operations have completed a number of transactions designed to enhance their liquidity, significantly extend their debt maturities and lower their interest costs. Collectively, these transactions have included public and private offerings for approximately $1.6 billion of debt securities, approximately $220.0 million of additional equity capital and the replacement of revolving credit facilities. The following should be read in conjunction with MAXXAM's Consolidated Financial Statements and the Notes thereto. MAXXAM (PARENT COMPANY) MAXXAM conducts its operations primarily through its subsidiaries. Creditors of and holders of minority interests in subsidiaries of MAXXAM have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of MAXXAM, including the holders of MAXXAM's public debt. As of September 30, 1996, the indebtedness of the subsidiaries and the minority interests reflected on MAXXAM's consolidated balance sheet were $1,668.6 million and $217.9 million, respectively. On a pro forma basis, as of September 30, 1996, after giving effect to: (a) the issuance of $130.0 million principal amount of Old Notes, (b) the redemption of $42.6 million aggregate principal amount of the Old MAXXAM Notes, and (c) the issuance of Kaiser's $225.0 million aggregate principal amount of KACC New Notes and the application of the net proceeds therefrom, MAXXAM would have had consolidated indebtedness of $1,893.3 million. MAXXAM did not receive any of the net proceeds from the sale of the KACC New Senior Notes. Certain of MAXXAM's subsidiaries, principally Kaiser and MGI, are restricted by their various debt agreements as to the amount of funds that can be paid in the form of dividends or loaned to MAXXAM. The 1994 KACC Credit Agreement contains covenants which, among other things, limit Kaiser's ability to pay cash dividends and restrict transactions between Kaiser and its affiliates. The indentures governing the KACC Notes contain covenants which, among other things, limit KACC's ability to pay cash dividends and restrict 75 78 transactions between KACC and its affiliates. Pursuant to the terms of the 1994 KACC Credit Agreement, Kaiser is precluded from paying any dividends with respect to its common stock. The Indenture governing the Notes contains various covenants which, among other things, will limit the payment of dividends and restrict transactions between the Company and its affiliates. Except for possible proceeds from the Headwaters Agreement, MAXXAM does not expect to receive any dividends from the Company during the next several years. Moreover, MAXXAM expects that the Company will be, to a large measure, dependent upon cash interest payments in respect of the Intercompany Note to meet the debt service obligations to the holders of the Notes. The most restrictive covenants governing debt of MAXXAM's real estate and other subsidiaries would not restrict payment to MAXXAM of all available cash and unused borrowing availability for such subsidiaries (aggregating approximately $12.1 million as of September 30, 1996). See also "Risk Factors -- Ability to Service Indebtedness." Although there are no restrictions on MAXXAM's ability to pay dividends on its capital stock, MAXXAM has not paid any dividends for a number of years and has no present intention to do so. MAXXAM has stated that, from time to time, it may purchase its common stock on national exchanges or in privately negotiated transactions. During 1994, MAXXAM sold 1,239,400 of Kaiser's Depositary Shares (as defined in "-- Aluminum Operations" below) for aggregate net proceeds of $10.3 million. MAXXAM sold its remaining 893,550 of Depositary Shares during the first six months of 1995 for aggregate net proceeds of $7.6 million. See Note 7 to the Audited Consolidated Financial Statements of MAXXAM. On October 6, 1995, wholly owned subsidiaries of MAXXAM made investments in SHRP, Ltd. of approximately $8.7 million, consisting of land, cash ($5.8 million) and other assets. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million aggregate initial principal amount of SHRP, Ltd.'s 11% Senior Secured Extendible Notes (the "SHRP Notes"). See "-- Real Estate and Other Operations." On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with Custodial Trust Company providing for up to $25.0 million in borrowings. Any amounts drawn would be payable upon demand and be secured by Kaiser Common Stock owned by MAXXAM (exclusive of the Kaiser Shares which will be contributed to the Company concurrently with the consummation of the Offering), or such other marketable securities acceptable to the lender, with an initial market value (as defined therein) of approximately three times the amount borrowed. Borrowings under this agreement would bear interest at the prime rate plus 1/2% per annum. The Custodial Trust Agreement provides for a revolving credit arrangement during the first year of the agreement. Any borrowings outstanding on the first anniversary date of the agreement convert into a term loan maturing on the second anniversary date of the agreement. No borrowings were outstanding as of the date of this Prospectus. On April 24, 1996, the SEC declared effective a shelf registration statement which MAXXAM had filed with respect to up to $200.0 million aggregate principal amount of debt securities. MAXXAM intends to withdraw this shelf registration statement. In that regard, Kaiser also filed a shelf registration statement with the SEC, which was also declared effective on April 24, 1996, covering 10 million shares of its common stock owned by MAXXAM. MAXXAM would use the net proceeds (or portions thereof) from the sale of such securities for working capital and general corporate purposes. On December 26, 1995, the OTS initiated formal administrative proceedings against MAXXAM and others by filing the Notice. The Notice alleges misconduct by MAXXAM, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of USAT, a wholly owned subsidiary of United Financial Group Inc. ("UFG"). The Notice claims that MAXXAM was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against MAXXAM and the other respondents, including, among other things, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 million from MAXXAM and Federated, civil money penalties and a removal from, and prohibition against MAXXAM and the other respondents engaging in, the banking industry. MAXXAM has concluded that it is 76 79 unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate impact, if any, of the outcome this matter may have on MAXXAM's consolidated financial position, results of operations or liquidity. On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the Southern District of Texas. The FDIC action did not name MAXXAM as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. On December 8, 1995, MAXXAM filed a motion to intervene in this action and conditioned it on the Court joining the OTS to this action. MAXXAM filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting MAXXAM's bid for USAT. MAXXAM's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. MAXXAM is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, MAXXAM's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. MAXXAM has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matter or its potential impact on MAXXAM's consolidated financial position, results of operations or liquidity. As of September 30, 1996, MAXXAM (excluding its subsidiaries) had cash and marketable securities of approximately $56.6 million. On a pro forma basis, as of September 30, 1996, after giving effect to: (a) the issuance of $130.0 million aggregate principal amount of the Notes and (b) the redemption of $42.6 million aggregate principal amount of the Old MAXXAM Notes together with accrued interest thereon, MAXXAM (excluding its subsidiaries) would have had cash and marketable securities of $136.1 million. Following the retirement of the Old MAXXAM Notes, MAXXAM will use the remaining proceeds from the Offering for general corporate purposes, including possible repurchases of its common stock. MAXXAM has issued a letter of financial support to Palmas del Mar Properties Inc., a subsidiary of MAXXAM ("PDMPI"), in each of the years subsequent to its formation in September 1993 stating that MAXXAM has provided economic support for PDMPI's past operations and plans to continue such support. MAXXAM has historically made these representations of financial support on an annual basis and has not expressed any intention of discontinuing such support. A subsidiary of PDMPI intends to borrow up to $15 million to construct a new golf course at Palmas. The principal security for the loan will be the new and existing golf courses at Palmas. MAXXAM is also required to guaranty $3.5 million of the loan. MAXXAM expects that its cash outlays for cash interest payments pursuant to the Intercompany Note will aggregate approximately $10.6 million each year. During the three years ended December 31, 1995, MAXXAM's corporate general and administrative expenses, net of cost reimbursements from its subsidiaries, have ranged between $11.0 million and $19.0 million per year. During the nine months ended September 30, 1996, MAXXAM's corporate general and administrative expenses were $28.8 million, of which $21.9 million represented an accrual for certain legal contingencies, of which a substantial portion relates to legal fees and expenses that MAXXAM may incur in connection with the legal matters described in "Legal Proceedings -- USAT Matters." Although MAXXAM cannot predict when or whether the expenses represented by such accrual will be incurred, there can be no assurance that such accrual will be adequate or that MAXXAM's recurring cash corporate general and administrative expenses will not increase. MAXXAM has realized a substantial portion of its cash flows during the past several years from the sale of real property and loans from the RTC Portfolio. From 1992 to September 30, 1996, an aggregate of approximately $41.7 million in loans (which represented thirteen loans) were sold or paid off and thirty-four properties were sold for aggregate consideration of approximately $177.3 million. These transactions resulted 77 80 in aggregate gains of $94.2 million. As of September 30, 1996, two loans resulting from property sales and eight properties (including two acquired via foreclosures) were held, which had an aggregate net book value of $18.2 million. Two properties within this portfolio have subsequently been sold for a gain of $3.0 million. Net proceeds consisted of $3.6 million in cash and a note of $1.3 million. All of the remaining assets are being managed and marketed for sale. One property in the portfolio is under contract for sale with closing estimated to occur during the first quarter of 1997. This sale is expected to produce a gain of approximately $2.5 million and net cash proceeds of approximately $4.3 million. MAXXAM does not expect the Real Estate Subsidiaries will be able to generate distributable cash flows during the next several years at or near recent historical levels. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Litigation." MAXXAM believes that its existing cash resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient to fund its working capital requirements, including the payment of interest on the Intercompany Note for the next year and for the next several years thereafter. With respect to its long-term liquidity, MAXXAM believes that its existing cash and cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries, and the proceeds from the sale of debt securities should be sufficient to meet its working capital requirements, including the payment of interest and principal on the Intercompany Note. However, there can be no assurance that MAXXAM's cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries and other sources of financing, will be sufficient for such purposes or that MAXXAM would be able to refinance or pay at maturity the aggregate principal amount of the Intercompany Note. Any adverse outcome of the litigation described above could materially adversely affect MAXXAM's ability to make payments under the Intercompany Note and satisfy its obligations under its guaranty. See also "Risk Factors -- Ability to Service Indebtedness" and "-- Litigation." ALUMINUM OPERATIONS The 1994 KACC Credit Agreement consists of a $325.0 million five-year secured revolving line of credit which matures in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $325.0 million or a borrowing base relating to eligible accounts receivable and inventory. The 1994 KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus a margin of 0% to 1 1/2% or LIBO Rate (Reserve Adjusted) (as defined) plus a margin of 1 3/4% to 3 1/4%. The interest rate margins applicable to borrowings under the 1994 KACC Credit Agreement are based on a financial test, quarterly. During the first two quarters of 1996, Kaiser paid interest at a rate per annum of the Reference Rate plus 0% or LIBO Rate plus 1 3/4%. During the third quarter of 1996, the per annum interest rates increased by 1/2% to the Reference Rate plus 1/2% or LIBO Rate plus 2 1/4%. Effective October 1, 1996, the margin applicable to loans under the 1994 KACC Credit Agreement increased by an additional 1/2% per annum based on the financial test. On October 23, 1996, KACC completed the offering of $175.0 million principal amount of the KACC New Senior Notes at 99.5% of their principal amount to yield 10.96% to maturity. The KACC New Senior Notes rank pari passu in right and priority of payment with outstanding indebtedness under the 1994 KACC Credit Agreement and the KACC Senior Notes and are guaranteed on a senior, unsecured basis by certain of KACC's subsidiaries. Net proceeds from the offering, after estimated expenses, were approximately $168.9 million, which were utilized to reduce the outstanding borrowings under the revolving credit facility of the 1994 Credit Agreement to zero. The remaining net proceeds were invested in short-term investments pending their application for working capital and general corporate purposes, including capital projects. On November 12, 1996, pursuant to an agreement with the initial purchasers of the KACC New Senior Notes, KACC filed a registration statement (the "KACC Registration Statement") with respect to an offer to exchange the KACC New Senior Notes for new notes with substantially identical terms (the "KACC Exchange Offer"). The KACC Registration Statement, as amended on December 10, 1996, was declared effective on December 11, 1996; however, the Exchange Offer thereunder has not yet been commenced. 78 81 On December 23, 1996, KACC completed the offering of $50.0 million principal amount of the KACC New Series C Senior Notes at 103.5% of their principal amount to yield 10.3% to maturity. The KACC New Series C Senior Notes rank pari passu in right and priority of payment with outstanding indebtedness under the 1994 KACC Credit Agreement and the KACC Senior Notes and are guaranteed on a senior, unsecured basis by certain of KACC's subsidiaries. Net proceeds from the offering, after estimated expenses, were approximately $50.4 million. In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). See Note 7 to MAXXAM's Audited Consolidated Financial Statements. On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted in the simultaneous redemption of all Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and unpaid dividends up to and including the day immediately prior to the redemption date of $2.8 million, and (iii) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. As a result of the issuance of the PRIDES and the Depositary Shares, and the subsequent redemption of the Depositary Shares, MAXXAM's equity interest in Kaiser has decreased to approximately 62% on a fully diluted basis. On February 17, 1994, KACC issued $225.0 million of the KACC Senior Notes. On February 1, 1993, KACC issued $400.0 million of the KACC Senior Subordinated Notes. The obligations of KACC with respect to the KACC New Senior Notes, the KACC Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. See Note 4 to the Consolidated Financial Statements for a description of the terms of the KACC Notes and the use of proceeds from their issuance. Pursuant to the terms of the 1994 KACC Credit Agreement, Kaiser is precluded from paying any dividends with respect to its common stock. The declaration and payment of dividends by Kaiser with respect to the PRIDES are expressly permitted by the terms of the 1994 KACC Credit Agreement. Kaiser's Board of Directors had approved a proposed recapitalization (the "Proposed Recapitalization") which would have, among other things: (i) provided for two classes of common stock: Class A Common Shares with one vote per share ("Class A Common Shares") and a new, lesser-voting class designated as Common Stock with 1/10 vote per share ("Recap Common Stock"); (ii) redesignated as Class A Common Shares the 100 million currently authorized shares of Kaiser's existing common stock and authorized an additional 250 million shares of Recap Common Stock; and (iii) reclassified each issued share of Kaiser's existing common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of Recap Common Stock. On May 1, 1996, Kaiser's stockholders approved the Proposed Recapitalization, but it was not implemented at that time due to a preliminary injunction issued by the Delaware Court of Chancery. The preliminary injunction was upheld on appeal by the Delaware Supreme Court on August 29, 1996. Kaiser's Board of Directors subsequently adopted a resolution abandoning the Proposed Recapitalization. See also "Legal Proceedings -- Kaiser Litigation -- Other Proceedings." The decision to abandon the Proposed Recapitalization does not preclude a recapitalization from being proposed to Kaiser's stockholders in the future, including a substantially identical recapitalization structure after the redemption or conversion of the PRIDES. In the event that such a recapitalization were implemented in the future, MAXXAM could retain a majority of the voting power of Kaiser even if it substantially reduced its total holdings of Kaiser's equity securities by more than two-thirds. Any securities which may be issued with respect to the Kaiser Shares pursuant to any future recapitalization of Kaiser, would be subject to the lien of the MGI Indenture. Further, if and to the extent any Kaiser Shares are then pledged pursuant to the Indenture governing the Notes, such securities would be subject to the lien of the Indenture. Kaiser's expenditures for property, plant and equipment during the first nine months of 1996 were $90.8 million, which were used primarily to improve production efficiency, reduce operating costs, expand capacity 79 82 at existing facilities, and construct new facilities, including Kaiser's first micromill which is nearing completion in Nevada as a full-scale demonstration and production facility. Kaiser's capital expenditures (of which approximately 6% is expected to be funded by Kaiser's minority partners in certain foreign joint ventures) are expected to be between $130.0 and $160.0 million per annum in each of 1996 through 1998. Management continues to evaluate numerous projects all of which require substantial capital, including Kaiser's micromill project and other potential opportunities both in the United States and overseas. In response to lower aluminum and alumina prices, management may consider deferring certain non-essential capital expenditures and/or raising investment capital (including through joint ventures), in order to conserve a portion of Kaiser's available cash resources to meet incremental capital and operating requirements and to take advantage of new investment opportunities. In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of Kaiser, entered into a Joint Venture Agreement and related agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the China National Nonferrous Metals Industry Corporation relating to the formation and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise (the "Joint Venture") organized under the laws of the PRC. KYRIL contributed $9.0 million to the capital of the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the amount, timing, and other conditions relating to KYRIL's additional contributions to the Joint Venture. Governmental approval in the PRC will be necessary in order to implement certain arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. At a recent meeting of the directors of the Joint Venture, KYRIL, LAS and the Joint Venture reached an agreement (i) that extended until early 1997 the time for KYRIL to make a second capital contribution to the Joint Venture, and (ii) that KYRIL would continue to explore various methods of financing any future capital contributions to the Joint Venture, including financing that could be obtained from third-party investors. See "Business of MAXXAM -- International Business Development." As described in Note 7 to MAXXAM's Unaudited Consolidated Financial Statements, Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under CERCLA and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1996, the balance of such accruals, which are primarily included in other noncurrent liabilities, was $32.9 million. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation to be performed. Kaiser expects these remediation actions to occur over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $2.0 million to $10.0 million for the years 1996 through 2000 and an aggregate of approximately $7.0 million thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $26.5 million and that the factors upon which a substantial portion of this estimate is based are expected to be resolved in early 1997. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, Kaiser currently believes that the resolution of such uncertainties should not have a material adverse effect on MAXXAM's consolidated financial position, results of operations or liquidity. See also "Risk Factors -- Risk Factors Relating to Kaiser -- Environmental Matters and Litigation." 80 83 Additionally, KACC is a defendant in a substantial number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At September 30, 1996, the number of claims pending was approximately 75,900, compared to 59,700 at December 31, 1995. During 1995, approximately 41,700 claims were received and approximately 7,200 were settled or dismissed and, during the first nine months of 1996, approximately 20,000 of such claims were received and 3,800 claims were settled or dismissed. Based on past experience and reasonably anticipated future activity, Kaiser has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and Kaiser's actual costs could exceed these estimates. Kaiser's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an estimated asbestos-related cost accrual of $160.0 million, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at September 30, 1996. Kaiser estimates that annual future cash payments in connection with such litigation will be approximately $13.0 million to $20.0 million for each of the years 1996 through 2000, and an aggregate of approximately $78.0 million thereafter through 2008. While Kaiser does not believe there is a reasonable basis for estimating such costs beyond 2008, and, accordingly, did not accrue such costs, there is a reasonable possibility that such costs may continue beyond 2008, and that such costs may be substantial. A substantial portion of the asbestos-related claims that were filed and served on KACC during 1995 and the first nine months of 1996 were filed in Texas. KACC has been advised by its counsel that, although there can be no assurance, the increase in pending claims may have been attributable in part to tort reform legislation in Texas. Although asbestos-related claims are currently exempt from certain aspects of the Texas tort reform legislation, Kaiser has been advised that efforts to remove the asbestos-related exemption in the tort reform legislation relating to the doctrine of forum non conveniens, as well as other developments in the legislative and legal environment in Texas, may be responsible for the accelerated pace of new claims experienced in late 1995 and its continuance through the first nine months of 1996, albeit at a somewhat reduced rate. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. KACC believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $142.3 million, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at September 30, 1996. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on MAXXAM's consolidated financial position, results of operations or liquidity. See also "Risk Factors -- Risk Factors Relating to Kaiser -- Environmental Matters and Litigation." Kaiser and KACC are involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the 81 84 resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on MAXXAM's consolidated financial position, results of operations or liquidity. Kaiser believes that its existing cash resources, together with cash flows from operations and borrowings under the 1994 KACC Credit Agreement, will be sufficient to meet its working capital and capital expenditure requirements for the next year. Additionally, with respect to long-term liquidity, Kaiser believes that operating cash flows, together with the ability to obtain both short and long-term financing, should provide sufficient funds to meet its working capital and capital expenditure requirements. See "Risk Factors -- Ability to Service Indebtedness." FOREST PRODUCTS OPERATIONS For information concerning the Company's financial condition and investing and financing activities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities." REAL ESTATE AND OTHER OPERATIONS As of September 30, 1996, approximately $3.8 million was outstanding pursuant to a loan agreement secured by the RTC portfolio (the "RTC Portfolio Loan"). The RTC Portfolio Loan matures on December 31, 1999 and bears interest at prime plus 3%. Upon the sale of any secured property or loan, principal payments are required based on the release price (as defined) of such property or loan. On July 15, 1995, a real estate subsidiary of MAXXAM, MCO Properties Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank which will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings under the MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables and real estate held for investment or development and sale, (ii) MCOP's pledge of the common stock of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's subsidiaries and MAXXAM. Further, MAXXAM has pledged MCOP's common stock as additional security. Interest is computed at the bank's prime rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit Agreement contains various covenants including a minimum net worth requirement and limitations on the payment of dividends (neither of which MAXXAM believes is material), investments and the incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0 million, of which $8.5 million may be used for standby letters of credit. The available credit is subject to borrowing base limitation calculations. As of September 30, 1996, $11.0 million of borrowings was available under the MCOP Credit Agreement; there were no outstanding borrowings, and letters of credit outstanding amounted to $1.4 million. In July 1993, MAXXAM, through various subsidiaries, acquired various interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million. MAXXAM increased its equity interest in SHRP, Ltd. to 45.0%, as a result of a $5.6 million capital contribution in October 1994. On January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on $75.0 million aggregate principal amount of its 11 3/4% Senior Secured Notes. On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, SHRP Capital Corp., together with SHRP Acquisition, Inc., a wholly owned subsidiary of MAXXAM and SHRP, Ltd.'s largest limited partner (collectively, the "Debtors"), filed voluntary petitions seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy cases were consolidated and transferred to the United States Bankruptcy Court for the Southern District of Texas, Houston Division, Case No. 95-43739-H3-11. On September 22, 1995, the bankruptcy plan of the Debtors (the "Plan") was confirmed and on October 6, 1995, the transactions called for by the Plan were completed. A new investor group (the "New SHRP Investor Group") made a capital contribution of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of MAXXAM contributed $5.8 million) to SHRP, Ltd. Additionally, a wholly owned subsidiary of MAXXAM contributed an adjoining approximately 87-acre tract of land (with a fair market value of $2.3 million). The new managing general partner of the reorganized SHRP, Ltd. (the "SHRP Managing General Partner") is SHRP General Partner, Inc., a wholly owned subsidiary of MAXXAM. SHRP Managing General Partner was issued a 1% interest in the 82 85 reorganized SHRP, Ltd. in exchange for contributing its pro rata share of the investment made by the New SHRP Investor Group. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million aggregate initial principal amount of the SHRP Notes and the corresponding shares of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which the selling noteholder was entitled. Such shares of common stock represent 39.0% of the shares of common stock of SHRP Equity, Inc. After giving effect to these transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd. SHRP, Ltd. has sustained substantial operating losses since it began operations in April 1994. At September 30, 1996, SHRP, Ltd. had cash and cash equivalents of $2.9 million and a line of credit from its partners of $1.7 million, of which MAXXAM's portion is $1.6 million. SHRP, Ltd. projects a loss from operations for the next two years. In the event that the existing cash resources of SHRP, Ltd. and the line of credit are inadequate to support the cash flow requirements of SHRP, Ltd., alternative sources of funding will be necessary. MAXXAM is not obligated to provide any further economic support to SHRP, Ltd., beyond the $1.6 million line of credit commitment. As of September 30, 1996, MAXXAM's real estate and other subsidiaries had approximately $11.0 million available for use under the MCOP Credit Agreement (all of which could be borrowed and distributed to MAXXAM). MAXXAM believes that the existing cash and credit facilities of its real estate and other subsidiaries are sufficient to fund the working capital and capital expenditure requirements of such subsidiaries for the next year. With respect to the long-term liquidity of such subsidiaries, MAXXAM believes that their ability to generate cash from the sale of their existing real estate, together with their ability to obtain financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. See also "Risk Factors -- Ability to Service Indebtedness." TRENDS ALUMINUM OPERATIONS Sensitivity to Prices Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. KACC enters into primary aluminum hedging transactions from time to time in the normal course of business. Primary aluminum hedging transactions are designed to mitigate Kaiser's exposure to declines in the market price of primary aluminum, while retaining the ability to participate in favorable environments that may materialize. KACC has employed strategies which include forward sales and purchases of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. At November 30, 1996, KACC had sold forward, at fixed prices, approximately 70,000 and 93,600 tons of primary aluminum in excess of its projected internal fabrication requirements for 1997 and 1998, respectively, and had purchased put options to establish a minimum price for 196,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. The weighted average price for Kaiser's purchased put options with respect to 1997 are below the AMT Price for the week ended December 13, 1996. The weighted average price of the minimum of the range established with respect to Kaiser's other 1998 option contracts approximates the AMT Price for the week ended December 13, 1996. In addition, as of November 30, 1996, KACC had sold approximately 89% and 90% of the alumina available to it in excess of its projected internal smelting requirements for 1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made at prices indexed to the future prices of primary aluminum. KACC has established margin accounts with its counterparties related to forward aluminum sales and option contracts. KACC is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At December 31, 1995, Kaiser was not required to maintain any such margin deposits. At 83 86 December 31, 1994, KACC had $50.5 million on deposit with various counterparties with respect to such deposit requirements. These amounts were recorded in prepaid expenses and other current assets. At September 30, 1996, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,481 per metric ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts was $46.4 million. Recent Trends and Developments During 1995, the average Midwest U.S. transaction price (the "AMT Price") for primary aluminum was approximately $.86 per pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in London Metal Exchange ("LME") inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend has continued throughout the first eleven months of 1996 as the supply of primary aluminum exceeded demand during this period. Net reported primary aluminum inventories have increased by approximately 53,000 tons in 1996 based upon recent reports of the LME (through December 13, 1996) and the International Primary Aluminium Institute ("IPAI") (through October 31, 1996), following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively. The AMT Price for primary aluminum for the week ended December 13, 1996, was approximately $.72 per pound. Increased production of primary aluminum due to restarts of certain previously idled capacity, the commissioning of a major new smelter in South Africa, and the continued high level of exports from the CIS have contributed to increased supplies of primary aluminum to the Western world in 1996. While the economies of the major aluminum consuming regions -- the United States, Japan, Western Europe, and Asia -- are performing relatively well, management believes that the reduction of aluminum inventories by consumers, as prices have continued to decline, has suppressed the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. In addition to these supply/demand dynamics, management believes the recent decline in primary aluminum prices may have been influenced by a recent major decline in copper prices on the LME. Fourth Quarter Results Kaiser incurred net losses of $4.8 million in the third quarter of 1996 and expects to continue to sustain net losses in the fourth quarter of 1996 due principally to lower average realized prices for alumina and primary aluminum, as compared to prices realized in the fourth quarter of 1995, and due to increased raw material, energy, and operational costs associated with the production of alumina at Kaiser's Gramercy alumina refinery and 65%-owned Alpart alumina refinery in Jamaica as compared to amounts incurred in the fourth quarter of 1995. Such losses could substantially exceed the loss for the third quarter of 1996. Profit Enhancement and Cost Cutting Initiative Kaiser has set a goal of achieving significant cost reductions and other profit improvements during 1997, with the full effect planned to be realized in 1998. The initiative is based on Kaiser's conclusion that the current level of performance of its existing facilities and businesses will not achieve the level of profits Kaiser considers satisfactory based upon historic long-term average prices for primary aluminum and alumina. To achieve this goal, Kaiser plans reductions in production costs, improvements in operating efficiencies, decreases in corporate selling, general and administrative expenses and enhancements to product mix. There can be no assurance that the initiative will result in the desired cost reductions and other profit improvements. 84 87 FOREST PRODUCTS OPERATIONS For information concerning trends with respect to the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Financial Condition and Investing and Financing Activities." RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans, and provides for alternative methods for an employer to recognize stock-based compensation costs. Under the first method, an employer may continue to account for compensation costs for stock, stock options, and other equity instruments issued to employees as it has historically, using the "intrinsic value based method" (as described in SFAS 123), and such compensation costs would be the excess, if any, of the quoted market price of the stock subject to an option at the grant date or other measurement date over the amount an employee must pay to acquire the stock. The intrinsic value based method generally would not result in the recognition of compensation costs upon the grant of stock options. Under the second method, an employer may adopt the "fair value based method" (as described in SFAS 123). Under the fair value based method, such compensation costs would be valued using an option-pricing model, and such amount would be charged to expense over the option's vesting period. Employers which elect to continue to account for stock-based compensation under the intrinsic value based method will be required by SFAS 123 to disclose in the notes to their financial statements the amount of net income and the earnings per share which would have been reported had the employer elected to use the fair value based method. MAXXAM has elected to continue to account for stock-based compensation under the intrinsic value based method, and will comply with the disclosure requirement of SFAS 123 for fiscal years beginning January 1, 1996. 85 88 BUSINESS OF THE COMPANY GENERAL The Company engages in forest products operations through MGI and its wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber, which has been in continuous operation for over 125 years, engages in several principal aspects of the lumber industry -- the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (which cannot efficiently process them in its own mills). PACIFIC LUMBER OPERATIONS TIMBERLANDS Pacific Lumber owns and manages approximately 192,000 acres of commercial timberlands. These timberlands are located in Humboldt County along the northern California coast which has very favorable soil and climate conditions. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located in close proximity to its sawmills and contains an extensive network of roads. These factors greatly facilitate Pacific Lumber's operations and forest management techniques. The extensive roads throughout Pacific Lumber's timberlands facilitate log hauling, serve as fire breaks and allow Pacific Lumber's foresters access to employ forest stewardship techniques which protect the trees from forest fires, erosion, insects and other damage. Approximately 179,000 acres of Pacific Lumber's timberlands are owned by Scotia Pacific (the "Scotia Pacific Timberlands"), a special purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber. Pacific Lumber has the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the Scotia Pacific Timberlands. Substantially all of Scotia Pacific's assets, including the Scotia Pacific Timberlands and the GIS (defined below), are pledged as security for the Timber Notes. Pacific Lumber harvests and purchases from Scotia Pacific all of the logs harvested from the Scotia Pacific Timberlands. See " -- Relationships With Scotia Pacific and Britt" for a description of this and other relationships among Pacific Lumber, Scotia Pacific and Britt. Approximately 6,000 acres of Pacific Lumber's timberlands are owned by Salmon Creek. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been partially harvested in the past. Pacific Lumber has engaged in extensive efforts to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Pacific Lumber is required to comply with California forestry regulations regarding reforestation, which generally require that an area be reforested to specified standards within an established period of time. Pacific Lumber also actively engages in efforts to establish timberlands from open areas such as pasture land. During 1995, Pacific Lumber planted approximately 676,000 redwood and Douglas-fir seedlings. Regeneration of redwood timber generally is accomplished through the natural growth of new redwood sprouts from the stump remaining after a redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on existing mature root systems. In addition, Pacific Lumber supplements natural redwood regeneration by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. 86 89 HARVESTING PRACTICES The ability of Pacific Lumber to sell logs or lumber products will depend, in part, upon its ability to obtain regulatory approval of THPs. THPs are required to be developed by registered professional foresters and must be filed with, and approved by, the CDF prior to the harvesting of timber. Each THP is designed to comply with applicable environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. See "-- Regulatory and Environmental Factors" for information regarding a critical habitat designation, sustained yield regulations and related matters. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base and conducting field studies, Pacific Lumber's foresters are better able to develop detailed THPs addressing the various regulatory requirements. Pacific Lumber also utilizes a Global Positioning System ("GPS") which allows precise location of geographic features through satellite positioning. Use of the GPS greatly enhances the quality and efficiency of GIS data. Pacific Lumber employs a variety of well-accepted methods of selecting trees for harvest. These methods, which are designed to achieve optimal regeneration and growth, are referred to as "silvicultural systems" in the forestry profession. Silvicultural systems range from very light thinnings aimed at enhancing the growth rate of retained trees to clear cutting which results in the harvest of all trees in an area and regeneration of a new forest stand. In between are a number of varying levels of partial harvests which can be employed. Pacific Lumber's foresters select the appropriate silvicultural system for any given site based upon the specific conditions of that site. Pacific Lumber frequently employs silvicultural systems that involve thinnings followed by a variety of partial cuttings to achieve a high degree of natural regeneration. Partial harvesting allows the remaining trees to obtain more light, nutrients and water, thereby promoting faster growth rates. Pacific Lumber uses a variety of factors, including the size and density of the remaining trees, to determine when to again submit a THP with respect to a given area. Clear cutting is only used when it is prudent due to specific site conditions (such as the inadvisability of repetitive partial harvestings, undesirable tree species composition for natural regeneration, topographic difficulties which preclude partial cuttings or the need to create more diverse wildlife habitats within watersheds as recommended by Pacific Lumber's wildlife biologists). Due to the magnitude of its timberlands and conservative application of silvicultural systems, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. PRODUCTION FACILITIES Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances which have increased the operating efficiency of its production facilities and the recovery of finished products from its timber. Over the past three years, Pacific Lumber's annual lumber production has averaged approximately 268 million board feet, with approximately 290, 286, and 228 million board feet produced in 1995, 1994 and 1993, respectively. Lumber production volume was 221 million board feet during the first nine months of 1996. The Fortuna sawmill, built by Pacific Lumber in 1972, produces primarily common grade lumber. During 1995 and the first nine months of 1996, the Fortuna mill produced approximately 94 million and 75 million board feet of lumber, respectively. The Carlotta sawmill was acquired in 1986 and produces both common and upper grade redwood lumber. During 1995 and the first nine months of 1996, the Carlotta mill produced approximately 67 million and 47 million board feet of lumber, respectively. Sawmill "A," located in Scotia, was remodeled in 1983 and processes Douglas-fir logs while Sawmill "B," also located in Scotia, primarily processes large diameter redwood logs. During 1995 and the first nine months of 1996, Sawmill "A" produced 79 million and 67 million board feet of lumber, respectively. During 1995 and the first nine months of 1996, Sawmill "B" produced 51 million and 31 million board feet of lumber, respectively. 87 90 Pacific Lumber operates a finishing plant which processes rough lumber into a variety of finished products such as trim, fascia, siding and paneling. These finished products include the industry's largest variety of customized trim and fascia patterns. Pacific Lumber also enhances the value of some grades of common grade lumber by assembling knot-free pieces of narrower and shorter lumber into wider or longer pieces in its state-of-the-art end and edge glue plants. The result is a standard sized upper grade product which can be sold at a significant premium over common grade products. Pacific Lumber has also installed a lumber remanufacturing facility at its mill in Fortuna. Pacific Lumber dries the majority of its upper grade lumber before it is sold. Upper grades of redwood lumber are generally air-dried for six to eighteen months and then kiln-dried for seven to twenty-four days to produce a dimensionally stable and high quality product which generally commands higher prices than "green" lumber (which is lumber sold before it has been dried). Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of approximately 95 million board feet, to dry its upper grades of lumber efficiently in order to produce a quality, premium product. Pacific Lumber also maintains several large enclosed storage sheds which hold approximately 27 million board feet of lumber. In addition, Pacific Lumber owns and operates a modern 25-megawatt cogeneration power plant which is fueled almost entirely by the wood residue from its milling and finishing operations. This power plant generates substantially all of the energy requirements of Scotia, California, the town adjacent to Pacific Lumber's timberlands where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1995, the sale of surplus power accounted for approximately 1% of Pacific Lumber's total revenues. PRODUCTS The following table sets forth the distribution of Pacific Lumber's lumber production (on a net board foot basis) and revenues by product line:
NINE MONTHS ENDED SEPTEMBER 30, 1996 YEAR ENDED DECEMBER 31, 1995 ------------------------------------ ------------------------------------ % OF TOTAL % OF TOTAL LUMBER % OF TOTAL LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER % OF TOTAL PRODUCT VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES - ----------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Upper grade redwood lumber......... 12% 33% 27% 17% 38% 31% Common grade redwood lumber........ 52% 41% 34% 54% 40% 32% --- --- -- --- --- -- Total redwood lumber..... 64% 74% 61% 71% 78% 63% --- --- -- --- --- -- Upper grade Douglas-fir lumber..... 4% 6% 5% 3% 5% 4% Common grade Douglas-fir lumber.... 26% 16% 13% 23% 14% 11% --- --- -- --- --- -- Total Douglas-fir lumber................. 30% 22% 18% 26% 19% 15% --- --- -- --- --- -- Other grades of lumber............. 6% 4% 3% 3% 3% 4% --- --- -- --- --- -- Total lumber............. 100% 100% 82% 100% 100% 82% === === == === === == Logs............................... 10% 7% == == Hardwood chips..................... 2% 4% Softwood chips..................... 4% 5% -- -- Total wood chips......... 6% 9% == ==
Lumber Pacific Lumber primarily produces and markets lumber. In 1995 and during the first nine months of 1996, Pacific Lumber sold approximately 277 million and 233 million board feet of lumber, respectively, which accounted for approximately 82% of Pacific Lumber's total revenues for each period. Lumber products 88 91 vary greatly by the species and quality of the timber from which it is produced. Lumber is sold not only by grade (such as "upper" grade versus "common" grade), but also by board size and the drying process associated with the lumber. Redwood lumber is Pacific Lumber's largest product category. Redwood is commercially grown only along the northern coast of California and possesses certain unique characteristics which permit it to be sold at a premium to many other wood products. Such characteristics include its natural beauty, superior ability to retain paint and other finishes, dimensional stability and innate resistance to decay, insects and chemicals. Typical applications include exterior siding, trim and fascia for both residential and commercial construction, outdoor furniture, decks, planters, retaining walls and other specialty applications. Redwood also has a variety of industrial applications because of its chemical resistance and because it does not impart any taste or odor to liquids or solids. Upper grade redwood lumber, which is derived primarily from old growth trees and is characterized by an absence of knots and other defects and a very fine grain, is used primarily in more costly and distinctive interior and exterior applications. The overall supply of upper grade lumber has been diminishing due to increasing environmental and regulatory restrictions and other factors. While Pacific Lumber's competitive position with respect to upper grade lumber has been improving due to the quality of its timberlands, Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Results of Operations." Common grade redwood lumber, Pacific Lumber's largest volume product, has many of the same aesthetic and structural qualities of redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is commonly used for construction purposes, including outdoor structures such as decks, hot tubs and fencing. Douglas-fir lumber is used primarily for new construction and some decorative purposes and is widely recognized for its strength, hard surface and attractive appearance. Douglas-fir is grown commercially along the west coast of North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is derived primarily from old growth Douglas-fir timber and is used principally in finished carpentry applications. Common grade Douglas-fir lumber is used for a variety of general construction purposes and is largely interchangeable with common grades of other whitewood lumber. Logs Pacific Lumber currently sells certain logs that, due to their size or quality, cannot be efficiently processed by its mills into lumber. The purchasers of these logs are largely Britt, and surrounding mills which do not own sufficient timberlands to support their mill operations. See " -- Relationships With Scotia Pacific and Britt" below. Except for the agreement with Britt described below, Pacific Lumber does not have any significant contractual relationships with any third parties relating to the purchase of logs. Pacific Lumber has historically not purchased significant quantities of logs from third parties; however, Pacific Lumber may from time to time purchase logs from third parties for processing in its mills or for resale to third parties if, in the opinion of management, economic factors are advantageous to Pacific Lumber. Wood Chips Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood trees which would otherwise be left as waste. These chips are sold to third parties primarily for the production of facsimile and other specialty papers. Pacific Lumber also produces softwood chips from the wood residue and waste from its milling and finishing operations. These chips are sold to third parties for the production of wood pulp and paper products. BACKLOG AND SEASONALITY Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was approximately $11.5 million and approximately $11.9 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Pacific Lumber's backlog of sales orders at September 30, 1996 was 89 92 approximately $20.4 million. Pacific Lumber has historically experienced lower first quarter sales due largely to the general decline in construction-related activity during the winter months. As a result, Pacific Lumber's results in any one quarter are not necessarily indicative of results to be expected for the full year. MARKETING The housing, construction and remodeling markets are the primary markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a wide distribution of its products both geographically and in terms of the number of customers. Pacific Lumber sells its lumber products throughout the country to a variety of accounts, the large majority of which are wholesalers, followed by retailers, industrial users, exporters and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold throughout the entire United States, as well as to export markets. Common grades of redwood lumber are sold principally west of the Mississippi River, with California accounting for approximately 63% and 67% of these sales in 1995 and during the first nine months of 1996, respectively. Common grades of Douglas-fir lumber are sold primarily in California. In 1995, no single customer accounted for more than 4% of Pacific Lumber's total revenues. Exports of lumber accounted for approximately 4% of Pacific Lumber's total revenues during each of 1995 and the first nine months of 1996. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of product. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes that it has a strong degree of customer loyalty. COMPETITION Pacific Lumber's lumber is sold in highly competitive markets. Competition is generally based upon a combination of price, service, product availability and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Results of Operations." Competition in the common grade redwood and Douglas-fir lumber market is more intense, and Pacific Lumber competes with numerous large and small lumber producers. EMPLOYEES As of September 30, 1996, Pacific Lumber had approximately 1,600 employees, none of whom are covered by a collective bargaining agreement. RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT In March 1993, Pacific Lumber consummated its offering of $235.0 million of its Senior Notes and Scotia Pacific consummated its offering of $385.0 million of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia Pacific and Britt entered into a variety of agreements. Pacific Lumber and Scotia Pacific entered into a Services Agreement (the "Services Agreement") and an Additional Services Agreement (the "Additional Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber provides operational, management and related services with respect to the Scotia Pacific Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia Pacific's own employees. Such services include the furnishing of all equipment, personnel and expertise not within Scotia Pacific's possession and reasonably necessary for the operation and maintenance of the Scotia Pacific 90 93 Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia Pacific Timber by fires, maintain a system of roads throughout the Scotia Pacific Timberlands, take measures to control the spread of disease and insect infestation affecting Scotia Pacific Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber is also required (to the extent necessary) to assist Scotia Pacific personnel in updating the GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and motions and otherwise diligently pursue appeals of any denial of any THP and related matters. As compensation for these and the other services to be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted on January 1 of each year based on a specified government index relating to wood products. The fee was approximately $115,000 per month in 1995 and has been approximately $112,000 per month in 1996. Pursuant to the Additional Services Agreement, Scotia Pacific provides Pacific Lumber with a variety of services, including (a) assisting Pacific Lumber to operate, maintain and harvest its own timber properties, (b) updating and providing access to the GIS with respect to information concerning Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays Scotia Pacific a fee for such services equal to the actual cost of providing such services, as determined in accordance with generally accepted accounting principles. Pacific Lumber and Scotia Pacific also entered into a Master Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the Scotia Pacific Timber covered by an approved THP. Each log purchase agreement generally constitutes an exclusive agreement with respect to the timber covered thereby, subject to certain limited exceptions. The purchase price must be at least equal to the SBE Price (as defined below). The Master Purchase Agreement provides that if the purchase price equals or exceeds (i) the price for such species and category thereof set forth on the structuring schedule applicable to the Timber Notes and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The Master Purchase Agreement defines the "SBE Price," for any species and category of timber, as the stumpage price for such species and category as set forth in the most recent "Harvest Value Schedule" published by the California State Board of Equalization ("SBE") applicable to the timber sold during the period covered by such Harvest Value Schedule. Such Harvest Value Schedules are published for purposes of computing yield taxes and generally are released every six months. As Pacific Lumber purchases logs from Scotia Pacific pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing Scotia Pacific Timber covered by approved THPs and, thus, the purchase price thereof is based upon "stumpage prices." Title to the harvested logs does not pass to Pacific Lumber until the logs are transported to Pacific Lumber's log decks and measured. Substantially all of Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. Pacific Lumber, Scotia Pacific and Salmon Creek also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, Pacific Lumber entered into an Environmental Indemnification Agreement with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia Pacific from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the Scotia Pacific Timberlands. Pacific Lumber entered into an agreement with Britt (the "Britt Agreement") which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from 91 94 third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold at applicable market prices, and administrative services are provided by Pacific Lumber based on Pacific Lumber's actual costs and an allocable share of Pacific Lumber's overhead expenses consistent with past practice. REGULATORY AND ENVIRONMENTAL FACTORS Regulatory and environmental issues play a significant role in Pacific Lumber's forest products operations. Pacific Lumber's forest products operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. These laws include the Forest Practice Act, which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the BOF. The ESA and CESA provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. CEQA provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not materially adversely affect the Company. In March 1992, the marbled murrelet was approved for listing as endangered under the CESA. In October 1992, the USFWS issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. Pacific Lumber has incorporated, and will continue to incorporate as required, mitigation measures into its THPs to protect and maintain habitat for the marbled murrelet on its timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide certain site specific mitigations in connection with THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during a portion of the murrelet's nesting and breeding season, which extends from April through mid-September. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the areas designated as critical habitat for the marbled murrelet (see below). Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In May 1996, the USFWS published the Final Designation of critical habitat for the marbled murrelet, designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timber. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop the Murrelet HCP. Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed the Takings Litigation alleging that certain portions of its timberlands have been "taken" and seeking just compensation. See "Legal Proceedings -- Pacific Lumber Litigation" for a description of the Takings Litigation. Pursuant to the Headwaters Agreement described below under "-- Headwaters Agreement," the Takings Litigation has been stayed by the Court at the request of the parties. It is impossible to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as the material regulatory and 92 95 legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. For example, the NMFS recently announced that by April 25, 1997, it would make a final determination whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See "-- Headwaters Agreement" below for a description of certain terms of the Headwaters Agreement relating to processing and approval of the Multi-Species HCP covering Pacific Lumber's timberlands. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. See "-- Headwaters Agreement" below for a description of certain terms of the Headwaters Agreement relating to processing and approval of the Multi-Species HCP. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish an LTSY harvest level that takes into account environmental and economic considerations. The SYP must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last five years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and submitting corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. See "-- Headwaters Agreement" below for a description of certain terms of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or which challenge other operations by Pacific Lumber. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to Pacific Lumber's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, 93 96 particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated operating results, financial position or liquidity of the Company. See also "Legal Proceedings -- Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. In June 1990, the USFWS designated the northern spotted owl as threatened under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations (and related California regulations) generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the USFWS has given its full concurrence to a northern spotted owl management plan (the "Owl Plan"). The Owl Plan was recently updated through 1999 and the USFWS expressed its agreement that operations consistent with the Owl Plan would not result in the taking of any owls. By incorporating the Owl Plan into each THP filed with the CDF, Pacific Lumber is able to expedite the approval time with respect to its THPs. The plaintiffs in the Marbled Murrelet action have requested and received injunctive relief with respect to certain THPs involving the Owl Plan. See "Legal Proceedings -- Pacific Lumber Litigation." Both federal and state agencies continue to review and consider possible additional regulations regarding the northern spotted owl. It is uncertain if such additional regulations will become effective or their ultimate content or impact on the Company. Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection, air and water quality, and the restriction, regulation and administration of timber harvesting practices. It is impossible to predict the content of any such bills, the likelihood of any of the bills passing or the impact of any of these bills on the future liquidity, consolidated financial position or operating results of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is impossible, however, to assess the effect of such matters on the Company's consolidated financial position, operating results or liquidity. HEADWATERS AGREEMENT On September 28, 1996, the Pacific Lumber Parties entered into the Headwaters Agreement, which provides the framework for the acquisition by the United States and California of certain timberlands of Pacific Lumber. The Headwaters Agreement requires the parties to use their respective best, good faith efforts to achieve certain items (the "Specified Items"). The Specified Items include the transfer to the United States and California of the Headwaters Timberlands, such timberlands consisting of 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest and related buffer zones (respectively, the "Headwaters Forest" and the "Elk Head Forest"). Approximately 4,900 of these acres are owned by Salmon Creek and are part of the area commonly referred to as the "Headwaters Forest." The remaining acreage is owned by Scotia Pacific (Pacific Lumber having harvesting rights on a portion of the acreage). These timberlands would be transferred in exchange for (a) property and other consideration (possibly including cash) from both the United States and California having an aggregate fair market value of $300 million and (b) the Elk River Timberlands, consisting of 7,775 acres of adjacent timberlands to be acquired by 94 97 the United States and California from a third party. The Specified Items also include acquisition by the United States and California of the Elk River Property, consisting of approximately 9,600 acres of timberlands, including the Elk River Timberlands, which would be transferred to Pacific Lumber (the "Exchanged Elk River Property"). An additional Specified Item is the expedited development and submission by Pacific Lumber and processing (a) by the United States of a Permit to be based upon a Multi-Species HCP covering Pacific Lumber's remaining timberlands and the timberlands and timber harvesting rights which Pacific Lumber will own as a result of the various transactions (the "Resulting Pacific Lumber Timber Property") as well as the Headwaters Forest and the Elk Head Forest (both as conserved habitat) and (b) by California of an SYP covering the Resulting Pacific Lumber Timber Property. The Headwaters Agreement contains various provisions regarding the processing of the HCP, the Permit and the SYP. Pacific Lumber expects that receipt of the Permit would expedite the approval time and reduce the costs associated with its THPs. The Specified Items also require, among other things, dismissal with prejudice at closing of the Takings Litigation pending against the United States and California. See "Legal Proceedings -- Pacific Lumber Litigation." The Headwaters Agreement provides that the parties will file appropriate joint motions to stay the Takings Litigation, subject to certain rights of the parties to terminate the stay. The Headwaters Agreement provides that the Pacific Lumber Parties will not enter the Headwaters Forest or the Elk Head Forest to conduct logging operations, including salvage logging (the "Moratorium"). The Moratorium will, however, terminate if within ten months from the date of the Agreement the parties have not achieved the Specified Items to their respective satisfaction. In addition, as a condition to the continued effectiveness of the Moratorium, the United States and/or California must provide to Pacific Lumber, within 60 days of the date of the Agreement, a list of property interests owned or controlled by the United States and/or California meeting certain conditions, including that they have a good faith estimated fair market value equal to or in excess of $300 million and are available for exchange (the "Presented Properties"). Should California and/or the United States fail to perform this obligation within 120 days from the date of the Agreement, the Moratorium terminates. If the Presented Properties list is furnished, the parties have a ten-day period of time in which to agree upon the procedures to be used for determining the fair market value of the Presented Properties. Pacific Lumber has an additional 30-day period of time (the "Evaluation Period") in which to evaluate the Presented Properties. The Moratorium terminates if the parties fail to agree upon such appraisal procedures by the end of the ten-day period or if at the end of the Evaluation Period Pacific Lumber has failed to identify $300 million in fair market value of Presented Properties that it finds acceptable. The Headwaters Agreement requires the lists of Presented Properties to be accompanied by sufficient background information (including valuation information) to enable Pacific Lumber to determine the commercial viability and the ability to monetize such property interests. On December 5, 1996, the United States and California each furnished a list of properties. Neither list was accompanied by the requisite background information, although both lists did indicate that additional information would be made available. The list of United States properties consisted of oil and gas interests in Kern County, California, approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and Trinity Counties in California, and surplus acreage next to a federal office building in Laguna Niguel, California. The California list contained a variety of properties located throughout the state. On December 10, 1996, Pacific Lumber wrote to the United States and California, stating, among other things, that the requisite background information had not been furnished, requesting the missing information and indicating that certain of the properties did not appear to be "available," as legislative action would be required for exchange of certain of the properties. Closing of the Headwaters Agreement is subject to various conditions, including (a) completion of the Specified Items, (b) approval of an HCP and SYP and issuance of the Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) approval by the boards of directors of the applicable Pacific Lumber Parties. The Headwaters 95 98 Agreement also provides that the parties will cooperate and act in good faith to preserve diligently the Headwaters Agreement, the HCP, the Permit and the SYP against third party challenge. BRITT LUMBER OPERATIONS BUSINESS Britt is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters. Britt's primary business is the processing of small diameter redwood logs into wood fencing products for sale to retail and wholesale customers. Britt was incorporated in 1965 and operated as an independent manufacturer of fence products until July 1990, when it was purchased by a subsidiary of the Company. Britt purchases small diameter (6 to 11 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a variety of different diameter and different length logs from various timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" x 6" fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing products in 6 through 12 foot lengths. Britt's purchases of logs from third parties are generally consummated pursuant to short-term contracts of twelve months or less. See "-- Pacific Lumber Operations -- Relationships With Scotia Pacific and Britt" for a description of Britt's log purchases from Pacific Lumber. MARKETING In 1995, Britt sold approximately 78 million board feet of lumber products to approximately 100 different customers. During the first nine months of 1996, Britt sold approximately 62 million board feet of lumber products to over 100 customers. Over one-half of Britt's 1995 lumber sales were in northern California. The remainder of its 1995 sales were in southern California and ten other western states. The largest and top five of such customers accounted for approximately 33% and 72%, respectively, of such 1995 sales. Britt markets its products through its own salesmen to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers and is expanding its market eastward. Britt's backlog of sales orders at December 31, 1995 and 1994 was approximately $3.2 million and $3.6 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Britt's backlog of sales orders at September 30, 1996 was $2.2 million. FACILITIES AND EMPLOYEES Britt's manufacturing operations are conducted on 12 acres of land, 10 acres of which are leased on a long-term fixed-price basis from an unrelated third party. Fence production is conducted in a 46,000 square foot mill. An 18 acre log sorting and storage yard is located one quarter of a mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made periodically. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 35.5 million board feet of fencing products per year. As of September 30, 1996, Britt employed approximately 110 people, none of whom are covered by a collective bargaining agreement. COMPETITION Management estimates that Britt accounted for approximately one-third of the redwood fence market in 1995. Britt competes primarily with the northern California mills of Louisiana Pacific, Georgia Pacific and Eel River. LEGAL PROCEEDINGS See "Legal Proceedings -- Pacific Lumber Litigation" for a description of certain legal proceedings in which Pacific Lumber is involved and "Legal Proceedings -- USAT Matters" for a description of the Martel action in which MGI is involved. 96 99 BUSINESS OF MAXXAM ALUMINUM OPERATIONS GENERAL MAXXAM engages in aluminum operations through Kaiser. Kaiser is a fully integrated aluminum producer operating in all principal aspects of the aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum and the manufacture of fabricated (including semi-fabricated) aluminum products. Kaiser is one of the largest domestic aluminum producers in terms of primary aluminum smelting capacity and is the Western world's second largest producer/seller of alumina, accounting for approximately 7% of the Western world's alumina capacity in 1995. Kaiser's production levels of alumina and primary aluminum exceed its internal processing needs which allows it to be a major seller of alumina (approximately 2.0 million tons in 1995 or 72% of 1995 production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of 1995 production) to third parties. Kaiser is also a major domestic supplier of fabricated aluminum products. In 1995, Kaiser shipped approximately 368,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic shipments. A majority of Kaiser's fabricated products are sold to distributors or used by customers as components in the manufacture and assembly of finished end-use products. INDUSTRY OVERVIEW Primary aluminum is produced by the refining of bauxite into alumina and the reduction of alumina into primary aluminum. Approximately two pounds of bauxite are required to produce one pound of alumina, and approximately two pounds of alumina are required to produce one pound of primary aluminum. Aluminum's valuable physical properties include its light weight, corrosion resistance, thermal and electrical conductivity and high tensile strength. Demand The packaging, transportation and construction industries are the principal consumers of aluminum in the United States, Japan and Western Europe. In the packaging industry, which accounted for approximately 22% of consumption in 1995 in the United States, Japan and Western Europe, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. Nearly all beer cans and soft drink cans manufactured for the United States market are made of aluminum. Kaiser believes that growth in the packaging area is likely to continue through the 1990s due to general population increase and to further penetration of the beverage container market in emerging markets. Kaiser believes that growth in demand for can sheet in the United States will follow the growth in population, offset, in part, by the effects of the use of lighter gauge aluminum for can sheet and of plastic container production from newly installed capacity. In the transportation industry, which accounted for approximately 28% of aluminum consumption in the United States, Japan and Western Europe in 1995, automotive manufacturers use aluminum instead of steel, ductile iron, or copper for an increasing number of components, including radiators, wheels, suspension components, and engines, in order to meet more stringent environmental, safety, and fuel efficiency standards. Kaiser believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. In addition, Kaiser believes that consumption of aluminum in the construction industry will follow the cyclical growth pattern of that industry, and will benefit from higher growth in Asian and Latin American economies. Supply As of year-end 1995, Western world aluminum capacity from 107 smelting facilities was approximately 16.6 million tons per year. Western world production of primary aluminum for 1995 increased approximately 1.8% compared to 1994. Net exports of aluminum from the former Sino Soviet bloc increased approximately 97 100 240% from 1990 levels during the period from 1991 through 1995 to approximately 2.1 million tons per year. These exports contributed to a significant increase in LME stocks of primary aluminum which peaked in June 1994 at 2.7 million tons. By the end of 1995, LME stocks of primary aluminum had declined 2.1 million tons from this peak level and 1.1 million tons from the beginning of 1995. As of December 13, 1996, LME stocks of primary aluminum were approximately 947,175 tons. See "-- Recent Industry Trends." Based upon information currently available, Kaiser believes that moderate additions will be made during 1996-1998 to Western world alumina and primary aluminum production capacity. The increases in alumina capacity during 1996-1998 are expected to come from one new refinery which began operations in 1995 and incremental expansions of existing refineries. In addition, Kaiser believes that there is currently approximately 1.1 million tons of unutilized smelting capacity that is available for production. The increases in primary aluminum capacity during 1996-1998 are expected to come from a major new smelter in South Africa which began operations in 1995, two new smelters which may begin operations in 1996 or 1997, and the remainder principally from incremental expansions of existing smelters. RECENT INDUSTRY TRENDS Primary Aluminum During 1995, the AMT Price for primary aluminum was approximately $.86 per pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in LME inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend has continued throughout the first eleven months of 1996 as the supply of primary aluminum exceeded demand during this period. Net reported primary aluminum inventories have increased by approximately 53,000 tons in 1996 based upon recent available reports of the LME (through December 13, 1996) and the IPAI (through October 31, 1996), following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively. The AMT Price for primary aluminum for the week ended December 13, 1996 was approximately $.72 per pound. Increased production of primary aluminum due to restarts of certain previously idled capacity, the commissioning of a major new smelter in South Africa, and the continued high level of exports from the CIS have contributed to increased supplies of primary aluminum to the Western world in 1996. While the economies of the major aluminum consuming regions -- the United States, Japan, Western Europe, and Asia -- are performing relatively well, Kaiser believes that the reduction of aluminum inventories by consumers, as prices have continued to decline, has suppressed the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. In addition to these supply/demand dynamics, Kaiser believes that the recent decline in primary aluminum prices may have been influenced by a recent major decline in copper prices on the LME. 98 101 The following table indicates the monthly average AMT Price for each of the months from January 1993 through November 1996 as reported by Metals Week. The AMT Price for the week ended December 13, 1996, as reported by Metals Week, was 72.0264 cents per pound.
AVERAGE TRANSACTION PRICES (CENTS/POUND) ---------------------------------------- 1996 1995 1994 1993 ------ ------- ------ ------ January................................ 75.514 100.377 57.019 56.479 February............................... 75.100 93.847 61.641 55.993 March.................................. 76.414 88.745 62.343 53.794 April.................................. 75.517 90.388 61.890 52.345 May.................................... 75.314 85.338 64.007 52.694 June................................... 70.450 85.305 67.807 54.673 July................................... 69.767 87.788 72.656 56.829 August................................. 70.023 87.828 71.249 55.516 September.............................. 67.567 82.010 77.764 52.095 October................................ 65.112 78.384 83.839 51.660 November............................... 70.019 78.000 91.926 50.365 December............................... 78.823 91.484 53.902 ------ ------- ------ ------ Average.............................. 71.891 86.403 71.969 53.862 ====== ======= ====== ======
Alumina Western world demand for alumina, and the price of alumina, declined in 1994 in response to the curtailment of Western world smelter production of primary aluminum, partially offset by increased usage of Western world alumina by smelters in the Commonwealth of Independent States ("CIS") and in the PRC. Increased Western world production of primary aluminum, as well as continued imports of Western world alumina by the CIS and the PRC, during 1995 resulted in higher demand for Western world alumina and significantly stronger alumina pricing. In the first nine months of 1996, however, the alumina market softened, primarily as a result of increased alumina production and decreased alumina exports to the CIS and the PRC, resulting in lower alumina prices. Fabricated Products United States shipments of domestic fabricated aluminum products in 1995 were approximately at 1994 levels, although in 1995 demand for can sheet in the United States softened relative to 1994. Shipments of domestic mill products during the first nine months of 1996 declined approximately 4% compared to the first nine months of 1995, principally due to an approximate 10% decline in the shipment of can sheet and a reduction of consumer inventories of other fabricated aluminum products. This trend has continued through the fourth quarter of 1996. See "Risk Factors -- Risk Factors Relating to Kaiser" for a discussion of certain factors that could cause actual results to differ from those that could otherwise result from the industry trends discussed above. STRATEGY Kaiser's objectives are to maintain leading market positions in its core businesses, while developing new opportunities both domestically and internationally which will enhance, and reduce the cyclicality of, Kaiser's earnings. The primary elements of Kaiser's strategies to achieve these objectives are: Increasing the competitiveness of its existing facilities. Kaiser is continuing to increase the competitiveness of its existing facilities. In 1995, Kaiser successfully restructured electric power purchase agreements for its smelting facilities in the Pacific Northwest, which has resulted in significantly lower electric power costs in 1996 for the Mead and Tacoma, Washington, smelters compared with 1995 electric power costs. Kaiser 99 102 expects to continue to benefit from these savings in electric power costs at these facilities in 1997 and beyond. See "Risk Factors -- Risk Factors Relating to Kaiser -- Power Supply." Kaiser has also commenced the modernization and expansion of the carbon baking furnace at its Mead smelter at an estimated cost of approximately $52.0 million. This project will lower costs, enhance safety and improve the environmental performance of the facility. This modernization is expected to be completed in late 1998. Kaiser continues to implement changes to the process and product mix of its Trentwood rolling mill in an effort to maximize its profitability and maintain full utilization of the facility. Recently, Kaiser has approved an expansion of its heat treat capacity by approximately one-third. Sales of Kaiser's heat treat products have increased significantly over the last several years and are made primarily to the aerospace and general engineering markets, which are experiencing growth in demand. The project is estimated to cost approximately $45.0 million and to take approximately two years to complete. See "-- Production Operations." Developing proprietary technologies. Kaiser has developed proprietary technologies which present growth opportunities in the future and have enabled it to substantially improve its operating efficiencies. Kaiser has developed a unique micromill for the production of can sheet from molten metal using a continuous cast process. The capital and conversion costs of these micromills are expected to be significantly lower than conventional rolling mills. Micromills are also expected to result in lower transportation costs due to the ability to strategically locate a micromill in close proximity to a manufacturing facility. Micromills are expected to be particularly well suited to take advantage of the rapid growth in demand for can sheet expected in emerging markets in Asia and Latin America where there is limited indigenous supply. Kaiser believes that micromills should also be capable of manufacturing other sheet products at relatively low capital and operating costs. The micromill technology is based on a proprietary thin-strip, high-speed, continuous-belt casting technique linked directly to hot and cold rolling mills. The major advantage of the process is that the sheet is continuously manufactured from molten metal, unlike the conventional process in which the metal is first cast into large, solid ingots and subsequently rolled into sheet through a series of highly capital-intensive steps. The first micromill is nearing completion in Nevada as a full-scale demonstration and production facility. Kaiser expects operational start-up of the facility by the end of 1996. If Kaiser is successful in proving and commercializing its micromill technology, micromills could represent an important source of future growth. There can be no assurance that Kaiser will be able to successfully develop and commercialize the technology for use at full-scale facilities. See "-- Research and Development." Kaiser has developed and installed proprietary retrofit technology in all of its smelters over the last decade, which has significantly contributed to increased and more efficient production of primary aluminum. Through continuing technological improvements, Kaiser's smelters have achieved improved energy efficiency and longer average life of reduction cells. Kaiser is actively engaged in licensing its smelting and other process and product technology and selling technical and managerial assistance to other producers worldwide. See "-- Production Operations -- Primary Aluminum Products." Increasing participation in emerging markets. Kaiser is actively pursuing opportunities to increase its participation in emerging markets by using its technical expertise and capital to form joint ventures or acquire equity in aluminum-related facilities in foreign countries where it can apply its proprietary technology. Kaiser has created Kaiser Aluminum International to identify growth opportunities in targeted emerging markets and develop the needed country competence to complement Kaiser's product and process competence in capitalizing on such opportunities. Kaiser has focused its efforts on countries that are expected to be important suppliers of aluminum and/or large customers for aluminum and alumina, including the PRC, Russia and other members of the CIS, India, and Venezuela. Kaiser's proprietary retrofit technology has been installed by Kaiser at various third party locations throughout the world and is an integral part of Kaiser's initiatives for participating in new and existing smelting facilities. See "Risk Factors -- Risk Factors Relating to Kaiser -- Foreign Activities" above and "-- International Business Development" below. 100 103 SENSITIVITY TO PRICES AND HEDGING PROGRAMS Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. During the period January 1, 1993 through December 13, 1996, the AMT Price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. For the week ended December 13, 1996, the AMT Price of primary aluminum was approximately $.72 per pound. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. See "-- Industry Overview" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Trends -- Aluminum Operations." Kaiser's production levels of alumina and primary aluminum exceed its internal processing needs, which allows it to be a major seller of alumina (approximately 2.0 million tons in 1995 or 72% of production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of production) to third parties. As of November 30, 1996, Kaiser had sold forward substantially all of the alumina available to it in excess of its projected internal smelting requirements for the balance of 1996, and 89% and 90% of such excess alumina for 1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made at prices indexed to future prices of primary aluminum. As of November 30, 1996, Kaiser had sold forward at fixed prices approximately 70,000 tons of its primary aluminum in excess of its projected internal fabrication requirements in 1997 and approximately 93,600 tons of such surplus in 1998 at fixed prices in excess of the AMT Price for primary aluminum for the week ended December 13, 1996. In addition, Kaiser has purchased put options in respect of approximately 196,000 tons and 45,000 tons of such surplus in 1997 and 1998, respectively, to establish a minimum price in excess of the AMT Price for primary aluminum for the week ended December 13, 1996. The weighted average price for Kaiser's purchased put options with respect to 1997 are below the AMT Price for the week ended December 13, 1996. The weighted average price of the minimum of the range established with respect to Kaiser's other 1998 option contracts approximates the AMT Price for the week ended December 13, 1996. PRODUCTION OPERATIONS The following table sets forth total shipments and intracompany transfers of Kaiser's alumina, primary aluminum, and fabricated aluminum operations:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ------------------------------- 1996 1995 1995 1994 1993 ------- ------- ------- ------- ------- (IN THOUSANDS OF TONS) ALUMINA: Shipments to Third Parties........ 1,506.7 1,494.6 2,040.1 2,086.7 1,997.5 Intracompany Transfers............ 662.2 546.3 800.6 820.9 807.5 PRIMARY ALUMINUM: Shipments to Third Parties........ 262.9 184.5 271.7 224.0 242.5 Intracompany Transfers............ 97.0 171.3 217.4 225.1 233.6 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties........ 245.4 284.3 368.2 399.0 373.2
Kaiser's operations are conducted through KACC's decentralized business units which compete through-out the aluminum industry. 101 104 - - The alumina business unit, which mines bauxite and obtains additional bauxite tonnage under long-term contracts, produced approximately 8% of Western world alumina in 1995. During 1995, Kaiser's shipments of bauxite to third parties represented approximately 21% of bauxite mined. In addition, Kaiser's third party shipments of alumina represented approximately 72% of alumina produced. Kaiser's share of total Western world alumina capacity was approximately 7% in 1995. - - The primary aluminum products business unit operates two domestic smelters wholly owned by Kaiser and two foreign smelters in which Kaiser holds significant ownership interests. During 1995, Kaiser's shipments of primary aluminum to third parties represented approximately 66% of primary aluminum production. Kaiser's share of total Western world primary aluminum capacity was approximately 3% in 1995. - - Fabricated aluminum products are manufactured by three business units -- flat-rolled products, extruded products and engineered components. The products include body, lid, and tab stock for beverage containers, sheet and plate products, heat-treated products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters, engine manifolds, and other castings, forgings and extruded products, which are manufactured at plants located in principal marketing areas of the United States and Canada. The aluminum utilized in Kaiser's fabricated products operations is comprised of primary aluminum, obtained both internally and from third parties, and scrap metal purchased from third parties. Alumina The following table lists Kaiser's bauxite mining and alumina refining facilities as of December 31, 1995:
ANNUAL TOTAL PRODUCTION ANNUAL CAPACITY PRODUCTION COMPANY AVAILABLE TO CAPACITY ACTIVITY FACILITY LOCATION OWNERSHIP KAISER --------- -------------------------- -------- --------- --------- ------------ (TONS) (TONS) Bauxite Mining............ KJBC(1) Jamaica 49% 4,500,000 4,500,000 Alpart(2) Jamaica 65% 2,275,000 3,500,000 --------- --------- 6,775,000 8,000,000 ========= ========= Alumina Refining.......... Gramercy Louisiana 100% 1,000,000 1,000,000 Alpart Jamaica 65% 943,000 1,450,000 QAL Australia 28.3% 934,000 3,300,000 --------- --------- 2,877,000 5,750,000 ========= =========
- --------------- (1) Although Kaiser owns 49% of KJBC, it has the right to receive all of such entity's output. (2) Alpart bauxite is refined into alumina at the Alpart refinery. Bauxite mined in Jamaica by KJBC is refined into alumina at Kaiser's plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of Jamaica granted Kaiser a mining lease for the mining of bauxite sufficient to supply Kaiser's then-existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the Gramercy plant is sold to third parties. Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina plant located in Jamaica. Kaiser owns a 65% interest in Alpart, and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. Kaiser has management responsibility for the facility on a fee basis. Kaiser and Hydro have agreed to be responsible for their proportionate shares of Alpart's costs and expenses. The Government of Jamaica has granted Alpart a mining lease and has entered into other agreements with Alpart designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery as it may be expanded to a capacity of 2,000,000 tons per year through the year 2024. Kaiser owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns the largest and one of the most efficient alumina refineries in the world, located in Queensland, Australia. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its stockholders pursuant to long-term tolling 102 105 contracts. The stockholders, including Kaiser, purchase bauxite from another QAL stockholder under long-term supply contracts. Kaiser has contracted with QAL to take approximately 792,000 tons per year of capacity or pay standby charges. Kaiser is unconditionally obligated to pay amounts calculated to service its share ($93.3 million in principal amount at September 30, 1996) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. QAL's annual production capacity is approximately 3,300,000 tons, of which approximately 934,000 tons are available to Kaiser. Kaiser's principal customers for bauxite and alumina consist of large and small domestic and international aluminum producers that purchase bauxite and reduction-grade alumina for use in their internal refining and smelting operations, trading intermediaries who resell raw materials to end-users, and users of chemical-grade alumina. In 1995, Kaiser sold all of its bauxite to two customers, the largest of which accounted for approximately 74% of such sales. Kaiser also sold alumina to nine customers, the largest and top five of which accounted for approximately 23% and 90% of such sales, respectively. See "-- Competition." Kaiser believes that among alumina producers it is now the Western world's second largest seller of alumina to third parties. Kaiser's strategy is to sell a substantial portion of the bauxite and alumina available to it in excess of its internal refining and smelting requirements under multi-year sales contracts. See "-- Sensitivity to Prices and Hedging Programs." Primary Aluminum Products The following table lists Kaiser's primary aluminum smelting facilities as of December 31, 1995:
ANNUAL RATED TOTAL CAPACITY ANNUAL 1995 COMPANY AVAILABLE TO RATED OPERATING LOCATION FACILITY OWNERSHIP KAISER CAPACITY RATE ------------------------------ --------- --------- ------------ -------- --------- (TONS) (TONS) Domestic Washington.................. Mead 100% 200,000 200,000 82% Washington.................. Tacoma 100% 73,000 73,000 82% ------- ------- Subtotal................. 273,000 273,000 ------- ------- International Ghana....................... Valco 90% 180,000 200,000 68% Wales, United Kingdom....... Anglesey 49% 55,000 112,000 119% ------- ------- Subtotal................. 235,000 312,000 ------- ------- TOTAL............... 508,000 585,000 ======= =======
Kaiser owns two smelters located at Mead and Tacoma, Washington, where alumina is processed into primary aluminum. The Mead facility uses pre-bake technology and produces primary aluminum. Approximately 71% of Mead's 1995 production was used at Kaiser's Trentwood fabricating facility and the balance was sold to third parties. The Tacoma plant uses Soderberg technology and produces primary aluminum and high-grade, continuous-cast, redraw rod, which currently commands a premium price in excess of the price of primary aluminum. Both smelters have achieved significant production efficiencies in recent years through retrofit technology, cost controls, and semi-variable wage and power contracts, leading to increases in production volume and enhancing their ability to compete with newer smelters. At the Mead plant, Kaiser has converted to welded anode assemblies to increase energy efficiency, extended the anode life-cycle in the smelting process, changed from pencil to liquid pitch to produce carbon anodes which achieve environmental and operating savings, and engaged in efforts to increase production through the use of improved, higher- efficiency reduction cells. Kaiser has also commenced the modernization and expansion of the carbon baking furnace at its Mead smelter at an estimated cost of approximately $52.0 million. This project will lower costs, enhance safety and improve the environmental performance of the facility. This modernization is expected to be completed in late 1998. See "-- Strategy." 103 106 Electric power supply represents an important production cost for Kaiser at its aluminum smelters. In 1995, Kaiser successfully restructured electric power purchase agreements for its smelting facilities in the Pacific Northwest, which has resulted in significantly lower electric power costs for the Mead and Tacoma, Washington, smelters compared with 1995 electric power costs. Kaiser expects to continue to benefit from these savings in electric power costs at these facilities in 1997 and beyond. From 1981 until 1995, electric power for Kaiser's Mead and Tacoma smelters was purchased exclusively from the Bonneville Power Administration ("BPA") by Kaiser under a contract which expires in 2001. In April 1995, the BPA agreed to allow each of the direct service industrial customers (the "DSIs"), which include Kaiser, to purchase a portion of its electric power requirement from sources other than the BPA beginning October 1, 1995. In June 1995, Kaiser entered into an agreement with The Washington Water Power Company ("WWP") to purchase up to 50 megawatts of electric power for its Northwest facilities for a five-year term beginning October 1, 1995. Kaiser is receiving power under that contract, which power displaces a portion of Kaiser's interruptible power from the BPA. In addition, in 1995 Kaiser entered into a new power purchase contract with the BPA, which amends the existing BPA power contract and which contemplates reductions during 1996 in the amount of power which Kaiser is obligated to purchase from the BPA and which the BPA is obligated to sell to Kaiser, and the replacement of such power with power to be purchased from other suppliers. Kaiser is negotiating power purchase agreements for such power with suppliers other than the BPA. Contracts for the purchase of all power required by Kaiser's Mead and Tacoma smelters and Trentwood rolling mill for 1996, and for approximately 75% of such power for the period 1997-2001, have been finalized. Two parties filed lawsuits in December 1995 against the BPA petitioning the court to review and set aside the BPA's offers of the new power purchase contracts to the DSIs, including the offer that Kaiser accepted. These lawsuits have been consolidated. In addition, the BPA's Business Plan Environmental Impact Statement that is under review in connection with the lawsuits challenging the BPA's transmission agreements with the DSIs, including Kaiser, as described in the following paragraph, is part of the record supporting the BPA's new power purchase contracts with the DSIs, and an adverse decision in those lawsuits may affect Kaiser's new power purchase contract with the BPA. The effect of such lawsuits, if any, on Kaiser's new power purchase contract with the BPA is not known. Certain of the DSIs, including Kaiser, have intervened in the lawsuits. In 1995, Kaiser also entered into agreements with the BPA and with the WWP, with terms ending in 2001, under which the BPA and the WWP would provide to Kaiser transmission services for power purchased from sources other than the BPA. The term of the transmission services agreement with the BPA was subsequently extended for an additional fifteen years, which extension has been challenged. Four lawsuits have been filed against the BPA by various parties, which lawsuits either challenge the BPA's record of decision offering such an extension agreement to the DSIs or challenge the BPA's Business Plan Environmental Impact Statement record of decision in connection therewith. Certain of the DSIs, including Kaiser, have intervened in the four lawsuits. See "-- Strategy." Kaiser reduced operations at its Mead and Tacoma smelters in Washington to approximately 75% of their full capacity in January 1993, when three reduction potlines were removed from production (two at Mead and one at Tacoma) in response to a power reduction imposed by the BPA. In March 1995, the BPA offered to its industrial customers, including Kaiser, surplus firm power at a discounted rate for the period April 1, 1995, through July 31, 1995, to enable such customers to restart idle industrial loads. In April 1995, Kaiser and the BPA entered into a contract for an amount of such power, and thereafter Kaiser restarted one-half of an idle potline (approximately 9,000 tons of annual capacity) at its Tacoma, Washington, smelter. The Tacoma smelter was returned to full production in October 1995. In 1995, Kaiser entered into a one-year power supply contract with the BPA, for a term ended September 30, 1996, in connection with the restart of idled capacity at its Mead smelter. The Mead smelter returned to full production in December 1995. Kaiser manages, and owns a 90% interest in, the Valco aluminum smelter in Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied by Kaiser and the other participant into primary aluminum under long-term tolling contracts which provide for proportionate payments by the participants in amounts intended to pay not less than all of Valco's operating and financing costs. Kaiser's share of the primary aluminum is sold to third parties. Power for the Valco smelter is supplied under an agreement which expires in 2017. The agreement indexes two-thirds of the price of the contract quantity of power to the market 104 107 price of primary aluminum. The agreement also provides for a review and adjustment of the base power rate and the price index every five years. The most recent review was completed in April 1994 for the 1994-1998 period. Valco has entered into an agreement with the government of Ghana under which Valco has been assured (except in cases of force majeure) that it will receive sufficient electric power to operate at its current level of three and one-half potlines through December 31, 1996. Kaiser believes that Valco should have available sufficient electric power to operate at least at its current level through 1997. See "Risk Factors -- Risk Factors Relating to Kaiser -- Power Supply." Kaiser owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. Kaiser supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum output. Kaiser sells its share of Anglesey's output to third parties. Power for the Anglesey alumina smelter is supplied under an agreement which expires in 2001. Kaiser has developed and installed proprietary retrofit technology in all of its smelters, as well as at third party locations. This technology -- which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved "feed" systems that add alumina to the cells, and a computerized system that controls energy flow in the cells -- has significantly contributed to increased and more efficient production of primary aluminum and enhances Kaiser's ability to compete more effectively with the industry's newer smelters. Kaiser is actively engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide, and may participate in joint ventures or similar business partnerships which employ Kaiser's technical and managerial knowledge. See "-- Strategy" and "-- Research and Development." Kaiser's principal primary aluminum customers consist of large trading intermediaries and metal brokers, who resell primary aluminum to fabricated product manufacturers, and large and small international aluminum fabricators. In 1995, Kaiser sold its primary aluminum production not utilized for internal purposes to approximately 35 customers, the largest and top five of which accounted for approximately 25% and 62% of such sales, respectively. See "-- Competition." Marketing and sales efforts are conducted by a small staff located at the business unit's headquarters in Pleasanton, California, and by senior executives of Kaiser who often participate in the structuring of major sales transactions. A majority of the business unit's sales are based upon long-term relationships with metal merchants and end-users. Fabricated Aluminum Products Kaiser manufactures and markets fabricated aluminum products for the packaging, transportation, construction, and consumer durables markets in the United States and abroad. Sales in these markets are made directly and through distributors to a large number of customers. In 1995, four domestic beverage container manufacturers were among the leading customers for Kaiser's fabricated products and accounted for approximately 12% of Kaiser's sales revenue. Kaiser's fabricated products compete with those of numerous domestic and foreign producers and with products made of steel, copper, glass, plastic, and other materials. Product quality, price, and availability are the principal competitive factors in the market for fabricated aluminum products. Kaiser has focused its fabricated products operations on selected products in which Kaiser has production expertise, high-quality capability, and geographic and other competitive advantages. Flat-Rolled Products. The flat-rolled product business unit, the largest of Kaiser's fabricated products businesses, operates the Trentwood sheet and plate mill at Spokane, Washington. The Trentwood facility is Kaiser's largest fabricating plant and accounted for approximately 64% of Kaiser's 1995 fabricated aluminum products shipments. The business unit supplies the beverage container market (producing body, lid, and tab stock), the aerospace and general engineering markets (producing heat treat products), and the specialty coil markets (producing automotive brazing sheet, wheel, and tread products), both directly and through distributors. During 1995, Kaiser successfully completed a two year restructuring of its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs by at least $50.0 million. 105 108 Kaiser's flat-rolled products are sold primarily to beverage container manufacturers located in the western United States and in the Asian Pacific Rim countries where the Trentwood plant's location provides Kaiser with a transportation advantage. Quality of products for the beverage container industry and timeliness of delivery are the primary bases on which Kaiser competes. Kaiser has made significant capital expenditures at Trentwood during the past several years in rolling technology and process control to improve the metal integrity, shape and gauge control of its products. Kaiser believes that such improvements have enhanced the quality of its products for the beverage container industry and the capacity and efficiency of its manufacturing operations. Kaiser believes that it is one of the highest quality producers of aluminum beverage can sheet in the world. Kaiser continues to implement changes to the process and product mix of its Trentwood rolling mill in an effort to maximize its profitability and maintain full utilization of the facility. Recently, Kaiser has approved an expansion of its heat treat capacity by approximately one-third, which will enable Kaiser to increase the range of its heat treat products and improve Trentwood's operating efficiency. Sales of Kaiser's heat treat products have increased significantly over the last several years and are made primarily to the aerospace and general engineering markets, which are experiencing growth in demand. The project is estimated to cost approximately $45.0 million and to take approximately two years to complete. In 1995, the flat-rolled products business unit had 31 domestic and foreign can sheet customers. The largest and top five of such customers accounted for approximately 14% and 41%, respectively, of the business unit's revenue. See "-- Competition." In 1995, the business unit shipped products to approximately 150 customers in the aerospace, transportation, and industrial ("ATI") markets, most of which were distributors who sell to a variety of industrial end-users. The top five customers in the ATI markets for flat-rolled products accounted for approximately 13% of the business unit's revenue. The marketing staff for the flat-rolled products business unit is located at the Trentwood facility and in Pleasanton, California. Sales are made directly to customers (including distributors) from eight sales offices located throughout the United States. International customers are served by sales offices in the Netherlands and Japan and by independent sales agents in Asia and Latin America. Extruded Products. The extruded products business unit is headquartered in Dallas, Texas, and operates soft-alloy extrusion facilities in Los Angeles, California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario, Canada; a cathodic protection business located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium; rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging stock, and billet; and a facility in Richland, Washington, which produces seamless tubing in both hard and soft alloys for the automotive, other transportation, export, recreation, agriculture, and other industrial markets. Each of the soft-alloy extrusion facilities has fabricating capabilities and provides finishing services. The extruded products business unit's major markets are in the transportation industry, to which it provides extruded shapes for automobiles, trucks, trailers, cabs, and shipping containers, and in the distribution, durable goods, defense, building and construction, ordnance and electrical markets. In 1995, the extruded products business unit had approximately 825 customers for its products, the largest and top five of which accounted for approximately 6% and 20%, respectively, of its revenue. See "-- Competition." Sales are made directly from plants as well as marketing locations across the United States. Engineered Components. The engineered components business unit operates forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood, South Carolina; a machine shop at Greenwood, South Carolina; and a casting facility in Canton, Ohio. The engineered components business unit is one of the largest producers of aluminum forgings in the United States and is a major supplier of high-quality forged parts to customers in the automotive, commercial vehicle and ordnance markets. The high strength-to-weight properties of forged and cast aluminum make it particularly well-suited for automotive applications. The business unit's casting facility manufactures aluminum engine manifolds for the automobile, truck and marine markets. In 1995, the engineered components business unit had approximately 250 customers, the largest and top five of which accounted for approximately 34% and 77%, respectively, of the business unit's revenue. See 106 109 "-- Competition." The engineered components business unit's headquarters and a sales and engineering office are located in Detroit, Michigan. The sales and engineering office works with car makers and other customers, the Center for Technology (see "-- Research and Development"), and plant personnel to create new automotive component designs and improve existing products. Kaiser entered into a letter of intent with Accuride Corporation ("Accuride") in September 1996 to form a global joint-venture company to design, manufacture and market aluminum wheels for the commercial transportation industry. Kaiser and Accuride will each own 50% of the new company. Kaiser will receive a cash payment in exchange for certain wheel manufacturing assets located primarily at its Erie, Pennsylvania facility, which currently forges wheels and other fabricated aluminum products. The transaction is expected to be consummated during the first quarter of 1997 and is subject to various conditions, including the negotiation of definitive agreements, third party consents, and board approvals. COMPETITION Aluminum competes in many markets with steel, copper, glass, plastic and numerous other materials. In recent years, plastic containers have increased and glass containers have decreased their respective shares of the soft drink sector of the beverage container market. In the United States, beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene terephthalate ("PET") container capacity is brought on line by plastics manufacturers. Within the aluminum business, Kaiser competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. Many of Kaiser's competitors have greater financial resources than Kaiser. Kaiser's principal competitors in the sale of alumina include Alcoa Alumina and Chemicals LLC, Billiton Marketing and Trading BV, and Alcan Aluminium Limited. Kaiser competes with most aluminum producers in the sale of primary aluminum. See "Risk Factors -- Risk Factors Relating to Kaiser -- Leverage." Primary aluminum and, to some degree, alumina are commodities with generally standard qualities, and competition in the sale of these commodities is based primarily upon price, quality and availability. Kaiser also competes with a wide range of domestic and international fabricators in the sale of fabricated aluminum products. Competition in the sale of fabricated products is based upon quality, availability, price and service, including delivery performance. Kaiser concentrates its fabricating operations on selected products in which it has production expertise, high-quality capability, and geographic and other competitive advantages. Kaiser believes that, assuming the current relationship between worldwide supply and demand for alumina and primary aluminum does not change materially, the loss of any one of its customers, including intermediaries, would not have a material adverse effect on its financial condition or results of operations. RESEARCH AND DEVELOPMENT Kaiser conducts research and development activities principally at three facilities -- the Center for Technology ("CFT") in Pleasanton, California; the Primary Aluminum Products Division Technology Center ("ATC") adjacent to the Mead smelter in Spokane, Washington; and the Alumina Development Laboratory ("ADL") at the Gramercy, Louisiana, refinery, which supports Kaiser Alumina Technical Services ("KATS") and the facilities of the alumina business unit. Net expenditures for company-sponsored research and development activities were $18.5 million in 1995, $16.7 million in 1994, and $18.5 million in 1993. Kaiser's research staff totaled 157 at December 31, 1995. Kaiser estimates that research and development net expenditures will be approximately $22.5 million in 1996. CFT performs research and development across a range of aluminum process and product technologies to support Kaiser's business units and new business opportunities. It also selectively offers technical services to third parties. Significant efforts are directed at product and process technology for the can sheet, aircraft and automotive markets, and aluminum reduction cell models which are applied to improving cell designs and operating conditions. The largest and most notable single project being developed at CFT is a unique micromill for the production of can sheet from molten metal using a continuous cast process. The capital and conversion costs of these micromills are expected to be significantly lower than conventional rolling mills. 107 110 Micromills are also expected to result in lower transportation costs due to the ability to strategically locate a micromill in close proximity to a manufacturing facility. Micromills are expected to be particularly well suited to take advantage of the rapid growth in demand for can sheet expected in emerging markets in Asia and Latin America where there is limited indigenous supply. Kaiser believes that micromills should also be capable of manufacturing other sheet products at relatively low capital and operating costs. The micromill technology is based on a proprietary thin-strip, high-speed, continuous-belt casting technique linked directly to hot and cold rolling mills. The major advantage of the process is that the sheet is continuously manufactured from molten metal, unlike the conventional process in which the metal is first cast into large, solid ingots and subsequently rolled into sheet through a series of highly capital-intensive steps. The first micromill is nearing completion in Nevada as a full-scale demonstration and production facility. Kaiser expects operational start-up of the facility by the end of 1996. If Kaiser is successful in proving and commercializing its micromill technology, micromills could represent an important source of future growth. There can be no assurance that Kaiser will be able to successfully develop and commercialize the technology for use at full-scale facilities. Kaiser is currently financing the cost of the construction of the Nevada micromill, estimated to be approximately $70 million, from general corporate funds, including borrowings under the 1994 KACC Credit Agreement. ATC maintains specialized laboratories and a miniature carbon plant where experiments with new anode and cathode technology are performed. ATC supports Kaiser's primary aluminum smelters, and concentrates on the development of cost-effective technical innovations such as equipment and process improvements. KATS provides improved alumina process technology to Kaiser's facilities and technical support to new business ventures in cooperation with Kaiser's international business development group. See "-- Strategy." Kaiser is actively engaged in efforts to license its technology and sell technical and managerial assistance to other producers worldwide. Kaiser's technology has been installed in alumina refineries, aluminum smelters and rolling mills located in the United States, Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New Zealand, Ghana, the United Arab Emirates, and the United Kingdom. Kaiser's revenue from technology sales and technical assistance to third parties was $5.7 million in 1995, $10.0 million in 1994, and $12.8 million in 1993. See "-- Strategy." Kaiser has entered into agreements with respect to the Krasnoyarsk smelter in Russia under which Kaiser has licensed certain of its technology for use in such facility and agreed to provide purchasing services in obtaining Western-sourced technology and equipment to be used in such facility. These agreements were entered into in November 1990, and the services under them are expected to be completed in 1996. In addition, in 1993, Kaiser entered into agreements with respect to the Nadvoitsy smelter in Russia and the Korba smelter of the Bharat Aluminium Co. Ltd., in India, under which Kaiser has licensed certain of its technology for use in such facilities. Services under the Nadvoitsy agreements were completed in 1995, and services under the Korba agreements are essentially completed although final contract closure will not occur until mid-1997. INTERNATIONAL BUSINESS DEVELOPMENT Kaiser is actively pursuing opportunities to increase its participation in emerging markets by using its technical expertise and capital to form joint ventures or acquire equity in aluminum-related facilities in foreign countries where it can apply its proprietary technology. Kaiser has created Kaiser Aluminum International to identify growth opportunities in targeted emerging markets and develop the needed country competence to complement Kaiser's product and process competence in capitalizing on such opportunities. Kaiser has focused its efforts on countries that are expected to be important suppliers of aluminum and/or large customers for aluminum and alumina, including the PRC, Russia and other members of the CIS, India, and Venezuela. Kaiser's proprietary retrofit technology has been installed by Kaiser at various third party locations throughout the world and is an integral part of Kaiser's initiatives for participating in new and existing smelting facilities. In 1995, KYRIL entered into the Joint Venture Agreements with LAS relating to the formation and operation of the Joint Venture. The Joint Venture's assets and operations are located primarily in the industrial city of Lanzhou, the capital of Gansu Province in northwestern China, and in nearby Lianhai, a 108 111 special economic zone also in Gansu Province. The smelter at Lanzhou is the fifth largest aluminum smelter in the PRC and has a capacity of approximately 55,000 tons of primary aluminum per year. The smelter at Lianhai has a capacity of approximately 30,000 tons of primary aluminum per year. In 1995, the two smelters produced an aggregate of approximately 71,000 tons of primary aluminum, which amount was less than the aggregate capacity of the plants principally because of a shortage of electric power available to the plants in 1995 due to a drought which impacted the hydroelectric system. The shortage of electric power available to the plants continued during the first part of 1996; however, normal power supply has been restored since July. KYRIL contributed $9.0 million to the capital of the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the amount, timing and other conditions relating to KYRIL's additional contributions to the Joint Venture and the use thereof by the Joint Venture. Governmental approval in the PRC will be necessary in order to implement any arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. At a recent meeting of the directors of the Joint Venture, KYRIL, LAS, and the Joint Venture reached an agreement (i) that extended until early 1997 the deadline for KYRIL to make a second capital contribution to the Joint Venture, and (ii) that KYRIL would continue to explore various methods of financing any future capital contributions to the Joint Venture, including possible financing from third-party investors. Kaiser, through its extruded products business unit, has entered into contracts to form two small joint venture companies in the PRC. Kaiser indirectly acquired equity interests of approximately 45% and 49%, respectively, in these two companies which will manufacture aluminum extrusions, in exchange for the contribution to those companies of certain used equipment, technology, services and cash. The majority equity interests in the two companies are owned by affiliates of Guizhou Guang Da Construction Company. See "Risk Factors -- Risk Factors Relating to Kaiser -- Foreign Activities." EMPLOYEES During 1995, Kaiser employed an average of approximately 9,500 persons, compared with an average of approximately 9,700 employees in 1994, and 10,200 employees in 1993. At December 31, 1995, Kaiser's work force was approximately 9,600, including a domestic work force of approximately 5,900, of whom 4,000 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 74% of such employees are covered by a master agreement (the "Labor Contract") with the USWA which expires September 30, 1998. The Labor Contract covers Kaiser's plants in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract replaced a contract that expired October 31, 1994, and was reached after an eight-day work stoppage by the USWA at these plants in February 1995. The Labor Contract provides for base wages at all covered plants. In addition, workers covered by the Labor Contract may receive quarterly bonus payments based on various indices of profitability, productivity, efficiency, and other aspects of specific plant performance, as well as, in certain cases, the price of alumina or primary aluminum. Pursuant to the Labor Contract, base wage rates were raised effective January 2, 1995, were raised again effective November 6, 1995, and will be raised an additional amount effective November 3, 1997, and an amount in respect of the cost of living adjustment under the previous master agreement will be phased into base wages during the term of the Labor Contract. In the second quarter of 1995, Kaiser acquired up to $2,000 of preference stock held in a stock plan for the benefit of each of approximately 82% of the employees covered by the Labor Contract and in the first half of 1998 will acquire up to an additional $4,000 of such preference stock held in such plan for the benefit of substantially the same employees. In addition, a profitability test was satisfied and, therefore, Kaiser acquired during 1996 up to an additional $1,000 of such preference stock held in such plan for the benefit of substantially the same employees. Kaiser made comparable acquisitions of preference stock held for the benefit of each of certain salaried employees. In February 1995, Alpart's employees engaged in a six-day work stoppage by its National Workers Union, which was settled by a new contract which expired in April 1996. Contract negotiations are ongoing. Management considers Kaiser's employee relations to be satisfactory. 109 112 ENVIRONMENTAL MATTERS Kaiser is subject to the Environmental Laws. From time to time the Environmental Laws are amended and new ones are adopted. The Environmental Laws regulate, among other things, air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; the release of hazardous or toxic substances, pollutants and contaminants into the environment; and, in certain instances, the environmental condition of industrial property prior to transfer or sale. In addition, Kaiser is subject to various federal, state and local workplace health and safety laws and regulations ("Health Laws"). From time to time, Kaiser is subject, with respect to its current and former operations, to fines or penalties assessed for alleged breaches of the Environmental and Health Laws and to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action under the Environmental and Health Laws or damages related to alleged injuries to health or to the environment, including claims with respect to certain waste disposal sites and the remediation of sites presently or formerly operated by Kaiser. See "Legal Proceedings." Kaiser currently is subject to a number of lawsuits under CERCLA. Kaiser, along with several other entities, has also been named as a PRP for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA and, in certain instances, may be exposed to joint and several liability for those costs or damages to natural resources. Kaiser's Mead, Washington, facility has been listed on the National Priorities List under CERCLA. By letter dated June 18, 1996, the Washington State Department of Ecology advised Kaiser that there are several options for remediation at the Mead facility that would be acceptable to the Department. Kaiser expects that one of these remedial options will be agreed upon and incorporated into a Consent Decree in early 1997. In addition, in connection with certain of its asset sales, Kaiser has indemnified the purchasers of assets with respect to certain liabilities (and associated expenses) resulting from acts or omissions arising prior to such dispositions, including environmental liabilities. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals, primarily related to potential solid waste disposal and soil and ground-water remediation matters. At September 30, 1996, the balance of such accruals, which are primarily included in other non-current liabilities, was $32.9 million. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and Kaiser's assessment of the likely remediation to be performed. Kaiser expects remediation to occur over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $2.0 to $10.0 million for the years 1996 through 2000 and an aggregate of approximately $7.0 million thereafter. Cash expenditures of $4.5 million in 1995, $3.6 million in 1994, and $7.2 million in 1993 were charged to previously established accruals relating to environmental costs. Approximately $8.4 million is expected to be charged to such accruals in 1996. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $26.5 million and that the factors upon which a substantial portion of this estimate is based are expected to be resolved in early 1997. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, Kaiser currently believes that the resolution of such uncertainties should not have a material adverse effect on Kaiser's consolidated financial position, results of operations, or liquidity. In addition to cash expenditures charged to environmental accruals, environmental capital spending was $9.2 million in 1995, $11.9 million in 1994, and $12.6 million in 1993. Annual operating costs for pollution control, not including corporate overhead or depreciation, were approximately $26.0 million in 1995, $23.1 million in 1994, and $22.4 million in 1993. Legislative, regulatory and economic uncertainties make it difficult to project future spending for these purposes. However, Kaiser currently anticipates that in the 1996-1997 period, environmental capital spending will be within the range of approximately $27.0-$33.0 million per year, and operating costs for pollution control will be within the range of $28.0-$29.0 million per year. 110 113 See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations," Note 9 of the Notes to Consolidated Financial Statements under the heading "Environmental Contingencies," and "Risk Factors -- Risk Factors Relating to Kaiser -- Environmental Matters and Litigation." PROPERTIES The locations and general character of the principal plants, mines, and other materially important physical properties relating to Kaiser's operations are described in "-- Production Operations." Kaiser owns in fee or leases all the real estate and facilities used in connection with its business. Plants and equipment and other facilities are generally in good condition and suitable for their intended uses, subject to changing environmental requirements. Although Kaiser's domestic aluminum smelters and alumina facility were initially designed early in Kaiser's history, they have been modified frequently over the years to incorporate technological advances in order to improve efficiency, increase capacity, and achieve energy savings. Kaiser believes that its domestic plants are cost competitive on an international basis. Due to Kaiser's variable cost structure, the plants' operating costs are relatively lower in periods of low primary aluminum prices and relatively higher in periods of high primary aluminum prices. Kaiser's obligations under the 1994 KACC Credit Agreement are secured by, among other things, mortgages on its major domestic plants (other than the Gramercy alumina refinery and Nevada micromill). See "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations." LEGAL PROCEEDINGS See "Legal Proceedings -- Kaiser Litigation" for a description of certain legal proceedings in which Kaiser is involved. FOREST PRODUCTS OPERATIONS See "Business of the Company" for a description of MAXXAM's forest products operations. REAL ESTATE AND OTHER OPERATIONS REAL ESTATE AND RESORT OPERATIONS General MAXXAM, principally through its wholly owned subsidiaries, is also engaged in the business of residential and commercial real estate investment and development, primarily in Arizona, California, Texas and Puerto Rico. At September 30, 1996, MAXXAM had approximately $19.5 million of outstanding receivables derived from the financing of real estate sales in its developments and may continue to finance such real estate sales in the future. As of September 30, 1996, these receivables had a weighted average interest rate of approximately 9.6%, a weighted average maturity of less than four years and average borrower equity of approximately 52%. As of September 30, 1996, MAXXAM also held $2.5 million of other receivables as a portion of the RTC Portfolio. Principal Properties Texas. In June 1991, a wholly owned subsidiary of MAXXAM purchased from the RTC at an auction, for approximately $122.3 million, the RTC Portfolio, which consisted of 27 parcels of income producing real property and 28 loans secured by real property, fifteen of which have subsequently been converted to income-producing real property through either foreclosure or contractual agreement with the borrower. Substantially all of the real property was located in Texas, with the largest concentration in the vicinities of San Antonio, Houston, Austin and Dallas. From 1992 to September 30, 1996, an aggregate of approximately $41.7 million in loans (which represented thirteen loans) were sold or paid off and thirty-four properties were sold for aggregate consideration of approximately $177.3 million. These transactions resulted in aggregate gains of 111 114 $94.2 million. As of September 30, 1996, two loans resulting from property sales and eight properties (including two acquired via foreclosures) were held, which had an aggregate net book value of $18.2 million. Two properties within this portfolio have subsequently been sold for a total gain of $3.0 million. Net proceeds consisted of $3.6 million in cash and a note of $1.3 million. All of the remaining assets are being managed (and marketed for sale or disposition as appropriate) by MAXXAM. One other property in the portfolio is under contract for sale with closing estimated to occur during the first quarter of 1997. This sale is expected to produce a gain of approximately $2.5 million and net cash proceeds of approximately $4.3 million. Palmas del Mar. Palmas del Mar, a time-sharing and land development and sales business with resort amenities, located on the southeastern coast of Puerto Rico near Humacao ("Palmas"), was acquired in 1984. Palmas consists of approximately 1,919 acres of undeveloped land, 104 condominiums utilized in its time-sharing program (comprising 5,300 time-share intervals of which approximately 841 remain to be sold), a 102-room hotel and adjacent executive convention center known as the Candelero Hotel, a 23-room luxury hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole golf course, 20 tennis courts, golf and tennis pro shops, restaurants, beach and pool facilities, an equestrian center and a marina. Certain stores and restaurants and the equestrian center are operated by third parties. Approximately 1,300 private residences and a marina are owned by third parties. A number of these private residences are made available to Palmas del Mar by their owners throughout the year for rental to vacationers. Since 1985, MAXXAM has been actively engaged in the development and sale of condominiums, estate lots and villas. For the nine months ended September 30, 1996, Palmas sold 20 condominiums, 177 time-share intervals, one residential lot and 490 time-share conversions for an aggregate of $8.5 million. During 1995, Palmas sold 31 condominium units and 65 time-share intervals. Additionally, Palmas completed a sale and leaseback transaction on July 14, 1995 of 33 furnished condominium units for approximately $8.4 million. As of September 30, 1996, the net book value of Palmas' assets was approximately $10.3 million. PDMPI has entered into a Purchase Agreement with BlueWater Palmas Ltd. ("BlueWater"), an affiliate of Talon Group, Inc., for the sale of the Candelero Hotel and certain other assets of Palmas for a purchase price of approximately $7.6 million. The Candelero Hotel and certain other Palmas' assets would be managed by BlueWater and Wyndham Hotels. PDMPI will continue to receive royalty payments from BlueWater, for a period of 49 years, equal to 3% of the gross revenues from the Candelero Hotel and a percentage of gross revenues from certain other assets. The sale is scheduled to close on December 18, 1996, subject to a right to extend the closing for 30 days and subject to certain other conditions. The Company may reinvest all or a portion of the proceeds of this sale in Palmas. Fountain Hills. In 1968, a subsidiary of MAXXAM purchased and began developing approximately 12,100 acres of real property at Fountain Hills, Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As of September 30, 1996, Fountain Hills had approximately 3,873 acres of undeveloped residential land, 83 developed commercial and industrial lots, 119 acres of undeveloped commercial and industrial land and 67 developed residential lots available for sale. The population of Fountain Hills is approximately 14,000. MAXXAM is planning the development of certain of the remaining acreage at Fountain Hills. Future sales are expected to consist mainly of undeveloped acreage, semi-developed parcels and fully-developed lots, although MAXXAM may engage in limited construction and direct sale of residential units. During 1995, approximately 115 residential lots, 22 commercial parcels and 103 acres were sold for an aggregate of $14.5 million. During the first nine months of 1996, approximately 51 residential lots, 18 commercial parcels and 2 acres were sold for an aggregate of $5.5 million. Additionally, in 1994 a subsidiary of MAXXAM entered into a venture to develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The development of SunRidge Canyon contemplates a residential golf-oriented, upscale master-planned community. The project includes 950 acres, of which 185 have been developed into a championship-quality, public golf course which opened for play in November 1995. The remaining 765 acres are being developed into approximately 860 single family lots. Sales of the individual lots began in November 1995. The project consists of both custom lots, marketed on an individual basis, and production lots, marketed to home builders. There are currently four homebuilders actively involved in the construction and sale of new homes within SunRidge Canyon. During the nine months ended September 30, 1996, 30 custom lots and 39 production lots were sold for an aggregate of $6.0 million. Nine 112 115 custom lots and three production lots were sold during 1995 for an aggregate of $1.4 million. The development is being undertaken by SunRidge Canyon L.L.C., an Arizona limited liability company organized by a subsidiary of MAXXAM and SunCor Development Company. A subsidiary of MAXXAM holds a 50% equity interest in the venture. MAXXAM intends to continue development of its remaining acreage at Fountain Hills in a manner that will allow it to maintain recent sales levels, although there can be no assurance that it will be able to do so. Lake Havasu City. In 1963, a subsidiary of MAXXAM purchased and began developing approximately 16,700 acres of real property at Lake Havasu City, Arizona, which were offered for sale in the form of subdivided single and multiple family residential, commercial and industrial sites. MAXXAM has sold substantially all of its lot inventory in Lake Havasu City and is currently planning the marketing of the remaining 129 acres. Rancho Mirage. In 1991, a subsidiary of MAXXAM acquired Mirada, a 195-acre luxury resort-residential project located in Rancho Mirage, California. Mirada is a master planned community built into the Santa Rosa Mountains, 650 feet above the Coachella Valley floor. Two of the five parcels have been developed, one of which is a custom lot subdivision of 46 estate lots with home prices ranging from $1.5 million to $3.0 million. The other parcel was developed by Ritz-Carlton hotels and an affiliate of MAXXAM as the Ritz-Carlton Rancho Mirage, a hotel with views of the Palm Springs area. The three remaining parcels encompass nearly 150 acres with entitlements allowing a variety of residential options. MAXXAM is currently marketing the project's 23 fully-developed lots. Other. MAXXAM, through its subsidiaries, owns a number of other properties in Arizona, New Mexico, Texas and Colorado. Efforts are underway to sell most of these properties. Most notably, in June 1995 MAXXAM sold approximately 6,000 acres at its Waterwood National Resort and Country Club project in Texas, for an aggregate of $4.1 million. Marketing MAXXAM is engaged in marketing and sales programs of varying magnitudes at its real estate developments. In recent years, MAXXAM has constructed residential units and sold time-share intervals at certain of its real estate developments. MAXXAM intends to continue selling land to builders and developers and lots to individuals and expects to continue to construct and sell completed residential units at certain of its developments. It also expects to sell certain of its commercial real estate assets. All sales are made directly to purchasers through MAXXAM's marketing personnel, independent contractors or through independent real estate brokers who are compensated through the payment of customary real estate brokerage commissions. Competition and Regulation and Other Industry Factors There is intense competition among companies in the real estate investment and development business. Sales and payments on real estate sales obligations depend, in part, on available financing and disposable income and, therefore, are affected by changes in general economic conditions and other factors. The real estate development business and commercial real estate business are subject to other risks such as shifts in population, fluctuations in the real estate market, and unpredictable changes in the desirability of residential, commercial and industrial areas. The resort and time-sharing business of Palmas competes with similar businesses in the Caribbean, Florida and other locations. MAXXAM's real estate operations are subject to comprehensive federal, state and local regulation. Applicable statutes and regulations may require disclosure of certain information concerning real estate developments and credit policies of MAXXAM and its subsidiaries. Periodic approval is required from various agencies in connection with the design of developments, the nature and extent of improvements, construction activity, land use, zoning, and numerous other matters. Failure to obtain such approval, or periodic renewal thereof, could adversely affect the real estate development and marketing operations of MAXXAM and its subsidiaries. Various jurisdictions also require inspection of properties by appropriate authorities, approval of 113 116 sales literature, disclosure to purchasers of specific information, bonding for property improvements, approval of real estate contract forms and delivery to purchasers of a report describing the property. Employees As of September 30, 1996, MAXXAM's real estate operations had approximately 600 employees, of which approximately 500 were employed by Palmas. On July 20, 1995, a majority of the employees of Palmas voted to have a local union represent them for collective bargaining purposes. MAXXAM and the union are engaged in collective bargaining negotiations. Until the collective bargaining process is completed, MAXXAM is unable to estimate the impact, if any, the union representation of its employees may have on its resort operations at Palmas. If the sale of the Candelero Hotel closes (see "-- Principal Properties - -- Palmas Del Mar"), a large number of these employees would transfer to the new owner. SAM HOUSTON RACE PARK General In July 1993, MAXXAM, through subsidiaries, acquired various interests in SHRP, Ltd., a Texas limited partnership which owns and operates Sam Houston Race Park (the "Race Park"), a Texas Class 1 horse racing facility located within the greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on its 11 3/4% Senior Secured Notes. On April 17, 1995, the Debtors, consisting of SHRP, Ltd. and two affiliated entities, filed voluntary petitions, each seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy cases were consolidated and transferred to the United States Bankruptcy Court (the "Bankruptcy Court") for the Southern District of Texas, Houston Division (Case No. 95-43739-H3-11). On September 22, 1995, the Bankruptcy Court confirmed the Plan (the Debtors' plan of reorganization) and on October 6, 1995, the transactions called for by the Plan were completed. The Plan provided for, among other things, a significant modification of SHRP, Ltd.'s 11 3/4% Senior Secured Notes (the "Original Notes" and, as modified, the "Extendible Notes"), an additional capital infusion and a reorganization of SHRP, Ltd. The Extendible Notes have an aggregate initial principal amount of $37.5 million, mature on September 1, 2001 and bear interest at the rate 11% per annum. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) during the 2001 legislative session. Interest on the Extendible Notes will accrue in-kind and will not be payable in cash until a certain level of cash flow from operations has been achieved. Once cash interest payments commence, interest payments may not thereafter be paid in-kind. The indenture governing the Extendible Notes provides additional latitude for SHRP, Ltd. to incur indebtedness and make investments in gaming, entertainment and other ventures. The New SHRP Investor Group made a capital contribution of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of MAXXAM contributed $5.8 million). Additionally, a wholly owned subsidiary of MAXXAM contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of land (having a fair market value of $2.3 million). A wholly owned subsidiary of MAXXAM is the new managing general partner of SHRP, Ltd. Each member of the New SHRP Investor Group provided its pro rata share of a $1.7 million line of credit, should the initial cash contributed to SHRP, Ltd. prove insufficient to fund the future operating and working capital requirements of SHRP, Ltd. MAXXAM has guaranteed its subsidiaries' share of the line of credit, which totaled $1.6 million. On October 20, 1995, a wholly owned subsidiary of MAXXAM purchased, for $7.3 million, $14.6 million of the Extendible Notes and the corresponding shares of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which one noteholder was entitled. Such shares of common stock represent approximately 39.0% of the shares of common stock of SHRP Equity, Inc. After giving effect to these transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd. Although the Race Park has sustained substantial operating losses since it began operations in April 1994, the reorganization of principal indebtedness of SHRP, Ltd. resulting in the issuance of the 11% Senior 114 117 Secured Extendible Notes (the "Extendible Notes") in exchange for the 11 3/4% Senior Secured Notes (the "Original Notes"), significantly improved the liquidity of SHRP, Ltd. by providing for the deferral of cash interest payments until certain conditions are met. SHRP, Ltd. projects a loss from operations for the next two years. Management believes the proceeds contributed on the date closing of the bankruptcy reorganization of SHRP, Ltd. (together with a $1.7 million line of credit) will be adequate to fund the operating activities of SHRP, Ltd. for that period of time. Racing Operations and Race Park Facilities The Race Park offers pari-mutuel wagering on live thoroughbred or quarter horse racing or simulcast racing generally seven days a week throughout the year. Simulcasting is the process by which live races held at one facility are broadcast simultaneously to other locations at which additional wagers are placed on the race being broadcast. The Race Park's principal sources of revenue are its statutory and contractual share of total wagering on live and simulcast racing. The Race Park also derives revenues from admission fees, food services, club memberships, luxury suites, advertising sales and other sources. The Race Park is located on approximately 300 acres of land in northwest Harris County approximately 18 miles from the Houston central business district and approximately 15 miles from Houston Intercontinental Airport. Regulation of Racing Operations The ownership and operation of horse racetracks in Texas are subject to significant regulation by the Texas Racing Commission (the "Racing Commission") under the Texas Racing Act and related regulations (collectively, the "Racing Act"). The Racing Act provides, among other things, for the allocation of wagering proceeds among betting participants, horsemen's purses, racetracks, the State of Texas and for other purposes, and empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. The Racing Commission must approve the number of live race days that may be offered at the Race Park each year, as well as all simulcast agreements. Class 1 racetracks in Texas are entitled to conduct at least seventeen weeks of live racing for each breed of horses (thoroughbreds and quarter horses). Marketing and Competition The Race Park believes that the majority of the patrons for the Race Park reside within a 50-mile radius of the Race Park, which includes the greater Houston metropolitan area, and that a secondary market of occasional patrons can be developed outside the 50-mile radius but within a 100-mile radius of the Race Park. The Race Park uses a number of marketing strategies in an attempt to reach these people and make them more frequent visitors to the Race Park. The Race Park competes with other forms of entertainment, including casinos located approximately 125 to 150 miles from Houston, a greyhound racetrack located 60 miles from the Race Park and a wide range of sporting events and other entertainment activities in the Houston area. The Race Park could in the future also compete with other forms of gambling in Texas, including casino gambling on Indian reservations or otherwise. While the Race Park believes that the location of the Race Park is a competitive advantage over the other more distant gaming ventures mentioned above, the most significant challenge for the Race Park is to develop and educate new racing fans in a market where pari-mutuel wagering has been absent since the 1930's. Other competitive factors faced by the Race Park include the allocation of sufficient live race days by the Racing Commission and attraction of sufficient race horses to run at the Race Park. The Race Park will have 142 days of live racing during 1996. The Race Park currently has 109 days of live racing scheduled for 1997. EMPLOYEES At September 30, 1996, MAXXAM and its subsidiaries employed approximately 2,400 persons, exclusive of those involved in Aluminum Operations. 115 118 LEGAL PROCEEDINGS GENERAL The following describes certain legal proceedings in which MAXXAM or its subsidiaries are involved. MAXXAM and certain of its subsidiaries are also involved in various claims, lawsuits and other proceedings not discussed herein which relate to a wide variety of matters. Uncertainties are inherent in the final outcome of those and the below-described matters and it is presently impossible to determine the actual costs that ultimately may be incurred. Nevertheless, MAXXAM believes (unless otherwise indicated herein) that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on MAXXAM's liquidity, consolidated financial position or results of operations. See also "Risk Factors -- Litigation." However, there can be no assurance that there will not be adverse determinations or settlements in one or more of the matters identified below or other proceedings that could have a material adverse effect on MAXXAM's financial condition, results of operations and liquidity. Certain present and former directors and officers of MAXXAM are defendants in certain of the actions described below. MAXXAM's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. MAXXAM is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, MAXXAM's indemnity obligation can under certain circumstances include amounts other than defense costs, including judgments and settlements. USAT MATTERS In October 1994, MAXXAM learned that the OTS had commenced an investigation into UFG and the insolvency of USAT, UFG's wholly owned subsidiary. In December 1988, the Federal Home Loan Bank Board ("FHLBB") placed USAT into receivership and appointed the Federal Savings & Loan Insurance Corp. ("FSLIC") as receiver. At the time of the receivership, MAXXAM owned approximately 13% of the voting stock of UFG. On December 26, 1995, the OTS initiated formal administrative proceedings (the "OTS action") against MAXXAM and others by filing the Notice. The Notice alleges misconduct by MAXXAM, Federated, Mr. Charles Hurwitz and the other respondents with respect to the failure of USAT. Mr. Hurwitz is the Chairman of the Board, Chief Executive Officer and President of MAXXAM. Mr. Hurwitz is also the Chairman of the Board and Chief Executive Officer of Federated, a New York business trust wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. Mr. Hurwitz and a wholly owned subsidiary of Federated collectively own approximately 61.1% of the aggregate voting power of MAXXAM. The Notice claims that MAXXAM was a savings and loan holding company, that with others it controlled USAT, and that, as a result of such status and agreements with the Federal Home Loan Bank Board, it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against MAXXAM and the other respondents, including, among others, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. ("Drexel"). The OTS, among other things, seeks unspecified damages in excess of $138.0 million from MAXXAM and Federated, civil money penalties and a removal from, and prohibition against MAXXAM and the other respondents engaging in, the banking industry. On February 20, 1996, the respondents filed their responses to the Notice. The date for the hearing on the merits has been scheduled for May 28, 1997. See also the description of the FDIC action and the Martel action below. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on MAXXAM's consolidated financial position, results of operations or liquidity, although there can be no assurance that such impact will not be material. In a separate but related matter, on December 7, 1995, MAXXAM filed a petition for review in the U.S. Fifth Circuit Court of Appeals alleging various statutory violations by certain predecessor agencies to the OTS and seeking to modify, terminate or set aside the December 30, 1988 order awarding the bid to acquire USAT to a bidder other than MAXXAM, whose bid was lower than MAXXAM's bid (i.e. more costly to the government and taxpayers). The action is entitled MAXXAM Inc. v. Office of Thrift Supervision, Department 116 119 of the Treasury (No. 95-60753) (the "MAXXAM v. OTS action"). By order dated December 10, 1996, the U.S. Fifth Circuit Court of Appeals denied MAXXAM's petition for review and denied any relief to MAXXAM. On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3956) (the "FDIC action") in the U.S. District Court for the Southern District of Texas. This action did not name MAXXAM as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM maintained the net worth of USAT. On October 24, 1995, Mr. Hurwitz filed a motion to dismiss this action. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. MAXXAM and certain other respondents in the OTS action subsequently filed motions to intervene in this action; MAXXAM conditioned its motion on the Court joining the OTS to this action. MAXXAM filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting MAXXAM's bid for USAT. The FDIC is opposing the motion to join the OTS and the intervention motions and is seeking to stay this action pending the outcome of the OTS action or proceed in this case only against Mr. Hurwitz. On August 6, 1996, the court entered an order denying the FDIC's motion to stay this case pending the outcome of the OTS action. At the November 19, 1996 pre-trial conference, the Court granted the motions to intervene of MAXXAM and others, and added the OTS as a party to this action. The Court instructed the plaintiffs to file an amended complaint by January 15, 1997, and the defendants to answer by February 5, 1997. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on MAXXAM's liquidity, consolidated financial position or results of operations, although there can be no assurance that such impact will not be material. In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court for the Northern District of California (No. C950322) and names as defendants MAXXAM, Mr. Hurwitz, MGI, Federated, UFG and a former director of MAXXAM. This action is purportedly brought by plaintiff on behalf of the U.S. government; however, the U.S. government has declined to participate in the suit. The suit alleges that defendants made false statements and claims in violation of the Federal False Claims Act in connection with USAT. Plaintiff alleges, among other things, that defendants used the federally insured assets of USAT to acquire junk bonds from Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel arranged financing for defendants' various business ventures, including the acquisition of Pacific Lumber. Plaintiff alleges that USAT became insolvent in 1988 and that defendants should be required to pay $1.6 billion (subject to trebling) to cover USAT's losses. MAXXAM's alleged portion of such damages has not been specified. Plaintiff seeks, among other things, that the Court impose a constructive trust upon the fruits of the alleged improper use of USAT funds. On March 22, 1996, the Court granted defendants' motion to have this case transferred to the U.S. District Court for the Southern District of Texas. On June 11, 1996, defendants filed their motion to dismiss this case. On August 6, 1996, the Court transferred this case to the judge handling the FDIC action. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against MAXXAM, MGI, MAXXAM Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of MAXXAM's directors in the Court of Chancery of the State of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785. Plaintiff purports to bring this action as a stockholder of MAXXAM derivatively on behalf of MAXXAM and MPI. In May 1989, a second action containing substantially similar allegations was filed in the Court of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. (No. 10846) and the two cases were consolidated (collectively, the "Zero Coupon Note actions"). The Zero Coupon Note actions relate to a Put and Call Agreement entered into between MPI and Mr. Hurwitz, as well as a predecessor agreement (the "Prior Agreement"). Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase from MPI certain notes (or MAXXAM's common stock into which they 117 120 were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call and acquired 990,400 shares of MAXXAM's common stock. The Zero Coupon Note actions generally allege that in entering into the Prior Agreement Mr. Hurwitz usurped a corporate opportunity belonging to MAXXAM, that the Put and Call Agreement constituted a waste of corporate assets of MAXXAM and MPI, and that the defendant directors breached their fiduciary duties in connection with these matters. Plaintiffs seek to have the Put and Call Agreement declared null and void, among other remedies. RANCHO MIRAGE LITIGATION In May 1991, a derivative action entitled Progressive United Corporation v. MAXXAM Inc., et al. (No. 12111) (the "Progressive United action") was filed in the Court of Chancery, State of Delaware against MAXXAM, Federated, MAXXAM's Board of Directors and MCOP. The action alleges abuse of control and breaches of fiduciary obligations based on, and unfair consideration for, MAXXAM's Agreement in Principle with Federated to (a) forgive payments of principal and interest of approximately $32.2 million due from Federated under two loan agreements entered into between MCOP and Federated in 1987 (and later assigned by MCOP to MAXXAM), and (b) grant an additional $11.0 million of consideration to Federated, in exchange for certain real estate assets valued at approximately $42.9 million in Rancho Mirage, California, held by Federated (the "Mirada transactions"). Plaintiff seeks, among other things, an accounting under the loan agreements, repayment of any losses or damages suffered by MAXXAM or MCOP, costs and attorneys fees. The following six additional lawsuits, similar to the Progressive United action, were filed in 1991 and 1992 in Delaware Chancery Court challenging the Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al. (No. 12353) (the "NL Industries action"); Kahn, et al. v. Federated Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377) (the "Thistlethwaite action"); Glinert, et al. v. Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al. (No. 12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No. 12404). The Kahn, Glinert, Friscia and Kassoway actions have been consolidated with the Progressive United action into In re MAXXAM Inc./Federated Development Shareholders Litigation (No. 12111); the NL Industries action has been "coordinated" with the consolidated actions; and the Thistlethwaite action has been stayed pending the outcome of the consolidated actions. In January 1994, a derivative action entitled NL Industries, Inc., et al. v. Federated Development Company, et al. (No. 94-00630) was filed in the District Court of Dallas County, Texas, against MAXXAM (as nominal defendant) and Federated. This action contains allegations and seeks relief similar to that contained in the In re MAXXAM Inc./Federated Development Shareholders Litigation. The parties have agreed to stay this action in light of the In re MAXXAM Inc./Federated Development Shareholders Litigation. With respect to the In re MAXXAM Inc./Federated Development Shareholders Litigation, on February 10, 1995, the Court issued its decision disapproving a previously announced proposed settlement and on June 23, 1995, the Court denied defendants' motion to dismiss certain of plaintiffs' claims. This matter was tried before the Court commencing January 29, 1996. The Court held a hearing on April 2, 1996 on various trial-related matters, including defendants' motion to dismiss the claims relating to the 1987 loan transactions. On August 14, 1996, the Court heard final oral argument on the merits of the case, but has not issued its decision. By order dated September 6, 1996, the Court denied defendants' motion to dismiss the 1987 loan claims and granted plaintiffs' motion to intervene and substitute a new plaintiff to cure standing problems concerning plaintiffs' 1987 loan claims. KAISER LITIGATION ENVIRONMENTAL LITIGATION Aberdeen Pesticide Dumps Site Matter The Aberdeen Pesticide Dumps Site, listed on the Superfund National Priorities List, is composed of five separate sites around the town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites are of concern to the United States Environmental Protection Agency (the "EPA") because of their past use as either pesticide formulation facilities or pesticide disposal areas from approximately the mid-1930's through the late 1980's. The United States originally filed a cost recovery complaint (as amended, the "Complaint") 118 121 in the United States District Court for the Middle District of North Carolina, Rockingham Division, No. C-89-231-R, which, as amended, includes KACC and a number of other defendants. The Complaint seeks reimbursement for past and future response costs and a determination of liability of the defendants under Section 107 of CERCLA. The EPA has performed a Remedial Investigation/Feasibility Study and issued a Record of Decision ("ROD") for the Sites in September 1991. The estimated cost of the major soil remediation selected for the Sites is approximately $32 million. Other possible remedies described in the ROD included on-site incineration and on-site ash disposal at an estimated cost of approximately $53 million and $222 million, respectively. The EPA has stated that it has incurred past costs at the Sites in the range of $7.5-$8 million as of February 9, 1993, and alleges that response costs will continue to be incurred in the future. On May 20, 1993, the EPA issued three unilateral Administrative Orders under Section 106(a) of CERCLA ordering the Respondents, including KACC, to perform the remedial design and remedial action described in the ROD for three of the Sites. The estimated cost as set forth in the ROD for the remedial action at the three Sites is approximately $27 million. In addition to KACC, a number of other companies are also named as respondents. KACC has entered into a PRP Participation Agreement with certain of the respondents (the "Aberdeen Site PRP Group" or the "Group") to participate jointly in responding to the Administrative Orders dated May 20, 1993, regarding soil remediation, to share costs incurred on an interim basis, and to seek to reach a final allocation of costs through agreement or to allow such final allocation and determination of liability to be made by the United States District Court. By letter dated July 6, 1993, KACC has notified the EPA of its ongoing participation with the Group which, as a group, are intending to comply with the Administrative Orders to the extent consistent with applicable law. By letters dated December 30, 1993, the EPA notified KACC of its potential liability for, and requested that KACC, along with a number of other companies, undertake or agree to finance, groundwater remediation at certain of the Sites. The ROD-selected remedy for the groundwater remediation selected by EPA includes a variety of techniques. The EPA has estimated the total present worth cost, including thirty years of operation and maintenance, at approximately $11.8 million. On June 22, 1994, the EPA issued two unilateral Administrative Orders under Section 106(a) of CERCLA ordering the respondents, including KACC, to undertake the groundwater remediation at three of the Sites. A PRP Participation Agreement with respect to groundwater remediation has been entered into by certain of the respondents, including KACC. By letter dated March 6, 1996, KACC gave notice of withdrawal from the Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation Agreement. KACC advised the Group and the EPA that even if it were liable for cleanup at the Sites, which it expressly denies, it had already contributed far more than its allocable potential share of response costs. KACC has advised the Group and the EPA that it has fully complied with the unilateral Administrative Orders. In May 1996, the EPA urged KACC to rejoin the Group and indicated that it would consider seeking penalties against KACC if it did not. On October 10, 1996, the EPA notified KACC that it deems KACC to be in violation of the Administrative Orders. KACC and certain members of the Group have entered into an agreement with the United States Department of Justice (the "DOJ") to enter into a mediation process regarding an appropriate allocation of responsibility for response costs at the Sites. KACC has also agreed to fund a portion of the costs associated with certain work at the Sites during the mediation process. United States of America v. Kaiser Aluminum & Chemical Corporation In February 1989, a civil action was filed by the DOJ at the request of the EPA against KACC in the United States District Court for the Eastern District of Washington, Case Number C-89-106-CLQ. The complaint alleged that emissions from certain stacks at KACC's Trentwood facility in Spokane, Washington, intermittently violated the opacity standard contained in the Washington State Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air Act. The complaint sought injunctive relief, including an order that KACC take all necessary action to achieve compliance with the Washington SIP opacity limit and the assessment of civil penalties of not more than $25,000 per day. 119 122 KACC and the EPA, without adjudication of any issue of fact or law, and without any admission of the violations alleged in the underlying complaint, have entered into a Consent Decree, which was approved by a Consent Order entered by the United States District Court for the Eastern District of Washington in January 1996. As approved, the Consent Decree settles the underlying disputes and requires KACC to (i) pay a $.5 million civil penalty (which penalty has been paid), (ii) complete a program of plant improvements and operational changes that began in 1990 at its Trentwood facility, including the installation of an emission control system to capture particulate emissions from certain furnaces, and (iii) achieve and maintain furnace compliance with the opacity standard in the SIP by no later than February 28, 1997. KACC anticipates that capital expenditures for the environmental upgrade of the furnace operation at its Trentwood facility, including the improvements and changes required by the Consent Decree, will be approximately $20.0 million. Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son, Inc. In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a Second Amended Complaint for Damages and Declaratory Relief against the United States, Catellus Development Corporation ("Catellus") and other defendants (collectively, the "Defendants") alleging, among other things, that the Defendants caused or allowed hazardous substances, pollutants, contaminants, debris and other solid wastes to be discharged, deposited, disposed of or released on certain property located in Richmond, California (the "Property") formerly owned by Catellus and leased to KACC for the purpose of shipbuilding activities conducted by KACC on behalf of the United States during World War II. The Plaintiffs sought recovery of response costs and natural resource damages under CERCLA. Certain of the Plaintiffs alleged that they had incurred or expect to incur costs and damages of approximately $49.0 million. Catellus subsequently filed a third party complaint (the "Third Party Complaint") against KACC in the United States District Court for the Northern District of California, Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC, Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims against the United States for $3.5 million plus thirty-five percent (35%) of future response costs. The trial involving this case commenced in March 1995. During the trial, Plaintiffs settled their claims against Catellus in exchange for payment of approximately $3.3 million. Subsequently, on June 2, 1995, the United States District Court for the Northern District of California issued an order on the remaining claims in that action. On December 7, 1995, the District Court issued a final judgment on those claims concluding that KACC is liable for various costs and interest, aggregating approximately $2.2 million, fifty percent (50%) of future costs of cleaning up certain parts of the Property and certain fees and costs associated specifically with the claim by Catellus against KACC. KACC paid the City of Richmond $1.8 million in partial satisfaction of this judgment. In January 1996, Catellus filed a notice of appeal with respect to its indemnity judgment against KACC. KACC has since filed a notice of cross appeal as to the Court's decision adjudicating that KACC is obligated to indemnify Catellus. In February 1996, the Plaintiffs filed motions seeking reimbursement of fees and costs from KACC in the aggregate amount of $2.8 million. On July 8, 1996 the Court issued an order awarding Plaintiffs nominal costs, which amount has been paid. The order also awarded Catellus de minimis costs. Catellus has filed a notice of appeal. On August 12, 1996, the Court issued an order granting the Catellus motion for attorneys' fees in the amount of approximately $.9 million. KACC and Catellus have filed notices of appeal with respect to the attorneys' fees award. Based on KACC's estimate of future costs of cleanup, resolution of the Catellus matter is not expected to have a material adverse effect on KACC's consolidated financial condition, results of operations, or liquidity. Waste Inc. Superfund Site On December 8, 1995, the EPA issued a unilateral Administrative Order for Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other respondents for remedial design and action at the Waste Inc. Superfund Site at Michigan City, Indiana. This site was operated as a landfill from 1965 to 1982. KACC is alleged to have arranged for the disposal of waste from its formerly owned plant at Wanatah, Indiana, during the period from 1964 to 1972. In its Record of Decision, the EPA estimated the cost of the work to be performed to have a present value of $15.7 million. KACC's share of the total waste sent to the site is unknown. A consultant retained by a group of PRPs estimated that KACC contributed 2.0% of the waste 120 123 sent to the site by the forty-one largest contributors. KACC's ultimate exposure will depend on the number of PRPs that participate and the volume of waste properly allocable to KACC. Based on the EPA's cost estimate, KACC believes that its financial exposure for remedial design and remedial action at this site is less than $500,000. KACC has entered into a Participation Agreement with thirteen of the respondents to perform the work required under the Administrative Order. Asbestos-related Litigation KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. For a discussion of asbestos-related litigation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations." DOJ Proceedings On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356 ("CID No. 11356") requesting information from Kaiser regarding (i) its production, capacity to produce, and sales of primary aluminum from January 1, 1991, to the date of the response; (ii) any actual or contemplated reduction in its production of primary aluminum during that period; and (iii) any communications with others regarding any actual, contemplated, possible or desired reductions in primary aluminum production by KAC or any of its competitors during that period. KAC's management believes that KAC's actions have at all times been appropriate, and KAC has submitted documents and interrogatory answers to the DOJ responding to CID No. 11356. On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503 ("CID No. 12503"), as part of an industry-wide investigation, requesting information from KACC regarding (i) any actual or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum ingot used by KACC to produce can sheet and the manner in which KACC's cost of acquiring aluminum scrap is factored into its can sheet prices, and (iii) any communications with others regarding any actual or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995. Management believes that KACC's actions have at all times been appropriate, and KACC has submitted documents and interrogatory answers to the DOJ responding to CID No. 12503. KACC was recently informed that the DOJ has officially closed its investigation and is returning the documents submitted by KACC. OTHER PROCEEDINGS Matheson et al. v. Kaiser Aluminum Corporation et al. On March 19, 1996, a lawsuit was filed against MAXXAM, Kaiser and Kaiser's directors challenging and seeking to enjoin the Proposed Recapitalization of Kaiser and the April 10, 1996 special stockholders meeting at which the Proposed Recapitalization was to be considered. The suit, which is entitled Matheson et al. v. Kaiser Aluminum Corporation et al.(No. 14900) and was filed in the Delaware Court of Chancery, alleges, among other things, breaches of fiduciary duties by certain defendants and that the Proposed Recapitalization violates Delaware law and the certificate of designations for the PRIDES. On April 8, 1996, the Delaware Court of Chancery issued a ruling which preliminarily enjoined Kaiser from implementing the Proposed Recapitalization. On May 1, 1996, Kaiser's stockholders approved the Proposed Recapitalization which was not implemented at that time due to a pending appeal of the trial court's ruling. On August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction and remanded the case to the Court of Chancery. On September 24, 1996, the plaintiffs filed a motion to make permanent the temporary injunction issued on April 8, 1996. On September 27, 1996, KACC's Board of Directors adopted a resolution abandoning the Proposed Recapitalization. On October 2, 1996, KACC filed a motion in the Delaware Court of Chancery to 121 124 dismiss the shareholder litigation relating to the Proposed Recapitalization on the ground of mootness and filed a response to plaintiffs' motion for entry of a permanent injunction. The Court has scheduled briefing for both motions, along with plaintiffs' petition for attorneys' fees and expenses. The Court will schedule oral argument after briefing is concluded on these issues on February 11, 1997. The decision to abandon the Proposed Recapitalization does not preclude a recapitalization from being proposed to the stockholders of Kaiser in the future, including a substantially identical recapitalization structure after the redemption or conversion of the PRIDES. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations." Hammons v. Alcan Aluminum Corp., et al. On March 5, 1996, a class action complaint was filed against KACC, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds Metals Company and the Aluminum Association in the Superior Court of California for the County of Los Angeles, Case No. BC145612. The complaint claims that the defendants conspired, in violation of the California Cartwright Act (Bus. & Prof. Code sec.16720 & 16750), in conjunction with a Memorandum of Understanding ("MOU") entered into by representatives of Australia, Canada, the European Union, Norway, the Russian Federation and the United States in 1994, to restrict the production of primary aluminum resulting in rises in prices for primary aluminum and aluminum products. The complaint seeks certification of a class consisting of persons who at any time between January 1, 1994, and the date of the complaint purchased aluminum or aluminum products manufactured by one or more of the defendants and estimates damages sustained by the class to be $4.4 billion during the year 1994, before trebling. Plaintiff's counsel has estimated damages to be $4.4 billion per year for each of the two years the MOU was active, which when trebled equals $26.4 billion. On April 2, 1996 the case was removed to the United States District Court for the Central District of California. On July 1, 1996, the Court granted summary judgment in favor of KACC and other defendants and dismissed the complaint as to all defendants. On July 18, 1996, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit appealing the summary judgment granted by the United States District Court for the Central District of California in favor of KACC and other defendants and the Court's dismissal of the complaint as to all defendants. Other Matters Various other lawsuits and claims are pending against KACC. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on KACC's consolidated financial position, results of operations, or liquidity. There can be no assurance that adverse determinations and/or unfavorable settlements with respect to KACC's legal proceedings will not have a material adverse effect on KACC's consolidated financial position, results of operations, or liquidity. See "Risk Factors -- Litigation." PACIFIC LUMBER LITIGATION On September 15, 1995, an action entitled Marbled Murrelet, et al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") was filed in the U.S. District Court for the Northern District of California. This action relates to, among other things, exemptions for forest health which Pacific Lumber and its subsidiaries had previously filed covering their entire timberlands. These exemptions allow Pacific Lumber to harvest dead, dying or diseased trees ("exempt harvesting operations"). As amended, the complaint alleges, among other things, violations of the ESA, the National Environmental Protection Act ("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among other things, that the exempt harvesting operations will contribute to the destruction of habitat for the marbled murrelet and the northern spotted owl. Following a hearing on September 28, 1995, the Court issued a preliminary injunction 122 125 enjoining Pacific Lumber and its subsidiaries from conducting a portion of the exempt operations until a trial on the merits of the case. The majority of the timberlands which were subject to the injunction are timberlands which have been proposed as critical habitat for the marbled murrelet. Pacific Lumber appealed the issuance of the preliminary injunction to the U.S. Ninth Circuit Court of Appeals. On May 7, 1996, the U.S. Ninth Circuit Court of Appeals reversed the preliminary injunction order concerning the exempt harvesting operations. On March 6, 1996, the plaintiffs asked for leave to amend their pleadings and on April 3, 1996, the Court granted a preliminary injunction preventing harvesting on eight already-approved THPs to the extent that they rely on the Owl Plan. In addition to appealing the preliminary injunction issued on April 3, 1996 preventing harvesting on eight of its THPs, Pacific Lumber has obtained regulatory reapproval of seven of the eight enjoined THPs without reliance on the Owl Plan and has, to date, confirmed with the Court that six of those THPs are not subject to the preliminary injunction. On November 4, 1996, the U.S. Ninth Circuit Court of Appeals heard oral arguments concerning Pacific Lumber's appeal of the April 3, 1996 preliminary injunction; the court has not yet rendered a decision on this matter. On August 23, 1996, plaintiffs filed a renewed motion for preliminary injunction to prevent the exempt harvesting operations in Pacific Lumber's old growth timberlands. In addition, on September 12, 1996, plaintiffs requested an emergency temporary restraining order ("TRO") with respect to such harvesting operations. The court denied both of these motions. On October 9, 1996, Pacific Lumber was cited for accidentally downing a hemlock tree and ordered to stop exempt harvesting operations in its old growth timberlands for 24 hours. Plaintiffs sought a TRO and preliminary injunction based on this citation and related events. After hearing plaintiffs' motions, the court denied the plaintiffs' requests. The CDF has withdrawn the citation and asked that it be dismissed. In related matters, in August 1996, the Sierra Club, the Environmental Protection Information Center ("EPIC") and others petitioned the BOF to adopt emergency regulations preventing Pacific Lumber from undertaking exempt harvesting operations in its old growth timberlands. On September 9, 1996, the BOF rejected such proposals and petitions. In September and October, the BOF was formally asked to reconsider its September 9, 1996 decision. The BOF reconsidered this matter and, ultimately, enacted no emergency regulation to prevent or further restrict Pacific Lumber's exempt harvesting operations in its old growth timberlands. The EPIC, et al. v. California State Board of Forestry, et al. (No. 91CP244) action in the Superior Court of Humboldt County, filed by the Sierra Club and EPIC in 1991, relates to a THP for approximately 237 acres of virgin old growth timber. After the Superior Court reversed the BOF's approval of this THP, certain modifications were made to the THP, which was then unanimously approved by the BOF. The Superior Court later issued judgment in favor of Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the trial court's judgment approving harvesting under this THP. In April 1993, EPIC filed another action with respect to this THP entitled EPIC, Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No. C93-1400) (the "EPIC action") in the U.S. District Court for the Northern District of California, alleging an unlawful "taking" of the marbled murrelet under the ESA. The Court dismissed the federal and state agency defendants and limited plaintiffs' claims against Pacific Lumber. Harvesting was stayed pending outcome of a trial which commenced in August 1994 and concluded in September 1994. On February 24, 1995, the judge ruled that the area covered by the THP is occupied by the marbled murrelet and permanently enjoined implementation of the THP in order to protect the marbled murrelet. The U.S. Ninth Circuit Court of Appeals affirmed the District Court's decision. On September 24, 1996, Pacific Lumber filed its petition for writ of certiorari requesting that the U.S. Supreme Court consider its appeal of the Ninth Circuit Court's decision. In view of the recent developments in the Marbled Murrelet action, the Company is uncertain whether or not the matters described above will have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. See "Business of the Company -- Pacific Lumber Operations -- Regulatory and Environmental Factors" above for a description of regulatory and similar matters which could affect Pacific Lumber's timber harvesting practices and future operating results. 123 126 On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon Creek Corporation v. California State Board of Forestry, et al. (No. 96CS01057) in the Superior Court of Sacramento County. This action seeks to overturn the BOF's decision denying approval of a THP for approximately 8 acres of virgin old growth timber in the area commonly known as the Headwaters Forest. Salmon Creek seeks a court order requiring approval of the THP so that it may harvest in accordance with the THP. Salmon Creek also seeks constitutional "just compensation" damages to the extent that its old growth timber within and surrounding the THP has been "taken" by reason of this regulatory denial and previous actions of governmental authorities. In addition, on May 7, 1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit entitled The Pacific Lumber Company, et al. v. The United States of America in the United States Court of Federal Claims. The suit alleges that the federal government has "taken" over 3,800 acres of Pacific Lumber's old growth timberlands through its application of the ESA (including the Headwaters Forest). Pacific Lumber, Scotia Pacific and Salmon Creek seek constitutional "just compensation" damages for the taking of these timberlands by the federal government's actions. The Court in each of these actions has granted the parties' agreed motions to stay the actions pursuant to the Headwaters Agreement. These actions would be dismissed if the Headwaters Agreement is consummated. See "Business of the Company -- Pacific Lumber Operations -- Headwaters Agreement" for a description of the Headwaters Agreement. OTHER MATTERS Groundwater contamination has been found on property sold to a subsidiary of MAXXAM by a subsidiary of Rockwell International Corporation ("Rockwell"). In March 1992, an enforcement action was filed against Rockwell and the current property owners by the Nevada Division of Environmental Protection seeking an order that would require defendants to investigate and report on the nature and extent of the pollution and contamination on the property. This action has been stayed, pending continued environmental investigation and remediation by Rockwell. MAXXAM was named as a defendant in three related damage actions filed by certain persons. Two of these cases have settled to date and in each case MAXXAM's share of the settlement was 21%. In September 1996, Rockwell submitted a global settlement package to MAXXAM. An Environmental Cleanup Liability report, which accompanied Rockwell's settlement package and which was prepared by Rockwell's experts, estimates total liability to be $26.08 million (which MAXXAM is disputing). No further settlement discussions have taken place between Rockwell and MAXXAM concerning the indemnification issue since the settlement package was presented. MAXXAM is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on MAXXAM's consolidated financial position or results of operations, or liquidity. 124 127 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The following table sets forth certain information, as of November 15, 1996, with respect to the executive officers and directors of the Company. All officers and directors hold office until their respective successors are elected and qualified or until their earlier resignation or removal.
NAME POSITIONS AND OFFICES WITH THE COMPANY ---- -------------------------------------- Chairman of the Board, President and Chief Executive Charles E. Hurwitz.......... Officer Paul N. Schwartz............ Vice President, Chief Financial Officer and Director John A. Campbell............ Vice President and Director Gary L. Clark............... Vice President John T. La Duc.............. Vice President and Director Anthony R. Pierno........... Vice President, General Counsel and Director William S. Riegel........... Vice President and Director Ronald L. Reman............. Vice President -- Taxes Byron L. Wade............... Vice President, Secretary and Deputy General Counsel
Charles E. Hurwitz. Mr. Hurwitz, age 56, has served as Chairman of the Board, Chief Executive Officer and President of the Company since its formation in November 1996. He has also served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected as Chairman of the Board and Chief Executive Officer of MAXXAM in March 1980. Mr. Hurwitz has also served MAXXAM as President since January 1993. Mr. Hurwitz has been, since January 1974, Chairman of the Board and Chief Executive Officer of Federated, a New York business trust primarily engaged in the management of real estate investments. In December 1994, Mr. Hurwitz was appointed Vice Chairman of the Board of KACC. He has served as a director of Kaiser since October 1988 and of KACC since November 1988. Since May 1982, Mr. Hurwitz has been Chairman of the Board and Chief Executive Officer, and since January 1, 1993, President, of MGI, a wholly owned subsidiary of MAXXAM. From May 1986 until February 1993, Mr. Hurwitz served as a director of Pacific Lumber. Mr. Hurwitz has also served SHRP as a director since May 1993, Chairman of the Board since October 1995, and President from May 1993 until April 1996. Paul N. Schwartz. Mr. Schwartz, age 50, has served as Vice President and Chief Financial Officer of the Company since its formation in November 1996. He was named Executive Vice President and Chief Financial Officer of MAXXAM, positions he has held since January 1, 1995. He previously served as Senior Vice President -- Corporate Development of MAXXAM from June 1987 until December 31, 1994, and Vice President -- Corporate Development of MAXXAM from July 1985 to June 1987. Mr. Schwartz has served as a Vice President of MGI and Pacific Lumber since May 1987 and January 1987, respectively, and has served as Chief Financial Officer of Pacific Lumber and Scotia Pacific, since February 1995. He also serves as Chairman of the Board and sole executive officer of United Financial Group, Inc., a Delaware public corporation, and has served as a director of Pacific Lumber and Scotia Pacific since February 1993, and as a director of MGI since January 1994. Since May 1993, Mr. Schwartz has also served as a director and a Vice President of SHRP. Mr. Schwartz is also a director of SLM Funding Corporation, which is a subsidiary of the Student Loan Marketing Association. John A. Campbell. Mr. Campbell, age 54, has served as a director and Vice President of the Company since its formation in November 1996. He also serves as a director and Vice President of MGI, positions he assumed in December 1994. Mr. Campbell has served Pacific Lumber and Scotia Pacific as a director and President since January 1989 and November 1992, respectively. Mr. Campbell was also elected as Chief Executive Officer of Pacific Lumber and Scotia Pacific in February and June 1993, respectively; Mr. Campbell served as Pacific Lumber's Executive Vice President -- Forest Products Operations from January 1985 to January 1989. He also served as Pacific Lumber's Vice President -- Wood Products from April 1982 to January 1985. Commencing shortly after he joined Pacific Lumber in 1969 until April 1982, Mr. Campbell served Pacific Lumber in a variety of managerial positions. 125 128 Gary L. Clark. Mr. Clark, age 54, has served as Vice President of the Company since its formation in November 1996. He also serves as Vice President of MGI, a position he assumed in December 1994. Mr. Clark has also served as Vice President -- Finance and Administration of Pacific Lumber and of Scotia Pacific since January 1, 1993. Prior to assuming these positions, he had served Pacific Lumber as Vice President and Treasurer since October 1990. Mr. Clark also served as Vice President and Treasurer of MAXXAM and MGI from September 1990 and October 1990, respectively, to December 31, 1992. Mr. Clark also served as the Treasurer of Kaiser and of KACC from May 1990 and January 1990, respectively, to December 31, 1992. From September 1987 until January 1990, Mr. Clark was the Director of Financial Planning and Analysis of KACC, and from April 1985 until September 1987, Mr. Clark served as the Business Manager and Controller of KACC's Primary Products Division. John T. La Duc. Mr. La Duc, age 53, has served as a director and Vice President of the Company since its formation in November 1996. He has also served as Senior Vice President of MAXXAM since September 1990, and as Vice President and as a director of MGI since October 1990 and January 1994, respectively. He also served MAXXAM and MGI as Chief Financial Officer from September 1990 until December 31, 1994 and February 28, 1995, respectively. Mr. La Duc has also served Kaiser as Chief Financial Officer since May 1990 and as a Vice President since June 1989. He has also served KACC as a Vice President since June 1989 and Chief Financial Officer since January 1990. Mr. La Duc served as Kaiser's Treasurer from August 1995 until February 1996 and from January 1993 until April 1993, and as KACC's Treasurer from June 1995 until February 1996 and from January 1993 until April 1993. Mr. La Duc also currently serves as a director and Vice President of Pacific Lumber and Scotia Pacific. He previously served as Chief Financial Officer of Pacific Lumber and of Scotia Pacific from October 1990 and November 1992, respectively, until February 28, 1995. Anthony R. Pierno. Mr. Pierno, age 64, has served as Vice President and General Counsel of the Company since its formation in November 1996. He also serves as Senior Vice President and General Counsel of MAXXAM, positions he has held since February 1989. He has also served as Vice President and General Counsel of MGI and Pacific Lumber since May 1989, and of Scotia Pacific since November 1992, and has served as a director of Pacific Lumber and MGI since November 1993 and January 1994, respectively. Additionally, Mr. Pierno has served as Vice President and General Counsel of Kaiser and KACC since January 1992. Immediately prior to joining MAXXAM, Mr. Pierno served as partner in charge of the business practice group in the Los Angeles office of the law firm of Pillsbury, Madison & Sutro. He has served as the Commissioner of Corporations of the State of California and as Chair of several committees of the State Bar of California. Mr. Pierno is Chairman of the Board of Trustees of Whittier College, and a former member and past Chairman of the Board of Trustees of Marymount College. William S. Riegel. Mr. Riegel, age 50, has served as a director and Vice President of the Company since its formation in November 1996. He has also served MGI as a director and Vice President since December 1994. He has also served Pacific Lumber as a director since January 1992, and as Vice President -- Sales since January 1990. From the time he joined Pacific Lumber in 1971 until January 1990, Mr. Riegel served in various sales management positions. Ronald L. Reman. Mr. Reman, age 38, has served as Vice President -- Taxes of the Company since its formation in November 1996. He was named Vice President -- Taxes of MAXXAM in September 1992. Prior to September 1992, he had served MAXXAM as Director of Taxes since joining MAXXAM in October 1986. From July 1984 until October 1986, Mr. Reman was a Senior Manager in the Tax Department of the New York office of Price Waterhouse after having served seven years with the New York office of Coopers & Lybrand, both of which are accounting firms. Mr. Reman also serves as Vice President -- Taxes of MGI and certain other subsidiaries of MAXXAM, and as Assistant Treasurer of Kaiser and KACC. Byron L. Wade. Mr. Wade, age 49, has served as Vice President and Deputy General Counsel of the Company since its formation in November 1996. He has also served as Vice President and Deputy General Counsel of MAXXAM since May 1990, and Secretary of MAXXAM since October 1988. Mr. Wade has also served as Vice President and Secretary of Kaiser and KACC since January 1992, and Deputy General Counsel of Kaiser and KACC since May and June 1992, respectively. He has been Vice President, Secretary and Deputy General Counsel of Pacific Lumber and Scotia Pacific since June 1990 and November 1992, 126 129 respectively. In addition, Mr. Wade has served since May 1993 as a Vice President and Secretary of SHRP. Mr. Wade has also served as a Vice President, Secretary and Deputy General Counsel of MGI since July 1990. He was Assistant Secretary of MAXXAM from November 1987 to October 1988 and Assistant General Counsel from November 1987 until May 1990. He had previously served as Vice President, Secretary and General Counsel of MCO Resources, Inc., a publicly traded oil and gas company, which was majority owned by MAXXAM. EXECUTIVE OFFICERS AND DIRECTORS OF MAXXAM The following table sets forth certain information, as of November 15, 1996, with respect to the executive officers and directors of MAXXAM. All officers and directors hold office until their respective successors are elected and qualified or until their earlier resignation or removal.
NAME POSITIONS AND OFFICES WITH MAXXAM ---- --------------------------------- Charles E. Hurwitz........... Chairman of the Board, President and Chief Executive Officer Paul N. Schwartz............. Executive Vice President and Chief Financial Officer John T. La Duc............... Senior Vice President Anthony R. Pierno............ Senior Vice President and General Counsel Robert E. Cole............... Vice President -- Federal Government Affairs Diane M. Dudley.............. Vice President -- Chief Personnel Officer Robert W. Irelan............. Vice President -- Public Relations Ronald L. Reman.............. Vice President -- Taxes Byron L. Wade................ Vice President, Secretary and Deputy General Counsel Robert J. Cruikshank......... Director Ezra G. Levin................ Director Stanley D. Rosenberg......... Director
See " -- Executive Officers and Directors of the Company" for biographical information relating to Messrs. Hurwitz, Schwartz, La Duc, Pierno, Reman and Wade. Diane M. Dudley. Ms. Dudley, age 55, was named Vice President -- Chief Personnel Officer of MAXXAM in May 1990. Since November 9, 1995, Ms. Dudley has also served as a Vice President of Pacific Lumber. From June 1987 until May 1990, she was Vice President -- Personnel and Administration of MAXXAM. From December 1983 until June 1987, Ms. Dudley served as Assistant Vice President -- Personnel of MAXXAM. Robert E. Cole. Mr. Cole, age 49, has served MAXXAM as Vice President -- Federal Government Affairs since September 1990. Since March 1981, Mr. Cole has also served as a Vice President of KACC. In addition, Mr. Cole has served as Vice President -- Federal Government Affairs for MGI and Pacific Lumber since September 1990. Mr. Cole is currently Chairman of the United States Auto Parts Advisory Committee to the United States Congress. Robert J. Cruikshank. Mr. Cruikshank, age 66, has served as a director of MAXXAM since May 1993. In addition, he has served as a director of Kaiser and KACC since January 1994. Mr. Cruikshank was a Senior Partner in the international public accounting firm of Deloitte & Touche from December 1989 until his retirement from that firm in March 1993. Prior to its merger with Touche Ross & Co. in December 1989, Mr. Cruikshank served as Managing Partner of Deloitte Haskins & Sells from June 1974 until the merger and served on such firm's board of directors from 1981 to 1985. Mr. Cruikshank also serves as a director and on the Compensation Committee of Houston Industries Incorporated, a public utility holding company with interests in electric utilities, coal and transportation businesses; as a director of Texas Biotechnology Incorporated as a director of American Residential Services; and as Advisory Director of Compass Bank -- Houston. Robert W. Irelan. Mr. Irelan, age 59, has served MAXXAM as Vice President -- Public Relations since September 1990. He has also been Vice President -- Public Relations of MGI and Pacific Lumber since September 1990, and Vice President -- Public Relations of KACC since February 1988. From June 1985 to 127 130 February 1988, Mr. Irelan served as Divisional Vice President -- Corporate Public Relations of KACC, and from 1968 to June 1985 he served KACC and certain affiliated companies in a variety of positions. Ezra G. Levin. Mr. Levin, age 62, was first elected a director of MAXXAM in May 1978. He has served as a director of Kaiser and KACC since July 1991 and November 1988, respectively. From May 1982 through December 1993, he also served as a director of MGI. He is a partner in the law firm of Kramer, Levin, Naftalis & Frankel. Mr. Levin also serves as a director of Pacific Lumber, Scotia Pacific and United Mizrahi Bank and Trust Company. Stanley D. Rosenberg. Mr. Rosenberg, age 65, was first elected to the Board of Directors of MAXXAM in June 1981. Mr. Rosenberg is a partner in the law firm of Rosenberg, Tuggey, Agather & Rosenthal. Mr. Rosenberg was a partner in the law firm of Oppenheimer, Rosenberg & Kelleher, Inc. from its inception in 1971 until February 1990, at which time he served as Of Counsel to that firm through June 30, 1993. SECURITY OWNERSHIP OF MAXXAM BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY The Company is a wholly owned subsidiary of MAXXAM. The following table sets forth, as of December 20, 1996, unless otherwise indicated, the beneficial ownership of MAXXAM's Common Stock and the Preferred Stock by (i) those persons known by MAXXAM to own beneficially more than 5% of the shares of each class then outstanding, (ii) each of the executive officers and directors of the Company, and (iii) all directors and executive officers of the Company as a group.
COMBINED % OF VOTING NAME OF BENEFICIAL OWNER TITLE OF CLASS # OF SHARES(1) % OF CLASS POWER(2) ------------------------ ----------------- -------------- ---------- -------- Federated Development Inc.(3).......... Common Stock 1,740,626(4) 19.9 54.2 Preferred Stock 661,377 98.9 The Stockholder Group(3)............... Common Stock 2,735,219(4)(5)(6) 31.3 61.3 Preferred Stock 685,074(7) 99.1 Harold C. Simmons, Kronos, Inc.,....... Common Stock 1,278,150(8) 14.8 8.3 The Combined Master Retirement Trust, NL Industries, Inc. and related entities Robertson, Stephens & Company, Inc.,... Common Stock 710,100(9) 8.2 4.6 The Robertson, Stephens Orphan Fund, The Contrarian Fund and related entities John A. Campbell....................... Common Stock 3,000 * * Gary L. Clark.......................... -- -- -- -- Charles E. Hurwitz(10)................. Common Stock 2,733,542(4)(5)(11) 31.3 61.2 Preferred Stock 684,941(7)(12) 99.1 John T. La Duc......................... -- -- -- -- Anthony R. Pierno...................... Common Stock 4,983(13) * * Ronald L. Reman........................ Common Stock 39(14) * * William S. Riegel...................... -- -- -- -- Paul N. Schwartz....................... Common Stock 30,975(15) * * Byron L. Wade.......................... Common Stock 5,526(16) * * All directors and executive officers of the.................................. Common Stock 2,778,065(4)(5) 31.7 61.4 Company as a group (9 persons)....... Preferred Stock 684,941(7) 99.1
- --------------- * Less than 1% (1) Unless otherwise indicated, the beneficial owners have sole voting and investment power with respect to the shares listed in the table. Includes the number of shares such persons would have received on December 20, 1996, if any, for their exercisable stock appreciation rights ("SARs") (excluding SARs 128 131 payable in cash only) if such rights had been paid solely in shares of Common Stock. Also includes the number of shares of Common Stock credited to such person's stock fund account under MAXXAM's 401(k) savings plan as of September 30, 1996. (2) MAXXAM's Preferred Stock is generally entitled to ten votes per share on matters presented to a vote of MAXXAM's stockholders. (3) FDI, Federated, Messrs. Hurwitz and Levin, and Mr. James H. Paulin, Jr., Secretary and Treasurer of Federated, may be deemed a "group" (the "Stockholder Group") within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended. The address of FDI is 5847 San Felipe, Suite 2600, Houston, Texas 77057. The address of the Stockholder Group is c/o Ezra G. Levin, Esq., Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022. (4) Includes 71,175 shares of Common Stock which FDI may acquire in exchange for 7% Cumulative Exchangeable Preferred Stock of MCOP, whose issued and outstanding common stock is wholly owned by MAXXAM. (5) Includes (a) 1,669,451 shares of Common Stock owned by FDI as to which Mr. Hurwitz indirectly possesses voting and investment power, (b) 20,892 shares of Common Stock separately owned by Mr. Hurwitz's spouse and as to which Mr. Hurwitz disclaims beneficial ownership, (c) 46,500 shares of Common Stock owned by a limited partnership controlled by Mr. Hurwitz and his spouse, 23,250 of which shares were separately owned by Mr. Hurwitz's spouse prior to their transfer to such limited partnership and as to which Mr. Hurwitz disclaims beneficial ownership, (d) 119,832 shares of Common Stock owned by the 1992 Hurwitz Investment Partnership, L.P., of which 59,916 shares are owned by Mr. Hurwitz's spouse as separate property and as to which Mr. Hurwitz disclaims beneficial ownership, and (e) 805,692 shares of Common Stock held directly by Mr. Hurwitz. (6) Includes options exercisable within 60 days of December 20, 1996 to purchase 325 shares of Common Stock. (7) Includes options exercisable within 60 days of December 20, 1996 to purchase 22,500 shares of Preferred Stock. (8) Information is based solely on the Schedule 13D filed with the Commission dated June 30, 1989, as amended through November 13, 1991 (the "Simmons 13D"). The Simmons 13D was filed by Harold C. Simmons, Kronos, Inc. ("Kronos"), NL Industries, Inc. ("NL"), The Combined Master Retirement Trust (the "Trust") and certain related entities. The Simmons 13D states that Kronos and the Trust are the direct beneficial owners of 250,900 and 1,027,250 shares of MAXXAM's Common Stock, respectively. The Simmons 13D also states that Mr. Simmons may be deemed to have the direct power to vote and direct the disposition of the shares of MAXXAM's Common Stock held by the Trust and that Mr. Simmons and the entities other than Kronos who filed the Simmons 13D may be deemed to share the indirect power to vote and direct the disposition of the shares of MAXXAM's Common Stock held by Kronos. Mr. Simmons disclaims beneficial ownership of all of such shares of MAXXAM's Common Stock. The address of Mr. Simmons and the Trust is Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240. The address of Kronos and NL is 3000 North Sam Houston Parkway East, Houston, Texas 77032. (9) Information is based solely on the Schedule 13D filed with the SEC dated April 14, 1994, as amended through October 13, 1995 (the "Robertson 13D"). The Robertson 13D was filed by The Robertson Stephens Contrarian Fund (the "Contrarian Fund"), Robertson, Stephens & Company, Incorporated ("RS & Co.") and RS & Co.'s five shareholders (Messrs. Sanford R. Robertson, Paul H. Stephens, Michael G. McCaffery, G. Randy Hecht and Kenneth R. Fitzsimmons). The purchase of MAXXAM's Common Stock giving rise to the Robertson 13D was made by the Contrarian Fund, the Robertson Stephens Orphans Fund, the Robertson Stephens Partners Fund and the Robertson Stephens Growth & Income Fund (collectively, the "Funds"). Pursuant to the Robertson 13D, the Funds are the direct beneficial owners of 705,000 shares of MAXXAM's Common Stock and in addition, Paul H. Stephens directly holds 5,100 shares. The Robertson 13D also states that Mr. Stephens is the Chief Investment Officer of RS & Co., and as such may be deemed to have shared voting power over the 705,000 shares of 129 132 MAXXAM's Common Stock held by the Funds. The five shareholders of RS & Co. disclaim any beneficial ownership of all of such shares of MAXXAM's Common Stock, except for Mr. Stephens as to the 5,100 shares owned by him personally. The address of Mr. Stephens, RS & Co. and the Funds is 555 California Street, Suite 2600, San Francisco, CA 94104. (10) Mr. Hurwitz serves as a trustee of Federated, and together with members of his immediate family and trusts for the benefit thereof, owns all of the voting shares of Federated, and his positions include Chairman of the Board, President and Chief Executive Officer of MAXXAM and Federated and membership on MAXXAM's Executive Committee. By reason of the foregoing and his relationship with the members of the Stockholder Group, Mr. Hurwitz may be deemed to possess shared voting and investment power with respect to the shares held by the Stockholder Group. (11) Does not include shares owned by other members of the Stockholder Group. (12) Includes 661,377 shares of Preferred Stock owned by FDI as to which Mr. Hurwitz possesses voting and investment power, and 1,064 shares of Preferred Stock held directly by Mr. Hurwitz. (13) Includes 4,827 shares of Common Stock, which is the number of shares Mr. Pierno would have received on December 20, 1996 for SARs exercisable within 60 days of such date on 26,000 shares of Common Stock, if such SARs had been paid solely in shares of Common Stock. (14) Includes 39 shares of Common Stock, which is the number of shares Mr. Reman would have received on December 20, 1996 for SARs exercisable within 60 days of such date on 1,000 shares of Common Stock, if such SARs had been paid solely in shares of Common Stock. (15) Includes 6,547 shares of Common Stock, which is the number of shares Mr. Schwartz would have received on December 20, 1996 for SARs exercisable within 60 days of such date on 18,000 shares of Common Stock, if such SARs had been paid solely in shares of Common Stock. Also includes options to purchase 10,000 shares of Common Stock exercisable within 60 days of December 20, 1996, and 10,749 shares of Common Stock owned by a trust of which Mr. Schwartz and his spouse are trustees. (16) Includes 4,890 shares of Common Stock, which is the number of shares Mr. Wade would have received on December 20, 1996 for SARs exercisable within 60 days of such date on 13,000 shares of Common Stock, if such SARs had been paid solely in shares of Common Stock. 130 133 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The Company is a newly formed holding company and wholly owned subsidiary of MAXXAM and does not separately compensate its executive officers. However, each of the Company's executive officers are executive officers of one or more of MAXXAM, MGI, Kaiser, and Pacific Lumber and receive compensation from one of these companies. The following table sets forth the information with respect to the total compensation, cash and non-cash, rather than any allocated part of such compensation, for each of the last three completed fiscal years of MAXXAM with respect to the Chief Executive Officer and the four most highly compensated executive officers of MAXXAM who are also executive officers of the Company (collectively referred to as the "named executive officers") for the fiscal year ended December 31, 1995:
LONG-TERM COMPENSATION --------------------------------- AWARDS ANNUAL COMPENSATION --------------------- PAYOUTS ---------------------------------- ------- (E) (F) (A) OTHER RESTRICTED (G) (H) (I) NAME AND (C) (D) ANNUAL STOCK OPTIONS/ LTIP ALL OTHER PRINCIPAL POSITION (B) SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION WITH THE COMPANY YEAR ($) ($) ($)(1) ($) (#) ($) ($) - -------------------------- ---- ------- ------- ------------ ---------- -------- ------- ------------ Charles E. Hurwitz, Chief 1995 633,235 450,000 -- -0- 22,500 -0- 100,985(3) Executive Officer, President 1994 614,880 450,000 -- -0- 295,000 (2) -0- 97,332(3) and Chairman of the Board 1993 598,994 500,000 -- -0- -0- -0- 97,494(3) Anthony R. Pierno, 1995 344,771 263,633(4) -- -0- 5,000 -0- 55,928(3) Senior Vice President and 1994 337,298 263,633(4) -- -0- -0- -0- 55,514(3) General Counsel 1993 330,226 290,000(4) -- -0- -0- -0- 57,179(3) Paul N. Schwartz,(5) 1995 290,850 218,307(4) -- -0- 10,000 -0- 48,476(3) Executive Vice President and 1994 270,138 218,307(4) -- -0- 25,000 -0- 45,390(3) Chief Financial Officer 1993 265,204 293,000(4) -- -0- -0- -0- 47,426(3) John T. La Duc,(6) 1995 248,333 130,000(7) -- -0-(8) -0- -0- 12,417(10) Senior Vice President 1994 240,000 103,000(7) -- -0- 9,200 (9) -0- 4,800(10) 1993 240,000 100,000(7) -- -0- -0- -0- 4,872(10) Byron L. Wade, 1995 196,660 128,355 -- -0- 5,000 -0- 37,500(3) Vice President, Secretary 1994 177,140 128,355 -- -0- -0- -0- 31,671(3) and Deputy General Counsel 1993 171,913 124,412 -- -0- -0- -0- 30,955(3)
- --------------- (1) Excludes perquisites and other personal benefits because the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officer. (2) A 1994 option for 45,000 shares of MAXXAM Preferred Stock was granted in exchange for Mr. Hurwitz relinquishing the SARs for 50,000 shares of MAXXAM Common Stock granted in 1993. Additionally, an option for 250,000 shares of Kaiser Common Stock was granted by Kaiser. (3) Reflects the following aggregate amounts accrued in respect of MAXXAM's Revised Capital Accumulation Plan for 1995, 1994 and 1993, respectively, pursuant to which, in general, benefits vesting 10% annually are payable upon termination of employment with the Company: Mr. Hurwitz -- $94,985, $91,332 and $88,500; Mr. Pierno -- $51,716, $49,727 and $48,185; Mr. Schwartz -- $43,628, $39,661 and $38,432; and Mr. Wade -- $31,500, $25,671 and $24,875. Additionally, these amounts reflect matching contributions by MAXXAM under its 401(k) savings plan for 1995, 1994 and 1993, respectively, as follows: Mr. Hurwitz -- $6,000, $6,000 and $8,994; Mr. Pierno -- $4,212, $5,787 and $8,994; Mr. Schwartz -- $4,848, $5,729 and $8,994; and Mr. Wade -- $6,000, $6,000 and $6,080. (4) Pursuant to the employment agreements of Messrs. Pierno and Schwartz, their personal loans from MAXXAM outstanding on the date of such agreements were forgiven in the amount of $15,000 and $20,000, respectively, per year. These amounts are included here as additional bonus compensation. See "Certain Transactions" for discussion on such personal loans. (5) Mr. Schwartz served as Senior Vice President -- Corporate Development of MAXXAM for fiscal years 1994 and 1993. (footnotes continued on the following page) 131 134 (6) Mr. La Duc also served as Chief Financial Officer of MAXXAM for fiscal years 1994 and 1993. Mr. La Duc received his compensation for all three years principally from Kaiser; however, MAXXAM reimbursed Kaiser for certain allocable costs associated with the performance of services for MAXXAM by such executive officer. The table reflects such officer's total compensation, rather than any allocated part of such compensation. (7) Includes $50,000 (to be paid over a two-year period), $75,000 (to be paid over a three-year period) and $100,000 (to be paid over a four-year period), awarded for 1995, 1994 and 1993, respectively, for which MAXXAM will reimburse Kaiser. (8) As of December 29, 1995, Mr. La Duc held 47,437 shares of restricted Kaiser Common Stock valued at approximately $622,611 based on the closing price on such date of $13.125 per share. Restrictions on all such shares were lifted on December 2, 1996. No dividends will be paid to Mr. La Duc in respect of any restricted shares held. No other named executive officer held restricted stock of Kaiser or MAXXAM at fiscal year end 1995. (9) Represents option for shares of Kaiser Common Stock. (10) Amount represents contributions under Kaiser's 401(k) savings plan by Kaiser. OPTION/SAR GRANTS TABLE The following table sets forth certain information concerning stock options or SARs granted by MAXXAM in fiscal year 1995 to any of the named executive officers:
INDIVIDUAL GRANTS - --------------------------------------------------------------------------------------- GRANT (C) DATE VALUE (B) % OF TOTAL ------------- # OF OPTIONS/ SECURITIES SARS (D) (F) UNDERLYING GRANTED TO EXERCISE OR (E) GRANT DATE (A) OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE NAME GRANTS 1995 ($/SHARE) DATE ($)(1) - ----------------------------- ------------ ------------ ----------- ---------- ------------- Charles E. Hurwitz........... 22,500(2) 38.5 46.80 01/24/06 398,302 Anthony R. Pierno............ 5,000(3) 8.5 45.15 11/29/05 86,158 Paul N. Schwartz............. 10,000(3) 17.1 45.15 11/29/05 172,316 Byron L. Wade................ 5,000(3) 8.5 45.15 11/29/05 86,158
- --------------- (1) Valuation utilizing Black-Scholes Option Price Model using the following assumptions: 5-year daily volatility for MAXXAM Common Stock, 5.8% risk-free rate (10-year Government Bond as of the grant date) (5.6% for Mr. Hurwitz), no dividend yield and 10-year exercise or expiration date. No adjustments were made for non-transferability or risk of forfeiture. (2) Represents underlying shares of MAXXAM Preferred Stock. These options were actually granted after 1995 fiscal year end but were for services Mr. Hurwitz provided during such year. (3) Represents underlying shares of MAXXAM Common Stock. The SARs set forth in the above table cover shares of MAXXAM Preferred Stock which were granted to Mr. Hurwitz on January 24, 1996 and shares of MAXXAM Common Stock granted to Messrs. Pierno, Schwartz and Wade on November 29, 1995 under MAXXAM's 1994 Omnibus Employee Incentive Plan (the "Omnibus Plan") at an exercise price of 20% above the closing price of MAXXAM Common Stock on the date of grant. SARs under the MAXXAM Omnibus Plan are exercisable for cash, MAXXAM Common Stock or a combination thereof at the discretion of MAXXAM's Board, and vest with respect to 20% on the first anniversary date of the grant and an additional 20% on each anniversary date thereafter until fully vested. 132 135 OPTION/SAR EXERCISES AND FISCAL YEAR END VALUE TABLE The table below provides information on an aggregated basis concerning each exercise of stock options (or tandem SARs) and freestanding SARs during the fiscal year ended December 31, 1995 by each of the named executive officers, and the 1995 fiscal year-end value of unexercised options and SARs, including SARs exercisable for cash only.
(D) (E) NUMBER OF UNEXERCISED VALUE OF UNEXERCISED (B) OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS SHARES (C) AT YEAR END(#) AT FISCAL YEAR-END($) (A) ACQUIRED ON VALUE --------------------------- ----------------------------- NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------ -------------- -------------- ----------- ------------- ----------- ------------- Charles E. Hurwitz............ 21,300 928,200 22,500 36,000 334,125(3) 175,500(3) -- -- 62,500 187,500 23,438(4) 70,313(4) John T. La Duc................ -- -- 6,000 4,000 43,500(3) 29,000(3) -- -- 2,300 6,900 863(4) 2,588(4) Paul N. Schwartz.............. 10,000 349,000 16,000 40,000 104,125(3) 170,000(3) Anthony R. Pierno............. 2,000 50,000 25,000 5,000 --(3) --(3) Byron L. Wade................. 19,000 922,625 9,000 11,000 65,250(3) 43,500(3)
- --------------- (1) If no shares received, the number reflected, if any, represents the number of securities with respect to which options/SARs were exercised. (2) Valued at the closing price of MAXXAM's Common Stock on the date of exercise, less exercise price. (3) Valued at $35.25 per share, the closing price of MAXXAM's Common Stock on December 29, 1995, less exercise price. If exercise price is equal to or higher than the closing price, no value is shown. (4) Valued at $13.125 per share, the closing price of Kaiser Common Stock on December 29, 1995, less exercise price. If exercise price is equal to or higher than closing price, no value is shown. DEFINED BENEFIT PLANS MAXXAM Pension Plan All officers who are also employees and other regular employees of MAXXAM who work at least 1,000 hours in the plan year automatically participate in MAXXAM's Pension Plan (the "MAXXAM Pension Plan"), a qualified, noncontributory, funded plan. Benefits equal the sum of an employee's "past service benefit" and "future service benefit" as set forth in the following two paragraphs. Benefits are based on an employee's base salary or wages, plus overtime (excluding bonuses, commissions, incentive compensation and all other extra compensation), the age of such employee at retirement and years of service. Under the MAXXAM Pension Plan, the annual past service benefit is the greatest of: (i) benefits accrued under the plan through December 31, 1986, (ii) the product of (a) the sum of 0.8% of the participant's Past Service Compensation Base (as defined), plus 0.8% of the participant's Past Service Compensation Base in excess of $15,000 multiplied by (b) the participant's credited years of service prior to January 1, 1987, or (iii) the product of 1.2% of the participant's Past Service Compensation Base multiplied by the participant's credited years of service prior to January 1, 1987. For 1987 and 1988, the annual future service benefit equaled 1.6% of an employee's plan compensation up to two-thirds of the Social Security wage base, plus 2.4% of any remaining compensation. Effective January 1, 1989, the annual future service benefit equaled 1.75% of an employee's compensation for each year of participation, plus 0.6% of the employee's compensation in excess of $10,000. Effective January 1, 1995, the annual future service benefit equals 2.35% of an employee's compensation for each year of participation. The amount of an employee's aggregate plan compensation that may be included in benefit computations under the MAXXAM Pension Plan is limited to $150,000 for 1995. Benefits are generally payable as a straight life annuity or, with respect to married employees, as a 50% joint and survivor annuity, or, if the 133 136 employee elects (with spousal consent), in certain alternative annuity forms. Benefits under the MAXXAM Pension Plan are not subject to any deductions for Social Security or other offsets. The covered compensation for 1995 and credited years of service as of December 31, 1995 for the MAXXAM Pension Plan and estimated annual benefits payable upon retirement at normal retirement age (age 65) for the named executive officers (other than those compensated by Kaiser who do not participate in the MAXXAM Pension Plan) were as follows: Mr. Hurwitz: $150,000 -- 15 years -- $112,000; Mr. Pierno: $150,000 -- 6 years -- $36,118; Mr. Schwartz: $150,000 -- 15 years -- $111,257; and Mr. Wade: $150,000 -- 15 years -- $93,143. The projected benefits shown above were computed as single life annuity amounts, payable beginning at age 65. The benefit amounts reflect a covered compensation limit of $150,000 for 1996 and subsequent years under Section 401(a)(17) of the Internal Revenue Code (the "Code"). In addition, the amounts reflect a maximum benefit limit of $120,000 for 1996 and subsequent years (with early retirement reductions where applicable) that is placed upon annual benefits that may be paid to a participant in the MAXXAM Pension Plan at retirement under Section 415 of the Code. Combined plan limits applicable to employees participating in both defined contribution and defined benefit plans have not been reflected. Kaiser Retirement Plan Kaiser maintains a qualified, defined-benefit Retirement Plan (the "Kaiser Retirement Plan") for salaried employees of Kaiser and co-sponsoring subsidiaries who meet certain eligibility requirements. The table below shows estimated annual retirement benefits payable under the terms of the Kaiser Retirement Plan to participants with the indicated years of credited service. These benefits are reflected without reduction for the limitations imposed by the Code on qualified plans and before adjustment for the Social Security offset, thereby reflecting aggregate benefits to be received, subject to Social Security offsets, under the Kaiser Retirement Plan and the Kaiser Supplemental Benefit Plan (as defined below).
YEARS OF SERVICE ANNUAL ------------------------------------------------------------ REMUNERATION 15 20 25 30 35 ---------------------------- -------- -------- -------- -------- -------- $150,000.................. $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 175,000.................. 39,375 52,500 65,625 78,750 91,875 200,000.................. 45,000 60,000 75,000 90,000 105,000 225,000.................. 50,625 67,500 84,375 101,250 118,125 250,000.................. 56,250 75,000 93,750 112,500 131,250 300,000.................. 67,500 90,000 112,500 135,000 157,500 350,000.................. 78,750 105,000 131,250 157,500 183,750 400,000.................. 90,000 120,000 150,000 180,000 210,000 450,000.................. 101,250 135,000 168,750 202,500 236,250 500,000.................. 112,500 150,000 187,500 225,000 262,500
The estimated annual retirement benefits shown are based upon the assumptions that current Kaiser Retirement Plan and Kaiser Supplemental Benefit Plan provisions remain in effect, that the participant retires at age 65, and that the retiree receives payments based on a straight life annuity for his lifetime. Mr. La Duc had 26.3 years of credited service on December 31, 1995. Monthly retirement benefits, except for certain minimum benefits, are determined by multiplying years of credited service (not in excess of 40) by the difference between 1.50% of average monthly compensation for the highest base period (of 36, 48 or 60 consecutive months, depending upon compensation level) in the last 10 years of employment and 1.25% of monthly primary Social Security benefits. Pension compensation covered by the Kaiser Retirement Plan and the Kaiser Supplemental Benefits Plan consists of salary and bonus amounts set forth in the Summary Compensation Table (column (c) plus column (d) thereof). Participants are entitled to retire and receive pension benefits, unreduced for age, upon reaching age 62 or after 30 years of credited service. Full early pension benefits (without adjustment for Social Security offset prior to age 62) are payable to participants who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total 70) and who have been terminated by 134 137 Kaiser or an affiliate for reasons of job elimination or partial disability. Participants electing to retire prior to age 62 who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total at least 70) may receive pension benefits, unreduced for age, payable at age 62 or reduced benefits payable earlier. Participants who terminate their employment after five years or more of pension service, or after age 55 but prior to age 62, are entitled to pension benefits, unreduced for age, commencing at age 62 or, if they have completed 10 or more years of pension service, actuarially reduced benefits payable earlier. For participants with five or more years of pension service or who have reached age 55 and who die, the Kaiser Retirement Plan provides a pension to their eligible surviving spouses. Upon retirement, participants may elect among several payment alternatives including, for most types of retirement, a lump-sum payment. MAXXAM Supplemental Executive Retirement Plan Effective March 8, 1991, MAXXAM adopted an unfunded non-qualified Supplemental Executive Retirement Plan (the "MAXXAM SERP"). The MAXXAM SERP provides that participants are entitled to receive benefits which would have been payable to such participants under the MAXXAM Pension Plan except for the limitations imposed by the Code. Participants in such plan are selected by the Company's Board of Directors or are entitled to participate by virtue of provisions in their employment agreements. Four named executive officers, Messrs. Hurwitz, Pierno, Schwartz and Wade, were entitled to receive benefits under the MAXXAM SERP during 1995. The following projections are based on the same assumptions as utilized in connection with the MAXXAM Pension Plan projections above. The 1996 qualified plan pay limit ($150,000) and benefit limit ($120,000) are reflected for all years in the future. In addition, no future increases in the participants' covered compensation amounts from the 1995 levels are assumed.
HURWITZ PIERNO SCHWARTZ WADE -------- -------- -------- -------- COVERED COMPENSATION FOR 1995: Qualified Plan........................... $150,000 $150,000 $150,000 $150,000 Nonqualified Plan........................ 46,660 194,771 140,850 46,660 -------- -------- -------- -------- Total............................ $196,660 $344,771 $290,850 $196,660 ======== ======== ======== ======== CREDITED YEARS OF SERVICE AS OF DECEMBER 31, 1995................................. 15 6 15 15 ======== ======== ======== ======== PROJECTED NORMAL RETIREMENT BENEFIT: Qualified Plan........................... $ 93,143 $ 36,118 $111,257 $ 93,143 Nonqualified Plan........................ 19,138 20,126 56,598 19,138 -------- -------- -------- -------- Total............................ $112,281 $ 56,244 $167,855 $112,281 ======== ======== ======== ========
Kaiser Supplemental Benefits Plan Kaiser maintains an unfunded, non-qualified Supplemental Benefits Plan (the "Kaiser Supplemental Benefits Plan"), the purpose of which is to restore benefits which would otherwise be paid from the Kaiser Retirement Plan or the Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the "Kaiser Savings Plan"), were it not for the Section 401(a)(17) and Section 415 limitations imposed by the Code. Participation in the Kaiser Supplemental Benefits Plan includes all employees of Kaiser and its subsidiaries whose benefits under the Kaiser Retirement Plan and Kaiser Savings Plan are likely to be affected by such limitations imposed by the Code. Eligible participants, including Mr. La Duc, are entitled to receive the equivalent of the Kaiser Retirement Plan and Kaiser Savings Plan benefits which they may be prevented from receiving under those plans because of such Code limitations. 135 138 MAXXAM Severance or Termination Policy Severance or termination pay is generally granted to regular full-time employees who are involuntarily terminated, subject to a number of exclusions, pursuant to an unfunded policy. After such termination, the policy provides for payment in an amount ranging from two weeks salary for at least one year of service graduating to a maximum of 104 weeks salary. The amounts payable under the policy if the named executive officers had been involuntarily terminated on December 31, 1995 would have been as follows: Mr. Hurwitz: $1,266,470; Mr. Pierno: $79,563; Mr. Schwartz: $581,700; and Mr. Wade: $420,000. Kaiser Termination Payment Policy Most full-time salaried employees of Kaiser are eligible for benefits under an unfunded termination policy if their employment is involuntarily terminated, subject to a number of exclusions. The policy provides for lump sum payments after termination ranging from one-half month's salary for less than one year of service graduating to eight months' salary for 30 or more years of service. The amount payable to Mr. La Duc under the policy if he had been involuntarily terminated on December 31, 1995 would have been $145,833. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS All executive officers of MAXXAM are eligible to participate in a deferred compensation program. An executive officer may defer up to 20% of gross salary and up to 20% of any bonus otherwise payable to such executive officer for any calendar year. The designated percentage of deferred compensation is credited to a book account as of the date such compensation would have been paid and is deemed "invested" in an account bearing interest calculated using one-twelfth of the sum of the prime rate plus 2% on the first day of each month. Deferred compensation, including all earnings credited to the book account, will be paid in cash to the executive or beneficiary as soon as practicable following the date the executive ceases for any reason to be an employee of MAXXAM either in a lump sum or in a specified number of annual installments, not to exceed ten, at the executive's election. No compensation was deferred under this program for 1995. DIRECTOR COMPENSATION Directors who were not employees of or consultants to MAXXAM receive an annual fee of $30,000 and no additional compensation for attending Committee meetings. Directors are also reimbursed for travel and other disbursements relating to Board and Committee meetings. Fees to directors who are also employees of MAXXAM are deemed to be included in their salary. Non-employee directors of MAXXAM who also serve as directors of certain of MAXXAM's majority-owned subsidiaries (Kaiser) also receive additional director or committee fees and are reimbursed for expenses pertaining to their services in such capacities from those subsidiaries. All non-employee directors of MAXXAM are eligible to participate in a deferred compensation program. By executing a Deferred Fee Agreement, a non-employee director may defer all or part, in 25% increments, of the director's fees received from the Company for service in such capacity. Deferred fees are credited to a book account as of the date such fees would have been paid to the director and are deemed "invested" in two investment choices, again in 25% increments, of phantom shares of MAXXAM's Common Stock and/or in an account bearing interest at a rate established from time to time by the Compensation Committee. Deferred director's fees, including all earnings credited to the book account, will be paid in cash to the director or beneficiary as soon as practicable following the date the director ceases for any reason to be a member of the Board of Directors, at the director's election, either in a lump sum or in a specified number of annual installments not to exceed ten. Non-employee directors are also eligible to participate in MAXXAM's 1994 Non-Employee Director Stock Plan. Pursuant to such plan, each eligible director receives an initial grant of an option to purchase 500 shares of MAXXAM Common Stock the day following the later of the 1994 Annual Meeting or the first Annual Meeting after such eligible director is first elected or appointed by the Board to be a director. Thereafter, each eligible director is granted an option to purchase 300 shares of MAXXAM Common Stock each year the day following the Annual Meeting. The exercise price of the options per share is the closing 136 139 price of the MAXXAM Common Stock as reported by the American Stock Exchange on the date the option is granted. Each option granted under such plan becomes exercisable as to 25% of the shares on the first, second, third and fourth anniversaries of the date of the grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee of the Board of Directors of MAXXAM was, during the 1995 fiscal year, an officer or employee of MAXXAM or any of its subsidiaries, or was formerly an officer of MAXXAM or any of its subsidiaries; however, one member had a relationship requiring disclosure by MAXXAM under Item 404 of Regulation S-K. Mr. Levin served on MAXXAM's Compensation Committee and Board of Directors during 1995. Mr. Levin is also a partner in the law firm of Kramer, Levin, Naftalis & Frankel, which provided legal services for MAXXAM and its subsidiaries during 1995. During MAXXAM's 1995 fiscal year, no executive officer of MAXXAM served as (i) a member of the Compensation Committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on the Compensation Committee of the Board of Directors of MAXXAM, (ii) a director of another entity, one of whose executive officers served on the Compensation Committee of MAXXAM, or (iii) a member of the Compensation Committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of MAXXAM. 137 140 CERTAIN TRANSACTIONS THE COMPANY MAXXAM, Pacific Lumber, Salmon Creek and Scotia Pacific entered into a tax allocation agreement effective March 23, 1993, which in part modified MAXXAM's existing tax allocation agreement with MGI and certain of its subsidiaries, including Pacific Lumber (collectively, the "Tax Allocation Agreements"). Pursuant to the terms of the Tax Allocation Agreements, MAXXAM pays any consolidated federal income tax liability for its affiliated group of corporations (the "Group") within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company and its subsidiaries, including MGI, Pacific Lumber, Salmon Creek and Scotia Pacific, are each members of the Group. Under the Tax Allocation Agreements, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively the "PL Subgroup") computed as if the PL Subgroup were a separate affiliated group of corporations which was never affiliated with the Group (taking into account all limitations under the Code and regulations applicable to the PL Subgroup). To the extent such calculation results in a net operating loss or a net capital loss or credit which the PL Subgroup could have carried back to a prior taxable period under the principles of Sections 172 and 1502 of the Code, MAXXAM will pay to Pacific Lumber an amount equal to the tax refund to which the PL Subgroup would have been entitled (but not in excess of the aggregate net amount previously paid by Pacific Lumber to MAXXAM for the current year and the three preceding taxable years). If such separately calculated net operating loss or net capital loss or credit of the PL Subgroup cannot be carried back to a prior taxable year of the PL Subgroup for which Pacific Lumber paid its consolidated tax liability to MAXXAM, the net operating loss or net capital loss or credit becomes a loss or credit carryover of the PL Subgroup to be used in computing the PL Subgroup's consolidated income tax liability for future taxable years. Although, under Treasury regulations, all members of the Group, including the members of the PL Subgroup, are severally liable for the Group's federal tax liability, under the Tax Allocation Agreements, MAXXAM indemnifies each PL Subgroup member for all federal tax liabilities relating to taxable years during which such PL Subgroup member is a member of the Group, except for payments required of Pacific Lumber or Salmon Creek under the Tax Allocation Agreements. The same principles are applied to any consolidated or combined state or local income tax returns filed by the Group with respect to the PL Subgroup. Under the Tax Allocation Agreements, Pacific Lumber will indemnify Scotia Pacific for all federal and state tax liabilities relating to any taxable years during which Scotia Pacific is not a member of the Group. The Tax Allocation Agreements further provide that Salmon Creek is liable to MAXXAM for its federal income tax liability computed as if Salmon Creek was a separate corporation which was never affiliated with the Group (taking into account all limitations under the Code and regulations applicable to Salmon Creek). Under the Tax Allocation Agreements, MGI's subsidiary, MPI, is liable to MAXXAM for its federal income tax liability computed as if it filed separate returns and was never a member of the Group. Under a separate tax allocation agreement, Britt is liable to MAXXAM for its federal income tax liability computed as if it filed separate returns and was never a member of the Group (the "Britt Tax Allocation Agreement"). Effective August 4, 1993, MAXXAM and MGI modified the Tax Allocation Agreements with respect to MGI (the "Revised MGI Tax Allocation Agreement"). Under the terms of the Revised MGI Tax Allocation Agreement, MAXXAM computes a tentative federal income tax liability for MGI as if MGI, members of the PL Subgroup, Britt, MPI and MGI's other subsidiaries, but excluding Salmon Creek, were a separate affiliated group of corporations which was never connected with MAXXAM (the "MGI Subgroup"). The federal income tax liability of MGI is the difference between (i) the tentative federal income tax liability of the MGI Subgroup and (ii) the sum of the separate tax liabilities (net of any refunds due to tax loss or credit carrybacks) for Pacific Lumber, Britt, MPI and MGI's other subsidiaries, but excluding Salmon Creek. To the extent that the tentative federal income tax liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. If the calculation of the tentative federal income tax liability results in a net operating loss or a net capital loss or credit which the MGI Subgroup could have carried back to a prior taxable period under the principles of Sections 172 and 1502 of the Code, MAXXAM 138 141 will pay to MGI an amount equal to the tax refund to which the MGI Subgroup would have been entitled (but not in excess of the aggregate net amount previously paid by MGI Subgroup members to MAXXAM for the current year and the three preceding taxable years). While MGI is severally liable for MAXXAM's federal income tax liability for all taxable periods during which it is a member of the Group, pursuant to the Tax Allocation Agreements, the Britt Tax Allocation Agreement and the Revised MGI Tax Allocation Agreement, MAXXAM will indemnify MGI and its subsidiaries, except for payments required under such agreements. Contemporaneously with the consummation of this Offering, MAXXAM and the Company entered into a tax allocation agreement (the "MGHI Tax Allocation Agreement"). Under the terms of the MGHI Tax Allocation Agreement, MAXXAM will compute a tentative federal income tax liability for the Company as if the Company, members of the MGI Subgroup, and any other subsidiaries of the Company, but excluding Salmon Creek, were a separate affiliated group of corporations which was never connected with MAXXAM (the "MGHI Subgroup"). The federal income tax liability of the Company is the difference between (i) the tentative federal income tax liability of the MGHI Subgroup, and (ii) the tentative federal income tax liability of the MGI Subgroup computed pursuant to the Revised MGI Tax Allocation Agreement. To the extent that the tentative federal income tax liability of the MGHI Subgroup is less than the tentative federal income tax liability of the MGI Subgroup, MAXXAM will be obligated to pay the amount of such difference to the Company. If the calculation of the tentative federal income tax liability results in a net operating loss or a net capital loss or credit which the MGHI Subgroup could have carried back to a prior taxable period under the principles of Sections 172 and 1502 of the Code, MAXXAM will be obligated to pay to the Company an amount equal to the tax refund to which the MGHI Subgroup would have been entitled, under principles similar to the Revised MGI Tax Allocation Agreement. While the Company is severally liable for MAXXAM's federal income tax liability for all taxable periods during which it is a member of the Group, pursuant to the MGHI Tax Allocation Agreement, MAXXAM will indemnify the Company, except for payments required under such agreement. The net proceeds of the Offering were loaned by the Company to MAXXAM pursuant to the Intercompany Note, which is pledged to secure the Notes. The Intercompany Note bears interest at the rate of 11% per annum (payable semiannually on the interest payment dates applicable to the Notes) and matures on August 1, 2003. MAXXAM is entitled to defer the payment of interest on the Intercompany Note on any interest payment date to the extent that the Company has sufficient available funds to satisfy its obligations on the Notes on such date. Any such deferred interest will be added to the principal amount of the Intercompany Note and be payable at the maturity thereof. The principal amount of the Intercompany Note will be reduced in an amount equal to any payments made by MAXXAM in respect of its guaranty of the Notes. The Intercompany Note may be amended to the extent such amendments do not materially adversely affect the Company's ability to pay its obligations on the Notes. MAXXAM will use a portion of the proceeds of the loan to redeem all of the outstanding public indebtedness of MAXXAM, consisting of the approximately $17.6 million aggregate principal amount of its Subordinated Debentures and the approximately $25.0 million aggregate principal amount of its Reset Notes, and to pay accrued interest on such instruments which aggregated approximately $0.4 million at December 23, 1996. MAXXAM will use the remaining proceeds of the loan for general corporate purposes, including possible repurchases of its common stock through open market purchases, in privately negotiated transactions or otherwise. MAXXAM and its subsidiaries have an arrangement pursuant to which they reimburse each other for certain allocable costs associated with the performance of services by their respective employees. These reimbursements are computed and allocated by and among the several entities at cost. The resulting costs of such services are no less favorable than what could be obtained from unrelated parties. MAXXAM See "Legal Proceedings -- USAT Matters," "-- Zero Coupon Note Litigation" and "-- Rancho Mirage Litigation" with respect to certain actions in which certain directors and officers of MAXXAM are defendants and in which MAXXAM is advancing expenses pursuant to indemnification obligations. 139 142 In May 1995, MCOP granted Olympus Rancho Mirage, L.P. ("Olympus"), an unaffiliated third party, a non-exclusive easement on certain property in Rancho Mirage, California. Such easement is to allow access to a proposed golf course. At the same time, a partnership owned by Federated which operated the business of the Ritz-Carlton Hotel (the "Hotel"), which is also located in Rancho Mirage, California, transferred the Hotel to Olympus. In consideration for such easement, Olympus agreed to provide MCOP with Hotel amenity benefits which will be available to area lot owners for a fee. Such amenities include, among other things, room service, maid service and use of the tennis center, health club, meeting rooms and swimming pool. MCOP also agreed not to develop a contemplated hotel-type facility on other real property it owns in the vicinity. Olympus received a revocable parking license on certain other adjacent property of MCOP. MAXXAM and certain of its subsidiaries shared certain administrative and general expenses with Federated. Under these arrangements, Federated's obligation to MAXXAM and its subsidiaries was approximately $201,000 for 1995 and $124,000 for the nine months ended September 30, 1996. Federated and MAXXAM also share office space leased by MAXXAM. The obligations of Federated relating to 1995 under such office space sharing arrangement amounted to approximately $9,000. At September 30, 1996, Federated owed MAXXAM $100,000 for shared office space and certain general and administrative expenses. MAXXAM's wholly owned subsidiary, Bering Holdings, Inc. ("Bering Holdings"), is a Texas registered investment adviser which has an agreement with Federated whereby Bering Holdings manages an investment portfolio for Federated on substantially the same terms as provided to other persons. The agreement provides for an annual management fee equal to 1% of the average value of the portfolio, except for certain short-term investments for which the management fee is 1/2 of 1% per annum. The agreement also provides for an annual performance fee equal to 10% of the net gain in certain portfolios. Bering Holdings has accrued management and performance fees for the year ended December 31, 1995 of approximately $84,000 and $215,000, respectively. At September 30, 1996, Federated owed Bering Holdings $113,000 in respect of such fees. Mr. Levin, a director of MAXXAM, Pacific Lumber, Scotia and Kaiser, is a partner in the law firm of Kramer, Levin, Naftalis & Frankel, which provides legal services for MAXXAM, the Company and its subsidiaries, and for KAC and its subsidiaries. On April 17, 1995, SHRP, Ltd., SHRP Acquisition, Inc. and SHRP Capital Corp. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. Their bankruptcy reorganization plan has since been confirmed and the transactions contemplated by the bankruptcy plan were consummated on October 6, 1995. Since July 1993, Mr. Wade has served as a director, Vice President and Secretary of SHRP Inc., SHRP, Ltd.'s sole general partner prior to SHRP, Ltd.'s bankruptcy reorganization, and of SHRP Capital Corp., a subsidiary of SHRP, Ltd.; Mr. Schwartz has served as a director and Executive Vice President of both SHRP, Inc. and SHRP Capital Corp.; and Mr. Hurwitz has served as director and Chairman of the Board of SHRP, Inc., and as a director, Chairman of the Board and President of SHRP Capital Corp. In January 1995, Mr. Pierno repaid a $150,000 bank loan which had been guaranteed by MAXXAM. Pursuant to the terms of Mr. Pierno's employment agreement with MAXXAM (which expired in March 1995), his personal loans from MAXXAM, which aggregated $150,000 at 6% interest, were forgiven at the rate of $15,000 per year. Such loans were, and continue to be, secured by real estate owned by Mr. Pierno. As of February 28, 1995, MAXXAM entered into an amendment of Mr. Pierno's promissory note evidencing such loans which provides that (i) installments of $18,750 be paid on each of December 31, 1995, 1996 and 1997, with the balance to be paid in full on December 31, 1998; and (ii) the loans also be secured by any amounts to which Mr. Pierno may be entitled pursuant to MAXXAM's Revised Capital Accumulation Plan. Mr. Pierno's principal balance on such loans is currently $56,250. Pursuant to the terms of Mr. Pierno's employment agreement, he borrowed an additional $200,000 bearing interest at 6% per annum, with interest being payable monthly and principal being due December 15, 1998 (with prepayments due upon the exercise by Mr. Pierno of any stock appreciation rights granted pursuant to the agreement or employee benefit plan). Such promissory note was also amended, extending the due date to December 15, 1998, and securing such loan with any amounts to which Mr. Pierno may be entitled pursuant to MAXXAM's Revised Capital Accumulation Plan. 140 143 Mr. Schwartz repaid his $100,000 outstanding loan from MAXXAM, together with accrued interest thereon, in August 1995. Mr. Wade repaid his $20,000 loan from MAXXAM, together with accrued interest thereon, in August 1995. Ms. Dudley repaid her $100,000 loan from MAXXAM, together with accrued interest thereon, in September 1995. 141 144 DESCRIPTION OF PRINCIPAL INDEBTEDNESS THE COMPANY The following sets forth a summary of certain terms of the principal indebtedness of the Company and its subsidiaries outstanding as of September 30, 1996. This summary is qualified in its entirety by reference to the applicable instruments, which have been filed as exhibits to the SEC Reports of the applicable companies. The term "as defined," as used below, refers to the definition of such term in the applicable instrument. The Company will furnish a copy of any such instrument, upon oral or written request to the Company, at 5847 San Felipe, Suite 2600, Houston, Texas 77057, attention: Investor Relations Coordinator (telephone number (713) 267-3675). MGI NOTES General The $100.0 million of MGI Senior Notes and $101.0 million (accreted amount as of September 30, 1996) of MGI Discount Notes mature on August 1, 2003. The MGI Senior Notes bear interest at the rate per annum of 11 1/4%, payable semiannually in arrears on February 1 and August 1 of each year. The MGI Discount Notes bear interest at the rate per annum of 12 1/4%, payable semiannually in arrears on February 1 and August 1 of each year, commencing on February 1, 1999. Interest on the MGI Notes is computed on the basis of a 360-day year of twelve 30-day months. Optional Redemption Except for partial redemptions prior to August 1, 1997 with the proceeds of a public equity offering by Pacific Lumber or certain other subsidiaries of MGI, the MGI Notes may not be redeemed prior to August 1, 1998. Thereafter, the MGI Notes may be redeemed at the option of MGI, at any time as a whole, or from time to time in part, at a redemption price equal to the principal amount thereof plus (until August 1, 2002) a redemption premium ranging from 6.125% during the 12 months commencing August 1, 1998 to 1.531% during the 12 months commencing August 1, 2001, in the case of the MGI Discount Notes, and ranging from 5.50% to 1.375% during the same periods, in the case of the MGI Senior Notes, plus accrued and unpaid interest (if any) to the date of redemption. Sinking Fund There are no mandatory sinking fund payments for the MGI Notes. Ranking The indebtedness represented by the MGI Notes is senior indebtedness of MGI and ranks pari passu in right and priority of payment with any existing or future senior indebtedness of MGI. Security The MGI Notes are secured by a first priority pledge of (i) all of the outstanding shares of stock owned or from time to time acquired by MGI or its Subsidiaries (as defined), of Pacific Lumber, Britt and MPI, and (ii) the 27,938,250 shares of common stock of Kaiser which, upon the consummation of the Offering, will be owned by the Company. The MGI Notes are not secured by any Salmon Creek Distributions (as defined) and, in addition, except during the continuance of an Event of Default, Interest Payment Default or Collateral Default (each as defined), the pledgors, including in the case of the pledged Kaiser shares the Company, will be entitled to receive and retain all Exempt Distributions (as defined) in respect of the shares so pledged. The pledgors will be entitled to vote all of such shares except under certain circumstances. 142 145 Release for Pledged Share Sales The MGI Indenture permits a Pledgor (as defined) to obtain a release of Pledged Shares (as defined) in order to effect a Pledged Share Sale (as defined); provided that (i) no Event of Default, Collateral Default or Interest Payment Default (each as defined) has occurred and is continuing or would result from such release, (ii) an officers' certificate is delivered to the trustee under the MGI Indenture (the "MGI Trustee") by MGI so stating and stating that such release is otherwise permitted under the relevant MGI Indenture provision and (iii) MGI agrees to subject money in an amount equal to the amount of Net Proceeds (as defined) of such Pledged Share Sale received by MGI and its Subsidiaries (as defined) that are Pledgors (and, with respect to the Pledged Kaiser Shares (as defined), MAXXAM or, following the consummation of the Offering, the Company), including all money and Cash Equivalents (as defined) required to constitute collateral under the MGI Indenture ("Trust Moneys") in the Accounts (as defined) to the extent required under Article 10 of the MGI Indenture, to an offer to purchase MGI Notes in accordance with the provisions described below under "-- Offers to Purchase MGI Notes with Certain Proceeds of Collateral." Release of Non-Cash Net Proceeds and Extraordinary Distributions The MGI Indenture entitles the Pledgors to obtain a release from the lien of the MGI Indenture of nonmoney and non-Cash Equivalent (i) Net Proceeds of (A) a Primary Share Sale (as defined) that were distributed on Pledged Shares or (B) a Pledged Share Sale and (ii) Extraordinary Distributions (as defined) on any Pledged Shares as follows: (x) if all or any portion of such Net Proceeds or Extraordinary Distributions are disposed of in one or more transactions (a "Monetization") for consideration consisting of money or Cash Equivalents (but which may also include indemnities) and MGI delivers or causes to be delivered to the MGI Trustee, for deposit into a cash collateral offer account, all of the money or Cash Equivalents received in such Monetization, then all or such portion of such Net Proceeds or Extraordinary Distributions will be released (simultaneously with such Monetization) from the lien of the MGI Indenture; and (y) if, in connection with an offer to purchase MGI Notes, as described below under "-- Offers to Purchase MGI Notes with Certain Proceeds of Collateral," MGI delivers to the MGI Trustee for deposit into the cash collateral offer account money in the amount, if any, to be deposited into such Account, as described in the first sentence of the second paragraph under such caption, then (1) if the purchase price at which such offer to purchase MGI Notes is made equals or exceeds 110% of the principal amount or the Accreted Value (as defined), as the case may be (the "respective Call Prices"), for the MGI Notes, plus accrued and unpaid interest, all of such Net Proceeds or Extraordinary Distributions will be released, simultaneously with such deposit, from the lien of the MGI Indenture, and (2) if the preceding clause (1) is not applicable, a portion of such Net Proceeds or Extraordinary Distributions, designated by MGI, not greater in value (at the time such Net Proceeds or Extraordinary Distributions became collateral) than the amount of money so delivered by MGI, will be released, simultaneously with such deposit, from the lien of the MGI Indenture. Offers to Purchase MGI Notes with Certain Proceeds of Collateral If at any time the sum of (i) Trust Moneys deposited in the cash collateral offer account, plus (ii) the value (as reasonably determined by the Board of Directors) when it became collateral of nonmoney and non-Cash Equivalent Net Proceeds, Extraordinary Distributions and Exempt Distributions then required to constitute collateral, in each case that have not previously been (and are not being) subjected to an offer to purchase MGI Notes pursuant to the provisions described under this caption or (in the case of Net Proceeds of a public equity offering by Pacific Lumber or certain other Subsidiaries of MGI) applied to an optional redemption of MGI Notes, exceed $10,000,000, MGI will be required to apply such sum to make an offer to purchase MGI Notes (provided that MGI may in its discretion make such an offer before such $10,000,000 threshold is met), for a purchase price of not less than 101% of the principal amount or Accreted Value thereof, as the case may be, plus accrued and unpaid interest, if any, to the date of purchase, and having an aggregate purchase price equal to the sum of the amounts included in items (i) and (ii) above (to the extent not subjected or applied (or being subjected or applied) as aforesaid), as of the close of business on the second business day preceding the mailing of written notice, to the MGI Trustee and the holders of MGI Notes, as provided in the MGI Indenture, of the terms of such offer (the "Offer Amount"); provided that, among other 143 146 things, no Net Proceeds of a public equity offering by Pacific Lumber or certain other Subsidiaries of MGI that have been applied to an optional redemption (or that are being so applied or that may be so applied by an election by MGI pursuant to the provisions of the MGI Indenture the time for which has not expired) shall be required to be subjected to such an offer. The MGI Indenture provides that MGI will, prior to the scheduled time of purchase pursuant to any such offer, deliver to the MGI Trustee, for deposit into the cash collateral offer account, an amount of money equal to the amount, if any, by which the aggregate purchase price of all MGI Notes (or portions thereof) to be purchased pursuant to such offer (i.e., the lesser of (A) the aggregate purchase price of all MGI Notes duly tendered and not withdrawn and (B) the Offer Amount) exceeds the amount of money on deposit in the cash collateral offer account. Following such delivery, but in any event prior to the time of purchase, the MGI Trustee will release from the lien of the MGI Indenture and deliver to the paying agent for such offer money from such Account in an amount equal to the aggregate purchase price of the MGI Notes to be purchased pursuant to such offer. If the price at which such offer to purchase MGI Notes is made is less than the respective Call Prices of the MGI Notes plus accrued and unpaid interest, if any, thereon, any Trust Moneys in the cash collateral offer account, to the extent not actually utilized in such offer, will remain collateral subject to the lien of the MGI Indenture. If, however, such purchase price is equal to at least the respective Call Prices of the MGI Notes as of the purchase date for such offer plus accrued and unpaid interest, if any, thereon, any such Trust Moneys not actually utilized to purchase MGI Notes in such offer will be released from the lien of the MGI Indenture. Any moneys included in the Offer Amount that remain subject to the Lien of the MGI Indenture following completion of an offer will be deposited into the cash collateral account and may be applied, as directed by MGI, to redeem the MGI Notes or to repurchase MGI Notes on the open market or otherwise. Release and Substitution of Kaiser Shares The MGI Indenture permits a release of Pledged Kaiser Shares from the lien of the MGI Indenture at any time, from time to time, if: (i) no Event of Default, Collateral Default or Interest Payment Default is continuing or would result from such release, (ii) an officers' certificate is delivered to the MGI Trustee so stating and stating that such release is otherwise permitted under such provision of the MGI Indenture and (iii) there remains as collateral, immediately subsequent to any such release, Pledged Kaiser Shares bearing the same proportion (taking account of any subdivision, combination or reclassification of such shares) to 28 million as (A) the sum of (x) the aggregate principal amount at maturity of MGI Notes outstanding on the date of such release, plus (y) one-half of the difference obtained by subtracting the aggregate principal amount at maturity of MGI Notes outstanding on the date of such release from $226,720,000 bears to (B) $226,720,000. In effect, so long as any MGI Notes remain outstanding, this provision permits the release of approximately 61,750 Kaiser Shares for each $1 million reduction in the outstanding principal amount of the MGI Notes. The MGI Indenture permits a release of Pledged Kaiser Shares from the lien of the MGI Indenture at any time and from time to time in connection with a merger or consolidation of Kaiser (or successor thereto pursuant to this provision) into, or a sale or transfer of all or substantially all of the assets of Kaiser in any transaction or series of related transactions to, another person, or in connection with any other corporate reorganization of Kaiser (other than a spinoff or other similar distribution of shares of Kaiser Stock to stockholders of MAXXAM or the Company (a "Kaiser Transaction")) if: (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, (ii) the MGI Trustee receives, as collateral subject to the lien of the MGI Indenture, in substitution for such Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction, (iii) all holders of common stock of Kaiser (or such successor) shall (subject to proration, customary treatment of fractional amounts and other similar adjustments) be entitled to receive substantially the same consideration in respect of their shares of Kaiser common stock pursuant to the terms of such Kaiser Transaction, and (iv) any nonmoney or non-Cash Equivalent consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser 144 147 Transaction shall have been registered under the Securities Act to the extent required under the federal securities law. Change of Control Upon the first Change of Control (as defined) to occur after the date of the MGI Indenture (but not upon any subsequent Change of Control), each holder of the MGI Notes has the right, at the holder's option, subject to the terms and conditions of the MGI Indenture, to require MGI to purchase any or all of such holder's MGI Notes at a cash purchase price equal to 101% of the principal amount of the MGI Notes to be purchased plus accrued and unpaid interest. Certain Covenants The MGI Indenture contains certain covenants including, among others, limitations on indebtedness, restricted payments, sales of capital stock of subsidiaries, dividends and other payment restrictions affecting subsidiaries, asset sales, transactions with affiliates, limitations on liens, amendments of the Timber Note Indenture and certain other agreements of Scotia Pacific, and mergers, consolidations and sales of all or substantially all of the assets of MGI. The MGI Indenture limits the amount of dividends MGI can pay to an amount that is generally equal to 50% of aggregate Consolidated Net Income (as defined) of MGI accrued on a cumulative basis subsequent to June 30, 1993. Consolidated Net Income (as defined) includes the fair market value in excess of $62 million of Salmon Creek Distributions (as defined) received by MGI or any of its Restricted Subsidiaries (as defined) from Pacific Lumber. There are no restrictions in the Pacific Lumber Indenture on the ability of Pacific Lumber to make Salmon Creek Distributions. The definition of the term Salmon Creek Distributions is the same in the MGI Indenture as in the Indenture governing the Notes. See "Description of New Notes -- Certain Definitions." PACIFIC LUMBER SENIOR NOTES General The $235.0 million of Pacific Lumber Senior Notes mature on March 1, 2003, and bear interest at the rate per annum of 10 1/2%, payable semiannually in arrears on March 1 and September 1 of each year. Interest on the Pacific Lumber Senior Notes is computed on the basis of a 360-day year of twelve 30-day months. Optional Redemption The Pacific Lumber Senior Notes may not be redeemed prior to March 1, 1998. Thereafter, the Pacific Lumber Senior Notes may be redeemed at the option of Pacific Lumber, at any time as a whole, or from time to time in part, at a redemption price equal to the principal amount thereof plus (until March 1, 2000) a redemption premium plus accrued and unpaid interest (if any) to the date of redemption. Sinking Fund There are no mandatory sinking fund payments for the Pacific Lumber Senior Notes. Ranking The indebtedness evidenced by the Pacific Lumber Senior Notes ranks pari passu in right and priority of payment with indebtedness of Pacific Lumber under the Pacific Lumber Credit Agreement, and any future senior indebtedness of Pacific Lumber. The Pacific Lumber Senior Notes are unsecured obligations. Change of Control Upon the first Change of Control (as defined) to occur after the date of the Pacific Lumber Indenture (but not upon any subsequent Change of Control), each holder of the Pacific Lumber Senior Notes will have 145 148 the right, at the holder's option, subject to the terms and conditions of the Pacific Lumber Indenture, to require Pacific Lumber to purchase any or all of such holder's Pacific Lumber Senior Notes at a cash purchase price equal to 100% of the principal amount of the Pacific Lumber Senior Notes to be purchased plus accrued and unpaid interest. Certain Covenants The Pacific Lumber Indenture contains certain covenants including, among others, limitations on indebtedness, restricted payments, sales of capital stock of subsidiaries, dividends and other payment restrictions affecting subsidiaries, asset sales, transactions with affiliates, limitations on liens, amendments of the Timber Note Indenture and certain other agreements of Scotia Pacific, and mergers, consolidations and sales of all or substantially all of the assets of Pacific Lumber. The Pacific Lumber Indenture limits the amount of dividends Pacific Lumber can pay, exclusive of Salmon Creek Distributions, to an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from Scotia Pacific (for periods subsequent to March 1, 1993), exclusive of net income and depletion of Scotia Pacific so long as any Timber Notes are outstanding. TIMBER NOTES Interest Interest is payable on the $336.1 million outstanding principal amount of the Timber Notes (as of September 30, 1996) at the rate of 7.95% per annum (computed on the basis of a 360-day year of twelve 30-day months; the "Timber Note Rate") on January 20 and July 20 of each year (a "Timber Note Payment Date"). Interest on overdue principal and, to the extent permitted by law, overdue interest and premium, is payable at the Timber Note Rate plus 200 basis points (the "Timber Note Default Rate") on each Timber Note Payment Date. Principal The Timber Notes have Scheduled Amortization, which represents the amount of principal which Scotia Pacific must have paid (on a cumulative basis) through each Timber Note Payment Date in order to avoid payment of prepayment or deficiency premiums. The Timber Notes also have Rated Amortization, which represents the minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) on or prior to each Timber Note Payment Date. The amount of principal payable on any Timber Note Payment Date is an amount which is intended to link, to the extent of cash available, the deemed depletion of the Scotia Pacific Timber (through the harvest and sale of logs) to the required amortization of the Timber Notes. The amount payable on any Timber Note Payment Date is based on various formulas in the Timber Note Indenture which generally compare the present value of the "fixed liabilities" associated with the Scotia Pacific Timber (i.e., the balance of the Timber Notes plus the discounted value of certain future operating expenses) to a hypothetical deemed valuation of the collateral supporting the Timber Notes. The deemed valuation is a theoretical construct which does not represent, and is not intended to reflect, the actual value of the Scotia Pacific Timber. The Timber Note Indenture provides that if, on any Timber Note Payment Date, the principal paid on such date exceeds the Scheduled Amortization Amount, as defined below (such excess, an "Excess Payment"), a premium (a "Prepayment Premium") will be payable on such date with respect to such Excess Payment. The Timber Note Indenture also provides that if, on any Timber Note Payment Date, the principal paid on such date is less than the Scheduled Amortization Amount (such deficiency, a "Payment Deficiency"), a premium (a "Deficiency Premium") will be payable on the next Timber Note Payment Date with respect to such Payment Deficiency. The Timber Note Indenture defines "Scheduled Amortization Amount," for any Timber Note Payment Date, as an amount equal to the excess, if any, of (i) the cumulative amount of all Scheduled Amortization, through and including such Note Payment Date over (ii) the cumulative amount of all principal paid on the Timber Notes, to and excluding such Timber Note Payment Date. 146 149 Premiums The Prepayment Premium payable on any Timber Note Payment Date with respect to the Excess Payment on such Timber Note Payment Date is a make whole premium, calculated based upon the yield of like term Treasury securities plus 50 basis points. The Deficiency Premium payable on any Timber Note Payment Date with respect to the Payment Deficiency on the previous Timber Note Payment Date equals an amount of interest (computed on the basis of a 360-day year of twelve 30-day months) on the Payment Deficiency, for the period from and including the Timber Note Payment Date immediately preceding such Timber Note Payment Date, to but excluding such Timber Note Payment Date, at a rate per annum equal to 1.50%. Optional Redemption Scotia Pacific may redeem the Timber Notes, in whole, but not in part, at any time, at a redemption price equal to all unpaid principal amounts, all accrued and unpaid premium thereon, all accrued and unpaid interest thereon, and a redemption premium. Scotia Pacific also has the right to cause additional prepayments of principal to be made on any Timber Note Payment Date by making additional deposits to the Payment Account (as defined below) from other funds available to Scotia Pacific. To the extent that any such additional deposit causes an Excess Payment on any Timber Note Payment Date, a Prepayment Premium will be payable in respect of such Excess Payment. Accounts; Payment on the Timber Notes The Timber Note Indenture provides that the trustee under the Timber Note Indenture (the "Timber Note Trustee") must maintain, subject to a lien for the benefit of holders of Timber Notes, the Liquidity Account, which provides liquidity for the Timber Notes and an account into which funds will be transferred on each Monthly Deposit Date (as defined in the Timber Note Indenture), for disbursement on each Timber Note Payment Date (the "Payment Account"). The balance in the Liquidity Account is to be maintained at the Required Liquidity Balance (as defined). The balance in the Liquidity Account at September 30, 1996 was $30.5 million. The Timber Note Indenture provides that all payments received by Scotia Pacific in connection with the harvesting, severing, cutting or sale of timber and all other cash proceeds of or from the Mortgaged Property will be deposited into a segregated trust account (the "Collection Account") maintained with the Timber Note Trustee, subject to a lien for the benefit of the holders of Timber Notes. Amounts to be utilized for payments on the Timber Notes generally are withdrawn from the Collection Account on each Monthly Deposit Date, deposited into the Payment Account, and (if the Monthly Deposit Date is not also a Timber Note Payment Date) invested in Eligible Investments (as defined) until the next Timber Note Payment Date. The amount so transferred from the Collection Account to the Payment Account on each Monthly Deposit Date (the Targeted Monthly Deposit Amount) is (to the extent of available cash) calculated so that the amount in the Payment Account will be sufficient to pay all accrued interest and Deficiency Premiums on the Timber Notes to the Monthly Deposit Date and the appropriate portion of principal amortization and Prepayment Premiums, if any, expected to be payable on the next Timber Note Payment Date (or, if such Monthly Deposit Date is also a Timber Note Payment Date, on such Timber Note Payment Date). Amounts remaining in the Collection Account on a Monthly Deposit Date after the required transfer of funds into the Payment Account, unless a Trapping Event (as described below) has occurred and is continuing, may be released to Scotia Pacific free and clear of the lien and security interest of the Deed of Trust securing the Timber Notes (the "Deed of Trust Lien"). On each Timber Note Payment Date, the amounts on deposit in the Payment Account are utilized to make required payments on the Timber Notes (or to make any required deposits to the Liquidity Account). Required principal payments in excess of Rated Amortization on the Timber Notes will be due and payable only to the extent of available cash in the Payment Account. However, if, for 24 consecutive months, the amount transferred from the Collection Account to the Payment Account is less than the Targeted Monthly Deposit Amount (as defined), Scotia Pacific will be required to make a payment into the Payment Account in 147 150 an amount equal to the difference between the Targeted Monthly Deposit Amount in the last such month and the actual amount transferred from the Collection Account to the Payment Account in such month. To the extent funds on deposit in the Payment Account are inadequate to make payments of interest (excluding interest on Premiums) and Rated Amortization when due, additional amounts will be drawn from the Liquidity Account to the extent of the balance thereof. To the extent that amounts on deposit in the Payment Account on a Timber Note Payment Date exceed the required payments on the Timber Notes (and any required deposits to the Liquidity Account) on such Timber Note Payment Date, such excess amounts, unless a Trapping Event has occurred and is continuing, may be released to Scotia Pacific free and clear of the Deed of Trust Lien. Consistent with Scotia Pacific's purpose and its needs to fund operating and capital expenses, substantially all of the cash released to Scotia Pacific free of the Deed of Trust Lien is periodically distributed to Pacific Lumber. Once appropriate provision for current debt service on the Timber Notes has been made, in the absence of certain Trapping Events or certain outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from Scotia Pacific to Pacific Lumber. Trapping Events During the continuance of a Trapping Event, amounts that otherwise may be released to Scotia Pacific free and clear of the Deed of Trust Lien will be retained by the Timber Note Trustee subject to the Deed of Trust Lien and, if a Trapping Event is continuing on the next Timber Note Payment Date, applied to the payment of principal on the Timber Notes. The Timber Note Indenture defines a "Trapping Event" as any of the following: (i) Events of Default (as defined) consisting of payment defaults on the Timber Notes, the bankruptcy or insolvency of Scotia Pacific or the sale or other disposition by Pacific Lumber of any capital stock of Scotia Pacific (other than in connection with a merger or similar transaction permitted by the Services Agreement), (ii) Events of Default other than payment defaults in respect of certain covenants, including, among others, those relating to title to the Mortgaged Property, the Deed of Trust Lien, the incurrence of indebtedness and the maintenance of a separate corporate identity by Scotia Pacific, provided that such Event of Default has, or, with the passage of time, would have, a Material Adverse Effect (as defined in the Timber Note Indenture), (iii) an acceleration of the Timber Notes which has not been rescinded, or (iv) an Event of Default arising from the failure of Scotia Pacific to comply with a variety of covenants, representations or warranties shall have occurred and be continuing, and the Trustee, within the previous 60 days, has commenced a consent solicitation for an election to accelerate the Timber Notes by reason of such Event of Default. Description of Mortgaged Property The Timber Notes are secured by a lien on, and security interest in, the Scotia Pacific Timberlands (subject to the Pacific Lumber Harvest Rights). The Timber Notes are also secured by (i) an assignment of the rights of Scotia Pacific under the Master Purchase Agreement, the Services Agreement, and certain other contracts, (ii) a lien on all amounts on deposit in the Collection Account, the Payment Account and the Liquidity Account, and (iii) a lien on certain data processing hardware and software utilized in the preparation of THPs (subject to certain rights of concurrent use with Pacific Lumber) and certain other assets. Certain Covenants The Timber Note Indenture contains certain covenants including, among others, limitations on the incurrence of liens by Scotia Pacific, a prohibition on the incurrence of additional indebtedness for borrowed money by Scotia Pacific, limitations on transactions with Affiliates (as defined in the Timber Note Indenture) and a limit on Scotia Pacific's business activities to the management, sale or maintenance of the Scotia Pacific Timberlands and Scotia Pacific's timber, the issuance and sale of the Timber Notes and actions reasonably incidental to the foregoing. 148 151 MAXXAM PARENT COMPANY MAXXAM's outstanding public indebtedness, consisting of the Subordinated Debentures and the Reset Notes, will be redeemed with the proceeds of the Offering. On June 28, 1996, MAXXAM entered into the Custodial Trust Agreement with Custodial Trust Company providing for up to $25.0 million in borrowings by MAXXAM. No borrowings were outstanding under the Custodial Trust Agreement as of September 30, 1996. Any amounts borrowed would be secured by Kaiser Common Stock owned by MAXXAM (or such other marketable securities acceptable to the lender) with an initial market value (as defined therein) of approximately three times the amount borrowed. Borrowings under the Custodial Trust Agreement would bear interest at the prime rate plus 1/2% per annum. The Custodial Trust Agreement provides for a revolving credit arrangement during the first year of the agreement. Any borrowings outstanding on the first anniversary date of the agreement convert into a term loan maturing on the second anniversary date of the agreement. MAXXAM is entitled to dividends and to exercise voting rights in respect of pledged shares so long as no Event of Default (as defined) has occurred. Other than for certain specified liens, the Custodial Trust Agreement prohibits Liens (as defined) on Kaiser Common Stock owned by MAXXAM except with the consent of Custodial Trust Company. Any borrowings under the Custodial Trust Agreement would rank pari passu in right and priority of payment with the MAXXAM Guaranty. ALUMINUM OPERATIONS As of September 30, 1996 Kaiser's principal indebtedness consisted of the $225.0 million principal amount of KACC's 9 7/8% Senior Notes due 2002, the $400.0 million principal amount of KACC's 12 3/4% Senior Subordinated Notes due 2003, and KACC's borrowings under the 1994 KACC Credit Agreement. On October 23, 1996, KACC completed an offering of $175.0 million principal amount of 10 7/8% Senior Notes due 2006. For information regarding this indebtedness, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations," Note 4 to the Audited Consolidated Financial Statements of Kaiser and Note 6 to the Unaudited Consolidated Financial Statements of Kaiser. On December 23, 1996, KACC completed an offering of $50.0 million principal amount of 10 7/8% Series C Senior Notes due 2006. For information regarding this indebtedness, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Aluminum Operations." FOREST PRODUCTS OPERATIONS See "-- The Company" for a description of the principal indebtedness of MAXXAM's forest products operations. REAL ESTATE AND OTHER OPERATIONS The principal indebtedness of MAXXAM's real estate and other operations consists of the 11% Senior Secured Extendible Notes of SHRP, Ltd., the RTC Portfolio Loan and the MCOP Credit Agreement. For information regarding this indebtedness, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAXXAM -- Financial Condition and Investing and Financing Activities -- Real Estate and Other Operations" and Note 4 to the Audited Consolidated Financial Statements of MAXXAM. 149 152 DESCRIPTION OF NEW NOTES GENERAL The New Notes will be issued under the Indenture, among the Company, as issuer, MAXXAM, as Guarantor, and First Bank National Association, as Trustee (the "Trustee"). Except as otherwise indicated below, the following summary applies to both the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the Old Notes and the New Notes unless otherwise indicated. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes (i) will be registered under the Securities Act, (ii) will not provide for payment of Additional Interest, which, except in certain limited circumstances, terminates upon consummation of the Exchange Offer, and (iii) will not bear any legends restricting transfer thereof. The New Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $130.0 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." The following statements relating to the Notes, the Indenture and the Registration Rights Agreement are summaries of certain provisions thereof and are subject to the detailed provisions of the Indenture and the Registration Rights Agreement, which documents have been filed as exhibits to this Registration Statement, to which reference is hereby made for a complete statement of such provisions. Wherever particular provisions of the Indenture or terms defined therein are referred to herein, such provisions or definitions are incorporated by reference and the summaries are qualified in their entirety by such reference. Capitalized terms used without definition have the respective meanings ascribed to them in the Indenture, certain of which are described below under "Certain Definitions." All parenthetical section references are to sections of the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes will mature on August 1, 2003. Interest on the Notes will be payable semiannually in arrears on February 1 and August 1 of each year, commencing on February 1, 1997, at the rate per annum stated on the cover page of this Prospectus. Interest will be payable to the persons who are registered holders of the Notes at the close of business on the January 15 or July 15 immediately preceding such interest payment date. The Trustee will authenticate and deliver Notes for original issuance in an aggregate principal amount of $130,000,000. The Company will pay interest on overdue principal and, to the extent permitted by applicable law, interest at the rate borne by the Notes. Interest on the Notes will be computed on the basis of a 360-day year of twelve 30-day months. Principal, premium and interest will be payable at the office of the Trustee but, at the option of the Company, interest may be paid by check mailed to the registered holders at their registered addresses. The Notes will be transferable and exchangeable at the office of the Trustee and will be issued in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. OPTIONAL REDEMPTION On and after August 1, 2000, the Notes may be redeemed at the option of the Company, in whole or in part, on not less than 15 days (or 30 days if legally required by The Depository Trust Company) but not more than 60 days notice to each holder of the Notes to be redeemed, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to (but not including) the date of redemption, if redeemed during the 12-month period commencing August 1 of the following years:
YEAR PERCENTAGE --------------------------- ---------- 2000....................... 106.00% 2001....................... 103.00% 2002....................... 100.00%
In the case of a partial redemption, the Trustee will allocate the Notes to be redeemed on a pro rata basis. 150 153 Notwithstanding the foregoing, at any time prior to August 1, 2000, the Company may, at its option, redeem all or any portion of the Notes at the Make-Whole Price plus accrued and unpaid interest to (but not including) the date of redemption. In addition, until August 1, 2000, upon any Public Equity Offering with respect to the Company or MGI (or any successor to MGI pursuant to the Indenture provision described below under "-- Security -- Merger by MGI") the Notes may be redeemed at the option of the Company in part, on not less than 15 days (or 30 days if legally required by The Depository Trust Company) but not more than 60 days notice to each holder of the Notes to be redeemed, with cash in the amount of the proceeds of such Public Equity Offering, at the Call Price, plus accrued and unpaid interest to (but not including) the date of redemption; provided, however, that after any such redemption the aggregate principal amount of Notes outstanding must equal at least 65% of such principal amount upon consummation of the Offering. SINKING FUND There will be no mandatory sinking fund payments for the Notes. RANKING The Indebtedness evidenced by the Notes will not be expressly subordinated to any other Indebtedness of the Company and will rank pari passu in right and priority of payment with any future senior indebtedness of the Company. The Notes will be general obligations of the Company secured by the Pledged MGI Shares and the Intercompany Note. In addition, under certain circumstances, the Company will be obligated to further secure payment of the Notes by pledging up to 16,055,000 Kaiser Shares that may be released from the Lien of the MGI Indenture pursuant to release provisions thereof by reason of payment in full of the MGI Notes, defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, or early retirement of a portion of the MGI Notes resulting in a release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant to the provision of the MGI Indenture described in the first paragraph under "Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares." However, collateral released from the Lien of the MGI Indenture need not be pledged to secure the Notes if it is pledged to secure indebtedness that refinances the MGI Notes. Substantially all of the Company's consolidated assets will be owned directly by its Subsidiaries, including MGI, Pacific Lumber, Britt and Scotia Pacific. As of September 30, 1996, MGI, Pacific Lumber, Britt and Scotia Pacific had approximately $772.9 million aggregate principal amount of outstanding indebtedness which effectively will be senior in right of payment to the Notes, although no such indebtedness is guaranteed by MAXXAM. GUARANTY Payment of principal and interest and premium, if any, on the Notes will be guaranteed on a senior unsecured basis by MAXXAM. The Indenture will provide that MAXXAM shall not consolidate with or merge with or into (whether or not MAXXAM is the surviving person), or sell all or substantially all of its assets to, another corporation, person or entity whether or not affiliated with MAXXAM unless (i) the person formed by or surviving any such consolidation or merger (if other than MAXXAM) or that acquires such assets assumes all the obligations of MAXXAM pursuant to a supplemental indenture, in form reasonably satisfactory to the Trustee, under the Notes and the Indenture and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. SECURITY Collateral The Notes will be secured by a first priority pledge of: (i) all outstanding shares of Stock of MGI now owned or from time to time acquired by the Company, (ii) all dividends distributed with respect to and property received in exchange for any of the Pledged MGI Shares other than any Salmon Creek Distributions, (iii) the Intercompany Note and (iv) all payments of interest on and principal of the Intercompany Note. If and only if any Released Kaiser Shares are released from the Lien of the MGI Indenture, the Company shall 151 154 pledge, and thereupon the Notes will be further secured by a first priority Lien on, certain of such Released Kaiser Shares as follows: (a) one hundred percent (100%) of the first 8,027,500 Released Kaiser Shares shall be pledged by the Company as additional Collateral securing the Notes; and (b) a number of additional Released Kaiser Shares in excess of those required to be pledged pursuant to clause (a) shall be pledged by the Company as additional Collateral securing the Notes in an amount equal to (1) 8,027,500 times (2) a fraction, the numerator of which is the aggregate principal amount of Notes outstanding on the date such Released Kaiser Shares are released from the Lien of the MGI Indenture, and the denominator of which is the aggregate principal amount of Notes outstanding on the Issue Date. To the extent that Released Kaiser Shares are comprised of securities or other property substituted or adjusted for Kaiser Shares (as contemplated by clause (i) or clause (ii) of the definition of Released Kaiser Shares), the kind and amount of Released Kaiser Shares to be pledged will be appropriately adjusted to take account of the kind and amount of such securities or other property so substituted for each Kaiser Share. All Kaiser Shares released from the Lien of the MGI Indenture that are not required to be so pledged shall be released to the Company. All dividends distributed with respect to, and property received in exchange for, any of the Released Kaiser Shares pledged to secure the Notes shall also be pledged as additional Collateral. In addition, if any cash proceeds of Kaiser Shares referred to in clause (i) of the definition of Kaiser Share Cash Equivalents are released from the Lien of the MGI Indenture as a result of such cash proceeds not having been used to purchase MGI Notes at a price at least equal to the respective Call Prices (as defined in the MGI Indenture) of the MGI Notes (see "Principal Indebtedness -- MGI Notes -- Offers to Purchase MGI Notes with Certain Proceeds of Collateral") or as a result of the payment in full or defeasance of the MGI Notes, such cash proceeds are required to be pledged as Collateral under the Indenture. The Pledged MGI Shares and other Collateral (including Released Kaiser Shares, if any, that become Collateral) will be subject to release from the Lien of the Indenture from time to time on the basis described below. Notwithstanding the foregoing, in no event will the aggregate of the number of Released Kaiser Shares required to be pledged as Collateral and the number of Kaiser Share Cash Equivalents resulting from the pledge of cash proceeds of Kaiser Shares referred to in the second sentence of this paragraph exceed the number of Released Kaiser Shares that would be required to be pledged if no such cash proceeds were pledged as Collateral under the Indenture. To the extent that collateral released from the Lien of the MGI Indenture is required to be pledged to secure the Notes, the Company has covenanted to seek the release of such collateral from the Lien of the MGI Indenture promptly after it becomes eligible for such release pursuant to the terms of the MGI Indenture. The Indenture will permit MGI to refinance, in whole or in part, the MGI Notes in an aggregate principal amount up to the then outstanding principal amount thereof, not to exceed $225.7 million, plus related expenses and redemption premiums, if any, and pledge the Kaiser Shares and other collateral under the MGI Indenture to secure such refinancing Indebtedness, provided that such refinancing Indebtedness contains provisions for release of collateral from the Lien thereunder that (except for the maturity date of such refinancing Indebtedness) are no less favorable in any material respect (taken as a whole) to the Holders than the release provisions of the MGI Indenture. Kaiser Shares and other collateral released from the Lien of the MGI Indenture pledged to secure such refinancing Indebtedness will not be deemed to be Released Kaiser Shares for any purpose of the Indenture. There can be no assurance that any Kaiser Shares will become Collateral securing the Notes at any time. Released Kaiser Shares will be pledged under the Indenture only in certain limited circumstances involving early retirement of MGI Notes, and then only on satisfaction of certain conditions specified in the MGI Indenture. The MGI Notes mature in 2003 concurrently with the maturity of the Notes, and there can be no assurance that any of the MGI Notes will be repurchased or redeemed prior to maturity. Moreover, if the MGI Notes are refinanced and the refinancing Indebtedness matures after the maturity of the Notes, it is less likely that any substantial number of Kaiser Shares will be pledged to secure the Notes. Any early retirement of the MGI Notes will be at the option of MGI or, with limited exceptions, as a result of transactions which neither the Company nor any of its Subsidiaries is required to enter into or consummate. 152 155 Voting and Foreclosure The Indenture provides that, unless a Notice of Acceleration has been delivered and is in effect, the Company may exercise all voting and other corporate rights pertaining to the Pledged Shares for any purpose. If at the time a Notice of Acceleration is in effect the Trustee delivers written notice to the Company of its intention to exercise such voting and other corporate rights, all such rights of the Company will cease and all such rights will become vested in the Trustee until such Notice of Acceleration has been rescinded. The Indenture provides that, if a Notice of Acceleration has been delivered and remains in effect, the Trustee may, subject to the terms of the Indenture, foreclose upon and sell the Collateral and seek any other available remedy with respect thereto. The Indenture provides that, upon such foreclosure, the Trustee may require the Company to use its best efforts to cause such Pledged Shares to be registered pursuant to an effective registration statement filed in accordance with the Securities Act. If voting rights with respect to the Pledged Shares were to become vested in the Trustee, or if the Trustee were to foreclose on the Collateral, such vesting or foreclosure, as the case may be, could constitute a change of control under instruments governing certain indebtedness of MGI and of Pacific Lumber and could constitute a change of control under instruments governing certain indebtedness of Kaiser. Such occurrence would enable the holders of such indebtedness to require the issuer to repurchase such indebtedness. See "Risk Factors -- Security for the Notes." Deposit of Trust Moneys into Accounts The Indenture requires all money and Cash Equivalents required to constitute Collateral and to be delivered to the Trustee or received by the Trustee, whether pursuant to the Indenture, the Uniform Commercial Code, other applicable law or otherwise ("Trust Moneys"), to be deposited in one of four accounts: the Cash Collateral Offer Account, the Cash Collateral Public Equity Offering Account, the Cash Collateral Default Account and the Cash Collateral Account (collectively, the "Accounts"). The Trustee will invest, apply, deposit into another Account or release, as the case may be, Trust Moneys in accordance with the terms of the Indenture, as described below. All right, title and interest in and to the Accounts will vest in the Trustee, who will have sole dominion and control over the Accounts, and only the Trustee will have any right of withdrawal therefrom. Pursuant to the Indenture, the Company may direct the Trustee in writing to, and the Trustee will, except as otherwise required under the Indenture, invest any Trust Moneys held in the Accounts in Cash Equivalents and liquidate Cash Equivalents held in the Accounts into money. Interest and other amounts earned on an Account will be held as part of the Collateral, will be credited to the Account in which the principal on which they are earned is deposited, and will be transferred between Accounts together with and in the same manner as the principal on which they are earned. Net Proceeds of Pledged Share Sales. The Indenture provides that, upon the release of any Pledged Shares and the receipt of any Net Proceeds of a Pledged Share Sale in respect of such Pledged Shares, the Company will deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account (for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"), all such Net Proceeds so received that are money or Cash Equivalents; provided that if such Pledged Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 2000, all such Net Proceeds so received that are money or Cash Equivalents will instead be deposited into the Cash Collateral Public Equity Offering Account. See "-- Net Proceeds of Certain Public Equity Offerings." In addition, the Indenture provides that, if money is released from the Lien of the MGI Indenture that is required to be pledged to secure the Company's obligations under the Indenture, the Company will deliver or cause to be delivered such money to the Trustee for deposit into the Cash Collateral Offer Account for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral." Net Proceeds of Primary Share Sales. Primary Share Sales by MGI will constitute Asset Sales under the Indenture and the cash portion of the proceeds thereof will qualify as Net Cash Proceeds of an Asset Sale under the Indenture, except to the extent Net Proceeds of a Primary Share Sale by MGI are distributed on 153 156 the Pledged MGI Shares. The Indenture provides that, upon the receipt of any Net Proceeds of a Primary Share Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI Shares or on Pledged Kaiser Shares, as the case may be, the Company will deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account (for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"), all such Net Proceeds so received that are money or Cash Equivalents; provided that if such Primary Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 2000, all such Net Proceeds so received that are money or Cash Equivalents will instead be deposited into the Cash Collateral Public Equity Offering Account. See "-- Net Proceeds of Certain Public Equity Offerings." Certain Non-Cash Amounts. If, following receipt by the Company of (i) Net Proceeds, other than money or Cash Equivalents, of either (A) a Primary Share Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI Shares or on Pledged Kaiser Shares, as the case may be, or (B) a Pledged Share Sale in respect of any Pledged Shares or (ii) Extraordinary Distributions on any Pledged Shares in a form other than money or Cash Equivalents, all or any portion of such Net Proceeds or Extraordinary Distributions at the time subject to the Lien of the Indenture are disposed of for money or Cash Equivalents, pursuant to the provisions described below in clause (x) under "-- Release of Non-Cash Net Proceeds and Extraordinary Distributions," the Company will deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account (for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"), all money and Cash Equivalents received in consideration of such disposition; provided that if any such Primary Share Sale or Pledged Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 2000, all such money and Cash Equivalents will instead be deposited into the Cash Collateral Public Equity Offering Account. See "-- Net Proceeds of Certain Public Equity Offerings." Extraordinary Distributions. The Indenture provides that, upon receipt by the Company of an Extraordinary Distribution on any Pledged Shares, the Company will deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account (for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral"), all amounts so received that are money or Cash Equivalents. Certain Exempt Distributions. The Company will deliver or cause to be delivered to the Trustee all Exempt Distributions made on any Pledged Shares the right to receive and retain which are vested in the Trustee under the provisions described below under "-- Dividends," for deposit into the Cash Collateral Default Account. Any Trust Moneys held in the Cash Collateral Default Account will be released from the Lien of the Indenture and, as the Company directs in writing, applied by the Trustee to cure any outstanding Interest Payment Defaults in respect of the Notes and to pay the principal due on the Notes at the final maturity thereof. If at any time following the deposit of Trust Moneys into the Cash Collateral Default Account, no Event of Default, Collateral Default or Interest Payment Default is continuing, any amounts in the Cash Collateral Default Account will be deposited in the Cash Collateral Offer Account, for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral." Net Proceeds of Certain Public Equity Offerings. The Company will deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, all Net Proceeds of a Public Equity Offering that constitute Collateral, are money or Cash Equivalents and are received prior to August 1, 2000. Following such receipt, the Company may elect, within 30 days after such receipt, optionally to redeem Notes with all or any portion of such Net Proceeds. If the Company so elects, such Net Proceeds (or such portion thereof) will remain in the Cash Collateral Public Equity Offering Account for application in accordance with the redemption provisions of the Indenture and the Notes. If no such election is made by the Company within such election period, all of such Net Proceeds will be deposited into the Cash Collateral Offer Account for application as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral." Cash Collateral Account. The Indenture provides that the Trustee will deposit into the Cash Collateral Account any money or Cash Equivalents (i) eligible for transfer out of the Cash Collateral Offer Account pursuant to the provisions described below under "-- Offers to Purchase Notes with Certain Proceeds of 154 157 Collateral" or (ii) constituting Trust Moneys whose disposition by the Trustee upon receipt thereof is not otherwise provided for. Intercompany Note The Indenture provides that, upon receipt by the Company of payments of interest on the Intercompany Note, the Company will deliver or cause to be delivered to the Trustee, for deposit in the Cash Collateral Account (for application as discussed below under "-- Release of Trust Moneys in the Cash Collateral Account," including to pay interest on the Notes) all amounts so received. Upon receipt by the Company of any payment or prepayments of principal of the Intercompany Note, the Company will deliver or cause to be delivered to the Trustee, for deposit in the Cash Collateral Offer Account (for application as described below under "-- Offers to Purchase Notes With Certain Proceeds of Collateral") all amounts so received. Notwithstanding the foregoing, prepayments of principal of the Intercompany Note that do not result in the principal amount of the Intercompany Note being reduced below the outstanding principal amount of the Notes shall be released from the Lien of the Indenture and paid over to the Company. Dividends The Indenture provides that, except during the continuance of an Event of Default, Interest Payment Default or Collateral Default, the Company may receive and retain any and all Exempt Distributions made on the Pledged Shares. Upon the occurrence and during the continuance of an Event of Default, Interest Payment Default or Collateral Default, all rights to receive and retain Exempt Distributions made on the Pledged Shares during such continuance will become vested in the Trustee, and the money and/or Cash Equivalent portion, if any, of any such Exempt Distributions so received and retained will be deposited into the Cash Collateral Default Account. If any such Event of Default, Interest Payment Default or Collateral Default, as the case may be, is cured or waived and no other Event of Default, Interest Payment Default or Collateral Default is continuing, all such rights to receive and retain Exempt Distributions will revert to the Company. Any Trust Moneys in the Cash Collateral Default Account that the Trustee receives during the continuance of an Event of Default, Interest Payment Default or Collateral Default may be released from the Lien of the Indenture and applied, at the direction of the Company, to cure any outstanding Interest Payment Defaults and to the payment of principal due on the Notes at the final maturity thereof. If, at the time at which all Events of Default, Interest Payment Defaults and Collateral Defaults have been cured or waived and no Events of Default, Interest Payment Defaults or Collateral Defaults are continuing, there remain Trust Moneys in the Cash Collateral Default Account, the Trustee will transfer such remaining Trust Moneys into the Cash Collateral Offer Account, and such Trust Moneys (together with additional amounts in respect of the non-money, non-Cash Equivalent portion, if any, of any Exempt Distribution received and retained by the Trustee) will, subject to the terms of the Indenture, be subjected to the requirement that the Company make an offer to purchase Notes for at least 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of purchase. See "-- Offers to Purchase Notes with Certain Proceeds of Collateral." The Indenture provides that the Trustee will at all times receive and retain as Collateral any Extraordinary Distributions on any of the Pledged Shares. The money and/or Cash Equivalent portion, if any, of any Extraordinary Distribution will be deposited into the Cash Collateral Offer Account, and such Trust Moneys (together with additional amounts in respect of the non-money or non-Cash Equivalent portion, if any, of any Extraordinary Distribution) will, subject to the terms of the Indenture, be subjected to the requirement that the Company make an offer to purchase Notes for at least 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of purchase. See "-- Offers to Purchase Notes with Certain Proceeds of Collateral." Release for Pledged Share Sales The Indenture permits the Company to obtain a release of Pledged Shares in order to effect a Pledged Share Sale; provided that (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the 155 158 Trustee by the Company so stating and stating that such release is otherwise permitted under the relevant Indenture provision and (iii) the Company agrees to subject money in an amount equal to the amount of Net Proceeds of such Pledged Share Sale received by the Company, including all Trust Moneys in the Accounts to the extent required under Article 10 of the Indenture, to an offer to purchase Notes in accordance with the provisions described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral" (or, if the Pledged Share Sale is a Public Equity Offering and the Company so elects as described above under "-- Deposit of Trust Moneys into Accounts -- Net Proceeds of Certain Public Equity Offerings" optionally to redeem Notes in accordance with the redemption provisions of the Indenture and the Notes). Release of Non-Cash Net Proceeds and Extraordinary Distributions The Indenture entitles the Company to obtain a release from the Lien of the Indenture of non-money and non-Cash Equivalent (i) Net Proceeds of (A) a Primary Share Sale that were distributed on Pledged Shares or (B) a Pledged Share Sale and (ii) Extraordinary Distributions on any Pledged Shares as follows: (w) if all or any portion of such Net Proceeds or Extraordinary Distributions are disposed of in one or more transactions (a "Monetization") for consideration consisting of money or Cash Equivalents (but which may also include indemnities) and the Company delivers or causes to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account or the Cash Collateral Public Equity Offering Account, as applicable, all of the money or Cash Equivalents received in such Monetization, then all or such portion of such Net Proceeds or Extraordinary Distributions will be released (simultaneously with such Monetization) from the Lien of the Indenture; (x) if, in connection with an offer to purchase Notes as described below under "-- Offers to Purchase Notes with Certain Proceeds of Collateral," the Company delivers to the Trustee for deposit into the Cash Collateral Offer Account money in the amount, if any, to be deposited into such Account as described in the first sentence of the second paragraph under such caption, then (1) if the purchase price at which such offer to purchase Notes is made equals or exceeds the Call Price for the Notes, plus accrued and unpaid interest, if any, to (but not including) the purchase date for such offer, all of such Net Proceeds or Extraordinary Distributions will be released, simultaneously with such deposit, from the Lien of the Indenture, and (2) if the preceding clause (1) is not applicable, a portion of such Net Proceeds or Extraordinary Distributions, designated by the Company, not greater in value (at the time such Net Proceeds or Extraordinary Distributions became Collateral) than the amount of money so delivered by the Company, will be released, simultaneously with such deposit, from the Lien of the Indenture; (y) if, in connection with an optional redemption following the receipt of Net Proceeds of a Public Equity Offering that constitute Collateral, the Company delivers to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, money in the amount specified below in the second sentence under the caption "-- Release of Trust Moneys to Fund Optional Redemptions," then a portion of such Net Proceeds, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company will be released, simultaneously with such deposit, from the Lien of the Indenture; and (z) if, in connection with an optional redemption referred to in the fourth paragraph under "-- Offers to Purchase Notes with Certain Proceeds of Collateral," the Company delivers to the Trustee for deposit into the Cash Collateral Offer Account money in the amount, if any, to be deposited in such Account as described in such paragraph, then a portion of such Net Proceeds or Extraordinary Distributions, designated by the Company, not greater in value (at the time such Net Proceeds or Extraordinary Distributions became Collateral) than the amount of money so delivered by the Company will be released, simultaneously with such deposit, from the Lien of the Indenture. Offers to Purchase Notes with Certain Proceeds of Collateral If at any time the sum of (i) Trust Moneys deposited in the Cash Collateral Offer Account, plus (ii) the value (as reasonably determined by the Board of Directors) when it became Collateral of non-money and non-Cash Equivalent Net Proceeds, Extraordinary Distributions and Exempt Distributions then required to constitute Collateral, in each case that have not previously been (and are not being) subjected to an offer to purchase Notes pursuant to the provisions described under this caption or (in the case of Net Proceeds of a Public Equity Offering) applied to an optional redemption of Notes, exceed $10,000,000, the Company will be required to apply U.S. Legal Tender to make an irrevocable and unconditional (subject to applicable law) 156 159 offer to purchase Notes (provided that the Company may in its discretion make such an offer before such $10,000,000 threshold is met), for a purchase price of not less than 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of purchase, and having an aggregate purchase price equal to the sum of the amounts included in items (i) and (ii) above (to the extent not subjected or applied (or being subjected or applied) as aforesaid), as of the close of business on the second Business Day preceding the mailing of written notice, to the Trustee and Holders, as provided in the Indenture, of the terms of such offer (the "Offer Amount"); provided that no Net Proceeds, Exempt Distributions, Extraordinary Distributions or other Trust Moneys will be subjected to more than one such offer (or will be subjected to any such offer to the extent they have been applied to an optional redemption (or are being so applied) in accordance with the provision described in the fourth paragraph under this description of Offers to Purchase Notes with Certain Proceeds of Collateral), and no Net Proceeds of a Public Equity Offering that have been applied to an optional redemption (or that are being so applied or that may be so applied by an election by the Company pursuant to the provision described below under "Release of Trust Moneys to Fund Optional Redemptions" the time for which has not expired) shall be required to be subjected to such an offer. Any such offer will be made under procedures substantially the same as those described below under "Change of Control"; provided that, if the Offer Amount is insufficient to fund an offer to purchase all of the outstanding Notes tendered into such offer, such offer may be an offer to purchase Notes on a pro rata basis. The Indenture provides that the Company will, prior to the scheduled time of purchase pursuant to any such offer, deliver to the Trustee, for deposit into the Cash Collateral Offer Account, an amount of money equal to the amount, if any, by which the aggregate purchase price of all Notes (or portions thereof) to be purchased pursuant to such offer (i.e., the lesser of (A) the aggregate purchase price of all Notes duly tendered and not withdrawn and (B) the Offer Amount) exceeds the amount of money on deposit in the Cash Collateral Offer Account. Following such delivery, but in any event prior to the time of purchase, the Trustee will release from the Lien of the Indenture and deliver to the paying agent for such offer money from such Account in an amount equal to the aggregate purchase price of the Notes to be purchased pursuant to such offer. If the price at which such offer to purchase Notes is made is less than the Call Price of the Notes plus accrued and unpaid interest, if any, thereon to (but not including) such purchase date, any Trust Moneys in the Cash Collateral Offer Account, to the extent not actually utilized in such offer, will remain Collateral subject to the Lien of the Indenture. If, however, such purchase price is equal to at least the Call Price of the Notes as of the purchase date for such offer plus accrued and unpaid interest, if any, thereon to (but not including) such purchase date, any such Trust Moneys not actually utilized to purchase Notes in such offer will be released from the Lien of the Indenture. Any moneys included in the Offer Amount that remain subject to the Lien of the Indenture following completion of an offer will be deposited into the Cash Collateral Account and may be applied, as directed by the Company, to redeem the Notes (if the Company is otherwise permitted to do so under the Indenture) or to repurchase Notes on the open market or otherwise. See "-- Release of Trust Moneys in the Cash Collateral Account." The Company will comply with all applicable tender offer rules (including, without limitation, Sections 13(e) and 14(e) of the Exchange Act and the rules and regulations promulgated pursuant thereto) in connection with any offers to purchase Notes pursuant to the foregoing provisions. Notwithstanding the foregoing provisions, the Company shall not be required to make an offer to purchase Notes pursuant to the foregoing provisions if and to the extent that, prior to the time when the Company would have been required to make such offer, the Company shall have, by written notice to the Trustee, (1) elected to apply all or any portion of the Offer Amount (such Offer Amount to be computed as if the date of delivery of such written notice to the Trustee were the date of mailing of a notice of such an offer) to a then permitted optional redemption of the Notes, in whole or in part, at a redemption price equal to not less than 101% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to (but not including) the redemption date and (2) notified the Trustee of the redemption date and the aggregate principal amount of Notes to be redeemed. Following the giving of such written notice, the Company shall, prior to the scheduled time for redemption, deliver to the Trustee, for deposit into the Cash Collateral Offer Account, an amount of money equal to the amount, if any, by which the aggregate redemption price of all 157 160 Notes called for redemption, including accrued and unpaid interest, if any, thereon to (but not including) the date of redemption, exceeds the amount of money on deposit in the Cash Collateral Offer Account. Following such delivery, but in any event on or prior to the scheduled time for redemption, the Trustee will release from the Lien of the Indenture and deliver to the paying agent for such redemption an amount of money from the Cash Collateral Offer Account equal to the aggregate redemption price of all Notes called for redemption, including accrued and unpaid interest, if any, thereon to (but not including) the date of redemption. Release of Trust Moneys to Fund Optional Redemptions If the Company receives Net Proceeds from a sale of Pledged Shares or from a Primary Share Sale that become subject to the Lien of the Indenture, and if such sale constitutes a Public Equity Offering and the Company is entitled at such time to effect an optional redemption in part of Notes pursuant to the Indenture and the Notes with such Net Proceeds, then the Company may elect, by written notice to the Trustee delivered within 30 days after it receives such Net Proceeds, to apply all or any portion of such Net Proceeds to such an optional redemption. The Indenture provides that the Company will, prior to the scheduled time for redemption established by the Company, deposit into the Cash Collateral Public Equity Account an amount of money equal to the amount, if any, by which the aggregate redemption price of all Notes called for redemption, including accrued and unpaid interest, if any, thereon to (but not including) the date of redemption, exceeds the amount of money on deposit in the Cash Collateral Public Equity Offering Account. Following such delivery, but in any event prior to the time of redemption, the Trustee will release from the Lien of the Indenture and deliver to the paying agent for such redemption an amount of money from the Account equal to such aggregate redemption price. Release and Substitution of Pledged Kaiser Shares The provisions described under this caption will be applicable only at such time, if any, as any Kaiser Shares or proceeds thereof are included in the Collateral. The Indenture contains a provision entitling the Company to a release of any Pledged Kaiser Shares from the Lien of the Indenture at any time and from time to time if: (i) no Event of Default, Collateral Default or Interest Payment Default is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is otherwise permitted under such provision of the Indenture and (iii) there remains as Collateral, immediately subsequent to any such release, a number of Pledged Kaiser Shares equal to 16,055,000 multiplied by a fraction, the numerator of which is equal to the sum of (x) the aggregate principal amount of Notes outstanding on the date of such release, plus (y) one-half of the difference obtained by subtracting the aggregate principal amount of Notes outstanding on the date of such release from the aggregate principal amount of Notes outstanding on the Issue Date, and the denominator of which is the aggregate principal amount of Notes outstanding on the Issue Date. To the extent that Pledged Kaiser Shares are comprised of securities or other property substituted for Kaiser Shares (as contemplated by the definition of Pledged Kaiser Shares), the kind and amount of Pledged Kaiser Shares to be released will be appropriately adjusted to take account of the kind and amount of such securities or other property so substituted for each Kaiser Share. The Indenture contains a provision entitling the Company to a release of any Trust Moneys from the Lien of the Indenture at any time or from time to time if: (i) the conditions set forth in clauses (i) and (ii) of the preceding paragraph are satisfied and (ii) there remains as Collateral immediately subsequent to any such release, an amount of Trust Moneys equal to the greater of (x) the Make-Whole Price with respect to the then outstanding principal amount of the Notes (if such release occurs prior to August 1, 2000) and (y) 110% of the then outstanding principal amount of the Notes. The Indenture entitles the Company to obtain a release of any Pledged Kaiser Shares from the Lien of the Indenture at any time and from time to time in connection with, and MAXXAM and the Company may permit Kaiser to effect, a merger or consolidation of Kaiser (or a successor thereto pursuant to this provision) into, or a sale or transfer of all or substantially all of the assets of Kaiser in any transaction or series of related transactions to, another person, or in connection with any other corporate reorganization of Kaiser (other than 158 161 a spin-off or other similar distribution of shares of Kaiser Stock to stockholders of MAXXAM or the Company) (a "Kaiser Transaction") if: (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release; (ii) the Trustee receives, as Collateral subject to the Lien of the Indenture, in substitution for such Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction; (iii) all holders of the common stock of Kaiser (or such successor) shall (subject to proration, customary treatment of fractional amounts and other similar adjustments) be entitled to receive substantially the same consideration in respect of their shares of Kaiser common stock pursuant to the terms of such Kaiser Transaction; and (iv) any non-money or non-Cash Equivalent consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction shall have been registered under the Securities Act to the extent required under federal securities law. Merger by MGI Notwithstanding any other provision of the Indenture, the Company may, at any time and from time to time, permit MGI to merge or consolidate into, or sell or transfer all or substantially all its assets in any transaction or series of transactions to, any Restricted Subsidiary if: (i) the Trustee receives, as Collateral subject to the Lien of the Indenture, the consideration distributed to the Company on the Pledged MGI Shares in such transaction or transactions; (ii) after giving effect to such transaction or transactions, the Collateral includes at least a majority of the Voting Stock and outstanding equity interests (on a fully diluted basis) of the person surviving such merger or consolidation or to whom such transfer is made, in a proportion at least equal to that in which the Voting Stock and outstanding equity interests of MGI were included in the Collateral immediately prior to such transaction or transactions; (iii) no Default exists or would exist immediately following such transaction or transactions after giving effect thereto on a pro forma basis; and (iv) the Company shall have delivered to the Trustee an Officers' Certificate stating that clause (iii) above is satisfied and stating that such transaction or transactions are otherwise permitted under this provision of the Indenture. Upon satisfaction of these requirements the Trustee will, if requested, release the Pledged MGI Shares from the Lien of the Indenture to the extent necessary to effect any transaction or transactions permitted under this provision; provided that any person surviving such merger or consolidation, or to whom such sale or transfer is made, will be deemed to be MGI for all purposes of the Indenture and will be a Restricted Subsidiary, and any owner of shares of Stock of such person that is either the Company or a Subsidiary of the Company will grant a security interest (of like tenor to the security interest granted on the Issue Date by the Company) in such shares of Stock and will expressly assume, by supplemental indenture to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations with respect to such shares applicable to the Company with respect thereto under Article 10 of the Indenture. Notwithstanding any other provision of the Indenture, MGI may, at any time and from time to time, merge or consolidate into, or transfer all or substantially all its assets in any transaction or series of transactions to, the Company. Release of Trust Moneys in the Cash Collateral Account The Indenture provides that the Company may obtain a release, at any time or from time to time, of any Trust Moneys held in the Cash Collateral Account to be applied, as the Company directs the Trustee in writing, to pay interest on the Notes (but only to the extent that the Trust Moneys so applied were derived from payments of interest on the Intercompany Note), to redeem Notes or to purchase Notes, in the open market or otherwise. Release upon Defeasance Upon satisfaction by the Company of the conditions to termination of certain of its obligations under the Indenture, as described below under "Discharge of the Indenture," the Lien of the Indenture on all Collateral will terminate and all of the Collateral will be released without any further action on part of the Trustee or any other person. 159 162 Application of Collateral upon a Notice of Acceleration and to Pay Certain Trustee Fees Notwithstanding any of the foregoing provisions, while a Notice of Acceleration is in effect, the Trustee shall apply any Trust Moneys deposited in the Accounts, first, to satisfy certain payment obligations to the Trustee under the Indenture, second, to make payments to holders of outstanding Notes, ratably, in respect of unpaid principal of and interest on the Notes and, third, to the Company. In addition, the Trustee may at any time satisfy certain payment obligations to it under the Indenture out of (i) Trust Moneys in the Cash Collateral Account or (ii) if at such time no Trust Moneys are in the Cash Collateral Account, Trust Moneys in the Cash Collateral Default Account. CHANGE OF CONTROL The Indenture provides that, upon the first Change of Control to occur after the date of the Indenture (but not upon any subsequent Change of Control), each holder of the Notes will have the right, at the holder's option, subject to the terms and conditions of the Indenture, to require the Company to purchase any or all of such holder's Notes, as described below, at a cash purchase price equal to 101% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest, if any, to (but not including) the scheduled date of purchase. For the definition of "Change of Control," see "-- Certain Definitions" below. A Change of Control under the Indenture could also constitute a change of control under instruments governing $235.0 million principal amount of indebtedness of Pacific Lumber (plus any indebtedness outstanding under the $60.0 million Pacific Lumber Credit Agreement), approximately $225.7 million principal amount ($201.0 million accreted value as of September 30, 1996) of indebtedness of MGI represented by the MGI Notes and approximately $859.0 million principal amount of indebtedness of Kaiser (plus any outstanding borrowings under the KACC 1994 Credit Agreement). A change of control under such instruments would enable the holders of such indebtedness to require repurchase of such indebtedness by Pacific Lumber, MGI and Kaiser. There can be no assurance that the assets of Pacific Lumber, MGI and Kaiser would be sufficient to enable them to effect such repurchases. In such event, there is a substantial risk that the value of the Collateral represented by the Pledged MGI Shares and any Pledged Kaiser Shares will have been substantially diminished or eliminated. In addition, these provisions could have limited applicability in the event of a leveraged buyout transaction initiated or supported by the Company, its management or an affiliate of the Company or its management. Within 30 days following the first occurrence of a Change of Control after the date of the Indenture, the Company is obligated to mail a notice to the Trustee, the Paying Agent and each holder of the Notes (and to beneficial owners as required by applicable law, including, without limitation, the rules and regulations of the Exchange Act) stating, among other things: (i) a brief description of the Change of Control and the date thereof; (ii) the date on which the Company is offering to purchase the Notes (the "Change of Control Purchase Date"), which will be no earlier than 30 days nor later than 60 days from the date such notice is mailed; (iii) the applicable purchase price offered by the Company; (iv) the procedures that a holder must follow in order to have its Notes purchased by the Company and a brief description of those rights; and (v) the procedures for withdrawing a Change of Control Purchase Notice (as defined below). To accept the offer to purchase, each holder of Notes must deliver written notice of the acceptance of such offer (a "Change of Control Purchase Notice") to the Paying Agent prior to the close of business on the third Business Day immediately preceding the Change of Control Purchase Date. The Change of Control Purchase Notice shall state: (i) the name of the holder of the Notes and the certificate numbers of the Notes to be delivered by the holder thereof for purchase by the Company; (ii) the portion of the principal amount of Notes to be purchased (which must be $1,000 or an integral multiple thereof) and (iii) that such Notes are to be purchased by the Company pursuant to the applicable provisions of the Notes and the Indenture. Any Change of Control Purchase Notice may be withdrawn by a holder of Notes by a written notice of withdrawal delivered to the Paying Agent on or prior to the close of business on the Business Day next preceding the Change of Control Purchase Date. The notice of withdrawal shall state the principal amount and the certificate number(s) of the Note(s) as to which the withdrawal notice relates and the principal amount, if any, which remains subject to a Change of Control Purchase Notice. 160 163 Payment by the Company for a holder's Notes for which a Change of Control Purchase Notice has been delivered and not withdrawn, or a portion thereof, is conditional upon delivery to the Paying Agent of the Notes described by the holder in its Change of Control Purchase Notice. The Company will comply with all applicable laws governing tender offers (including, without limitation, the Exchange Act and the applicable rules and regulations thereof) if a holder elects to exercise its option to have the Company purchase any or all of its Notes under the circumstances described herein. CERTAIN DEFINITIONS "Affiliate" of any person means (i) any person who, directly or indirectly, is in control of, is controlled by or is under common control with such person and (ii) any person who is a director or officer (A) of such person, (B) of any subsidiary of such person or (C) of any person described in clause (i) above, and shall be deemed to include any joint venture, partnership or other person (other than a Subsidiary of the Company) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and in which one or more Affiliates of the Company has a direct or an indirect equity ownership interest in excess of 5% therein other than by virtue of the direct or indirect equity ownership in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries; provided, however, that the term "Affiliate" shall not include (i) the Company or (ii) any Subsidiary of the Company so long as no Affiliate of the Company has a direct or indirect equity ownership interest equal to or greater than 5% in such Subsidiary other than by virtue of the direct or indirect equity ownership in such Subsidiary held (in the aggregate) by the Company and/or one or more of its Subsidiaries. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. The fact that an Affiliate of a person is a partner of a law firm that renders services to such person or its Affiliates does not mean that the law firm is an Affiliate of such person. "Asset Sale" means any sale, transfer or other disposition (including, without limitation, dispositions pursuant to any Taking, merger, consolidation or sale and leaseback transactions), after the Issue Date, by the Company or any of its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) to any person other than to the Company or any of its Restricted Subsidiaries of (i) any Capital Stock or other ownership interest of any of the Company's Restricted Subsidiaries (including sales, transfers or other dispositions by such Restricted Subsidiary of its Capital Stock or other ownership interest) or (ii) any other assets (other than any Capital Stock or ownership interests in any Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries, other than sales, transfers or other dispositions of assets in the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; provided, however, that the term Asset Sale shall not include (A) the sale, transfer or other disposition of any assets or Capital Stock or other ownership interest by the Company or its Restricted Subsidiaries if such transaction would have been an Asset Sale in the absence of this clause (A) to the extent the gross proceeds thereof (exclusive of indemnities) do not exceed, in aggregate amount with all other such sales, transfers or other dispositions after the Issue Date, $25,000,000 from and after the Issue Date (such proceeds, to the extent non-cash, to be determined in good faith by the Board of Directors), (B) the creation, incurrence, assumption or existence of any Lien to the extent not prohibited by the provision described below under "-- Certain Covenants -- Limitation on Liens," (C) any of the transactions governed by the provision described below under "-- Successor Company," (D) an exchange of assets, provided the assets received are to be used in the lines of business of the Company or any of its Restricted Subsidiaries on the Issue Date or reasonably related extensions of such lines and only to the extent such exchange qualifies for non-recognition treatment under the Code, (E) any transaction to the extent governed by the provisions described below under "-- Certain Covenants -- Limitation on Restricted Payments" or "-- Ownership of Capital Stock of Subsidiaries and Kaiser Shares," (F) the sale, transfer or disposition of Collateral under the Indenture, collateral under the MGI Indenture or any assets referred to in clause (vi) of the third paragraph under "-- Certain Covenants -- Limitation on Restricted Payments" or the proceeds of such assets or (G) any Primary Share Sale by MGI to the extent the Net Proceeds of such Primary Share Sale are distributed on the Pledged MGI Shares. 161 164 "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "Bering Agreement" means the investment management agreement, effective as of December 1, 1991, between Bering Holdings Inc. and each of MAXXAM, the Company, MGI, MPI and Pacific Lumber, as the same has been or may be amended, supplemented or otherwise modified from time to time in a manner that is not materially adverse to the Holders. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Britt" means Britt Lumber Co., Inc., a California corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "Business Day" means each day that is not a Legal Holiday. "Call Price" means, expressed as a percentage of principal amount, 110%. "Capital Lease Obligations" of any person means, as of any date of determination, any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such person prepared in accordance with GAAP as of such determination date (it being understood that the Capital Lease Obligations of the Company shall not include any such obligations attributable to any Unrestricted Subsidiary as of any determination date); the amount of such obligation shall be the capitalized amount thereof, determined in accordance with GAAP; and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock of such person, including any Preferred Stock of such person but excluding any Redeemable Stock of such person. "Cash Equivalents" means (x) when used in respect of any Trust Moneys (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company organized under the laws of the United States of America or any State thereof (including the Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in subclauses (i), (ii) or (iv) of this clause (x); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii) taxable or non-taxable auction rate securities which have interest rates reset on periodic short-term intervals (typically each 7, 14, 21, 28 or 49 days via a Dutch auction process) and which at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (viii) any investments hereafter developed which are substantially 162 165 comparable to those described above in this clause (x); and (y) otherwise (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company organized under the laws of the United States of America or any state thereof (including the Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in subclauses (i), (ii) or (iv) of this clause (y); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable auction rate securities commonly known as "money market rate notes" that at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (vii) any investments hereafter developed which are substantially comparable to those described above in this clause (y). "Change of Control" means the occurrence of any of the following events: (i) MAXXAM, directly or indirectly, not having (other than by reason of the existence of a Lien, but including by reason of the foreclosure of or other realization upon a Lien) direct or indirect sole beneficial ownership (as defined under Regulation 13d-3 of the Exchange Act as in effect on the date of the Indenture) of at least 40% of the total common equity, on a fully diluted basis, of the Company; provided, however, that such ownership by MAXXAM, directly or indirectly, of 30% or greater, but less than 40% of the total common equity, on a fully diluted basis, of the Company shall not be a Change of Control if MAXXAM, through direct representation or through persons nominated by it, controls a majority of the Board of Directors necessary to effectuate any actions by the Board of Directors; and provided, further, that the foregoing minimum percentages shall be deemed not satisfied if any person or group shall, directly or indirectly, own more of the total voting power entitled to vote generally in the election of directors of the Company than MAXXAM; (ii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than to a person that is a Subsidiary of MAXXAM both immediately before and immediately after giving effect to such transaction or to any of the Principals (as defined below) or to a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock beneficially owned by such group); (iii) the approval by the stockholders of the Company of a plan for the liquidation or dissolution of the Company other than into MAXXAM or a Subsidiary of MAXXAM; (iv) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than any of the Principals or a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock beneficially owned by such group), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of Voting Stock representing more than 35% of the voting power in the election of a majority of the directors of MAXXAM represented by all outstanding Voting Stock of MAXXAM; (v) the consummation of the first transaction (including, without limitation, any merger or consolidation) the result of which is that any 163 166 "person" (as defined above) other than a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock beneficially owned by such group) becomes the "beneficial owner" (as defined above), directly or indirectly, of Voting Stock representing more of the voting power in the election of a majority of the directors of MAXXAM represented by all outstanding Voting Stock of MAXXAM than is at the time represented by Voting Stock "beneficially owned" (as defined above) by the Principals; or (vi) the first day on which a majority of the members of the Board of Directors of MAXXAM are not Continuing Directors. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring Voting Stock of MAXXAM will be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of MAXXAM who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Principals" means Charles Hurwitz, his wife and lineal descendants, any trust for the benefit thereof, and/or any entity in which any one or more of such persons hold a 0% or more controlling interest. "Code" means the Internal Revenue Code of 1986, as amended (or any successor statute thereto), and the regulations promulgated thereunder, all as in effect from time to time. "Collateral" means, at any time of determination, all property upon which a Lien exists at such time in favor of the Trustee for the benefit of the Holders pursuant to Articles 5 and 10 of the Indenture, including pursuant to instruments executed and delivered in compliance with the provisions described above under "-- Security -- Merger by MGI," in the second sentence under "-- Security -- Collateral" and below under "-- Successor Company." "Collateral Default" means a Default consisting of the Company's failure to comply with any provision contained in Article 10 of the Indenture which (i) either (A) results in an impairment of the validity, perfection, or priority of the Lien of the Indenture with respect to any portion of the Collateral having a fair market value in excess of $1 million in the aggregate or (B) would be materially adverse in any way to the Holders (any Default consisting of the failure to make any offer required to be made pursuant to the provisions described above under "-- Security -- Offers to Purchase Notes with Certain Proceeds of Collateral" being deemed, without limitation, material for this purpose) and (ii) would constitute an Event of Default unless cured within the applicable cure or grace period set forth in the Indenture. "Consolidated Cash Flow Coverage Ratio" of the Company means, as of the date of the transaction giving rise to the need to calculate the Consolidated Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount of EBITDA for the immediately preceding four fiscal quarters for which financial information in respect thereof is available immediately prior to the Transaction Date to (ii) the aggregate Consolidated Interest Expense for the fiscal quarter in which the Transaction Date occurs and to be accrued during the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount of Indebtedness of the Company and its Restricted Subsidiaries reasonably expected by the Company to be outstanding on the Transaction Date and thereafter other than the Timber Notes), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Transaction Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date; provided that if the Company or any of its Restricted Subsidiaries is a party to any Interest Rate Protection Agreements which would have the effect of changing the interest rate on any Indebtedness of the Company or any of its Restricted Subsidiaries for such four quarter period (or a portion thereof), the resulting rate shall be used for such four quarter period or portion thereof; and provided, further, that any Consolidated Interest Expense with respect to Indebtedness Incurred or retired by the Company or any of its Restricted Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Indebtedness was so Incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs; and provided, further, that if, during the four fiscal quarters referred to in clause (i) of this definition, (A) the Company or any of its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or 164 167 increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (B) the Company or any of its Restricted Subsidiaries shall have acquired any material assets out of the ordinary course of business, EBITDA shall be calculated on a pro forma basis as if such asset acquisition and any related financing had occurred on the first day of such period. "Consolidated Income Tax Expense" of the Company means (without duplication), for any period, the aggregate of the income tax expense (net of applicable credits) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP other than income taxes (including credits) with respect to items of net income excluded from the definition of Consolidated Net Income. "Consolidated Interest Expense" of the Company means, for any period (without duplication), (i) the sum of (A) the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, (B) all fees, commissions, discounts and other charges of the Company and its Subsidiaries with respect to letters of credit and bankers' acceptances and the costs (net of benefits) associated with Interest Rate Protection Agreements for such period, determined on a consolidated basis in accordance with GAAP, and (C) dividends declared on Redeemable Stock of the Company or any Restricted Subsidiary held by persons other than the Company or a Wholly Owned Restricted Subsidiary (other than dividends payable in Capital Stock of the Company or pro rata dividends payable to all stockholders of such class or series of Stock payable in Capital Stock of any such Restricted Subsidiary), less (ii) the amortization or write-off of deferred financing costs by the Company and its Subsidiaries during such period, determined on a consolidated basis in accordance with GAAP (including, without limitation, the amortization of any unamortized deferred financing costs in connection with any refinancing of the Credit Agreement); in the case of clauses (i) and (ii) of this definition, without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as any Timber Notes are outstanding, during such period. "Consolidated Net Income" of the Company means, for any period, the aggregate net income (or net loss, as the case may be) of the Company and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP ("GAAP Net Income"); provided that (without duplication) there shall be excluded from GAAP Net Income (to the extent otherwise included therein) (i) gains and losses (net of applicable taxes) from (A) Asset Sales or reserves relating thereto, (B) any sale, transfer or other disposition of any Capital Stock or ownership interests in (x) Salmon Creek or (y) any Unrestricted Subsidiary to which non-cash proceeds received by the Company in respect of a Salmon Creek Distribution have been contributed by the Company as contemplated by the provision described in the fourth paragraph under "-- Certain Covenants -- Limitations on Restricted Payments," (C) the sale by the Company of any assets received by the Company in respect of a Salmon Creek Distribution or (D) any sale, transfer or other disposition of Kaiser Shares; (ii) items classified as extraordinary and gains and losses from discontinued operations; (iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any person that is not a Subsidiary of the Company or that is accounted for on the equity method of accounting, provided that in each case the amount of dividends or other distributions actually paid to the Company (other than Salmon Creek Distributions) during such period shall be added to Consolidated Net Income (to the extent, in the case of clause (A), that the Company elects to include such distributions in the computation of Consolidated Net Income at the time of the computation thereof) and the amount of dividends or other distributions actually paid to a Restricted Subsidiary of the Company (other than Salmon Creek Distributions) during such period shall be included in computing the net income (or net loss, as the case may be) of such Restricted Subsidiary, subject to clause (v) below (to the extent, in the case of clause (A), that the Company elects to include such distributions in the computation of Consolidated Net Income at the time of the computation thereof); (iv) except to the extent includable pursuant to clause (iii) of this definition, the net income (or loss) of any other person accrued or attributable to any period prior to the date it becomes a Subsidiary of the Company or is merged into or consolidated with the Company or any of its Subsidiaries or such other person's property (or a portion thereof) is acquired by the Company or any of its Subsidiaries; (v) the net income (or loss) of any Restricted Subsidiary during such period if and to the extent that the declaration or payment of dividends or 165 168 similar distributions by such Restricted Subsidiary to the Company or any Restricted Subsidiary of any such net income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or government regulation applicable to such Restricted Subsidiary, provided that the amount of dividends or other distributions actually paid to the Company by such Restricted Subsidiary (other than Salmon Creek Distributions) shall be added to Consolidated Net Income during such period and the amount of dividends or other distributions actually paid to a Restricted Subsidiary of the Company (the "Recipient Restricted Subsidiary") by such Restricted Subsidiary (other than Salmon Creek Distributions) shall be included in computing the net income (or net loss, as the case may be) of such Recipient Restricted Subsidiary during such period; and (vi) the transfer of the Kaiser Shares to the Company by MAXXAM; provided that there shall be excluded from Consolidated Net Income, to the extent otherwise included therein, the amount of dividends and distributions made with the net proceeds of any Equity Offering by any Subsidiary of the Company. "Credit Agreement" means the agreement dated November 10, 1995, between Bank of America, National Trust and Savings Association and Pacific Lumber, together with all related notes, letters of credit, collateral documents and guarantees and any other related agreements and instruments executed and delivered in connection therewith, in each case, as amended, supplemented, restated, restructured, renewed, extended, refinanced or otherwise modified, in whole or in part, from time to time. "Deed of Trust" means the Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993, from Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit of the Collateral Agent named therein, as the same has been or may be amended, supplemented or otherwise modified from time to time. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default as specified in the provisions described below in the second paragraph under "-- Events of Default; Notice and Waiver." "EBITDA" of the Company means, for any period, the sum for such period of Consolidated Net Income (excluding, to the extent included in Consolidated Net Income for such period, any gains (net of applicable taxes) from any sale, transfer or other disposition of any Capital Stock or ownership interests in any Unrestricted Subsidiary to which non-cash proceeds received by a Restricted Subsidiary in respect of a Salmon Creek Distribution have been contributed by a Restricted Subsidiary as contemplated by the provision described in the fourth paragraph under "-- Certain Covenants -- Limitation on Restricted Payments") plus, to the extent reflected in the income statement for such period from which Consolidated Net Income is determined, without duplication, (i) Consolidated Interest Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and depletion expense, (iv) amortization expense (including amortization of deferred financing costs), and (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Indebtedness prior to its stated maturity; (A) in the case of clauses (iii), (iv) and (v) of this definition, of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP for such period, but without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary during such period or to Scotia Pacific so long as any Timber Notes are outstanding, and (B) in the case of clauses (iv) and (v) of this definition, excluding the amounts thereof excluded from the definition of "Consolidated Interest Expense" pursuant to clause (ii) of such definition. "Equity Offering" means any sale, public or private, of equity securities of any person. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "Exempt Distribution" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any of the Pledged Shares other than: (i) any liquidating dividend or other liquidating distribution or other similar extraordinary dividend or distribution; (ii) any dividend or other distribution on Pledged MGI Shares (or on Stock of MGI's permitted successor pursuant to the provision described above under "-- Security -- Merger by MGI") if the amount of all dividends and other distributions on the Stock of MGI made on or after the Issue Date to and including the date of such 166 169 dividend or other distribution on such Pledged MGI Shares (other than dividends and distributions to the extent that such dividends or distributions were previously paid or delivered to the Trustee for inclusion in the Collateral, whether by deposit into an Account or otherwise, and other than amounts referred to in clauses (iv), (v) and (vi) below) exceeds 100% of the consolidated net income of MGI plus 100% of the consolidated depletion expense of MGI, each determined in accordance with GAAP, accrued on a cumulative basis subsequent to September 30, 1996; (iii) any dividend or other distribution on any Pledged Kaiser Shares to the extent of the amount, if any, by which all dividends and other distributions on such Pledged Kaiser Shares during the 12-month period ending on and including the date on which such dividend or distribution is paid (other than dividends and distributions to the extent that such dividends or distributions were previously paid or delivered to the Trustee for inclusion in the Collateral, whether by deposit into an Account or otherwise, and other than amounts referred to in clauses (iv), (v) and (vi) below) exceeds, on a per share basis, 7.5% of the average of the daily closing prices (or average bid and asked prices if closing prices are not available) of such Kaiser Shares over such consecutive 12-month period; (iv) any Salmon Creek Distribution; (v) any dividend or other distribution consisting of proceeds of any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale; and (vi) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with the provision described above in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares" or the provision described above under "-- Security -- Merger by MGI." Notwithstanding the foregoing, any dividend or other distribution made on any Pledged MGI Shares and received by the Company during any fiscal year shall be an Exempt Distribution if such dividend or distribution, together with all other dividends and other distributions previously so made during such fiscal year (exclusive of amounts referred to in clauses (iv), (v) and (vi) above), does not exceed 120% of the interest that has become payable or is to become payable on the Notes during such year. "Extraordinary Distribution" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any Pledged Shares other than: (i) an Exempt Distribution; (ii) any Salmon Creek Distribution; (iii) any dividend or other distribution consisting of proceeds of any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale; and (iv) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with the provision described above in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares" or the provision of the Indenture described above under "-- Security -- Merger by MGI." "GAAP" means, at any date, generally accepted accounting principles as in effect on December 31, 1995, and used in the preparation of the Company's consolidated balance sheet at such date and the Company's statements of consolidated income and cash flows for the year then ended. "Holder" or "Securityholder" means the person in whose name a Note is registered on the Registrar's books. "Indebtedness" of any person means, at any date, any of the following (without duplication): (i) the principal amount of all obligations (unconditional or contingent) of such person for borrowed money (whether or not there is recourse to the whole of the assets of such person or only to a portion thereof) and the principal amount of all obligations (unconditional or contingent) of such person evidenced by debentures, notes or other similar instruments (including, without limitation, reimbursement obligations with respect to letters of credit (except to the extent collateralized by cash or Cash Equivalents), performance bonds (except to the extent collateralized by cash or Cash Equivalents) and bankers' acceptances (except to the extent collateralized by cash or Cash Equivalents)); (ii) all obligations of such person to pay the deferred purchase price of property or services, except (A) accounts payable and other current liabilities arising in the ordinary course of business and (B) compensation, pension obligations and other obligations arising from employee benefits and employee arrangements; (iii) Capital Lease Obligations of such person; (iv) all Indebtedness of others secured by a Lien on any asset of such person (other than assets referred to in clause (vi) of the provision described in the third paragraph under "-- Certain Covenants -- Limitation on Restricted Payments" and the proceeds of such assets) whether or not such Indebtedness is assumed or guaranteed by such person; (v) all Indebtedness of others guaranteed by such person; and (vi) all Redeemable Stock, valued at the greater of its voluntary or involuntary maximum fixed repurchase price (or its stated liquidation value in the case of Preferred Stock that is not by its terms redeemable) exclusive of accrued and unpaid dividends; and the amounts thereof shall be 167 170 the outstanding balance of any such unconditional obligations as described in clauses (i) through (v) (other than clause (iv)), and the maximum liability of any such contingent obligations at such date as described in clauses (i) through (v) (other than with respect to clause (iv)), and, in the case of clause (iv), the lesser of the fair value (as determined by the Board of Directors) at such date of any asset subject to any Lien securing the Indebtedness of others and the principal amount of the Indebtedness secured; provided that the Indebtedness of any person shall not include (x) obligations of such person arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such obligations are extinguished within two Business Days after their Incurrence and (y) obligations of such person resulting from the endorsement of negotiable instruments in the ordinary course of business. For purposes of the Indenture, the "maximum fixed repurchase price" of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were purchased on any date on which Indebtedness is required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Redeemable Stock, such fair market value shall be determined in good faith by the board of directors of the issuer of such Redeemable Stock. "Intercompany Note" means that certain intercompany note, dated as of the Issue Date, payable by MAXXAM to the Company. "Interest Payment Default" means a default in the payment of interest when due and payable on any of the Notes which would constitute an Event of Default if such payment were not made within the applicable cure or grace period. "Interest Rate Protection Agreement" means any interest rate swap agreement, interest rate cap agreement, currency swap agreement or other financial agreement or arrangement designed to protect the Company or any Subsidiary of the Company against fluctuations in interest rates or currency exchange rates, as in effect from time to time. "Investment" means, with respect to any person (such person being referred to in this definition as the "Investor") (without duplication), (i) any amount paid or any property transferred, in each case, directly or indirectly, by the Investor for Capital Stock or Redeemable Stock, partnership interests or other securities of, or as a contribution to the capital of any other person, (ii) any direct or indirect loan or advance by the Investor to any other person other than accounts receivable of the Investor relating to the purchase and sale of property or services arising in the ordinary course of business, and (iii) any direct or indirect guarantee by the Investor of any Indebtedness of any other person. "Issue Date" means the date of initial issuance of Notes pursuant to the Indenture. "Kaiser" means Kaiser Aluminum Corporation, a Delaware corporation, and any successor pursuant to a transaction governed by and in accordance with the provision described in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares" or a similar provision of the MGI Indenture (see the second paragraph under "Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares"). "Kaiser Share Cash Equivalents" means (i) the amount of any Trust Moneys constituting proceeds of any Primary Share Sale by Kaiser or a Pledged Share Sale of Pledged Kaiser Shares or any Extraordinary Distribution on Pledged Kaiser Shares (or the proceeds of any non-cash consideration received in any such transaction) that are released from the Lien of the MGI Indenture and thereupon pledged under the Indenture as a result of such Trust Moneys not having been utilized to purchase MGI Notes pursuant to an offer by MGI to purchase MGI Notes at a price at least equal to the respective Call Prices of the MGI Notes or as a result of payment in full of the MGI Notes or defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, divided by (ii) the greater of (A) the Net Proceeds per share received by the Company with respect to Pledged Kaiser Shares released from the Lien of the MGI Indenture in the transaction that resulted in the deposit of such Trust Moneys thereunder and (B) $9.00 (as adjusted to reflect any subdivision, combination or reclassification of Kaiser Shares). To the extent that any of the Net Proceeds referred to in clause (ii)(A) of the preceding sentence are other than cash, the amount of such non-cash Net Proceeds 168 171 attributable to each Pledged Kaiser Share released from the Lien of the MGI Indenture for purposes of such clause (ii)(A) shall be determined by a nationally recognized investment banking firm selected by the Company based on the fair market value per share of such non-cash Net Proceeds received by the Company in such transaction. As used in this definition, each of the terms Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary Distribution, Trust Moneys, Call Prices and Net Proceeds has the meaning ascribed to such term in the MGI Indenture (as in effect on the date of the Indenture). "Kaiser Shares" means, at any time, the 27,938,250 shares of common stock, par value $.01 per share, of Kaiser owned by the Company, and, as of the Issue Date, pledged under the MGI Indenture, as such shares are (and any number thereof as utilized in the Indenture is) adjusted to reflect any subdivision, combination or reclassification (in a merger or otherwise) of such Kaiser shares on or after the Issue Date, and any securities or property substituted for such Kaiser Shares pursuant to any Kaiser Transaction (as such term is defined in the MGI Indenture as in effect on the date of the Indenture; see the second paragraph under "Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares") under the MGI Indenture. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required by applicable law to be open in the States of New York, California, Minnesota and Texas. "Lien" means, with respect to any asset, any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof) in respect of such asset. "Make-Whole Amount" with respect to a Note means an amount equal to the excess, if any, of (i) the present value of the remaining interest, premium and principal payments due on such Note as if such Note were redeemed on August 1, 2000, computed using a discount rate equal to the Treasury Rate plus 75 basis points, over (ii) the outstanding principal amount of such Note. "Treasury Rate" is defined as the yield to maturity at the time of the computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15 (519), which has become publicly available at least two Business Days prior to the date of the redemption notice or, if such Statistical Release is no longer published, any publicly available source of similar market data) most nearly equal to the then remaining maturity of the Notes assuming redemption of the Notes on August 1, 2000; provided, however, that if the Make-Whole Average Life of such Note is not equal to the constant maturity of the United States Treasury securities for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Make-Whole Average Life of such Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "Make-Whole Average Life" means the number of years (calculated to the nearest one-twelfth) between the date of redemption and August 1, 2000. "Make-Whole Price" with respect to any Note means the greater of (i) the sum of the outstanding principal amount and the Make-Whole Amount of such Note, and (ii) 110% of the outstanding principal amount of such Note. "MAXXAM" means MAXXAM Inc., a Delaware corporation, and, subject to the provisions described under "-- Guaranty," any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "money" or "U.S. Legal Tender" means such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. "MGI" means MAXXAM Group Inc., a Delaware corporation, and any successor Restricted Subsidiary pursuant to a transaction governed by and in accordance with the provision described above under "-- Security -- Merger by MGI." 169 172 "MGI Indenture" means the Indenture dated as of August 4, 1993, between MGI and Fleet National Bank, as successor to Shawmut Bank, N.A., as trustee, pursuant to which the MGI Notes were issued, as the same has been or may be amended, supplemented or otherwise modified from time to time. "MGI Notes" means the debt securities outstanding pursuant to, and whose terms are governed by, the MGI Indenture. "MPI" means MAXXAM Properties Inc., a Delaware corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "MXM Guaranty" means the Unconditional Guarantee of Payment and Performance dated June 17, 1991 to General Electric Capital Corp. by MAXXAM Inc. and MGI , as amended by agreements dated as of June 17, 1992 and December 30, 1992, as amended, supplemented or otherwise modified from time to time in a manner that is not materially adverse to the Holders. "Net Cash Proceeds" means cash payments received (but if received in a currency other than United States dollars, such payments shall not be deemed received until the earliest time at which such currency is converted into United States dollars) by the Company and/or any of its Restricted Subsidiaries (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, or the cash realization of any non-cash proceeds of any Asset Sale, but, in each case, only as and when, and to the extent, received by the Company or any of its Restricted Subsidiaries) from an Asset Sale, in each case and without duplication, net of (i) fees, expenses and other expenditures in connection with such Asset Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness retained, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Asset Sale or (B) associated with such assets and due in connection with such Asset Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Asset Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such assets which are the subject of such Asset Sale, (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in connection with or as a result of such Asset Sale, (v) with respect to any Asset Sale by a Restricted Subsidiary of the Company or any Primary Share Sale, the portion of such cash payments required to be paid to persons holding a minority interest in such Restricted Subsidiary and (vi) if such Asset Sale is a Primary Share Sale by MGI, any of the proceeds from such Primary Share Sale distributed by the issuer in such Primary Share Sale to its stockholders; provided, in each such case, such fees, expenses, expenditures and other amounts are not payable to an Affiliate of the Company. "Net Proceeds" means any property, assets or other consideration of any kind, whether tangible or intangible, received by the Company as a dividend or distribution on any Pledged Shares of proceeds of any Primary Share Sale by, or from any Pledged Share Sale of any of the Pledged Shares of, MGI or Kaiser, in each case and without duplication net of (i) fees, expenses and other expenditures in connection with such Pledged Share Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness assumed, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Pledged Share Sale or (B) associated with such assets and due in connection with such Pledged Share Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Pledged Share Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such shares which are the subject of such Pledged Share Sale and (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in 170 173 connection with or as a result of such dividend or distribution or Pledged Share Sale; provided, in each such case, such fees, expenses, expenditures and other amounts are not payable to an Affiliate of the Company; and provided, further, that, if other than cash, Net Proceeds shall have as their value for purposes of the Indenture their fair value as reasonably determined by the Board of Directors. "Notice of Acceleration" means a written notice delivered during the continuance of an Event of Default to the Company by the Trustee or by the holders of at least 25% in aggregate principal amount of Notes then outstanding, stating that an Event of Default has occurred and is continuing and that the principal amount of and accrued and unpaid interest, if any, on all of the Notes are due and payable; provided that a Notice of Acceleration shall be deemed to have been delivered and to be effective for all purposes under Article 10 of the Indenture upon the occurrence and during the continuance of certain events of bankruptcy with respect to the Company constituting Events of Default. "Officer" means the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary, an Assistant Secretary, the Controller or an Assistant Controller of the Company. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee, as the case may be. "Pacific Lumber" means The Pacific Lumber Company, a Delaware corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "Pacific Lumber Indenture" means the indenture, dated as of March 23, 1993, between Pacific Lumber and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, pursuant to which the Pacific Lumber Senior Notes were issued, as amended, supplemented or otherwise modified, or, in accordance with and subject to the provisions of the Indenture described below in the third paragraph under "-- Limitation on Indebtedness," restated, restructured, renewed or refinanced in whole or in part from time to time. "Pacific Lumber Senior Notes" means the debt securities outstanding pursuant to, and whose terms are governed by, the Pacific Lumber Indenture. "person" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Pledged Kaiser Shares" means, at any time, any Kaiser Shares which are included in the Collateral at such time, and any securities or other property substituted for Pledged Kaiser Shares pursuant to the provision described above in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares" included in the Collateral at such time. "Pledged MGI Shares" means, at any time, any shares of Stock of MGI included in the Collateral at such time, and any securities or other property substituted for Pledged MGI Shares pursuant to the provision described above under "-- Security -- Merger by MGI" included in the Collateral at such time. "Pledged Share Sale" means a sale to any person of Pledged Shares other than (i) a sale in connection with a transaction pursuant to and in accordance with the provision described above under "-- Security -- Merger by MGI," (ii) a sale in connection with a transaction pursuant to and in accordance with the provision described above in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares" or (iii) a sale of Pledged MGI Shares by the Company or one of its Subsidiaries to any of the Company's Subsidiaries, in which the purchaser becomes a pledgor with respect to such Pledged Shares pursuant to Article 10 of the Indenture. "Pledged Shares" means the Pledged MGI Shares and the Pledged Kaiser Shares. 171 174 "Preferred Stock," as applied to the Capital Stock or Redeemable Stock of any corporation, means Capital Stock or Redeemable Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock or Redeemable Stock, as the case may be, of any other class of such corporation. "Primary Share Sale" means (i) any issuance and sale of Stock by MGI other than to the Company or any of its Subsidiaries (provided that no issuance of Stock in connection with a transaction pursuant to and in accordance with the provision described above under "-- Security -- Merger by MGI" shall constitute a Primary Share Sale) and (ii) any issuance and sale of common stock by Kaiser (provided that no issuance of Stock in connection with a transaction pursuant to and in accordance with the provision described above in the fourth paragraph under "-- Security -- Release and Substitution of Pledged Kaiser Shares," or pursuant to and in accordance with any similar provision of the MGI Indenture as in effect on the date of the Indenture, shall constitute a Primary Share Sale). "Public Equity Offering" means an underwritten public offering of common stock of the Company or MGI (or the successor in a transaction with MGI pursuant to the provision described above under " -- Security -- Merger by MGI") pursuant to an effective registration statement filed pursuant to the Securities Act. "Redeemable Stock" of any person means any equity security of such person that by its terms is required to be redeemed prior to the final Stated Maturity of all principal of the Notes, or is redeemable at the option of the holder thereof at any time prior to the final Stated Maturity of all principal of the Notes and shall also include, in the case of the Company, all Preferred Stock of the Company's Restricted Subsidiaries. "Released Kaiser Shares" means (i) all or any portion of the Kaiser Shares transferred to the Company by MAXXAM as of the Issue Date (as such shares are (and any number thereof as utilized in the Indenture is) adjusted to reflect any subdivision, combination or reclassification (in a merger or otherwise) of such Kaiser Shares on or after the Issue Date) that are released after the Issue Date from the Lien of the MGI Indenture as a result of (a) payment in full of the MGI Notes, (b) defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, or (c) early retirement of a portion of the MGI Notes resulting in a release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant to Section 10.05(c)(1) thereof (see the first paragraph under "Description of Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares"); and (ii) all or any portion of any securities or other property substituted for Kaiser Shares under the MGI Indenture pursuant to a transaction described in the second paragraph under "Description of Principal Indebtedness -- MGI Notes -- Release and Substitution of Kaiser Shares" that are released from the Lien of the MGI Indenture as a result of an occurrence referred to in clause (a), (b) or (c) of the preceding clause (i); provided, however, that Kaiser Shares and other collateral released from the Lien of the MGI Indenture pledged to secure Indebtedness that refinances the MGI Notes (as permitted by the provision described in the third paragraph under " -- Security -- Collateral") shall not be deemed to be Released Kaiser Shares. "Restricted Investment" means any Investment in an Affiliate (other than any Unrestricted Subsidiary referred to in the provision described in the last paragraph under " -- Certain Covenants -- Limitation on Restricted Payments") of the Company, except for (i) the Intercompany Note and (ii) the Company's ownership of Kaiser Shares or any other asset that is included in the Collateral under the Indenture or the collateral under the MGI Indenture. "Restricted Subsidiary" means, as of any determination date, each of the Subsidiaries of the Company which is not as of such determination date an Unrestricted Subsidiary of the Company. "Salmon Creek" means Salmon Creek Corporation, a Delaware corporation, or any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise, which holds the Salmon Creek Property on the date of the Indenture but which may not acquire any other assets (other than assets incidental to the operation, disposition, management and maintenance of the Salmon Creek Property or assets received (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all 172 175 or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property), except in exchange for or out of the proceeds of the sale or disposition of the Salmon Creek Property. "Salmon Creek Distribution" means a dividend or other distribution identified as a "Salmon Creek Distribution" by the Company in writing to the Trustee at the time of such dividend or other distribution. The Indenture provides that the Company will not so identify any dividend or distribution, except for any dividends and other distributions on Pledged MGI Shares or on shares of Stock of any other Restricted Subsidiary of the Company of amounts or other consideration received by the Company or any of its Subsidiaries from any person or entity (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property. "Salmon Creek Property" means any of the property described on Exhibit C to the Indenture or any assets or Stock, in each case, held by Salmon Creek. "Scotia Pacific" means Scotia Pacific Holding Company, a Delaware corporation, and any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise. "Scotia Pacific Agreements" means any agreements between Scotia Pacific and Pacific Lumber or any Subsidiary of Pacific Lumber as the same may be amended after the date of the Indenture in accordance with the terms thereof, including, without limitation, the Master Purchase Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Additional Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Environmental Indemnification Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, and the Reciprocal Rights Agreement, dated as of March 18, 1993, among Scotia Pacific, Pacific Lumber and Salmon Creek. "Securities Act" means the Securities Act of 1933, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "Significant Subsidiary" means any Restricted Subsidiary of the Company which at the time of determination had, or any group of Restricted Subsidiaries which, if merged into each other at the time of determination, would at the time of determination have had, (i) assets which, as of the date of the Company's most recent quarterly consolidated balance sheet, constituted at least 10% of the Company's total assets on a consolidated basis as of such date, (ii) revenues for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total revenues on a consolidated basis for such period or (iii) EBITDA for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total EBITDA on a consolidated basis for such period (it being understood that for the purposes of clause (iii) of this definition, EBITDA of any Restricted Subsidiary or group of Restricted Subsidiaries of the Company for any period shall be that portion of the Company's total EBITDA attributable to such Restricted Subsidiary or group of Restricted Subsidiaries during such period). "Stated Maturity," when used with respect to the payment of any principal of, or accrued interest on, any Note, means the date specified in such Note as the fixed date on which such principal of or accrued interest on such Note is due and payable, as the case may be. "Stock" of any person means, collectively, the Capital Stock and the Redeemable Stock of such person. "Subsidiary" means, with respect to any person, (i) any corporation of which more than 50% of the outstanding Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of the corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries 173 176 of such person, or by such person and one or more other Subsidiaries of such person, or (ii) any other entity of which more than 50% of the outstanding equity ownership interests are at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries of such person, or by such person and one or more other Subsidiaries of such person. Notwithstanding the foregoing, neither Kaiser nor any Subsidiary of Kaiser shall be deemed a Subsidiary of the Company for any purpose under the Indenture unless ownership by the Company of more than 50% of the outstanding Capital Stock of Kaiser resulted from the acquisition (other than in connection with a Kaiser Transaction, a dividend or distribution on Capital Stock of Kaiser, a reclassification of shares of Capital Stock of Kaiser or any other transaction in which the Company or any Restricted Subsidiary of the Company receives Capital Stock or other securities of Kaiser in exchange for or in respect of other shares of Capital Stock or securities of Kaiser) by the Company of Kaiser Capital Stock after the Issue Date. "Taking" means any sale, transfer or other disposition of all or any part of the assets of the Company and its Restricted Subsidiaries that occurs by reason of condemnation or eminent domain or other similar proceedings exercised by, or by consensual transfer by the Company or its Restricted Subsidiaries of assets to, the United States of America or any State, municipality, agency or other governmental authority thereof. "Tax Sharing Agreements" means (i) the tax allocation agreement, dated May 21, 1988, by and among MAXXAM, Pacific Lumber and certain other subsidiaries of MAXXAM and MGI, as amended by the tax allocation agreement, dated as of March 23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek, and as further amended by the tax allocation agreement, dated as of August 4, 1993, by and between MAXXAM and MGI, (ii) the tax allocation agreement, dated as of July 3, 1990, by and between MAXXAM and Britt and (iii) the tax allocation agreement, dated as of the Issue Date, by and between MAXXAM and the Company; each as amended, supplemented or otherwise modified from time to time. "Timber Note Indenture" means the indenture, dated as of March 23, 1993, between Scotia Pacific and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, pursuant to which the Timber Notes were issued, as amended, supplemented or otherwise modified from time to time. "Timber Notes" means the 7.95% Timber Collateralized Notes due 2015, issued by Scotia Pacific as amended, supplemented or otherwise modified, in whole or in part, from time to time in accordance with the terms of the Timber Note Indenture. "Trustee" means the party named as such in the Indenture until a successor replaces it in accordance with the terms of the Indenture and, thereafter, means the successor. "Trust Moneys" has the meaning ascribed to such term in the first paragraph under " -- Security -- Deposit of Trust Moneys into Accounts." "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time, except with respect to matters concerning the validity and perfection of security interests of the Trustee in favor of the Holders in the Accounts, in which case such term shall mean the Minnesota Uniform Commercial Code as in effect from time to time. "Unrestricted Investments Outstanding" means, at any time of determination, in respect of any Unrestricted Subsidiary, the difference between (i) the sum of all Unrestricted Investments theretofore made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary after the date of the Indenture, minus (ii) the amount of all dividends and distributions paid to the Company or a Restricted Subsidiary (to the extent that the Company does not elect to include the amount of such dividends and distributions in the computation of Consolidated Net Income pursuant to the parenthetical of clause (iii) of the definition thereof at the time of determination), and all repayments of the principal amount of loans or advances by such Unrestricted Subsidiary to the Company or any of its Restricted Subsidiaries during the period that such person was an Unrestricted Subsidiary and any other reduction of Unrestricted Investments in such Unrestricted Subsidiary during the period that such person was an Unrestricted Subsidiary (the amount of any Unrestricted Investment returned or reduced, if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced 174 177 by a resolution of the Board of Directors filed with the Trustee); provided that the amount of Unrestricted Investments Outstanding in respect of any Unrestricted Subsidiary shall at no time be a negative amount. "Unrestricted Subsidiary" means (i) each of the Subsidiaries of the Company so designated by a resolution adopted by the Company's Board of Directors and whose creditors have no direct or indirect recourse (including, but not limited to, recourse with respect to the payment of principal or interest on Indebtedness of such Subsidiary) to the Company or a Restricted Subsidiary (except to the extent such recourse arises (A) solely by operation of law and not pursuant to a contractual or other consensual arrangement or (B) pursuant to an Investment or a Restricted Investment permitted by the Indenture), (ii) any joint venture, partnership or other person (other than a Subsidiary of the Company, Kaiser or a Subsidiary of Kaiser) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and (except for any Unrestricted Subsidiary referred to in the provision described in the last paragraph under " -- Certain Covenants -- Limitation on Restricted Payments") in which no Affiliate of the Company has a direct or an indirect equity ownership interest in excess of 5% therein other than by virtue of the direct or indirect equity ownership interest in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries and (iii) Salmon Creek. The Board of Directors may designate an Unrestricted Subsidiary to be a Restricted Subsidiary, provided that any such redesignation shall be deemed to be an Incurrence by the Company and its Restricted Subsidiaries of the Indebtedness (if any) of such redesignated Restricted Subsidiary for purposes of the covenant described below under " -- Certain Covenants -- Limitation on Indebtedness" as of the date of such redesignation to the extent that such Indebtedness does not already constitute Indebtedness of the Company or one or more of its Restricted Subsidiaries. Subject to the foregoing, the Board of Directors of the Company also may designate any Restricted Subsidiary (other than Scotia Pacific so long as there are any Timber Notes outstanding) to be an Unrestricted Subsidiary, provided that (x) the amount of any outstanding Investments by the Company and its Restricted Subsidiaries in such Restricted Subsidiary shall be deemed to be Unrestricted Investments Outstanding at the time of such designation and (y) immediately after giving effect to such designation and to the characterization of the Investments by the Company and its Restricted Subsidiaries in such newly designated Unrestricted Subsidiary, the Company and its remaining Restricted Subsidiaries could make at least $1.00 of additional Restricted Payments or Unrestricted Investments pursuant to the covenant described below under " -- Certain Covenants -- Limitation on Restricted Payments." "U.S. Governmental Obligations" means any evidence of obligations issued directly or fully guaranteed or insured by the United States of America or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "U.S. Legal Tender." See the definition of "money." "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled to vote in the election of directors. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary (i) which is a corporation of which all of the outstanding shares of Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the Company (except for director's qualifying shares), or (ii) which is any other entity of which all of the outstanding equity ownership interests are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the Company. CERTAIN COVENANTS Limitation on Indebtedness The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or become liable with respect to, contingently 175 178 or otherwise (collectively, "Incur"), any Indebtedness (including, without duplication, guarantees of Indebtedness by the Company and/or its Restricted Subsidiaries), except that the Company and its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur Indebtedness (including, without duplication, guarantees of Indebtedness by the Company and/or its Restricted Subsidiaries), if, immediately after giving effect thereto and the receipt and application of the proceeds thereof, the Consolidated Cash Flow Coverage Ratio of the Company would exceed 2.0 to 1. Notwithstanding the foregoing provision, the Company and/or its Restricted Subsidiaries (other than, except in the case of clauses (xi) and (xii) below, Scotia Pacific so long as there are any Timber Notes outstanding) may Incur (without duplication) the following: (i) Indebtedness in respect of the Notes; (ii) aggregate Indebtedness under the Credit Agreement in an amount not to exceed at any time outstanding $40,000,000; (iii) Indebtedness outstanding on the Issue Date, including the indebtedness outstanding pursuant to the MGI Indenture or the Pacific Lumber Indenture (other than the Timber Notes which are governed by clause (xi) below); (iv) Indebtedness in connection with one or more letters of credit issued pursuant to (A) self-insurance obligations (other than workmen's compensation obligations), the aggregate face or stated amount of which, together with the aggregate amount of any related reimbursement obligations (without duplication) does not exceed $1,000,000 at any time outstanding, and (B) workmen's compensation obligations; (v) Indebtedness owed by the Company to a Restricted Subsidiary or owed by a Restricted Subsidiary to the Company or to any other Restricted Subsidiary of the Company; (vi) Capital Lease Obligations (other than Capital Lease Obligations permitted by clause (xii) below) not exceeding in the aggregate $10,000,000 at any time outstanding; (vii) Indebtedness under any Interest Rate Protection Agreement to the extent that such Interest Rate Protection Agreement is related to payment obligations on Indebtedness otherwise permitted under the Limitation on Indebtedness covenant; (viii) Indebtedness Incurred in connection with Indebtedness the interest on which is exempt from federal income tax under the Code in an aggregate amount not exceeding $10,000,000 at any time outstanding; (ix) Indebtedness owed to or guaranteed by any governmental agency, instrumentality or other authority Incurred to provide relief from natural disasters or other similar assistance; (x) Indebtedness Incurred after August 4, 1993 (in addition to (and without duplication of) Indebtedness otherwise permitted by the Limitation on Indebtedness covenant), in an aggregate principal amount not exceeding $25,000,000 at any one time outstanding in the case of Indebtedness Incurred by Pacific Lumber and its Subsidiaries which are Restricted Subsidiaries, $15,000,000 at any one time outstanding in the case of Indebtedness Incurred by MGI and its Restricted Subsidiaries other than Pacific Lumber and its Subsidiaries that are Restricted Subsidiaries, and $7,500,000 at any one time outstanding in the case of Indebtedness Incurred by the Company; (xi) Indebtedness of Scotia Pacific under the Timber Notes or the Timber Note Indenture or in respect of the Scotia Pacific Agreements or any other agreement entered into in connection with the Timber Notes, as the same may be amended from time to time in accordance with the covenant described below under "Amendment of Scotia Pacific Agreements"; and (xii) Capital Lease Obligations of Scotia Pacific. Notwithstanding anything to the contrary in the two immediately preceding paragraphs, the Indenture permits the Company and its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) to Incur Indebtedness all of the net proceeds of which (after premiums, reasonable fees, expenses, and costs related to the Incurrence of such Indebtedness) are applied to renew, extend, restructure, restate, refund or otherwise refinance, in whole or in part (collectively "refinance"), the Indebtedness permitted by the provisions described in the first paragraph of this description of the limitation of Indebtedness or in clauses (i) and (iii) of the immediately preceding paragraph or any one or more successive refinancings thereof (collectively, "Refinancing Indebtedness"), provided that: (i) such Refinancing Indebtedness is in an aggregate amount not exceeding the aggregate amount outstanding of the Indebtedness being so refinanced plus an amount equal to the premiums, reasonable fees and expenses incurred in connection with such refinancing; (ii) with respect to Refinancing Indebtedness which refinances Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Notes, (A) the final stated maturity date of such Refinancing Indebtedness shall not be earlier than the final stated maturity date of the Indebtedness being so refinanced, (B) in the case of such Refinancing Indebtedness Incurred by the Company, such Refinancing Indebtedness is ranked (pursuant to its terms) subordinate in right and priority of payment to the Notes to the same extent as the Indebtedness being so refinanced, and 176 179 (C) such Refinancing Indebtedness has an Average Life at the time it is Incurred which is not less than the remaining Average Life of the Indebtedness being so refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing Indebtedness to refinance Indebtedness of the Company pursuant to the provisions described in this paragraph except to the extent that such Refinancing Indebtedness constitutes a guarantee by such Restricted Subsidiary of Indebtedness of the Company (it being understood that such Restricted Subsidiary may incur Indebtedness to refinance Indebtedness of the Company to the extent that the Incurrence of such Indebtedness is otherwise permitted by the provisions described in the preceding two paragraphs). Any revocation of the designation of an Unrestricted Subsidiary shall be deemed for purposes of the Limitation on Indebtedness covenant to be an Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of the Indebtedness of such Unrestricted Subsidiary as of the time of such revocation to the extent such Indebtedness does not already constitute Indebtedness of the Company or one of its Restricted Subsidiaries. Notwithstanding anything to the contrary in the foregoing, so long as Britt remains a Restricted Subsidiary, Britt may not Incur after the Issue Date Indebtedness (other than Indebtedness in respect of the Notes, the MGI Notes and Indebtedness owed to the Company or MGI and Refinancing Indebtedness in respect of the foregoing) in an aggregate principal amount exceeding $5,000,000 at any time outstanding. The Indenture contains no limitations on the amount of Indebtedness which any Unrestricted Subsidiary may incur, create, assume, guarantee or otherwise become liable. Limitation on Restricted Payments The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary, directly or indirectly, to, (i)(x) declare or pay any dividend or make any distribution on the Company's Capital Stock or the Company's Redeemable Stock (other than (A) in either case, dividends or distributions payable in Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness of the Company and (B) in the case of the Company's Redeemable Stock, dividends and distributions in an amount not exceeding (in addition to any dividends or distributions declared or paid in accordance with clause (A) above) the amount stated to be payable on such Redeemable Stock pursuant to the provisions thereof) or (y) purchase, redeem or otherwise acquire or retire for value any Capital Stock or Redeemable Stock of the Company (each of the foregoing in clauses (x) and (y) a "Restricted Payment"), (ii) make any Restricted Investment, (iii) make any Investment in an Unrestricted Subsidiary (an "Unrestricted Investment"), or (iv) redeem, repurchase, defease or otherwise acquire or retire for value (a "Repurchase"), prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Notes and which was scheduled to mature subsequent to the final stated maturity of all principal of the Notes (other than acquisitions of such Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such acquisition), if, at the time of such Restricted Payment, Restricted Investment, Unrestricted Investment or Repurchase: (A) a Default shall have occurred and be continuing; or (B) after giving effect to such Restricted Payment, Restricted Investment, Unrestricted Investment or Repurchase, by the Company or any Restricted Subsidiary, the aggregate amount (i) expended for all such Restricted Payments and Repurchases subsequent to the Issue Date, (ii) of all Restricted Investments then outstanding (the amount expended for such Restricted Payments, Repurchases and Restricted Investments subsequent to the Issue Date, the amount of any Restricted Investments outstanding at any time, and the amount of any Restricted Investments returned or reduced, in each case if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee), and (iii) of all Unrestricted Investments Outstanding, exceeds the sum of: (1) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis subsequent to September 30, 1996 (or, in case such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss), and (2) the aggregate net cash proceeds, received by the Company as capital contributions to the Company subsequent to September 30, 1996, or from the issue or sale (other than to a Subsidiary of the Company) subsequent to September 30, 1996 of Capital Stock (including Capital Stock issued upon the conversion of, or 177 180 in exchange for, Indebtedness or Redeemable Stock (other than that issued pursuant to clause (ii) of the penultimate paragraph under this description of the Limitation on Restricted Payments covenant) and including upon exercise of warrants or options or other rights to purchase such Capital Stock, issued subsequent to September 30, 1996), or from the issue or sale, subsequent to September 30, 1996 of any Indebtedness (other than that issued pursuant to clause (ii) of the penultimate paragraph under this description of the Limitation on Restricted Payments covenant) or, without duplication, other security of the Company convertible or exercisable into such Capital Stock that has been so converted or exercised. Transactions and payments which are permitted by the provisions described below in the second paragraph under " -- Limitation on Transactions with Affiliates" will not be considered Restricted Payments or Restricted Investments. The provisions of the Limitation on Restricted Payments covenant described above will not be violated by reason of: (i) the payment of any dividend or distribution or the redemption of any securities within 60 days after the date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, if at said date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, such dividend, distribution or redemption would have complied with the first paragraph under this description of the Limitation on Restricted Payments covenant and so long as no Event of Default exists as of the payment date; (ii) redemptions, repurchases, defeasances, acquisitions or retirements for value, of indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Notes from the proceeds of Refinancing Indebtedness permitted by the provision described above in the third paragraph under " -- Limitation on Indebtedness"; (iii) the acquisition, redemption or retirement of any shares of the Company's Capital Stock or any Indebtedness of the Company in exchange for, or in connection with a substantially concurrent issuance of, Capital Stock of the Company (provided such Capital Stock is not exchangeable for or convertible into Redeemable Stock or Indebtedness of the Company or any of its Subsidiaries); (iv) the repurchase of the Company's Capital Stock or Redeemable Stock with the proceeds of a substantially concurrent issuance of the Company's Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness of the Company; (v) the making by Pacific Lumber or its Restricted Subsidiaries of an Unrestricted Investment to the extent the amount of Unrestricted Investments Outstanding made pursuant to this clause (v) does not exceed $25 million, provided that none of the funds used by Pacific Lumber or its Restricted Subsidiaries to make any such Unrestricted Investment is obtained from the Company or any Restricted Subsidiary (other than Pacific Lumber or a Restricted Subsidiary of Pacific Lumber); (vi) dividends or distributions of (A) any Kaiser Shares that are either (x) released from the Lien of the Indenture pursuant to the provision described in the second paragraph under " -- Security -- Release and Substitution of Pledged Kaiser Shares" or (y) Released Kaiser Shares that are not required to be subjected to the Lien of the Indenture upon release from the Lien of the MGI Indenture or (B) cash, securities or other property received by the Company upon the sale of any such Kaiser Shares or (C) any proceeds of Kaiser Shares that are (x) released from the Lien of the Indenture or (y) released from the Lien of the MGI Indenture and not required to be subjected to the Lien of the Indenture upon such release; or (vii) the payment of any dividends or distributions by the Company with fifty percent (50%) of the fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee) of Salmon Creek Distributions received by the Company (less 50% of any income taxes payable by the Company in respect of the receipt by the Company of such Salmon Creek Distributions, or in respect of the sale or other disposition by the Company of any non-cash proceeds of such Salmon Creek Distributions (to the extent that Salmon Creek Distributions dividended or distributed by the Company are the proceeds of such sales or other dispositions)) provided that: (x) such dividends or distributions (to the extent made in cash) shall not exceed 50% of the amount of cash so received by the Company (including any cash realization of any non-cash proceeds of any Salmon Creek Distribution, but, in each case, only as, when, and to the extent, received by the Company) in respect of Salmon Creek Distributions, and (y) such dividends or distributions (to the extent made in kind with property received by the Company in a Salmon Creek Distribution) shall be valued at fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee, except to the extent the fair market value exceeds $10 million, in which case such determination shall be made by an investment banking firm with capital of at 178 181 least $250 million or a nationally recognized appraiser or other expert selected by the Company whose opinion shall be delivered, and shall be acceptable, to the Trustee). No payment or other transfer made pursuant to the provisions described in clauses (ii) through (vii) of this paragraph will reduce the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments or Repurchases under the provisions described in the first paragraph under this description of the Limitation on Restricted Payments covenant and the application of proceeds from the issuance of Capital Stock applied pursuant to the provision described in clause (iii) or (iv) of this paragraph will not reduce the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments or Repurchases under the provisions described in the first paragraph under this description of the Limitation on Restricted Payments covenant; provided, however, that the proceeds from the issuance of Capital Stock pursuant to the provisions described in clauses (iii) and (iv) of this paragraph will not increase the amount available for Restricted Payments, Unrestricted Investments, Restricted Investments and Repurchases under the provisions described in the first paragraph under this description of the Limitation on Restricted Payments covenant. Notwithstanding anything to the contrary contained in the Indenture (but subject to the covenant entitled " -- Limitation on Transactions With Affiliates"), the Company or any of its Restricted Subsidiaries shall be permitted to contribute any non-cash proceeds received in respect of a Salmon Creek Distribution to one or more Unrestricted Subsidiaries and such contribution(s) shall not constitute an Unrestricted Investment under the Indenture. Ownership of Capital Stock of Subsidiaries and Kaiser Shares The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia Pacific (it being understood that no issue, sale, assignment, transfer or other disposition of any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific) shall be deemed to violate the provision described in this clause (i) provided that Pacific Lumber thereafter continues to own directly all outstanding Stock of Scotia Pacific), (ii) any Capital Stock or Redeemable Stock of MGI, Pacific Lumber, Britt or MPI if immediately thereafter, or as a consequence thereof, the Company shall beneficially own, directly or indirectly, less than a majority of the Voting Stock and outstanding equity interests (on a fully diluted basis) of any such company (other than in a transaction governed by and in compliance with the provision described above under "-- Security -- Merger by MGI" or Section 10.13 of the MGI Indenture (as in effect on the date of the Indenture)), (iii) any assets of Scotia Pacific for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary, (iv) any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) (except to the Company or to one or more Restricted Subsidiaries) or any assets of any Restricted Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary unless, in the case of this clause (iv), immediately after giving effect thereto and the receipt and application of the proceeds therefrom, the Consolidated Cash Flow Coverage Ratio of the Company would be greater than 1.5 to 1; provided, however, that this provision shall permit, assuming compliance with certain provisions governing the release of Collateral described above under "-- Security" (including the provisions described under "-- Merger by MGI") and the provisions described below under " -- Successor Company," in each case to the extent applicable, the disposition in a single transaction or in a series of related transactions of all of the Capital Stock of any Restricted Subsidiary then owned by the Company or its Restricted Subsidiaries for a consideration consisting of cash or other property (other than Capital Stock or Redeemable Stock of another person) which is at least equal to the fair value (as reasonably determined by the Board of Directors of the Company) of such Capital Stock; and provided, further, that any entity resulting from any transaction or disposition permitted by the covenant described in clause (iv) of this paragraph shall be or become a Restricted Subsidiary. The Indenture also provides that, until such time as the maximum number of Kaiser Shares required to be pledged as Collateral pursuant to the Indenture are included in the Collateral, the Company shall not sell, transfer, assign, pledge or otherwise dispose of any Kaiser Shares (i) to a Subsidiary of the Company or to 179 182 MAXXAM or (ii) in violation of any of the provisions of the MGI Indenture. In addition, the Indenture provides that the Company shall not sell, transfer, assign, pledge or otherwise dispose of any Pledged Shares except pursuant to the provisions described under "-- Security -- Release for Pledged Share Sales," "-- Release and Substitution of Pledged Kaiser Shares" and "-- Merger by MGI" and under "-- Successor Company" and except for certain tax liens, liens arising by operation of law and judgment liens. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual restriction or encumbrance on the ability of any such Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or Redeemable Stock or any other interest or participation in, or measured by, its profits, in each case, owned by the Company, or pay any Indebtedness owed to the Company or any Restricted Subsidiary of the Company, (ii) make loans or advances to the Company or any Restricted Subsidiary of the Company, or (iii) make any transfer of any of its assets to the Company or a Restricted Subsidiary. The foregoing provisions will not prohibit encumbrances or restrictions now or hereafter existing under or by reason of: (i) the Indenture, the MGI Indenture or the Pacific Lumber Indenture; (ii) the Credit Agreement; (iii)(A) customary provisions restricting subletting or assignment of any lease of the Company or any Restricted Subsidiary of the Company, or (B) customary restrictions imposed on the transfer of copyrighted or patented materials or provisions in agreements that restrict the assignment of such agreement or any rights thereunder; (iv) any instrument governing Indebtedness or other obligations of a person acquired (whether pursuant to a purchase of stock or assets) by the Company or any Restricted Subsidiary or applicable to any assets so acquired at the time such person became a Subsidiary of the Company or such assets were acquired by the Company or a Restricted Subsidiary (excluding instruments entered into by such person in connection with, or in contemplation of, its becoming a Subsidiary of the Company or its assets being acquired by the Company or any Restricted Subsidiary, as the case may be), which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person or the property or assets of the person so acquired (including the Capital Stock or Redeemable Stock thereof) or any entity formed to effect such acquisition, and, in each case, the monetary proceeds thereof; (v) Indebtedness or other obligations existing on the Issue Date; (vi) the subordination (pursuant to its terms) in right and priority of payment to Indebtedness of the Company or any of its Restricted Subsidiaries of any Indebtedness owed by the Company or any Restricted Subsidiary of the Company to the Company or any of its other Restricted Subsidiaries, provided (A) the Indebtedness is permitted under the Indenture and (B) the Board of Directors has determined in good faith at the time of the creation of such encumbrance or restriction that such encumbrance or restriction would not singly or in the aggregate have a material adverse effect on the Holders of the Notes; (vii) restrictions imposed by covenants contained in any refinancing of Indebtedness or other obligations described in clauses (i), (ii), (iv), (v) and (ix) of this paragraph, provided that such restrictions are, in the good faith determination of the Board of Directors, on the whole, not materially more restrictive than such restrictions contained in such refinanced Indebtedness; (viii) restrictions imposed by applicable laws or regulations or pursuant to condemnation or eminent domain proceedings; (ix) restrictions on Scotia Pacific and/or any of its Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of Trust, the Timber Note Indenture or any other agreements entered into in connection with the Timber Notes, as the same may be amended in accordance with the provision of the Indenture described below under "-- Amendment of Scotia Pacific Agreements"; (x) an agreement which has been entered into for the sale or disposition of all or substantially all of the Stock or assets of a Restricted Subsidiary of the Company, provided, however, that such encumbrances or restrictions are limited to the Stock or assets being sold or disposed of; (xi) applicable law and agreements with foreign governments with respect to assets located in their respective jurisdictions; or (xii) customary provisions placing limitations on the payment of dividends on shares of stock contained in the terms of Preferred Stock instruments issued in compliance with the Indenture. Although there is no single established meaning of the phrase "all or substantially all of the Stock or assets" under the law governing the Indenture and the amount of Stock or assets that will constitute "all or substantially all of the Stock or assets" of a Subsidiary of the Company is not readily quantifiable, a determination as to whether 180 183 an agreement described in clause (x) of this paragraph has been entered into will depend on the percentage of issued and outstanding Stock or operating and total assets transferred, as the case may be, among other measurements, and the facts and circumstances of the transaction. In any particular transaction, this determination will be made by the Company, and, subject to the limitations on a Holder's rights to institute suit with respect to the Indenture or the Notes (as described below under "-- Events of Default; Notice and Waiver"), a Holder could institute an action to dispute the Company's determination in any particular transaction. The provisions of the first paragraph under this description of the Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries covenant do not prohibit Liens not prohibited by the provisions described below under "-- Limitation on Liens" or restrictions on the sale or other disposition of any property securing Indebtedness, provided that such Indebtedness is otherwise permitted by the Indenture. Limitation on Asset Sales The Indenture provides that neither the Company nor any Restricted Subsidiary thereof will consummate any Asset Sale unless (except in the case of an Asset Sale which is a Taking) (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair value of the assets subject to such Asset Sale (as reasonably determined by the Board of Directors), including the value of all non-cash consideration, and (ii) at least 75% of the aggregate consideration (excluding indemnities) received therefor by the Company or such Restricted Subsidiary is in the form of money or Cash Equivalents. The amount of any liabilities of the Company or any Restricted Subsidiary of the Company that is actually assumed by the transferee in such Asset Sale shall be deemed to be money for purposes of determining the percentage of money and Cash Equivalent consideration received by the Company and its Restricted Subsidiaries. When the Asset Sale Offer Amount (as defined below) exceeds $25,000,000, each holder of the Notes will have the right to require the Company to apply the total amount of such Asset Sale Offer Amount to purchase the Notes tendered pursuant to an offer by the Company to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, together with accrued and unpaid interest, if any, to (but not including) the date of purchase, in accordance with the procedures set forth in the Indenture. The Company will make such an offer in the form, and requiring the information, specified in the Indenture to the holders of the Notes (and to beneficial owners as required by applicable law, including the Exchange Act and the rules and regulations thereof) within 30 days following the date that the aggregate Asset Sale Offer Amount exceeds $25,000,000 (provided that the Company may in its discretion make such an offer before such $25,000,000 threshold is met). The procedures pursuant to which the Company will purchase the Notes, if a holder so elects, are substantially the same as those described above under " -- Change of Control," provided that, if the Asset Sale Offer Amount is insufficient to fund an offer to purchase all of the outstanding Notes tendered into such Offer, such offer may be an offer to purchase Notes on a pro rata basis. In no event will any Net Cash Proceeds that are subjected to an offer to purchase Notes be required to be subjected to more than one offer to purchase Notes. For purposes of the foregoing requirement, "Asset Sale Offer Amount" means the sum of the amount of Net Cash Proceeds from each Asset Sale by the Company and its Restricted Subsidiaries (excluding the amount of Net Cash Proceeds that has been subjected to a prior offer to purchase Notes in accordance with the foregoing requirement) that, on the 360th day following consummation of such Asset Sale (or the 540th day following the consummation of an Asset Sale to the extent that such Asset Sale is by MGI and/or any Subsidiary of MGI that is a Restricted Subsidiary (other than Pacific Lumber or any Subsidiary of Pacific Lumber that is a Restricted Subsidiary) and is governed by the terms of the MGI Indenture (an "MGI Asset Sale") or the 590th day following the consummation of an Asset Sale to the extent that such Asset Sale is by Pacific Lumber and/or any Subsidiary of Pacific Lumber that is a Restricted Subsidiary, other than Scotia Pacific so long as any Timber Notes are outstanding, and is governed by the terms of the Pacific Lumber Indenture (a "PL Asset Sale")), the Company and/or its Restricted Subsidiaries have not either: (i) reinvested, or entered into binding obligations (subject to customary closing and termination provisions) to reinvest, in additional assets to be used in one or more lines of business (including capital expenditures) in 181 184 which the Company and its Restricted Subsidiaries are engaged as of the Issue Date (or reasonably related extensions of such lines); or (ii) applied to make repayments or purchases of the Notes, the MGI Notes or the Pacific Lumber Senior Notes (or Indebtedness ranking pari passu in right and priority of payment with the Notes, the MGI Notes or the Pacific Lumber Senior Notes); provided that (x) Net Cash Proceeds of any MGI Asset Sale, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on the date of the Indenture) and applicable law on the earlier of (A) the 450th day following the consummation of such MGI Asset Sale and (B) the consummation of any offer to purchase MGI Notes which MGI is required to make with such Net Cash Proceeds pursuant to the MGI Indenture, (y) Net Cash Proceeds of any PL Asset Sale, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent (A) permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the Pacific Lumber Indenture and applicable law on the earlier of (1) the 450th day following the consummation of such PL Asset Sale and (2) the consummation of any offer to purchase Pacific Lumber Senior Notes which Pacific Lumber is required to make with such Net Cash Proceeds pursuant to the Pacific Lumber Indenture and (B) permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on the date of the Indenture) and applicable law on the earlier of (1) the 590th day following the consummation of such PL Asset Sale and (2) the consummation of any offer to purchase MGI Notes which MGI is required to make with such Net Cash Proceeds pursuant to the MGI Indenture, and (z) Net Cash Proceeds of any Primary Share Sale by MGI, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on the date of the Indenture) on the 270th day following the consummation of such Primary Share Sale. The foregoing will not apply to (i) a consolidation or merger of the Company or a transfer, conveyance, sale or lease of all or substantially all of the Company's assets, provided that any such transaction complies with the terms contained in the covenant described below under " -- Successor Company," or (ii) any transaction permitted by the covenant described above under " -- Limitation on Restricted Payments." Primary Share Sales generally will constitute Asset Sales, except for (i) Primary Share Sales effected by Kaiser and (ii) Primary Share Sales by MGI to the extent Net Proceeds thereof are distributed on the Pledged MGI Shares. Any Net Proceeds of a Primary Share Sale that are distributed on any Pledged Shares will be used to fund an offer to purchase Notes or optional redemption of Notes in accordance with the provisions described above under " -- Security -- Offers to Purchase Notes with Certain Proceeds of Collateral" and under " -- Security -- Release of Trust Moneys to Fund Optional Redemptions." The Company will comply with all applicable tender offer rules (including, without limitation, Sections 13(e) and 14(e) of the Exchange Act and the Rules and Regulations promulgated pursuant thereto) if a purchase option is triggered under the circumstances described herein. Limitation on Transactions with Affiliates The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries, Salmon Creek (or any successor to Salmon Creek or any transferee of substantially all of the assets of Salmon Creek so long as such successor or transferee is a Subsidiary of the Company) or any Unrestricted Subsidiary to which the Company or any of its Restricted Subsidiaries makes a contribution of non-cash proceeds received in respect of a Salmon Creek Distribution pursuant to the provision described in the last paragraph under "Limitation on Restricted Payments" (each, a "Company Party") to, enter into any transaction or transactions with any Affiliate of the Company, unless: (i) the terms thereof are not less favorable to the Company Party than those that could reasonably be obtained in a comparable transaction at such time with a person who is not an Affiliate of the Company; (ii) such transaction shall have been approved as meeting such standard, in good faith, by a majority of the members of the Board of Directors; and (iii) with respect to any transaction or series of related transactions involving payments and consideration in excess of $10,000,000, the Company shall have obtained and made available to the Trustee an opinion of a nationally recognized 182 185 investment banking firm stating that the terms of such transaction or series of transactions are fair from a financial point of view to the Company Party. The Company will deliver to the Trustee, within 60 days after the end of each fiscal quarter of the Company, an Officers' Certificate which will briefly describe and specify the aggregate dollar amount of transactions (other than the transactions set forth in the next paragraph, except in clause (vii) thereof) with Affiliates of the Company occurring during such fiscal quarter. The provisions contained in the foregoing paragraph do not apply to: (i) any transactions permitted by the provisions described above in the first paragraph, or in clauses (i), (v), (vi) and (vii) of the third paragraph, under " -- Limitation on Restricted Payments"; (ii) the execution and delivery of, performance of, and the making of any payments required by, the Tax Sharing Agreements; (iii) the execution and delivery of, performance of, and the making of any payments required by, the Bering Agreement; (iv) the making of payments to MAXXAM for reimbursement for actual services provided thereby to the Company and its Subsidiaries based on actual costs and an allocable share of overhead expenses consistent with prior practices; (v) compensation, indemnification and other benefits paid or made available to officers, directors and employees of any Company Party for services rendered in such person's capacity as an officer, director, or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and directors' and officers' liability insurance); (vi) execution and delivery of, the performance of, and the making of any payments required by, the MXM Guaranty; (vii) the execution, delivery and performance of, and the making of any payments or the taking of any action required or contemplated by, any agreements initially entered into by a Company Party with one or more Affiliates, in which MAXXAM (and no other Affiliate) has an equity interest of 30% or less (each, a "Headwaters Joint Venture") relating to the ownership, holding, development or disposition of any non-cash or non-Cash Equivalent property (whether an individual property or a group of properties) received by Pacific Lumber or any of its Subsidiaries as a Salmon Creek Distribution in connection with or relating to the transactions referred to in or contemplated by the information set forth above under the caption "Business of the Company -- Headwaters Agreement" (each, an "Initial Salmon Creek Agreement") provided that each Initial Salmon Creek Agreement satisfies the provisions described above in the foregoing paragraph and that each subsequent agreement entered into by a Company Party and any transaction between any Headwaters Joint Venture and any Affiliate subsequent to the execution of an Initial Salmon Creek Agreement that relate to the subject matter of such Initial Salmon Creek Agreement satisfies the provisions of clauses (i) and (ii) described above in the foregoing paragraph; provided, further, that (a) each such subsequent agreement involving payments and other consideration paid to or received by any Company Party, or involving payments and other consideration paid to or received from any Headwaters Joint Venture by any Affiliate, in excess of $10.0 million shall satisfy the requirements of the first paragraph of this " -- Limitation on Transactions with Affiliates" covenant, and (b) any material amendment of any Initial Salmon Creek Agreement or any such subsequent agreement shall be on terms (considered as a whole) no less favorable to any Company Party, relative to MAXXAM, than the terms of such Initial Salmon Creek Agreement; (viii) the execution, delivery and performance of any agreements granting any Lien permitted by the provision described in clause (xv) under " -- Limitation on Liens" or any amendment to any such agreement, to the extent that such agreement or amendment thereto does not create or evidence Indebtedness of the Company or any Restricted Subsidiary of the Company; and (ix) the making of the loan evidenced by the Intercompany Note and any amendment to the Intercompany Note to the extent such amendment does not materially adversely affect the Company's ability to pay its obligations on the Notes; in the case of clauses (iii) and (iv) of this paragraph, to the extent the aggregate amount of payments pursuant to such clauses does not exceed $5.0 million in any calendar year, which amount shall be adjusted for each calendar year, commencing with the calendar year beginning January 1, 1996 (each, an "Adjustment Period"), by multiplying such amount by a fraction, the numerator of which shall be the then most recent Producer Price Index (Lumber and Wood Products Commodity Groups) (Standard Industrial Classification No. 2400), as published by the United States Department of Labor, Bureau of Labor Statistics (the "PPI Index"), in effect on the first day of such Adjustment Period, and the denominator of which shall be the most recent PPI Index published as of January 1, 1993. 183 186 Limitation on Liens The Indenture provides that neither the Company nor any of its Restricted Subsidiaries will incur, assume, suffer to exist, create or otherwise cause to be effective Liens upon any of their respective assets to secure Indebtedness except: (i) Liens existing on the Issue Date; (ii) Liens securing all or any Indebtedness outstanding under the Credit Agreement; (iii) Liens incurred or pledges and deposits in connection with workers' compensation, unemployment insurance and other social security benefits, leases, appeal bonds and other obligations of like nature incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (iv) Liens imposed by law, including, without limitation, mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (v) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property or minor irregularities of title incident thereto, which do not in the aggregate have a material adverse effect on the operation of the business of the Company or its Restricted Subsidiaries taken as a whole; (vi) Liens for ad valorem, income or property taxes or assessments and similar charges either (A) not delinquent or (B) contested in good faith by appropriate proceedings and as to which the Company has set aside on its books reserves to the extent required by GAAP; (vii) Liens in respect of purchase money Indebtedness incurred to acquire assets or Stock provided that such Liens are limited to the assets or Stock acquired with the proceeds of such Indebtedness (and the proceeds of such assets or Stock); (viii) Liens securing Indebtedness permitted by the covenant described above under "-- Limitation on Indebtedness" which refinances secured Indebtedness, so long as such Liens are limited to the collateral which secures the Indebtedness being refinanced and the proceeds of such collateral; (ix) Liens on any assets or the Stock of any Subsidiary of the Company which assets or Stock are acquired by the Company or a Restricted Subsidiary subsequent to the date of the Indenture and which Liens were in existence on or prior to the acquisition of such assets or Stock of such Subsidiary (to the extent that such Liens were not created in contemplation of such acquisition); provided that such Liens are limited to the assets so acquired or the Stock of such acquired Subsidiary (or the entity organized to effect such acquisition) and the proceeds thereof; (x) Liens securing Indebtedness permitted by the provisions described above in clauses (vi), (viii), (ix) or (xii) of the second paragraph under "-- Limitation on Indebtedness"; provided, in each such case, that such Liens are limited to the assets financed with the proceeds of the Indebtedness incurred pursuant to such provisions (and the proceeds of such assets); (xi) Liens securing Indebtedness under any Interest Rate Protection Agreement permitted by the provisions described above in clause (vii) of the second paragraph under "-- Limitation on Indebtedness," provided that such Liens are limited to the collateral which secures the Indebtedness to which such Interest Rate Protection Agreement relates; (xii) Liens imposed pursuant to condemnation or eminent domain or substantially similar proceedings or in connection with compliance with environmental laws or regulations; (xiii) Liens granted pursuant to the Timber Notes, the Timber Note Indenture or the Deed of Trust, in connection with the Timber Notes or in connection with any of the Scotia Pacific Agreements, or in connection with any other agreement entered into in connection with the Timber Notes; (xiv) other Liens securing Indebtedness not exceeding $25,000,000 in aggregate principal amount; (xv) Liens on assets referred to in the provision described in clause (vi) of the third paragraph under "-- Limitation on Restricted Payments" and on the proceeds of such assets; and (xvi) Liens in favor of the Trustee pursuant to the Indenture, Liens in favor of the trustee under and pursuant to the MGI Indenture and Liens in favor of the trustee under and pursuant to the Pacific Lumber Indenture. Amendment of Scotia Pacific Agreements or Intercompany Note The Indenture provides that the Company will not permit Scotia Pacific to agree to amend the Timber Note Indenture, the Deed of Trust, or any of the Scotia Pacific Agreements, unless such amendment (i) is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of Scotia Pacific for the benefit of the Company or the Holders or to surrender any right or power conferred in the Master Purchase Agreement on Scotia Pacific, or (ii) does not materially adversely affect the ability of the Company to pay principal or interest on the Notes when due. The Indenture also provides that the Company will not agree to any amendment or modification of the Intercompany Note unless such amendment (i) is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of MAXXAM for the benefit of the 184 187 Company or the Holders or (ii) does not materially adversely affect the ability of the Company to pay principal or interest on the Notes when due. Limitation on Liens on Pledged Shares Except for certain tax Liens, Liens arising by operation of law and judgment Liens, the Company may not permit to exist, will defend the Pledged Shares and the Intercompany Note against, and will take such action as is necessary to remove, any Lien or claim on or in respect of any Pledged Shares and/or the InterCompany Note. Declaration and Payment of Dividends by MGI MGI shall, to the extent that there exists any consensual restriction or encumbrance on its ability to pay dividends or make any other distributions on its Capital Stock ("Dividend Encumbrances"), declare and pay dividends to its stockholders to the maximum extent permitted by the instruments or other agreements containing such Dividend Encumbrances, unless the Board of Directors of MGI determines in good faith (whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee) that the declaration or payment of such dividend would be detrimental to the capital and other operating needs of MGI. SUCCESSOR COMPANY The Indenture provides that, except as permitted by the provisions described above under "-- Security -- Merger by MGI," the Company may not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to, any person or group of related persons in a single transaction or series of related transactions, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions if such transaction or transactions in the aggregate would result in a transfer of all or substantially all of the assets of the Company and its Restricted Subsidiaries on a consolidated basis to any person other than the Company, unless (except as permitted by the provisions contained in Article 10 of the Indenture): (i) the resulting, surviving or transferee person (if other than the Company) is organized and existing under the laws of the United States of America or a State thereof or the District of Columbia and such entity expressly assumes by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture (in which event the Company (except in the event of a lease of all or substantially all of the Company's assets) shall be relieved of its obligations under the Indenture and the Notes) and such entity and/or each other person that, upon consummation of such transaction or transactions, obtains ownership of any portion of the Collateral (to the extent such Collateral is not released from the Lien of the Indenture in accordance with the terms thereof) grants a security interest in such Collateral (of like tenor to the security interest theretofore granted on the Issue Date with respect to such Collateral) and expressly assumes, by supplemental indenture to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company with respect to such Collateral set forth in Article 10 of the Indenture; (ii) immediately after giving effect to such transaction, no Default shall have occurred and be continuing, (iii) except in the case of a merger, or a transfer of all or substantially all assets, of a Restricted Subsidiary into or to the Company or into or to another Restricted Subsidiary, immediately after giving effect to such transaction, the Consolidated Cash Flow Coverage Ratio of the Company or the surviving entity would exceed 2.0 to 1.0, (iv) the Company shall have delivered to the Trustee an Officers' Certificate to the foregoing effect and an Opinion of Counsel, stating that such consolidation, merger or transfer, conveyance or lease (other than the calculation of the Consolidated Cash Flow Coverage Ratio as to which counsel need not opine) and such supplemental indenture comply with the Indenture; and (v) the Lien of the Indenture on the Collateral in favor of the Trustee for the benefit of Holders of the Notes has not been materially impaired in contravention of the provisions of the Indenture as a result of such transaction or transactions, provided that MGI may merge or consolidate with or transfer substantially all of its assets to a Restricted Subsidiary of the Company pursuant to a transaction in compliance with the provisions described above under "-- Security -- Merger by MGI." Each person that becomes a pledgor with respect to any Collateral upon consummation of such transaction or 185 188 transactions will succeed to, and may exercise every right and power of, the Company with respect to such Collateral prior to such consummation with the same effect as if such person had originally been a pledgor with respect to such Collateral under the Indenture and each person who ceases to be such a pledgor upon such consummation will be relieved of its obligations as a pledgor under the Indenture. Although there is no single established meaning of the phrase "all or substantially all of the assets" under the law governing the Indenture and the amount of assets that will constitute "all or substantially all" of the assets of the Company and its Restricted Subsidiaries on a consolidated basis is not readily quantifiable, a determination as to whether such a sale, lease, conveyance or other disposition has occurred will depend on the percentage of operating and total assets transferred, among other measurements, and other facts and circumstances of the transaction. Based upon the foregoing factors, it is possible that a sale, lease, conveyance or other disposition of a significant amount of assets by the Company would not be deemed to constitute a sale, lease, conveyance or other disposition of "all or substantially all" of the assets of the Company and, subject to the limitations on a Holder's rights to institute suit with respect to the Indenture (as described under "Events of Default; Notice and Waiver"), a Holder could institute an action to dispute the Company's determination in any particular transaction. EVENTS OF DEFAULT; NOTICE AND WAIVER The Indenture provides that if an Event of Default occurs and is continuing, the Trustee, or the holders of at least 25% of the aggregate principal amount of the Notes then outstanding may declare the principal amount of and accrued interest on all the Notes to be due and payable. In the case of certain events of bankruptcy or insolvency the principal of and interest on all the Notes then outstanding will automatically become and be immediately due and payable. Under certain circumstances specified in the Indenture, the holders of a majority in aggregate principal amount of the Notes then outstanding, by notice to the Trustee, may rescind an acceleration and its consequences. An "Event of Default" under the Indenture includes: (i) failure of the Company to pay interest for a period of 30 days or principal when due on any of the Notes; (ii) the failure of the Company to perform any other covenant or agreement contained in the Indenture for 60 days after notice (other than a covenant or agreement on the part of the Company, a default in whose performance or breach is specifically addressed elsewhere in the "Event of Default" provisions); (iii) a payment default at final maturity or acceleration of payment of any indebtedness of the Company, or any Restricted Subsidiary thereof, in an aggregate principal amount exceeding $10,000,000; (iv) certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary; and (v) a final judgment or order for the payment of money aggregating in excess of $10,000,000 (to the extent not covered by insurance) being rendered against the Company or any Restricted Subsidiary and not discharged within 60 days after such judgment or order becomes final and non-appealable. A holder of the Notes may not pursue any remedy with respect to the Indenture or the Notes unless: (1) the holders of at least 25% of the aggregate principal amount of the Notes then outstanding give to the Trustee written notice stating that an Event of Default is continuing; (2) the holders of at least 25% of the aggregate principal amount of the Notes then outstanding make a written request to the Trustee to pursue the remedy; (3) such holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense to be incurred in complying with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity and such Event of Default has not been cured or waived; and (5) the holders of a majority of the aggregate principal amount of the Notes then outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A holder of the Notes may not use the Indenture to prejudice the rights of another holder of the Notes or to obtain a preference or priority over another holder of the Notes. Where any event occurs which, with the giving of notice and the lapse of time, would become an Event of Default under clauses (iii) or (v) above, the Company is required under the Indenture to deliver to the Trustee, within 30 days after the occurrence thereof, an Officers' Certificate regarding that event. Such notice must specify the status of such event and what action the Company is taking or proposes to take with respect thereto. The Indenture further provides that the Company must deliver an Officers' Certificate within 186 189 120 days after the end of each fiscal year stating whether the signers know of any Default that occurred during such period and, if so, describing the Default and its status. REPORTS TO HOLDERS OF THE NOTES MAXXAM is, and the Company is not, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Whether or not the Company and MAXXAM are subject to such requirements, each of the Company and MAXXAM shall file with the Commission (unless the Commission will not accept the same for filing) and the Trustee, within fifteen days after it is or would have been required to file the same with the Commission, copies of such annual reports and such information, documents and other reports as it would file if it were subject to the requirements of Section 13 or 15(d) of the Exchange Act. In addition, the Company and MAXXAM have agreed that, for so long as any Notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. AMENDMENT, SUPPLEMENT AND WAIVER Subject to certain exceptions, the Indenture and the Notes may be amended, supplemented or otherwise modified with the consent of the holders of at least a majority (or, in the case of an amendment, supplement or other modification of the provisions of Article 10 of the Indenture, which relates to the Collateral, at least 66 2/3%) of the aggregate principal amount of the Notes then outstanding and any past default or compliance with any provisions may be waived with the consent of the holders of at least a majority of the aggregate principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, no amendment, supplement, other modification or waiver may, among other things: reduce the amount of Notes whose holders must consent to an amendment, supplement, other modification or waiver; reduce the rate of or extend the stated maturity of any payment of interest on any Note; reduce the principal amount (at maturity or any other time) of or extend the Stated Maturity of any payment of principal of any Note, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; reduce the premium payable upon the redemption of any Note, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; or make any Note payable in money other than that stated in the Note. The right of any Holder to receive payment of principal and interest in the Notes held by such Holder on or after the respective due dates expressed therein, or to bring suit for enforcement of any such payment on or after such respective due dates, may not be impaired or affected without such Holder's consent; provided that no Holder shall have the right to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral created by the Indenture. Without the consent of any holder of the Notes, the Company and the Trustee may amend, supplement or otherwise modify the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company or MAXXAM thereunder, to comply with certain provisions of Article 10 of the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes, to add to the covenants of the Company for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Company under the Indenture, to comply with the Trust Indenture Act or to make any change that does not adversely affect the rights of any holder of the Notes. DISCHARGE OF THE INDENTURE The Indenture permits the Company to terminate the majority of its obligations under the Indenture, other than the obligation to pay interest on and the principal of the Notes and certain other obligations, at any time, if (i) it irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient for the payment of principal and interest on the Notes to maturity or redemption, as the case may be, and (ii) it complies with certain other conditions, including delivery to the Trustee of an opinion of counsel relating to certain events of bankruptcy, and an opinion of counsel or a ruling received from the Internal Revenue Service to the effect that holders of the Notes will not recognize income, gain or loss for federal 187 190 income tax purposes as a result of the exercise of such right and will be subject to federal income tax in the same amount and in the same manner and at the same times as would have been the case otherwise, provided that the Company will not be required to deliver to the Trustee such an Opinion of Counsel upon the exercise of this option within one year of either the Stated Maturity or a date fixed for redemption of the Notes. In addition, the Indenture permits the Company to terminate the majority of its obligations under the Indenture (including its obligations to pay interest on and the principal of the Notes), at any time, if all of the Notes have been delivered to the Trustee for cancellation or if (i) the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption and (ii) the Company has irrevocably deposited or caused to be deposited with the Trustee an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal and interest to the stated maturity or redemption. In such case, holders of the Notes must look to the deposited money for payment. CONCERNING THE TRUSTEE First Bank National Association is to be the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Notes. TAX TREATMENT BY COMPANY The Company will treat the Notes as debt for federal income tax purposes. BOOK-ENTRY; DELIVERY AND FORM Except as set forth below, the New Notes will initially be represented by a single, permanent global Note, in definitive, fully registered form without interest coupons (the "Global New Note") and will be deposited with the Trustee as custodian for DTC and registered in the name of Cede, or such other nominee as DTC may designate. The Global New Note (and any New Note issued in exchange therefor) will be subject to certain restrictions on transfer set forth therein and in the Indenture and will bear the respective legends regarding such restrictions set forth under the heading "Notice to Investors." New Notes that are (i) originally issued to or transferred to institutional "accredited investors" who are not "qualified institutional buyers" (as such terms are defined under "Notice to Investors"), (ii) except as described below, purchased by or transferred to Persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act or (iii) held by qualified institutional buyers who elect to take physical delivery of their Notes (and which are then unable to trade through DTC) (collectively, the "Non-Global Purchasers") will be issued in the form of registered definitive certificates (the "Certificated New Notes"). Upon the transfer to a qualified institutional buyer of Certificated New Notes initially issued to a Non-Global Purchaser, such Certificated New Notes may, unless the Global New Note has previously been exchanged for Certificated New Notes, be exchanged for an interest in the Global New Note representing the principal amount of New Notes being transferred. Certificated New Notes will be subject to certain restrictions on transfer set forth therein and in the Indenture and will bear the respective legends regarding such restrictions set forth under the heading "Notice to Investors." DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provision of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). 188 191 Upon the issuance of the Global New Note, DTC or its custodian will credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global New Note to the accounts of persons who have accounts with DTC. Such accounts initially will be designated by or on behalf of the Initial Purchasers. Ownership of beneficial interests in the Global New Note will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in the Global New Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). So long as DTC or its nominee is the registered owner or holder of the Global New Note, DTC or such nominee, as the case may be, will be considered the sole record owner or holder of the Note represented by such Global New Note for all purposes under the Indenture and such New Note. No beneficial owners of an interest in the Global New Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of the principal of, premium, if any, and interest on the Global New Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Company, MAXXAM, the Trustee, nor the paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global New Note or for maintaining, supervising or reviewing any records of such beneficial ownership interest. The Company expects that DTC or its nominee, upon receipt of any payment of principal, premium, if any, or interest in respect to the Global New Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial ownership interests in the principal amount of such Global New Note, as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global New Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in accordance with DTC rules. If an owner of New Notes requires physical delivery of Certificated New Notes for any reason, including to sell New Notes to persons in states that require such delivery of such New Notes or to pledge such New Notes, such owner must transfer its interest in the Global New Note, in accordance with the normal procedures of DTC and the procedures set forth in the Indenture. None of the Company, MAXXAM or the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Subject to certain conditions, any person having a beneficial interest in the Global New Note may, upon request to the Trustee, exchange such beneficial interest for Certificated New Notes. Upon any such issuance, the Trustee is required to register such Certificated New Notes in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). All such Certificated New Notes would be subject to the legend requirements described herein under "Notice to Investors." In addition, if DTC is at any time unwilling or unable to continue as a depositary for the Global New Note and a successor depositary is not appointed by the Company within 90 days, the Company will issue Certificated New Notes in exchange for the Global New Note, which, in the case of New Notes issued in exchange for the Global New Notes will bear the legend referred to under the heading "Notice to Investors." 189 192 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion sets forth the material anticipated federal income tax consequences expected to result to holders from the acquisition, ownership and disposition of the New Notes. This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations, judicial authority and administrative pronouncements, all of which are subject to change, possibly with retroactive effect. No ruling has been or will be requested by the Company from the Internal Revenue Service (the "Service") on any matters relating to the New Notes, and there can be no assurance that the Service will have a similar view with respect to the tax consequences described below. The following discussion is for general information only. The tax treatment of a holder of the New Notes may vary depending upon such holder's particular situation. The discussion only addresses the tax consequences to holders who acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes as capital assets and does not deal with special classes of holders, such as insurance companies, tax-exempt organizations, financial institutions, dealers in securities, foreign corporations and persons who are not citizens or residents of the United States, that may be subject to special rules not discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS. THE EXCHANGE OFFER The exchange of the New Notes for the Old Notes pursuant to the Exchange Offer should not be taxable to a holder thereof for federal income tax purposes. An exchanging holder's tax basis in the New Notes should be equal to his adjusted tax basis in the Old Notes, and the holding period of the New Notes should include the holding period of the Old Notes. ORIGINAL ISSUE DISCOUNT AND STATED INTEREST The Old Notes were issued and the New Notes will be issued without original issue discount. Stated interest on the Old Notes and New Notes will be taxable to a holder as ordinary interest income at the time it is accrued or paid in accordance with such holder's method of accounting for tax purposes. BOND PREMIUM ON THE NEW NOTES If a holder of a New Note purchased the Old Notes for an amount in excess of the amount payable at the maturity date (or a call date, if appropriate) of the Old Notes, the holder may deduct such excess as amortizable bond premium over the aggregate terms of the Old Notes and the New Notes (taking into account earlier call dates, as appropriate), under a yield-to-maturity formula. The deduction is available only if an election is made by the purchaser or is in effect. This election is revocable only with the consent of the Service. The election applies to all obligations owned or subsequently acquired by the holder. The holder's adjusted tax basis in the Old Notes and the New Notes will be reduced to the extent of the deduction of amortizable bond premium. Except as may otherwise be provided in future regulations, under the Code the amortizable bond premium is treated as an offset to interest income on the Old Notes and the New Notes rather than as a separate deduction item. MARKET DISCOUNT ON THE NEW NOTES Tax consequences of a disposition of the New Notes may be affected by the market discount provisions of the Code. These rules generally provide that if a holder acquired the Old Notes (other than in an original issue) at a market discount which equals or exceeds 1/4 of 1% of the stated redemption price of the Old Notes at maturity multiplied by the number of remaining complete years to maturity and thereafter recognizes gain upon a disposition (or makes a gift) of the New Notes, the lesser of (i) such gain (or appreciation, in the case of a gift) or (ii) the portion of the market discount which accrued while the Old Notes or New Notes were held by such holder will be treated as ordinary income at the time of the disposition (or gift). For these 190 193 purposes, market discount means the excess (if any) of the stated redemption price at maturity over the basis of such Old Notes or New Notes immediately after their acquisition by the holder. A holder of the New Notes may elect to include any market discount (whether accrued under the Old Notes or the New Notes) in income currently rather than upon disposition of the New Notes. This election once made applies to all market discount obligations acquired on or after the first taxable year to which the election applies, and may not be revoked without the consent of the Service. A holder of any New Note who acquired the Old Note at a market discount generally will be required to defer the deduction of a portion of the interest on any indebtedness incurred or maintained to purchase or carry such Old Note or New Note until the market discount is recognized upon a subsequent disposition of such New Note. Such a deferral is not required, however, if the holder elects to include accrued market discount in income currently. REDEMPTION OR SALE OF THE NEW NOTES Generally, any redemption or sale of the New Notes by a holder should result in taxable gain or loss equal to the difference between the amount of cash and the fair market value of property received (except to the extent that such cash or property received is attributable to accrued, but previously untaxed, interest) and the holder's tax basis in the New Notes. The tax basis of a holder of the New Notes should generally be equal to the price paid for the Old Notes exchanged therefor, plus any accrued market discount on the New Notes (and the Old Notes exchanged therefor) included in the holder's income prior to sale or redemption of the New Notes, or reduced by any amortizable bond premium applied against the holder's income prior to sale or redemption of the New Notes. Such gain or loss generally would be long-term capital gain or loss if the holding period exceeded one year, except to the extent it constitutes accrued market discount. BACKUP WITHHOLDING AND INFORMATION REPORTING A 31% "backup" withholding tax and information reporting requirements apply to certain payments of interest and original issue discount on an obligation, and to proceeds of the sale of an obligation before maturity, to certain non-corporate holders. The Company, and/or any paying and/or collection agent, including a broker, as the case may be, will be required to withhold from any payment that is subject to backup withholding a tax equal to 31% of such payment unless the holder furnishes its taxpayer identification number (i.e., social security number in the case of an individual) in the manner prescribed in applicable Treasury regulations, certifies that such number is correct, certifies (with respect to payments of interest) as to no loss of exemption from backup withholding and meets certain other conditions. Backup withholding, however, in any event, generally does not apply to payments to certain "exempt recipients" such as corporations. THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. 191 194 PLAN OF DISTRIBUTION Each broker-dealer that holds Old Notes that were acquired for its own account as a result of market making or other trading activities (other than Old Notes acquired directly from the Company), may exchange Old Notes for New Notes in the Exchange Offer. However, any such broker-dealer may be deemed to be an "underwriter" within the meaning of such term under the Securities Act and must, therefore, acknowledge that it will deliver a prospectus in connection with any resale of New Notes received in the Exchange Offer. This prospectus delivery requirement may be satisfied by the delivery by such broker-dealer of this Prospectus, as it may be amended or supplemented from time to time. The Company has agreed that, for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus, as amended or supplemented, available to any broker-dealer who receives New Notes in the Exchange Offer for use in connection with any such sale. The Company will not receive any proceeds from any sales of New Notes by broker-dealers. New Notes received by broker-dealers for their own accounts pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale of New Notes by broker-dealers may be made directly to a purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. In addition, if any Eligible Holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such Eligible Holder cannot rely on the position of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in the Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and similar no-action or interpretive letters issued to third parties, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Company has agreed to pay all expenses incident to the Exchange Offer other than commissions or concessions of any brokers or dealers and will indemnify Eligible Holders (including any broker-dealer) against certain liabilities, including liabilities under the Securities Act. By acceptance of the Exchange Offer, each broker-dealer that receives New Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior to using the Prospectus in connection with the sale or transfer of New Notes, and acknowledges and agrees that, upon receipt of notice from the Company of the happening of any event which makes any statement in the Prospectus untrue in any material respect or which requires the making of any changes in the Prospectus in order to make the statements herein not misleading (which notice the Company agrees to deliver promptly to such broker-dealer), such broker-dealer will suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented prospectus to such broker-dealer. 192 195 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company incorporates herein by reference the following documents filed with the Commission under the Exchange Act: All documents and reports subsequently filed by the Company or the Guarantor pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to termination of the transactions to which this Prospectus relates shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents or reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded, except as so modified or superseded, shall not be deemed to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, on the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference, other than exhibits to such documents unless they are specifically incorporated by reference into such documents. Requests for such copies should be directed to: MAXXAM Group Holdings Inc., 5847 San Felipe, Suite 2600, Houston, Texas 77057, Attention: General Counsel. LEGAL MATTERS The validity of the New Notes and the Guaranty will be passed upon for the Company by Kramer, Levin, Naftalis & Frankel, New York, New York. EXPERTS The audited financial statements and schedule included or incorporated by reference in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. 193 196 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------ AUDITED FINANCIAL STATEMENTS OF THE COMPANY MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES Report of Independent Public Accountants........................................... F-3 Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-4 Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993................................................................... F-5 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................................... F-6 Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993................................................ F-7 Notes to Consolidated Financial Statements......................................... F-8 UNAUDITED QUARTERLY FINANCIAL INFORMATION OF THE COMPANY MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheet at September 30, 1996................................... F-29 Consolidated Statement of Operations for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-30 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-31 Condensed Notes to Consolidated Financial Statements............................... F-32 Unaudited Summary Quarterly Financial Data......................................... F-38 AUDITED FINANCIAL STATEMENTS OF MAXXAM MAXXAM INC. AND SUBSIDIARY COMPANIES Report of Independent Public Accountants........................................... F-39 Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-40 Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993............................................................. F-41 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................................... F-42 Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993................................................ F-43 Notes to Consolidated Financial Statements......................................... F-44 UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MAXXAM MAXXAM INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheet at September 30, 1996................................... F-78 Consolidated Statement of Operations for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-79 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-80 Condensed Notes to Consolidated Financial Statements............................... F-81 Unaudited Summary Quarterly Financial Data......................................... F-88 CONDENSED FINANCIAL INFORMATION OF MAXXAM MAXXAM INC. -- Parent Only (Unconsolidated) Audited Information: Report of Independent Public Accountants........................................ F-89 Balance Sheet at December 31, 1995 and 1994..................................... F-90 Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993.... F-91 Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.... F-92 Notes to Financial Statements................................................... F-93
F-1 197
PAGE ------ Unaudited Information: Balance Sheet at September 30, 1996............................................. F-94 Statement of Operations for the Nine Months Ended September 30, 1996 and 1995... F-95 Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995... F-96 Notes to Unaudited Financial Statements......................................... F-97 AUDITED FINANCIAL STATEMENTS OF KAISER KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Report of Independent Public Accountants........................................... F-98 Consolidated Balance Sheets at December 31, 1995 and 1994.......................... F-99 Statement of Consolidated Income (Loss) for the Years Ended December 31, 1995, 1994 and 1993........................................................................ F-100 Statement of Consolidated Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................................... F-101 Notes to Consolidated Financial Statements......................................... F-102 UNAUDITED QUARTERLY FINANCIAL INFORMATION OF KAISER KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Consolidated Balance Sheets at September 30, 1996.................................. F-126 Statement of Consolidated Income for the Nine Months Ended September 30, 1996 and 1995............................................................................ F-127 Statement of Consolidated Cash Flows for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-128 Notes to Interim Consolidated Financial Statements................................. F-129 Unaudited Summary Quarterly Financial Data......................................... F-134 AUDITED FINANCIAL STATEMENTS OF MGI MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES Report of Independent Public Accountants........................................... F-135 Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-136 Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993........................................................................ F-137 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993........................................................................ F-138 Consolidated Statement of Stockholder's Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993................................................ F-139 Notes to Consolidated Financial Statements......................................... F-140 UNAUDITED QUARTERLY FINANCIAL INFORMATION OF MGI MAXXAM GROUP INC. AND SUBSIDIARY COMPANIES Consolidated Balance Sheet at September 30, 1996................................... F-156 Consolidated Statement of Operations for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-157 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1996 and 1995........................................................................ F-158 Condensed Notes to Consolidated Financial Statements............................... F-159 Unaudited Summary Quarterly Financial Data......................................... F-163
F-2 198 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder and Board of Directors of MAXXAM Group Holdings Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholder's equity (deficit) for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Group Holdings Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Notes 7 and 8 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. ARTHUR ANDERSEN LLP San Francisco, California December 23, 1996 F-3 199 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ----------------------- 1995 1994 --------- --------- (IN THOUSANDS OF DOLLARS) ASSETS Current assets: Cash and cash equivalents.......................................... $ 48,396 $ 48,575 Marketable securities.............................................. 36,568 19,514 Receivables: Trade........................................................... 20,576 23,170 Other........................................................... 1,624 7,435 Inventories........................................................ 81,181 73,375 Prepaid expenses and other current assets.......................... 7,101 3,717 --------- --------- Total current assets....................................... 195,446 175,786 Timber and timberlands, net of depletion of $139,554 and $123,942 at December 31, 1995 and 1994, respectively........................... 312,983 325,223 Property, plant and equipment, net................................... 101,033 104,206 Deferred financing costs, net........................................ 27,288 30,096 Deferred income taxes................................................ 67,208 70,631 Restricted cash...................................................... 31,367 32,402 Other assets......................................................... 5,542 6,122 --------- --------- $ 740,867 $ 744,466 ========= ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable................................................... $ 4,166 $ 3,703 Accrued interest................................................... 25,354 25,765 Accrued compensation and related benefits.......................... 9,611 10,622 Deferred income taxes.............................................. 11,489 14,231 Other accrued liabilities.......................................... 4,435 3,266 Long-term debt, current maturities................................. 14,195 13,670 --------- --------- Total current liabilities.................................. 69,250 71,257 Long-term debt, less current maturities.............................. 764,310 768,786 Other noncurrent liabilities......................................... 33,813 30,365 --------- --------- Total liabilities.......................................... 867,373 870,408 --------- --------- Contingencies Stockholder's deficit: Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued............................................. 1 1 Additional capital................................................. 89,767 89,767 Accumulated deficit................................................ (216,274) (215,710) --------- --------- Total stockholder's deficit................................ (126,506) (125,942) --------- --------- $ 740,867 $ 744,466 ========= =========
The accompanying notes are an integral part of these financial statements. F-4 200 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 -------- -------- --------- (IN THOUSANDS OF DOLLARS) Net sales: Lumber and logs......................................... $216,898 $227,430 $ 215,743 Other................................................... 25,694 22,199 17,696 -------- -------- -------- 242,592.. 249,629 233,439 -------- -------- -------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation)........................................ 127,124 129,598 134,563 Selling, general and administrative expenses............ 15,884 16,250 20,108 Depletion and depreciation.............................. 25,296 24,685 24,545 -------- -------- -------- 168,304 170,533 179,216 -------- -------- -------- Operating income.......................................... 74,288 79,096 54,223 Other income (expense): Investment, interest and other income................... 9,393 14,367 9,992 Interest expense........................................ (77,824) (77,383) (81,870) -------- -------- -------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles........................ 5,857 16,080 (17,655) Credit (provision) in lieu of income taxes................ (1,621) 3,150 3,584 -------- -------- -------- Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles................................... 4,236 19,230 (14,071) Loss from net assets transferred to MAXXAM, net of minority interests and related income taxes............. -- -- (272,016) -------- -------- -------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles.............. 4,236 19,230 (286,087) Extraordinary items: Loss on litigation settlement, net of related credit in lieu of income taxes of $6,312....................... -- (14,866) -- Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $16,211............ -- -- (31,467) Cumulative effect of changes in accounting principles: Cumulative effect of changes in accounting principles attributable to equity in loss of Kaiser............. -- -- (240,954) Postretirement benefits other than pensions, net of related credit in lieu of income taxes of $1,566..... -- -- (2,348) Accounting for income taxes............................. -- -- 22,818 -------- -------- -------- Net income (loss)......................................... $ 4,236 $ 4,364 $(538,038) ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 201 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 -------- -------- --------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ 4,236 $ 4,364 $(538,038) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation........................... 25,296 24,685 24,545 Amortization of deferred financing costs and discounts on long-term debt........................ 13,328 12,127 7,435 Net (purchases) sales of marketable securities....... (19,533) 5,321 12,389 Net gains on marketable securities................... (4,175) (1,669) (6,414) Loss from net assets transferred to MAXXAM, net...... -- -- 272,016 Extraordinary loss on early extinguishment of debt, net................................................ -- -- 31,467 Cumulative effect of changes in accounting principles, net.................................... -- -- 220,484 Decrease (increase) in inventories, net of depletion.......................................... (7,695) 3,634 (2,077) Increase in accounts payable......................... 463 832 471 Decrease (increase) in receivables................... 5,778 (7,660) 7,558 Decrease (increase) in prepaids and other assets..... (3,384) (528) 212 Decrease (increase) in accrued and deferred income taxes.............................................. 2,713 (3,349) (4,095) Increase (decrease) in other liabilities............. 7,734 (2,283) (185) Decrease in accrued interest......................... (411) (451) (7,284) Other................................................ 1,020 (86) 848 -------- -------- -------- Net cash provided by operating activities....... 25,370 34,937 19,332 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment of note receivable from affiliate............... 2,500 -- -- Net proceeds from sale of assets........................ 18 1,149 256 Capital expenditures.................................... (9,852) (11,322) (11,120) Increase in net assets transferred to MAXXAM............ -- -- (11,770) -------- -------- -------- Net cash used for investing activities.......... (7,334) (10,173) (22,634) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions, repurchase of and principal payments on long-term debt....................................... (14,300) (13,237) (716,551) Net borrowings (payments) under revolving credit agreements........................................... -- (2,900) 2,900 Incurrence of financing costs........................... (150) (213) (34,738) Proceeds from issuance of long-term debt................ -- -- 790,000 Restricted cash deposits (withdrawals), net............. 1,035 1,160 (33,562) Dividends paid.......................................... (4,800) -- (20,000) -------- -------- -------- Net cash used for financing activities.......... (18,215) (15,190) (11,951) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (179) 9,574 (15,253) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 48,575 39,001 54,254 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 48,396 $ 48,575 $ 39,001 ======== ======== ======== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings (payments) for marketable securities........................................... $ (6,648) $ 5,628 $ 1,020 Timber and timberlands acquired subject to loan from seller............................................... 615 910 -- Net assets transferred to MAXXAM........................ -- -- 30,531 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest.............. $ 64,907 $ 65,707 $ 80,188 Income taxes paid (refunded)............................ (5,190) 1,170 46 Tax allocation payments to MAXXAM....................... -- 397 1,722
The accompanying notes are an integral part of these financial statements. F-6 202 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
COMMON RETAINED STOCK ADDITIONAL EARNINGS ($1.00 PAR) CAPITAL (DEFICIT) TOTAL ----------- ---------- --------- --------- (IN THOUSANDS OF DOLLARS) Balance, January 1, 1993........................... $ 1 $ 89,737 $ 368,495 $ 458,233 Net loss......................................... -- -- (538,038) (538,038) Dividend......................................... -- -- (20,000) (20,000) Gain from issuance of Kaiser Aluminum Corporation common stock.................................. -- 30 -- 30 Net assets transferred to MAXXAM................. -- -- (30,531) (30,531) --- ------- --------- --------- Balance, December 31, 1993......................... 1 89,767 (220,074) (130,306) Net income....................................... -- -- 4,364 4,364 --- ------- --------- --------- Balance, December 31, 1994......................... 1 89,767 (215,710) (125,942) Net income....................................... -- -- 4,236 4,236 Dividend......................................... -- -- (4,800) (4,800) --- ------- --------- --------- Balance, December 31, 1995......................... $ 1 $ 89,767 $(216,274) $(126,506) === ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-7 203 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FORMATION OF MGHI MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to facilitate the offering of Senior Secured Notes. Subsequent to its formation, MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further, concurrent with the consummation of the Private Offering of $130,000 aggregate principal amount of the Company's Senior Secured Notes due 2003 as described in Note 6, MAXXAM transfered to the Company, as an additional capital contribution, 27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock representing a 34.7% interest in Kaiser on a fully diluted basis. The contribution of MGI's capital stock has been accounted for as a reorganization of entities under common control, which requires MGHI to record the assets and liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the successor entity to MGI and as such, the accompanying consolidated financial statements of MGHI and its subsidiaries (together, the "Company") reflect both the historical operating results of MGI and MAXXAM's purchase accounting adjustments which principally relate to MGI's timber and depreciable assets. The purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The contribution of the Kaiser common stock has been reflected in the consolidated financial statements of the Company as if such contribution occurred as of the beginning of the earliest period presented, at MAXXAM's historical cost using the equity method of accounting. The Company conducts its business primarily through the operations of its subsidiaries, including MGI. FORMATION OF THE FOREST PRODUCTS GROUP Prior to the Forest Products Group Formation (as defined below), MGI operated in three industries: aluminum, through its majority owned subsidiary, Kaiser, a fully integrated aluminum producer, forest products, through The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real estate management and development, through the Palmas del Mar development located in Puerto Rico ("Palmas") which was owned by MGI's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the consummation of the sale of the MGI Notes (as defined in Note 6), MGI (i) transferred to MAXXAM 50 million common shares of Kaiser held by a subsidiary of MGI, representing MGI's (and MAXXAM's) entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of MAXXAM common stock held by a subsidiary of MGI, (iii) transferred to MAXXAM certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to MGI of approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being in satisfaction of a $15,000 promissory note evidencing a cash loan made by MAXXAM to MGI in January 1993. On the same day, MAXXAM assumed approximately $17,500 of certain liabilities of MGI that were unrelated to MGI's forest products operations or were related to operations which have been disposed of by MGI. Additionally, on September 28, 1993, MGI transferred to MAXXAM its interest in Palmas. The foregoing transactions are collectively referred to as the "Forest Products Group Formation." MGI presented the loss from net assets transferred to MAXXAM pursuant to the Forest Products Group Formation (including certain allocated costs from MAXXAM for general and administrative expenses unrelated to MGI's forest products operations) in a manner similar to that which would have been presented if MGI had discontinued the operations relating to such net assets. See Note 2. As a result of the Forest Products Group Formation, MGI and therefore the Company is engaged in forest products operations conducted through its wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in several principal aspects of the lumber industry, including the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the manufacture of lumber into a variety F-8 204 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) of finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which is obtained from Pacific Lumber. Housing, construction and remodeling are the principal markets for the Company's lumber products. Export sales generally constitute less than 4% of forest product sales. A significant portion of forest product sales are made to third parties located west of the Mississippi river. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 10 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. BASIS OF PRESENTATION The consolidated financial statements include the accounts of MGHI and its subsidiaries. MGHI is a wholly owned subsidiary of MAXXAM. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to be consistent with the current year's presentation. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities Marketable securities are carried at fair value. Prior to December 31, 1993, marketable securities portfolios were carried at the lower of cost or market at the balance sheet date. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income for each of the three years ended December 31, 1995 were: 1995 -- net unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net unrealized holding losses of $1,094 and net realized gains of $2,763; and 1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized losses and net unrealized gains of $841. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out ("LIFO") method. F-9 205 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Timber and Timberlands Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount initially deposited into an account (the "Liquidity Account") held by the trustee under the indenture governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific Lumber. See Note 6. The Liquidity Account is not available, except under certain limited circumstances, for Scotia Pacific's working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 6) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. Investment, interest and other income for the years ended December 31, 1995, 1994 and 1993 includes interest of approximately $2,560, $2,638 and $2,101, respectively, attributable to an investment rate agreement (at 7.95% per annum) with the financial institution which holds the Liquidity Account. At December 31, 1995 and 1994, cash and cash equivalents include $19,742 and $19,439, respectively, (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 6). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Stockholder's Equity (Deficit) The adjustment to the Company's additional capital for the year ended December 31, 1993 resulted from a transaction relating to Kaiser's common stock prior to the Forest Products Group Formation. Pursuant to the terms of an amended compensation plan, Kaiser issued 4,228 shares to certain members of its management in 1993. As a result of this transaction, MGI's equity in Kaiser's net assets differed from MGI's historical cost. MGI accounted for this difference as an adjustment to additional capital. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the Timber Notes, the 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes" and together F-10 206 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) with the MGI Senior Notes, the "MGI Notes"), and on the current rates offered for borrowings similar to the other debt. The Timber Notes, the Pacific Lumber Senior Notes and the MGI Notes are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575 Marketable securities (held for trading purposes)............................... 36,568 36,568 19,514 19,514 Restricted cash........................... 31,367 31,367 32,402 32,402 Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
F-11 207 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 2. NET ASSETS TRANSFERRED TO MAXXAM As a result of the Forest Products Group Formation (as described in Note 1), MGI transferred all of its interest in Kaiser's common stock, the assets and related liabilities of Palmas, and certain other net assets that were unrelated to MGI's forest products operations, to MAXXAM. MGI did not incur any gain or loss relating to the transfer of such assets and liabilities to MAXXAM. The net loss from net assets transferred to MAXXAM is as follows:
SEVEN MONTHS ENDED JULY 31, 1993 ------------ Net sales: Aluminum operations................................................... $1,016,966 Real estate and other................................................. 19,654 ---------- 1,036,620 ---------- Cost and expenses: Aluminum operations................................................... 1,091,353 Real estate and other................................................. 28,132 ---------- 1,119,485 ---------- Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................. (82,865) Credit for income taxes................................................. 31,050 Minority interests...................................................... 3,641 ---------- Loss before extraordinary item and cumulative effect of changes in accounting principles................................................. (48,174) Extraordinary item: Loss on redemption of debt, net of related benefits for income taxes and minority interests of $11,249 and $2,791, respectively......... (19,045) Cumulative effect of changes in accounting principles: Postretirement and postemployment benefits, net of related benefits for income taxes and minority interests of $108,271 and $29,406, respectively....................................................... (200,670) Accounting for income taxes........................................... (4,127) ---------- Loss from net assets transferred to MAXXAM.............................. $ (272,016) ==========
F-12 208 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Net assets transferred to MAXXAM are as follows as of the date of transfer: Current assets: Aluminum operations.................................................... $ 780,791 Real estate and other.................................................. 16,480 ---------- 797,271 ---------- Current liabilities: Aluminum operations.................................................... 477,805 Real estate and other.................................................. 28,853 ---------- 506,658 ---------- Net current assets....................................................... 290,613 ---------- Non-current assets: Aluminum operations.................................................... 1,722,362 Real estate and other.................................................. 56,422 ---------- 1,778,784 ---------- Non-current liabilities: Aluminum operations.................................................... 1,790,946 Minority interests in aluminum operations.............................. 221,907 Real estate and other.................................................. 26,013 ---------- 2,038,866 ---------- Net assets transferred to MAXXAM......................................... $ 30,531 ==========
3. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------- 1995 1994 ------- ------- Lumber........................................................... $65,566 $61,313 Logs............................................................. 15,615 12,062 ------- ------- $81,181 $73,375 ======= =======
During 1993, Pacific Lumber's inventory quantities were reduced. This reduction resulted in the liquidation of Pacific Lumber's LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory. The effect of this inventory liquidation increased cost of goods sold by approximately $222 for the year ended December 31, 1993. F-13 209 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
DECEMBER 31, ESTIMATED --------------------- USEFUL LIVES 1995 1994 ------------ -------- -------- Logging roads, land and improvements.............. 15 years $ 7,929 $ 7,545 Buildings......................................... 33 years 29,661 28,209 Machinery and equipment........................... 5-15 years 121,343 118,059 Construction in progress.......................... 520 30 -------- -------- 159,453 153,843 Less: accumulated depreciation.................... (58,420) (49,637) -------- -------- $101,033 $104,206 ======== ========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $9,795, $9,260 and $8,610, respectively. 5. INVESTMENT IN KAISER Concurrent with the consummation of the offering on December 23, 1996 described in Note 6, the Company received, as a capital contribution from MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully integrated producer and marketer of alumina, primary aluminum and fabricated aluminum products. Kaiser's common stock is publicly traded on the New York Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares represent a 39.0% equity interest in Kaiser at December 31, 1995 (34.7% on a fully diluted basis, after giving effect to the conversion of Kaiser's outstanding preferred stock into an equal number of common shares). The Company follows the equity method of accounting for its investment in Kaiser. As described in Note 1, the Company and MAXXAM are entities under common control; accordingly, the Company has recorded its investment in Kaiser at MAXXAM's historical cost. During the first quarter of 1993, losses exhausted Kaiser's equity with respect to its common stockholders. The Company recorded its equity share of such losses in January 1993 up to an amount of its investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses with respect to the results of operations attributable to Kaiser's common stockholders have exceeded cumulative earnings. The Company is under no obligation to provide any economic support to Kaiser, and accordingly, has not recorded any amounts attributable to its equity in Kaiser's results of operations for any period subsequent to January 1993. The Company will not record its equity in Kaiser's results of operations until such time as future earnings exceed the cumulative losses incurred. F-14 210 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The market value for the Pledged Kaiser Shares based on the price per share quoted at the close of business on December 20, 1996 was $321,290. There can be no assurance that such value would be realized should the Company dispose of its investment in the Pledged Kaiser Shares. The following table contains summarized financial information of Kaiser.
AS OF DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- Current assets.............................................. $ 932,800 $ 842,800 Property, plant and equipment, net.......................... 1,109,600 1,133,200 Other assets................................................ 770,800 722,100 ---------- ---------- Total assets...................................... $2,813,200 $2,698,100 ========== ========== Current liabilities......................................... $ 601,100 $ 583,100 Long-term debt, less current maturities..................... 749,200 751,100 Other liabilities........................................... 1,282,500 1,230,400 Minority interests.......................................... 122,700 116,200 Stockholders' equity: Preferred................................................. 98,100 100,100 Common.................................................... (40,400) (82,800) ---------- ---------- 57,700 17,300 ---------- ---------- Total liabilities and stockholders' equity........ $2,813,200 $2,698,100 ========== ==========
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net sales................................... $ 2,237,800 $ 1,781,500 $ 1,719,100 Costs and expenses.......................... (2,027,200) (1,837,700) (1,842,500) Other expenses.............................. (108,000) (95,900) (85,100) ----------- ----------- ----------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles................................ 102,600 (152,100) (208,500) (Provision) credit for income taxes......... (37,200) 53,800 86,900 Minority interests.......................... (5,100) (3,100) (1,500) ----------- ----------- ----------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................................ 60,300 (101,400) (123,100) Extraordinary loss on early extinguishment of debt, net of taxes..................... -- (5,400) (21,800) Cumulative effect of changes in accounting principles, net of taxes.................. -- -- (507,300) ----------- ----------- ----------- Net income (loss)........................... 60,300 (106,800) (652,200) Dividends on preferred stock................ (17,600) (20,100) (6,300) ----------- ----------- ----------- Net income (loss) available to common stockholders.............................. $ 42,700 $ (126,900) $ (658,500) =========== =========== =========== Equity in earnings (loss) of Kaiser......... $ -- $ -- $ (240,954) =========== =========== ===========
F-15 211 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The equity in loss of Kaiser of $240,954 for the year ended December 31, 1993 includes a $239,849 charge attributable to the Company's equity in Kaiser's cumulative effect of the change in accounting for postretirement benefits other than pensions and a $1,105 charge attributable to the Company's equity in Kaiser's cumulative effect of the change in accounting for income taxes. 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015......................................................... $350,233 $363,811 11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount.............................................. 92,498 82,779 10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000 Other.......................................................... 774 866 -------- -------- 778,505 782,456 Less: current maturities....................................... (14,195) (13,670) -------- -------- $764,310 $768,786 ======== ========
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes"), and (c) $41,750 aggregate principal amount of Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a subsidiary of the Company. These transactions resulted in a pre-tax extraordinary loss of $38,001, consisting primarily of the payment of premiums and the write-off of amortized deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179,364 of the Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract rights and certain other assets, (iii) the funds deposited in the Payment Account and the Liquidity Account, and (iv) substantially all of Scotia Pacific's other property and equipment. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathemati- F-16 212 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) cal formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Substantially all of the Company's consolidated assets are owned by MGI; substantially all of MGI's consolidated assets are owned by Pacific Lumber, and a significant portion of Pacific Lumber's assets are owned by Scotia Pacific. The Company expects that Pacific Lumber will provide a major portion of MGI's future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and the holders of the Pacific Lumber Senior Notes have priority over the claims and creditors of MGI (including the holders of the MGI Senior Notes and the MGI Discount Notes) and the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Principal and interest on the Timber Notes are payable semi-annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber has a revolving credit agreement with a bank (as amended and restated, the "Revolving Credit Agreement") which expires on May 31, 1998. Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The Revolving Credit Agreement provides for borrowings of up to $60,000, of which $15,000 may be used for standby letters of credit and $30,000 is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48,090 of borrowings was available under the Revolving Credit Agreement, of which $3,090 was available for letters of credit and $30,000 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11,910. The Revolving Credit Agreement contains covenants substantially similar to those contained in the Indenture governing the Pacific Lumber Senior Notes. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes and the Revolving Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1995, under the most restrictive of these covenants, approximately $15,663 of dividends could be paid by Pacific Lumber. F-17 213 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) On August 4, 1993, MGI issued $100,000 aggregate principal amount of the MGI Senior Notes and $126,720 aggregate principal amount (approximately $70,000 net of original issue discount) of the MGI Discount Notes, which, together with the MGI Senior Notes, are referred to collectively as the "MGI Notes". The MGI Notes are secured by MGI's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. The indenture governing the MGI Notes, among other things, restricts the ability of MGI to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1995, under the most restrictive of these covenants, approximately $1,899 of dividends could be paid by MGI, of which $1,600 was paid in January 1996. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33,222 and $43,941 at December 31, 1995 and 1994, respectively. The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of each year. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semi-annual interest payments will become due on each February 1 and August 1 thereafter. MGI used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of MGI's 12 3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. MGI used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20,000 dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 at 100% of their principal amount plus accrued interest thereon. The Company incurred a pre-tax extraordinary loss associated with the early retirement of MGI's 12 3/4% Notes of $9,677 consisting of net interest cost of $3,763, the write-off of $3,472 of unamortized deferred financing costs, a premium of $1,500 and the write-off of $942 of unamortized original issue discount. Maturities The following table of scheduled maturities of long-term debt outstanding at December 31, 1995 reflects Scheduled Amortization with respect to the Timber Notes:
YEARS ENDING DECEMBER 31, ------------------------------------------------------------ 1996 1997 1998 1999 2000 THEREAFTER ------- ------- ------- ------- ------- ---------- 7.95% Scotia Pacific Timber Collateralized Notes.......... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009 11 1/4% MGI Senior Secured Notes......................... -- -- -- -- -- 100,000 12 1/4% MGI Senior Secured Discount Notes................ -- -- -- -- -- 125,720 10 1/2% Pacific Lumber Senior Notes......................... -- -- -- -- -- 235,000 Other........................... 92 93 94 94 95 306 ------- ------- ------- ------- ------- -------- $14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035 ======= ======= ======= ======= ======= ========
Private Offering The Company completed an offering (the "Offering") of $130,000 principal amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured Notes") on December 23, 1996 (the "Issue F-18 214 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Date"). Interest is payable semiannually on February 1 and August 1 of each year beginning February 1, 1997. The MGHI Senior Secured Notes were not registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or on applicable exemption from registration requirements. The MGHI Senior Notes rank pari passu in right and priority of payment with any future senior indebtedness of the Company, and are guaranteed on a senior, unsecured basis by MAXXAM. The MGHI Senior Secured Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. The net proceeds from the Offering on the Issue Date, after estimated expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant to an intercompany note (the "Intercompany Note") which will be pledged to secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest at the rate of 11% per annum (payable semiannually prior to the interest payment dates applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003. MAXXAM will be entitled to defer the payment of interest on the Intercompany Note on any interest payment date to the extent that the Company has sufficient available funds to satisfy its obligations on the MGHI Senior Secured Notes on such date. Any such deferred interest will be added to the principal amount of the Intercompany Note and be payable at maturity. On a pro forma basis, at September 30, 1996, after giving effect to the Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total consolidated indebtedness would have increased from $772,877 to $902,877. The Indentures governing the MGI Notes were amended to, among other things, provide for the contribution of the Kaiser Shares to the Company. Pursuant to an agreement with the initial purchasers of the MGHI Senior Secured Notes, the Company and MAXXAM have agreed to file a registration statement (the "Registration Statement") with the Securities and Exchange Commission within 60 days of the Issue Date with respect to a registered offer to exchange the MGHI Senior Secured Notes for new notes with substantially identical terms (the "Exchange Offer"), and to use their reasonable best efforts to have the Registration Statement declared effective within 150 days of the Issue Date and the Exchange Offer consummated within 180 days of the Issue Date. The Exchange Date will be made only by means of a prospectus. Restricted Net Assets of Subsidiaries At December 31, 1995, certain debt instruments restricted the ability of MGI to transfer assets, make loans and advances to pay dividends to the Company. As of December 31, 1995, all of the assets of MGI and its subsidiaries are subject to such restrictions. 7. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The Company and its subsidiaries are members of MAXXAM's consolidated return group for federal income tax purposes. Prior to August 4, 1993, the Company and each of its subsidiaries computed their tax liabilities or tax benefits on a separate company basis (except as discussed in the following paragraph), in accordance with their respective tax allocation agreements with MAXXAM. Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation agreement that, among other things, amended the tax calculations with respect to Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never connected with MAXXAM. The PL Tax F-19 215 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for its federal income tax liability computed on a separate company basis as if it was never connected with MAXXAM. The remaining subsidiaries of MGI are each liable to MAXXAM for their respective income tax liabilities computed on a separate company basis as if they were never connected with MAXXAM, pursuant to their respective tax allocation agreements. MGI's tax allocation agreement with MAXXAM, (the "MGI Tax Allocation Agreement"), provides that MGI's federal income tax liability is computed as if MGI files a consolidated tax return with all of its subsidiaries except Salmon Creek, and that such corporations were never connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income tax liability of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities for MGI's subsidiaries (computed as discussed above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. A federal consolidated tax liability is also computed for MGHI and its subsidiaries, as if MGHI and its subsidiaries, except Salmon Creek, file a consolidated tax return and that such corporations were never connected with MAXXAM (the "MGHI Consolidated Tax Liability"). The federal income tax liability of MGHI is the difference between the MGHI Consolidated Tax Liability and the MGI Consolidated Tax Liability. To the extent that the MGHI Consolidated Tax Liability is less than the MGI Consolidated Tax Liability, MAXXAM is obligated to pay the amount of such difference to MGHI. The credit (provision) in lieu of income taxes on income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles consists of the following:
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 ------- ------ ------ Current: Federal credit (provision) in lieu of income taxes.... $ (167) $ -- $ (988) State and local....................................... (35) (55) (253) ------- ------ ------ (202) (55) (1,241) ------- ------ ------ Deferred: Federal credit (provision) in lieu of income taxes.... (410) 1,938 5,054 State and local....................................... (1,009) 1,267 (229) ------- ------ ------ (1,419) 3,205 4,825 ------- ------ ------ $(1,621) $3,150 $3,584 ======= ====== ======
The 1994 deferred federal credit in lieu of income taxes of $1,938 includes a credit relating to reserves the Company no longer believed were necessary, the 1993 deferred federal credit in lieu of income taxes of $4,054 includes $2,061 for the benefit of operating loss carryforwards generated in 1993 and includes a $1,082 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993 which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. F-20 216 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) A reconciliation between the credit (provision) in lieu of income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles is as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ------- ------- -------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................... $ 5,857 $16,080 $(17,655) ======= ======= ======== Amount of federal income tax based upon the statutory rate................................................ $(2,050) $(5,628) $ 6,179 Revision of prior years' tax estimates and other changes in valuation allowances..................... 907 7,739 (3,468) Increase in net deferred income tax assets due to tax rate change......................................... -- -- 1,082 State and local taxes, net of federal tax benefit..... (679) 787 (313) Other................................................. 201 252 104 ------- ------- -------- $(1,621) $ 3,150 $ 3,584 ======= ======= ========
As shown in the Consolidated Statement of Operations for the year ended December 31, 1994, the Company recorded an extraordinary loss related to the settlement of litigation in connection with MGI's acquisition of Pacific Lumber (see Note 10). The Company reported the loss net of related deferred income taxes of $6,312 which is less than the federal and state statutory income tax rates due to expenses for which no tax benefit was recognized. As shown in the Consolidated Statement of Operations for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related deferred income taxes of $16,211 which approximated the federal statutory income tax rate in effect an the dates the transactions occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by APB 11. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $22,818. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of Pacific Lumber in 1986, MGI in 1988 and Britt in 1990. As a result of restating these assets and liabilities, the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was decreased by $514. F-21 217 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The components of the Company's net deferred income tax assets (liabilities) are as follows:
DECEMBER 31, --------------------- 1995 1994 -------- -------- Deferred income tax assets: Loss and credit carryforwards................................ $ 83,705 $ 86,864 Timber and timberlands....................................... 41,803 46,955 Other liabilities............................................ 17,203 10,460 Postretirement benefits other than pensions.................. 2,316 2,145 Other........................................................ 327 1,818 Valuation allowances......................................... (51,595) (52,060) -------- -------- Total deferred income tax assets, net................ 93,759 96,182 -------- -------- Deferred income tax liabilities: Inventories.................................................. (17,313) (19,179) Property, plant and equipment................................ (16,899) (16,952) Other........................................................ (3,828) (3,651) -------- -------- Total deferred income tax liabilities................ (38,040) (39,782) -------- -------- Net deferred income tax assets................................. $ 55,719 $ 56,400 ======== ========
The valuation allowances listed above relate primarily to loss and credit carryforwards. As of December 31, 1995, approximately $41,803 of the net deferred income tax assets listed above relate to the excess of the tax basis over financial statement basis with respect to timber and timberlands. The Company believes that it is more likely than not that this net deferred income tax asset will be realized, based primarily upon the estimated value of its timber and timberlands which is well in excess of its tax basis. Also included in net deferred income tax assets as of December 31, 1995 is $32,110 which relates to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for loss and credit carryforwards. These factors included any limitations concerning use of the carryforwards, the year the carryforwards expire and the levels of taxable income necessary for utilization. The Company has concluded that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. Included in the net deferred income tax assets listed above are $50,504 and $51,501 at December 31, 1995 and 1994, respectively, which are recorded pursuant to the tax allocation agreements with MAXXAM. The following table presents the estimated tax attributes for federal income tax purposes for the Company and its subsidiaries as of December 31, 1995, under the terms of the respective tax allocation agreements. The utilization of certain of these attributes is subject to limitations.
EXPIRING THROUGH -------- Regular Tax Attribute Carryforwards: Net operating losses......................................... $224,485 2010 Net capital losses........................................... 5,177 1997 Minimum tax credit........................................... 167 -- Alternative Minimum Tax Attribute Carryforwards: Net operating losses......................................... $185,803 2010
F-22 218 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 8. EMPLOYEE BENEFIT PLANS Pacific Lumber has a defined benefit plan which covers all employees of Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or earlier, if certain provisions are met. The benefits are determined under a career average formula based on each year of service with Pacific Lumber and the employee's compensation for that year. Pacific Lumber's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by The Employee Retirement Income Security Act of 1974, as amended. A summary of the components of net periodic pension cost is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------- ------ ------- Service cost -- benefits earned during the year........ $ 1,483 $1,643 $ 1,600 Interest cost on projected benefit obligation.......... 1,693 1,263 918 Actual loss (gain) on plan assets...................... (3,900) 10 (2,128) Net amortization and deferral.......................... 2,460 (859) 1,359 ------- ------ ------- Net periodic pension cost.............................. $ 1,736 $2,057 $ 1,749 ======= ====== =======
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
DECEMBER 31 --------------------- 1995 1994 -------- -------- Actuarial present value of accumulated plan benefits: Vested benefit obligation.................................... $ 16,910 $ 11,809 Non-vested benefit obligation................................ 1,214 779 -------- -------- Total accumulated benefit obligation................. $ 18,124 $ 12,588 ======== ======== Projected benefit obligation................................... $ 21,841 $ 15,047 Plan assets at fair value, primarily equity and debt securities................................................... (18,363) (13,184) -------- -------- Projected benefit obligation in excess of plan assets.......... 3,478 1,863 Unrecognized net transaction asset............................. 24 29 Unrecognized net gain (loss)................................... (27) 1,475 Unrecognized prior service cost................................ (45) (50) -------- -------- Accrued pension liability.................................... $ 3,430 $ 3,317 ======== ========
The assumptions used in accounting for the defined benefit plan were as follows:
1995 1994 1993 ----- ---- ---- Rate of increase in compensation levels...................... 5.0% 5.0% 5.0% Discount rate................................................ 7.25% 8.5% 7.5% Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
Pacific Lumber has an unfunded defined benefit plan for certain postretirement and other benefits which covers substantially all employees of Pacific Lumber. Participants of the plan are eligible for certain health care benefits upon termination of employment and retirement and commencement of pension benefits. Participants make contributions for a portion of the cost of their health care benefits. F-23 219 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $2,348, net of related income taxes of $1,566. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal and state statutory rates in effect on the date SFAS 106 was adopted. A summary of the components of net periodic postretirement benefit cost is as follows:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ---- ---- ---- Service cost -- benefits earned during the year............... $228 $216 $153 Interest cost on accumulated postretirement benefit obligation.................................................. 317 294 315 Net amortization and deferral................................. (53) (7) -- ---- ---- ---- Net periodic postretirement benefit cost...................... $492 $503 $468 ==== ==== ====
The adoption of SFAS 106 increased the Company's loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles by $212 ($360 before tax) for the year ended December 31, 1993. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Retirees........................................................... $ 634 $ 860 Actives eligible for benefits...................................... 726 656 Actives not eligible for benefits.................................. 3,317 2,355 ------ ------ Accumulated postretirement benefit obligation.................... 4,677 3,871 Unrecognized net gain.............................................. 553 972 ------ ------ Postretirement benefit liability................................. $5,230 $4,843 ====== ======
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $674 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $90. The discount rates used in determining the accumulated postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994, respectively. Subsequent to December 31, 1993, Pacific Lumber's employees were eligible to participate in a defined contribution savings plan sponsored by MAXXAM. This plan is designed to enhance the existing retirement programs of participating employees. Employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the plan, Pacific Lumber's contributions consist of a matching contribution of up to 4% of the compensation of participants for F-24 220 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) each calendar quarter. The cost to the Company of this plan was $1,281 and $1,215 for the years ended December 31, 1995 and 1994, respectively. Pacific Lumber is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $8,900 and $9,233 at December 31, 1995 and 1994, respectively. Workers' compensation expenses amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995, 1994 and 1993, respectively. 9. RELATED PARTY TRANSACTIONS MAXXAM provides the Company and certain of the Company's subsidiaries with accounting and data processing services. In addition, MAXXAM provides the Company with office space and various office personnel, insurance, legal, operating, financial and certain other services. MAXXAM's expenses incurred on behalf of the Company are reimbursed by the Company through payments consisting of (i) an allocation of the lease expense for the office space utilized by or on behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor costs of personnel rendering services to the Company. Charges by MAXXAM for such services were $1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company believes that the services being rendered are on terms not less favorable to the Company than those which would be obtainable from unaffiliated third parties. In 1994, in connection with the litigation settlement described in Note 10, Pacific Lumber paid approximately $3,185 to a law firm in which a director of Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately $1,931 in connection with the offering of the Pacific Lumber Senior Notes and the Timber Notes to this same law firm. 10. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement, subsequently approved by the court, of class and related individual claims brought by former stockholders of Pacific Lumber against MAXXAM, the Company, Pacific Lumber, former directors of Pacific Lumber and others concerning the Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by Pacific Lumber, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded an extraordinary loss of $14,866 related to the settlement and associated costs, including a $2,000 accrual for certain contingent claims and $4,400 of related legal fees, net of benefits for federal and state income taxes of $6,312. The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. While the Company does not expect that Pacific Lumber's compliance with such existing laws and regulations will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity, Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions would not materially and adversely affect Pacific Lumber or its ability to harvest timber. F-25 221 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its final designation of critical habitat for the marbled murrelet ("Final Designation"), designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such 33,000 acres being young growth timber. Pacific Lumber's wildlife surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the area covered by the Final Designation. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") alleging that certain portions of its timberlands have been "taken" and seeking just compensation. Pursuant to the Headwaters Agreement described in Note 11 below (the "Headwaters Agreement"), the Takings Litigation has been stayed by the court at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as all of the material regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be material. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act ("ESA") and/or the California Endangered Species Act and to designate critical habitat for such species. For example, the National Marine Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See Note 11 below for a description of certain terms of the Headwaters Agreement relating to processing and approval of multi-species habitat conservation plan (the "Multi-Species HCP") covering Pacific Lumber's timberlands. In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a long-term sustained yield ("LTSY") harvest level that takes into account environmental and economic considerations. The proposed sustained yield plan ("SYP") must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the California Department of Forestry ("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last five years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the F-26 222 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and submitting corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future consolidated financial position, results of operations or liquidity. See Note 11 below for a description of certain terms of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs") and other timber harvesting operations, and the Company expects that such groups and individuals will continue to file such objections to certain of the Company's THPs and other timber harvesting operations. In addition, lawsuits are pending and/or threatened which seek to prevent the Company from implementing certain of its approved THP's and/or which challenge other operations of the Company. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to the Company's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the Company's consolidated financial position, results of operations or liquidity. The Company is also involved in various claims, lawsuits and proceedings relating to a wide variety of other matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to determine the ultimate costs that may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 11. HEADWATERS AGREEMENT On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber Parties") entered into an agreement (the "Headwaters Agreement") which provides the framework for the acquisition by the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). The Headwaters Timberlands would be transferred in exchange for (a) property and consideration (including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California (the "Elk River Timberlands"). The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions, including completion within ten months of specified closing items. F-27 223 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP which is to cover all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of an SYP. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP, and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. 12. OTHER ITEMS Investment, Interest and Other Income In February 1994, Pacific Lumber received a franchise tax refund of $7,243, the substantial portion of which represents interest from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of $1,527 and $1,200, respectively, resulting from business interruption insurance reimbursements for higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. Other receivables at December 31, 1994 included $1,684 related to earthquake related insurance claims. F-28 224 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, ASSETS 1996 1995 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents........................................ $ 53,122 $ 48,396 Marketable securities............................................ 31,852 36,568 Receivables: Trade......................................................... 11,466 20,576 Other......................................................... 2,429 1,624 Inventories...................................................... 78,113 81,181 Prepaid expenses and other current assets........................ 5,612 7,101 --------- --------- Total current assets..................................... 182,594 195,446 Timber and timberlands, net of depletion of $151,273 and $139,554 at September 30, 1996 and December 31, 1995, respectively........ 303,011 312,983 Property, plant and equipment, net of accumulated depreciation of $65,108 and $58,420 at September 30, 1996 and December 31, 1995, respectively..................................................... 101,214 101,033 Deferred financing costs, net...................................... 24,996 27,288 Deferred income taxes.............................................. 65,162 67,208 Restricted cash.................................................... 30,453 31,367 Other assets....................................................... 5,843 5,542 --------- --------- $ 713,273 $ 740,867 ========= ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable................................................. $ 5,436 $ 4,166 Accrued compensation and related benefits........................ 9,791 9,611 Accrued interest................................................. 9,217 25,354 Deferred income taxes............................................ 11,489 11,489 Other accrued liabilities........................................ 3,828 4,435 Long-term debt, current maturities............................... 16,258 14,195 --------- --------- Total current liabilities................................ 56,019 69,250 Long-term debt, less current maturities............................ 756,619 764,310 Other noncurrent liabilities....................................... 26,518 33,813 --------- --------- Total liabilities........................................ 839,156 867,373 --------- --------- Contingencies Stockholder's deficit: Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued........................................... 1 1 Additional capital............................................... 89,767 89,767 Accumulated deficit.............................................. (215,651) (216,274) --------- --------- Total stockholder's deficit.............................. (125,883) (126,506) --------- --------- $ 713,273 $ 740,867 ========= =========
The accompanying notes are an integral part of these financial statements. F-29 225 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- Net sales: Lumber and logs...................................................... $183,913 $161,151 Other................................................................ 15,667 19,761 -------- -------- 199,580 180,912 -------- -------- Operating expenses: Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997 Selling, general and administrative expenses......................... 11,344 12,243 Depletion and depreciation........................................... 20,175 18,957 -------- -------- 146,136 127,197 -------- -------- Operating income....................................................... 53,444 53,715 Other income (expense): Investment, interest and other income................................ 8,377 6,835 Interest expense..................................................... (58,388) (58,228) -------- -------- Income before income taxes............................................. 3,433 2,322 Credit (provision) in lieu of income taxes............................. 1,090 (772) -------- -------- Net income............................................................. $ 4,523 $ 1,550 ======== ========
The accompanying notes are an integral part of these financial statements. F-30 226 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 4,523 $ 1,550 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and depreciation........................................ 20,175 18,957 Amortization of deferred financing costs and discounts on long-term debt................................................... 10,815 9,772 Decrease in receivables........................................... 11,478 12,683 Net sales (purchases) of marketable securities.................... 8,351 (10,542) Decrease (increase) in inventories, net of depletion.............. 1,588 (6,067) Increase in accounts payable...................................... 1,270 853 Decrease (increase) in prepaid expenses and other assets.......... 1,188 (1,132) Decrease in accrued interest...................................... (16,137) (16,330) Increase (decrease) in other liabilities.......................... (8,729) 9,618 Net gains on marketable securities................................ (3,635) (2,362) Decrease (increase) in accrued and deferred income taxes.......... (120) 562 Other............................................................. (28) 465 -------- -------- Net cash provided by operating activities.................... 30,739 18,027 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment of note receivable from affiliate............................ -- 2,500 Net proceeds from sale of assets..................................... 110 9 Capital expenditures................................................. (8,986) (6,624) -------- -------- Net cash used for investing activities....................... (8,876) (4,115) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Restricted cash withdrawals, net..................................... 914 563 Repurchase of and principal payments on long-term debt............... (14,151) (14,256) Dividends paid....................................................... (3,900) (4,800) -------- -------- Net cash used for financing activities....................... (17,137) (18,493) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 4,726 (4,581) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 48,396 48,575 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 53,122 $ 43,994 ======== ======== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net repayments of margin borrowings for marketable securities........ $ -- $ 6,648 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest........................... $ 63,710 $ 64,786 Tax allocation payments to (receipts from) MAXXAM Inc., net.......... 167 -- Income taxes paid (refunded)......................................... (1,549) (5,461)
The accompanying notes are an integral part of these financial statements. F-31 227 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. GENERAL FORMATION OF MGHI MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4, 1996, to facilitate the offering of Senior Secured Notes. Subsequent to its formation, MGHI received, as a capital contribution, 100% of the capital stock of MAXXAM Inc.'s ("MAXXAM") wholly owned subsidiary MAXXAM Group Inc. ("MGI"). Further, concurrent with the consummation of the Private Offering of $130,000 aggregate principal amount of the Company's Senior Secured Notes due 2003 as described in Note 6, MAXXAM transfered to the Company, as an additional capital contribution, 27,938,250 shares of Kaiser Aluminum Corporation ("Kaiser") common stock representing a 34.7% interest in Kaiser on a fully diluted basis. The contribution of MGI's capital stock has been accounted for as a reorganization of entities under common control, which requires MGHI to record the assets and liabilities of MGI at MAXXAM's historical cost. Accordingly, MGHI is the successor entity to MGI and as such, the accompanying financial statements of MGHI and its subsidiaries (together, the "Company") reflect both the historical operating results of MGI and MAXXAM's purchase accounting adjustments which principally relate to MGI's timber and depreciable assets. The purchase accounting adjustments arose from MAXXAM's acquisition of MGI in May 1988. The contribution of the Kaiser common stock has been reflected in the consolidated financial statements of the Company as if such contribution occurred as of the beginning of the earliest period presented, at MAXXAM's historical cost using the equity method of accounting. The Company conducts its business primarily through the operations of its subsidiaries, including MGI. BASIS OF PRESENTATION The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the Audited Consolidated Financial Statements of the Company and the Notes thereto which are contained elsewhere herein. Any capitalized terms used but not defined in the following Condensed Notes to Consolidated Financial Statements have the same meaning given to them in the Audited Consolidated Financial Statements of the Company. All references to the "Company" include MGHI and its subsidiary companies unless otherwise noted or the context indicates otherwise. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 1996, the consolidated results of operations for the nine months ended September 30, 1996 and 1995 and consolidated cash flows for the nine months ended September 30, 1996 and 1995. Certain reclassifications of prior period information have been made to conform to the current presentation. The Company is a wholly owned subsidiary of MAXXAM. 2. RESTRICTED CASH Restricted cash represents the amount deposited into an account held by the Trustee under the indenture governing the Timber Notes of the Company's indirect wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"). At September 30, 1996 and December 31, 1995, cash and cash equivalents also includes $5,676 and $19,742, respectively, which is restricted for debt service payments on the succeeding note payment date for the Timber Notes. F-32 228 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS) 3. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Lumber..................................................... $58,827 $ 65,566 Logs....................................................... 19,286 15,615 ------- ------- $78,113 $ 81,181 ======= =======
4. INVESTMENT IN KAISER Concurrent with the consummation of the offering on December 23, 1996 described in Note 5, the Company received, as a capital contribution from MAXXAM, 27,938,250 shares of the common stock of Kaiser which are pledged as collateral for the MGI Notes (the "Pledged Kaiser Shares"). Kaiser is a fully integrated producer and marketer of alumina, primary aluminum and fabricated aluminum products. Kaiser's common stock is publicly traded on the New York Stock Exchange under the trading symbol "KLU." The Pledged Kaiser Shares represent a 39.0% equity interest in Kaiser at September 30, 1996 (34.7% on a fully diluted basis, after giving effect to the conversion of Kaiser's outstanding preferred stock into an equal number of common shares). The Company follows the equity method of accounting for its investment in Kaiser. As described in Note 1, the Company and MAXXAM are entities under common control; accordingly, the Company has recorded its investment in Kaiser at MAXXAM's historical cost. During the first quarter of 1993, losses exhausted Kaiser's equity with respect to its common stockholders. The Company recorded its equity share of such losses in January 1993 up to an amount of its investment in the Pledged Kaiser Shares. Since January 1993, cumulative losses with respect to the results of operations attributable to Kaiser's common stockholders have exceeded cumulative earnings. The Company is under no obligation to provide any economic support to Kaiser, and accordingly, has not recorded any amounts attributable to its equity share of Kaiser's results of operations for any period subsequent to January 1993. The Company will not record its equity share of Kaiser's results of operations until such time as future earnings exceed the cumulative losses incurred. The market value for the Pledged Kaiser Shares based on the price per share quoted at the close of business on December 20, 1996 was $321,290. There can be no assurance that such value would be realized should the Company dispose of its investment in the Pledged Kaiser Shares. The following table contains summarized financial information of Kaiser.
AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Current assets............................................. $ 940,400 $ 932,800 Property, plant and equipment, net......................... 1,126,400 1,109,600 Other assets............................................... 802,400 770,800 ---------- ---------- Total assets..................................... $ 2,869,200 $2,813,200 ========== ========== Current liabilities........................................ $ 542,000 $ 601,100 Long-term debt, less current maturities.................... 858,400 749,200 Other liabilities.......................................... 1,286,000 1,282,500 Minority interests......................................... 119,400 122,700 Stockholders' equity: Preferred................................................ 98,100 98,100 Common................................................... (34,700) (40,400) ---------- ---------- 63,400 57,700 ---------- ---------- Total liabilities and stockholders' equity....... $ 2,869,200 $2,813,200 ========== ==========
F-33 229 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 ----------- ----------- Net sales................................................. $ 1,652,100 $ 1,646,700 Costs and expenses........................................ (1,564,700) (1,497,300) Other expenses............................................ (65,300) (81,100) ----------- ----------- Income before income taxes and minority interests......... 22,100 68,300 Provision for income taxes................................ (8,400) (24,600) Minority interests........................................ (2,200) (4,400) ----------- ----------- Net income................................................ 11,500 39,300 Dividends on preferred stock.............................. (6,300) (15,500) ----------- ----------- Net income available to common stockholders............... $ 5,200 $ 23,800 =========== =========== Equity in earnings of Kaiser.............................. $ -- $ -- =========== ===========
5. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015............................................ $ 336,130 $350,233 11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100,000 100,000 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount.................................... 101,021 92,498 10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235,000 235,000 Other...................................................... 726 774 -------- -------- 772,877 778,505 Less: current maturities................................... (16,258) (14,195) -------- -------- $ 756,619 $764,310 ======== ========
PRIVATE OFFERING The Company completed an offering (the "Offering") of $130,000 principal amount of 12% Senior Secured Notes due August 1, 2003 (the "MGHI Senior Secured Notes") on December 23, 1996 (the "Issue Date"). Interest is payable semiannually on February 1 and August 1 of each year beginning February 1, 1997. The MGHI Senior Secured Notes were not registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or on applicable exemption from registration requirements. The MGHI Senior Notes rank pari passu in right and priority of payment with any future senior indebtedness of the Company, and are guaranteed on a senior, unsecured basis by MAXXAM. The MGHI Senior Secured Notes will be effectively subordinated to liabilities of the Company's subsidiaries, including trade payables. The net proceeds from the Offering on the Issue Date, after estimated expenses, were approximately $125,000 all of which was loaned to MAXXAM pursuant to an intercompany note (the "Intercompany Note") which will be pledged to secure the MGHI Senior Secured Notes. The Intercompany Note will bear interest at the rate of 11% per annum (payable semiannually on the interest payment dates applicable to the MGHI Senior Secured Notes) and mature on August 1, 2003. MAXXAM will be entitled to defer the F-34 230 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS) payment of interest on the Intercompany Note on any interest payment date to the extent that the Company has sufficient available funds to satisfy its obligations on the MGHI Senior Secured Notes on such date. Any such deferred interest will be added to the principal amount of the Intercompany Note and be payable at maturity. On a pro forma basis, at September 30, 1996, after giving effect to the Offering and the loan of the proceeds therefrom to MAXXAM, the Company's total consolidated indebtedness would have increased from $772,877 to $902,877. The Indentures governing the MGI Notes were amended to, among other things, provide for the contribution of the Kaiser Shares to the Company. Pursuant to an agreement with the initial purchasers of the MGHI Senior Secured Notes, the Company and MAXXAM have agreed to file a registration statement (the "Registration Statement") with the Securities and Exchange Commission within 60 days of the Issue Date with respect to a registered offer to exchange the MGHI Senior Secured Notes for new notes with substantially identical terms (the "Exchange Offer"), and to use their reasonable best efforts to have the Registration Statement declared effective within 150 days of the Issue Date and the Exchange Offer consummated within 180 days of the Issue Date. The Exchange Date will be made only by means of a prospectus. 6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The credit in lieu of income taxes for the nine months ended September 30, 1996 includes a benefit of $2,620 relating to the refund of taxes previously paid in connection with a settlement of certain federal income tax matters in June 1996. The Company received the cash refund in August 1996. 7. CONTINGENCIES The Company's forest products operations are primarily conducted by The Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. While the Company does not expect that Pacific Lumber's compliance with such existing laws and regulations will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity, Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions would not materially and adversely affect Pacific Lumber or its ability to harvest timber. In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its final designation of critical habitat for the marbled murrelet ("Final Designation"), designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such 33,000 acres being young growth timber. Pacific Lumber's wildlife surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the area covered by the Final Designation. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") alleging that certain portions of its timberlands have been "taken" and seeking just compensation. Pursuant to F-35 231 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS) the Headwaters Agreement described in Note 8 below (the "Headwaters Agreement"), the Takings Litigation has been stayed by the court at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such times as all of the material regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be material. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act ("ESA") and/or the California Endangered Species Act and to designate critical habitat for such species. For example, the National Marine Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by the Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See Note 8 below for a description of certain terms of the Headwaters Agreement relating to processing and approval of a multi-species habitat conservation plan (the "Multi-Species HCP") covering Pacific Lumber's timberlands. In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a long-term sustained yield ("LTSY") harvest level that takes into account environmental and economic considerations. The proposed sustained yield plan ("SYP") must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the California Department of Forestry ("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last five years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and submitting corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future consolidated financial position, results of operations or F-36 232 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS) liquidity. See Note 8 below for a description of certain terms of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs") and other timber harvesting operations, and the Company expects that such groups and individuals will continue to file such objections to certain of the Company's THPs and other timber harvesting operations. In addition, lawsuits are pending and/or threatened which seek to prevent the Company from implementing certain of its approved THPs and/or which challenge other operations of the Company. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to the Company's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the Company's consolidated financial position, results of operations or liquidity. The Company is also involved in various claims, lawsuits and proceedings relating to a wide variety of other matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to determine the ultimate costs that may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 8. HEADWATERS AGREEMENT On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber Parties") entered into an agreement (the "Headwaters Agreement") which provides the framework for the acquisition by the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). The Headwaters Timberlands would be transferred in exchange for (a) property and consideration (including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California (the "Elk River Timberlands"). The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions, including completion within ten months of specified closing items. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP which is to cover all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of an SYP. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP, and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. F-37 233 MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED ----------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN MILLIONS OF DOLLARS) 1996 QUARTERLY INFORMATION: Net sales.................................... $ 59.8 $ 71.3 $ 68.5 Gross profit................................. 26.7 29.9 28.4 Operating income............................. 16.7 19.3 17.4 Net income................................... .3 4.1 .1 1995 QUARTERLY INFORMATION: Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7 Gross profit................................. 22.5 32.6 29.8 30.6 Operating income............................. 12.7 22.0 19.0 20.6 Net income (loss)............................ (3.1) 3.3 1.3 2.7 1994 QUARTERLY INFORMATION: Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2 Gross profit................................. 23.6 31.9 29.1 35.4 Operating income............................. 13.5 23.0 19.7 22.9 Income before extraordinary item............. 1.2 3.4 8.5 6.2 Extraordinary loss -- net.................... -- (14.9) -- -- Net income (loss)............................ 1.2 (11.5) 8.5 6.2
F-38 234 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of MAXXAM Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Notes 5 and 6 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 F-39 235 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, --------------------- ASSETS 1995 1994 -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Current assets: Cash and cash equivalents............................................. $ 104.2 $ 84.6 Marketable securities................................................. 45.9 40.3 Receivables: Trade, net of allowance for doubtful accounts of $5.5 and $4.4 at December 31, 1995 and 1994, respectively.......................... 246.2 176.8 Other.............................................................. 98.9 62.9 Inventories........................................................... 606.8 541.4 Prepaid expenses and other current assets............................. 129.7 185.3 -------- -------- Total current assets.......................................... 1,231.7 1,091.3 Property, plant and equipment, net...................................... 1,231.9 1,231.6 Timber and timberlands, net of depletion of $139.6 and $123.9 at December 31, 1995 and 1994, respectively.............................. 313.0 325.2 Investments in and advances to unconsolidated affiliates................ 189.1 169.7 Deferred income taxes................................................... 414.0 425.6 Long-term receivables and other assets.................................. 452.6 447.4 -------- -------- $3,832.3 $3,690.8 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable...................................................... $ 196.7 $ 161.8 Accrued interest...................................................... 58.0 62.0 Accrued compensation and related benefits............................. 166.5 138.3 Other accrued liabilities............................................. 148.4 200.2 Payable to affiliates................................................. 90.2 81.8 Long-term debt, current maturities.................................... 25.1 33.7 -------- -------- Total current liabilities..................................... 684.9 677.8 Long-term debt, less current maturities................................. 1,585.1 1,582.5 Accrued postretirement benefits......................................... 742.6 743.1 Other noncurrent liabilities............................................ 680.3 618.4 -------- -------- Total liabilities............................................. 3,692.9 3,621.8 -------- -------- Commitments and contingencies Minority interests...................................................... 223.2 344.3 Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1995 -- 669,701 and 1994 -- 669,957.......... .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359.......................................... 5.0 5.0 Additional capital.................................................... 155.0 53.2 Accumulated deficit................................................... (208.5) (302.9) Pension liability adjustment.......................................... (16.1) (11.4) Treasury stock, at cost (shares held: preferred -- 845; common: 1995 -- 1,355,512 and 1994 -- 1,355,768)........................... (19.5) (19.5) -------- -------- Total stockholders' deficit................................... (83.8) (275.3) -------- -------- $3,832.3 $3,690.8 ======== ========
The accompanying notes are an integral part of these financial statements. F-40 236 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (IN MILLIONS OF DOLLARS EXCEPT SHARE AMOUNTS) Net sales: Aluminum operations........................................ $2,237.8 $1,781.5 $1,719.1 Forest products operations................................. 242.6 249.6 233.5 Real estate and other operations........................... 84.8 84.6 78.5 -------- -------- -------- 2,565.2 2,115.7 2,031.1 -------- -------- -------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations..................................... 1,798.4 1,625.5 1,587.7 Forest products operations.............................. 127.1 129.6 134.6 Real estate and other operations........................ 65.4 62.8 65.3 Selling, general and administrative expenses............... 195.8 169.4 183.0 Depreciation and depletion................................. 120.9 121.1 120.8 Restructuring of aluminum operations....................... -- -- 35.8 -------- -------- -------- 2,307.6 2,108.4 2,127.2 -------- -------- -------- Operating income (loss)...................................... 257.6 7.3 (96.1) Other income (expense): Investment, interest and other income (expense)............ 18.2 (2.2) 69.8 Interest expense........................................... (172.7) (167.3) (169.5) Amortization of deferred financing costs................... (8.6) (9.6) (15.6) -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles...................................... 94.5 (171.8) (211.4) Credit (provision) for income taxes.......................... (14.8) 77.1 82.5 Minority interests........................................... (22.2) (22.0) (3.0) -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of changes in accounting principles........................ 57.5 (116.7) (131.9) Extraordinary item: Loss on early extinguishment of debt, net of related benefits for minority interests of $nil in 1994 and $2.8 in 1993 and income taxes of $2.9 in 1994 and $27.5 in 1993, respectively...................................... -- (5.4) (50.6) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions and postemployment benefits, net of related benefits for minority interests of $64.6 and income taxes of $240.2.................................................. -- -- (444.3) Accounting for income taxes................................ -- -- 26.6 -------- -------- -------- Net income (loss)............................................ $ 57.5 $ (122.1) $ (600.2) ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles.............. $ 6.08 $ (12.35) $ (13.95) Extraordinary item......................................... -- (.57) (5.35) Cumulative effect of changes in accounting principles...... -- -- (44.17) -------- -------- -------- Net income (loss).......................................... $ 6.08 $ (12.92) $ (63.47) ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-41 237 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- --------- (IN MILLIONS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................................... $ 57.5 $(122.1) $ (600.2) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and depletion............................................... 120.9 121.1 120.8 Minority interests....................................................... 22.2 22.0 3.0 Amortization of deferred financing costs and discounts on long-term debt.................................................................... 19.5 19.3 21.7 Amortization of excess investment over equity in net assets of unconsolidated affiliates.............................................. 11.4 11.6 11.9 Equity in (earnings) loss of unconsolidated affiliates................... (19.1) 15.0 4.9 Net gain on sales of real estate, mortgage loans and other assets........ (9.7) (6.5) (45.8) Net gains on marketable securities....................................... (8.6) (4.2) (7.1) Net sales (purchases) of marketable securities........................... (4.0) 12.9 31.1 Extraordinary loss on early extinguishment of debt, net.................. -- 5.4 50.6 Cumulative effect of changes in accounting principles, net............... -- -- 417.7 Decrease (increase) in prepaid expenses and other assets................. 84.5 (47.9) 5.4 Increase (decrease) in accounts payable.................................. 34.7 26.3 (14.1) Decrease (increase) in receivables....................................... (103.6) 24.5 5.0 Decrease (increase) in inventories....................................... (65.3) (37.5) 10.9 Increase in accrued and deferred income taxes............................ (13.1) (77.2) (96.5) Increase (decrease) in payable to affiliates and other liabilities....... (1.2) 37.5 110.5 Increase (decrease) in accrued interest.................................. (1.0) 8.3 14.3 Other.................................................................... 12.8 (4.0) 8.0 ------- ------- --------- Net cash provided by operating activities........................... 137.9 4.5 52.1 ------- ------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments................... 39.3 30.0 143.0 Capital expenditures........................................................ (97.7) (89.3) (86.2) Investment in subsidiaries and joint ventures............................... (15.9) (7.4) (9.4) Other....................................................................... (1.1) (1.2) (2.8) ------- ------- --------- Net cash provided by (used for) investing activities................ (75.4) (67.9) 44.6 ------- ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................................... 5.7 229.7 1,201.3 Net borrowings (payments) under revolving credit agreements and short-term borrowings (payments).................................................... 4.4 (191.8) (107.6) Proceeds from issuance of Kaiser capital stock.............................. 1.2 100.1 119.3 Restricted cash (deposits), net of withdrawals.............................. 1.0 1.2 (33.6) Redemptions, repurchase of and principal payments an long-term debt......... (40.9) (39.1) (1,219.4) Dividends paid to Kaiser's minority preferred stockholders.................. (20.5) (13.7) (5.6) Redemption of preference stock.............................................. (8.8) (8.5) (4.2) Incurrence of financing costs............................................... (1.8) (19.7) (47.9) Other....................................................................... 16.8 5.9 3.0 ------- ------- --------- Net cash provided by (used for) financing activities................ (42.9) 64.1 (94.7) ------- ------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... 19.6 .7 2.0 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 84.6 83.9 81.9 ------- ------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 104.2 $ 84.6 $ 83.9 ======= ======= ========= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings (repayments) for marketable securities................ $ (6.9) $ 5.9 $ (.9) Reduction of stockholders' deficit due to redemption of Kaiser preferred stock.................................................................... 136.2 -- -- Contribution of property in exchange for joint venture interest, net of deferred gain of $8.6............................................. 1.3 -- -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest.................................. $ 162.8 $ 149.3 $ 149.1 Income taxes paid, net...................................................... 30.3 18.3 13.2
The accompanying notes are an integral part of these financial statements. F-42 238 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED COMMON STOCK RETAINED PENSION STOCK ------------------- ADDITIONAL EARNINGS LIABILITY TREASURY ($.50 PAR) SHARES ($.50 PAR) CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL ---------- ------ ---------- ---------- -------- ---------- -------- ------- (IN MILLIONS OF DOLLARS AND SHARES) Balance, January 1, 1993........ $ .3 8.7 $5.0 $ 47.9 $ 419.4 $ (9.0) $(19.7) $ 443.9 Net loss...................... -- -- -- -- (600.2) -- -- (600.2) Gain from issuance of Kaiser Aluminum Corporation common stock...................... -- -- -- 3.3 -- -- -- 3.3 Additional pension liability.................. -- -- -- -- -- (14.9) -- (14.9) --- --- ---- ------ ------- ------ ------ ------ Balance, December 31, 1993...... .3 8.7 5.0 51.2 (180.8) (23.9) (19.7) (167.9) Net loss...................... -- -- -- -- (122.1) -- -- (122.1) Gain from issuance of Kaiser Aluminum Corporation common stock...................... -- -- -- 2.2 -- -- -- 2.2 Conversions of preferred stock to common stock............ -- -- -- (.2) -- -- .2 -- Reduction of pension liability.................. -- -- -- -- -- 12.5 -- 12.5 --- --- ---- ------ ------- ------ ------ ------ Balance, December 31, 1994...... .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3) --- --- ---- ------ ------- ------ ------ ------ Net income.................... -- -- -- -- 57.5 -- -- 57.5 Gain from issuance of Kaiser Aluminum Corporation common stock...................... -- -- -- 2.5 -- -- -- 2.5 Redemption of Kaiser Aluminum Corporation preferred stock...................... -- -- -- 99.3 36.9 -- -- 136.2 Additional pension liability.................. -- -- -- -- -- (4.7) -- (4.7) --- --- ---- ------ ------- ------ ------ ------ Balance, December 31, 1995...... $ .3 8.7 $5.0 $155.0 $ (208.5) $(16.1) $(19.5) $ (83.8) === === ==== ====== ======= ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-43 239 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company The consolidated financial statements include the accounts of MAXXAM Inc. and its majority and wholly owned subsidiaries. All references to the "Company" include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless otherwise indicated or the context indicates otherwise. Intercompany balances and transactions have been eliminated. Investments in affiliates (20% to 50%-owned) are accounted for utilizing the equity method of accounting. Certain reclassifications have been made to prior years' financial statements to be consistent with the current year's presentation. The Company is a holding company and, as such, conducts substantially all of its operations through its subsidiaries. The Company operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries, principally The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate investment and development, managed through its wholly owned subsidiary, MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. Description of the Company's Operations Kaiser operates in the aluminum industry through its principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all principal aspects of the aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of aluminum, and the manufacture of fabricated and semi-fabricated aluminum products. KACC's production levels of alumina and primary aluminum exceed its internal requirements and allow it to be a major seller of alumina and primary aluminum in domestic and international markets. The substantial portion of the Company's consolidated assets, liabilities, revenues, results of operations and cash flows are attributable to Kaiser (see Note 11). Pacific Lumber operates in several principal aspects of the lumber industry -- the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the manufacture of lumber into a variety of finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which is obtained from Pacific Lumber. Housing, construction and remodeling markets are the principal markets for the Company's lumber products. Export sales generally constitute less than 4% of forest products sales. A significant portion of forest products sales are made to third parties located west of the Mississippi river. The Company, principally through its wholly owned subsidiaries, is engaged in the business of residential and commercial real estate investment and development, primarily in California, Arizona, Texas and Puerto Rico. With respect to periods after October 6, 1995, other commercial operations include the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited partnership which owns and operates a Class I horse racing facility in the greater Houston metropolitan area. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties F-44 240 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 9 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. The cumulative losses of Kaiser in the first and second quarters of 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions as described in Note 6, eliminated Kaiser's equity with respect to its common stock; accordingly, the Company recorded 100% of Kaiser's losses in the third and fourth quarters of 1993 and all of 1994, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7). The Company recorded 100% of Kaiser's earnings in 1995 and will continue to do so until such time as the cumulative losses recorded by the Company with respect to Kaiser's minority common stockholders are recovered. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities Marketable securities are carried at fair value. Prior to December 31, 1993, marketable securities were carried at the lower of cost or market. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income (expense) for each of the three years ended December 31, 1995 were: 1995 -- net unrealized holding gains of $1.9 and net realized gains of $6.8; 1994 -- net unrealized holding losses of $1.0 and net realized gains of $5.2; and 1993 -- net realized gains of $4.2, the recovery of $2.0 of net unrealized losses and net unrealized gains of $.9. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Inventories Inventories are stated at the lower of cost or market. Cost for the aluminum and forest products operations inventories is primarily determined using the last-in, first-out ("LIFO") method. Other inventories of the aluminum operations, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor and manufacturing overhead, including depreciation and depletion. The Company recorded pre-tax charges of approximately $19.4 in 1993 because of reductions in the carrying value of its aluminum operations inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated aluminum products. F-45 241 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Inventories consist of the following:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Aluminum Operations: Finished fabricated products..................................... $ 91.5 $ 49.4 Primary aluminum and work in process............................. 195.9 203.1 Bauxite and alumina.............................................. 119.6 102.3 Operating supplies and repair and maintenance parts.............. 118.7 113.2 ------ ------ 525.7 468.0 ------ ------ Forest Products Operations: Lumber........................................................... 65.5 61.3 Logs............................................................. 15.6 12.1 ------ ------ 81.1 73.4 ------ ------ $606.8 $541.4 ====== ======
Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed principally utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Timber and Timberlands Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk At December 31, 1995 and 1994, cash and cash equivalents includes $19.7 and $19.4, respectively, which is reserved for debt service payments on the Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At December 31, 1995 and 1994, long-term receivables and other assets includes $31.4 and $32.4, respectively, of restricted cash deposits held for the benefit of the Timber Note holders as described in Note 4. Each of these deposits is held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Restructuring of Aluminum Operations In 1993, Kaiser implemented a restructuring plan primarily for its flat-rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets and declining demand for aluminum products sold to customers in the commercial aerospace F-46 242 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) industry, all of which had resulted in declining prices in Trentwood's key markets. Additionally, KACC implemented a plan to streamline its casting operations, which included the shutdown of two facilities located in Ohio. This entire restructuring was successfully completed by the end of 1995. The pre-tax charge for this restructuring of $35.8 included $25.2 for pension, severance and other termination benefits at Trentwood; $8.0 related to casting facilities; and $2.6 for various other items. Investment, Interest and Other Income (Expense) During 1994, the Company, Pacific Lumber and others agreed to a settlement, subsequently approved by the court, of class and related individual claims brought by former stockholders of Pacific Lumber against the Company, MGI, Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's acquisition of Pacific Lumber. Of the $52.0 settlement $33.0 was paid by insurance carriers of the Company and Pacific Lumber, $14.8 was paid by Pacific Lumber, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded a pre-tax loss of $21.2 which consists of Pacific Lumber's $14.8 cash payment to the settlement fund, a $2.0 accrual for certain contingent claims, and $4.4 of related legal fees. Insofar as these matters do not originate from, or relate in any manner to, its ongoing operations, the Company recorded the settlement as a charge to investment, interest and other income (expense). Additionally, in February 1994, Pacific Lumber received a franchise tax refund of $7.2, the substantial portion of which represents interest, from the state of California relating to tax years 1972 through 1985. The net effect of these transactions are included in investment, interest and other income (expense) for the year ended December 31, 1994. Investment, interest and other income (expense) for the years ended December 31, 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9, respectively, of pre-tax charges related principally to establishing additional litigation reserves for asbestos claims and environmental reserves for potential solid waste disposal and soil and ground water remediation matters, each pertaining to operations which were discontinued prior to the acquisition of Kaiser by the Company in 1988. Investment, interest and other income for the year ended December 31, 1993 includes a fourth quarter pre-tax gain of $47.8 from the sale of sixteen multi-family real estate properties for cash proceeds of $113.6. Foreign Currency Translation The Company uses the United States dollar as the functional currency for its foreign operations. Derivative Financial Instruments Gains and losses arising from the use of derivative financial instruments are reflected in Kaiser's operating results concurrently with the consummation of the underlying hedged transactions. Deferred gains or losses are included in prepaid expenses and other current assets and other accrued liabilities. Kaiser does not hold or issue derivative financial instruments for trading purposes (see Note 10). F-47 243 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the publicly traded issues and on the current rates offered for borrowings similar to the other debt. MGI's publicly traded debt issues are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The fair value of foreign currency contracts generally reflects the estimated amounts that Kaiser would receive to enter into similar contracts at the balance sheet date, thereby taking into account unrealized gains or losses on open contracts (see Note 10). The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- Cash and cash equivalents............. $ 104.2 $ 104.2 $ 84.6 $ 84.6 Marketable securities (held for trading purposes)................... 45.9 45.9 40.3 40.3 Restricted cash....................... 31.4 31.4 32.4 32.4 Long-term debt........................ (1,610.2) (1,672.0) (1,616.2) (1,545.9) Foreign currency contracts............ -- 1.9 -- 3.5
Stock-Based Compensation The Company applies the intrinsic value based method for accounting for stock or stock-based compensation awards described by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (see Note 8). Per Share Information Per share calculations are based on the weighted average number of common shares outstanding in each year and, if dilutive, weighted average common equivalent shares and common stock options based upon the average price of the Company's common stock during the year. The weighted average number of common and common equivalent shares was 9,459,293 shares, 9,447,878 shares and 9,457,083 shares for the years ended December 31, 1995, 1994 and 1993, respectively. 2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES KACC INVESTORS Kaiser's investments in unconsolidated affiliates are held by KACC. KACC holds a 28.3% interest in Queensland Alumina Limited ("QAL"), a leading producer of alumina, and a 49% interest in both Kaiser Jamaica Bauxite Company, a bauxite supplier, and Anglesey Aluminium Limited ("Anglesey"), which produces primary aluminum. KACC provides some of its affiliates with services such as financing, management and engineering. Purchases from these affiliates for the acquisition and processing of bauxite, alumina and primary aluminum aggregated $284.4, $219.7 and $206.6 for the years ended December 31, 1995, 1994 and 1993, respectively (see Note 9). KACC received dividends of $8.1 from the investees for the year ended December 31, 1995. No dividends were received for the years ended December 31, 1994 or 1993. KACC's equity in earnings (loss) before income taxes of such operations is treated as a reduction (increase) in cost of sales. At December 31, 1995 and 1994, KACC's net receivables from these affiliates were not material. F-48 244 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Summarized combined financial information for KACC's investees is as follows:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Current assets..................................................... $429.0 $342.3 Property, plant and equipment, net................................. 330.8 349.4 Other assets....................................................... 39.3 42.4 ------ ------ Total assets............................................. $799.1 $734.1 ====== ====== Current liabilities................................................ $125.4 $122.4 Long-term debt..................................................... 331.8 307.6 Other liabilities.................................................. 35.6 31.0 Stockholders' equity............................................... 306.3 273.1 ------ ------ Total liabilities and stockholders' equity............... $799.1 $734.1 ====== ======
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- Net sales............................................. $ 685.9 $ 489.8 $ 510.3 Costs and expenses.................................... (618.7) (494.8) (527.2) Credit (provision) for income taxes................... (18.7) (6.3) 1.9 ------- ------- ------- Net income (loss)..................................... $ 48.5 $ (11.3) $ (15.0) ======= ======= ======= KACC's equity in earnings (loss) of affiliates........ $ 19.2 $ (1.9) $ (3.3) ======= ======= =======
KACC's equity in earnings (loss) differs from the summary net income (loss) for unconsolidated affiliates due to various percentage ownerships in the constituent entities and the amortization of the excess of KACC's investment in the affiliates over its equity in their net assets. At December 31, 1995, KACC's investment in these affiliates exceeded its equity in their net assets by $54.9. KACC is amortizing this amount over a twelve-year period which results in an annual charge of approximately $11.4. OTHER INVESTEES In 1995, pursuant to a joint venture agreement with SunCor Development Company ("SunCor") for the purpose of developing and managing a real estate project, the Company, through a wholly owned real estate subsidiary, contributed 950 acres of undeveloped land valued at $10.0 and cash of $1.0 in exchange for a 50% interest. SunCor, the managing partner, contributed $11.0 in cash in exchange for its 50% interest. A subsidiary of the Company and SunCor are each guarantors of 50% of $4.6 aggregate principal amount of the joint venture's debt. At December 31, 1995, the joint venture had assets of $32.6, liabilities of $10.5 and equity of $22.1. For the year ended December 31, 1995, the joint venture incurred losses of $.2. On July 8, 1993, the Company, through various subsidiaries, acquired control of the general partner and became responsible for the management of SHRP, Ltd. for an investment of $9.1. The Company's subsidiaries held an initial equity interest in SHRP, Ltd. of 29.7%. The Company increased its equity interest in SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in October 1994. At December 31, 1994, SHRP, Ltd. had assets of $76.9 ($6.5 current), liabilities of $88.6 ($13.4 current) and a deficiency in net assets of $11.7. SHRP, Ltd. incurred net losses for the years ended December 31, 1994 and 1993 of approximately $20.0 and $5.9, respectively. The Company recorded losses with respect to its investment in SBRP, Ltd. of $13.1 and $1.6 for the year ended December 31, 1994 and for the period from July 8, 1993 to December 31, 1993, respectively. F-49 245 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1995 ACQUISITION OF MAJORITY INTEREST IN SHRP, LTD. On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together with SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the Company), filed voluntary petitions seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy plan (the "Plan") was confirmed on September 22, 1995, and the transactions called for by the Plan were completed on October 6, 1995. Such transactions included cash contributions to SHRP, Ltd. from a new investor group totaling $5.9 (of which wholly owned subsidiaries of the Company contributed $5.8). Additionally, a wholly owned subsidiary of the Company contributed a tract of land to SHRP, Ltd. (with a fair market value of $2.3). The new managing general partner of the reorganized SHRP, Ltd. is a wholly owned subsidiary of the Company. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3 (which approximated fair value), $14.6 aggregate initial principal amount of the SHRP Notes (as defined in Note 4) and the corresponding equity interest in SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which the selling noteholder was entitled. After giving effect to the previously described transactions, wholly owned subsidiaries of the Company hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SBRP, Ltd. Supplemental cash flows disclosure related to the acquisition of SHRP, Ltd. in October 1995 is as follows: assets acquired of $29.3, assumed liabilities of $20.7, and additional minority interest of $2.8. The assets and liabilities of SHRP, Ltd. are included in the accompanying Consolidated Balance Sheet as of December 31, 1995, and the results of SHRP, Ltd.'s operations and cash flows for the period from October 6, 1995 to December 31, 1995 are included in the accompanying Consolidated Statements of Operations and Cash Flows. The carrying value of SHRP, Ltd.'s assets and liabilities following its emergence from the Chapter 11 proceedings differs in material amounts from those of the predecessor entity. The pro forma disclosures, assuming SHRP, Ltd. was included in the Company's consolidated results of operations are as follows: revenue -- $2,579.3, $2,135.9; income (loss) before extraordinary items -- $50.6, ($125.0); net income (loss) -- $50.6, ($130.4); and earnings (loss) per common and common equivalent share -- $5.35, ($13.80), for the years ended December 31, 1995 and 1994, respectively. The pro forma information excludes amounts attributable to SHRP, Ltd.'s extraordinary gain of $14.9 resulting from the restructuring transactions contained in the Plan. The extraordinary gain was omitted because the Company believes the item would distort normal trends. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
DECEMBER 31, ESTIMATED --------------------- USEFUL LIVES 1995 1994 ------------ -------- -------- Land and improvements.............................. 5-30 years $ 185.8 $ 176.1 Buildings.......................................... 5-45 years 272.4 259.6 Machinery and equipment............................ 3-40 years 1,388.5 1,330.8 Construction in progress........................... 63.3 45.0 -------- -------- 1,910.0 1,811.5 Less: accumulated depreciation..................... (678.1) (579.9) -------- -------- $1,231.9 $1,231.6 ======== ========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $105.4, $105.7 and $104.9, respectively. F-50 246 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- Corporate: 14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000................................................ $ 25.0 $ 25.0 12 1/2% MAXXAM Subordinated Debentures due December 15, 1999, net of discount............................................. 16.5 20.9 Other.......................................................... .1 .2 Aluminum Operations: 1994 KACC Credit Agreement..................................... 13.1 6.7 9 7/8% KACC Senior Notes due February 15, 2002, net of discount.................................................... 223.8 223.6 Alpart CARIFA Loan............................................. 60.0 60.0 12 3/4% KACC Senior Subordinated Notes due February 1, 2003.... 400.0 400.0 Other.......................................................... 61.2 69.2 Forest Products Operations: 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015........................................................ 350.2 363.8 11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100.0 100.0 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount............................................. 92.5 82.8 10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235.0 235.0 Other.......................................................... .8 .9 Real Estate and Other Operations: 11% SHRP, Ltd. Senior Secured Extendible Notes due September 1, 2001, net of discount....................................... 13.3 -- RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3%............................................... 8.0 10.0 MCOP Credit Agreement.......................................... .7 2.6 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment........................ 10.0 15.5 -------- -------- 1,610.2 1,616.2 Less: current maturities.................................... (25.1) (33.7) -------- -------- $1,585.1 $1,582.5 ======== ========
CORPORATE 14% MAXXAM Senior Subordinated Reset Notes due 2000 (the "Reset Notes") Pursuant to the terms of the indenture governing the Reset Notes, no further adjustments to the interest rate are permitted. The Reset Notes are redeemable at the Company's option, in whole or in part, at par. 12 1/2% MAXXAM Subordinated Debentures due 1999 (the "12 1/2% Debentures") The 12 1/2% Debentures, which are net of discount of $1.1 and $1.7 at December 31, 1995 and 1994, respectively, have mandatory redemptions of $3.2 in December 1997 and $3.3 in December 1998. The 12 1/2% Debentures are redeemable at the Company's option, in whole or in part, at par. F-51 247 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) MAXXAM Demand Loan Agreement On October 10, 1994, the Company entered into a demand loan and pledge agreement (the "Custodial Trust Agreement") with Custodial Trust Company providing for up to $25.0 in borrowings. Any amounts drawn would be payable upon demand and be secured by Kaiser common stock owned by the Company (or such other marketable securities acceptable to the lender) with an initial market value (as defined therein) of approximately three times the amount borrowed. Borrowings under the Custodial Trust Agreement would bear interest at the prime rate plus 1% per annum. The Custodial Trust Agreement contains a negative pledge on 22 million shares of Kaiser's common stock owned by the Company and provides that the Company may sell such shares upon 24 hours notice to the Custodial Trust Company. No borrowings were outstanding as of December 31, 1995. ALUMINUM OPERATIONS The 1994 KACC Credit Agreement (as amended, the "1994 KACC Credit Agreement") The 1994 KACC Credit Agreement consists of a $325.0 five-year secured revolving line of credit which matures in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base relating to eligible accounts receivable and inventory. As of December 31, 1995, $259.3 (of which $72.4 could have been used for letters of credit) was available to KACC under the 1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus 1 1/2% or LIBOR (Reserve Adjusted) (as defined) plus 3 1/4%. Effective June 30, 1995, the interest rate margins applicable to borrowings under the 1994 KACC Credit Agreement may be reduced by up to 1 1/2% (non-cumulatively), based on a financial test, determined quarterly. As of December 31, 1995, the financial test permitted a reduction of 1 1/2% per annum in margins effective January 1, 1996. Kaiser recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to Kaiser's previous credit agreement (the "1989 KACC Credit Agreement"). The 1994 KACC Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on Kaiser's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures and enter into unrelated lines of business. The 1994 KACC Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding Kaiser's Gramercy alumina plant), (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks and substantially all other personal property of KACC and certain of its subsidiaries, (iii) a pledge of all of the stock of KACC owned by Kaiser, and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries and pledges of a portion of the stock of certain partially owned foreign affiliates. Substantially all of the identifiable assets of the bauxite and alumina and aluminum processing segments (see Note 11) are attributable to KACC and collateralize the 1994 KACC Credit Agreement indebtedness. 9 7/8% KACC Senior Notes due 2002 (the "KACC Senior Notes") Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") (see Note 7), KACC issued $225.0 of the KACC Senior Notes. The net proceeds from the offering of the KACC Senior Notes were used to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement immediately prior to the effectiveness of the F-52 248 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1994 KACC Credit Agreement and for working capital and general corporate purposes. The KACC Senior Notes are net of discount of $1.2 and $1.4 at December 31, 1995 and 1994, respectively. 12 3/4% KACC Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Notes") On February 1, 1993, KACC issued $400.0 of the KACC Senior Subordinated Notes. The net proceeds from the sale of the KACC Senior Subordinated Notes were used to retire KACC's 14 1/4% Senior Subordinated Notes due 1995, to prepay $18.0 of the term loan under the 1989 KACC Credit Agreement and to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0, consisting primarily of the payment of premiums and the write-off of unamortized discount and deferred financing costs on the 14 1/4% Senior Subordinated Notes. The obligations of KACC with respect to the KACC Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. Pursuant to the terms of the indentures governing the KACC Senior Notes and the KACC Senior Subordinated Notes, at December 31, 1995, $66.0 was available for payment of dividends on Kaiser's common stock. However, pursuant to the terms of the 1994 KACC Credit Agreement, at December 31, 1995, Kaiser is precluded from paying any dividends on its common stock. Further, the indentures governing the KACC Senior Notes and the KACC Subordinated Notes provide that KACC must offer to purchase such notes upon the occurrence of a Change of Control (as defined therein), and the 1994 KACC Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. Alpart CARIFA Loan In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned subsidiary of KACC) entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal amount of Series A bonds matures on June 1, 2008. Substantially all of the Series A bonds bear interest at a floating rate of 87% of the applicable LIBID rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B bonds matures on June 1, 2007 and bears interest at a fixed rate of 8.25%. Proceeds from the sale of the bonds were used by Alpart to refinance interim loans from the partners in Alpart, to pay eligible project costs for the expansion and modernization of its alumina refinery and related port and bauxite mining facilities, and to pay certain costs of issuance. Under the terms of the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined by applicable laws. Alpart has agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. Alpart's obligations under the loan agreement are secured by a $64.2 letter of credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed by Kaiser's minority partner). FOREST PRODUCTS OPERATIONS Scotia Pacific Timber Notes and 10 1/2% Pacific Lumber Senior Notes due 2003 (the "Pacific Lumber Senior Notes") On March 23, 1993, Pacific Lumber issued $235.0 of the Pacific Lumber Senior Notes and its newly formed wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"), issued $385.0 of the Timber Notes. Pacific Lumber and Scotia Pacific used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163.8 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, F-53 249 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1996 (the "Series A Notes"), (b) $299.7 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes"), and (c) $41.7 aggregate principal amount of Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"), (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption, (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities, (iv) repay Pacific Lumber's $28.9 cogeneration facility loan, (v) fund the initial deposit of $35.0 to an account held by the trustee for the Timber Notes (the "Liquidity Account"), and (vi) pay a $25.0 dividend to a subsidiary of MGI. These transactions resulted in a pre-tax extraordinary loss of $38.1, consisting primarily of the payment of premiums and the write-off of unamortized discounts and deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179.4 of the Company's consolidated balance at December 31, 1995), (ii) substantially all of Scotia Pacific's property and equipment, and (iii) other property including cash equivalents reserved for debt service payments and the funds deposited in the Liquidity Account. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Principal and interest on the Timber Notes are payable semi-annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber Revolving Credit Agreement (as amended and restated, the "Pacific Lumber Credit Agreement") Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31, 1998, are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for borrowings of up to $60.0, of which $15.0 may be used for standby letters of credit and $30.0 is restricted to timberland F-54 250 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48.1 of borrowings was available under the Pacific Lumber Credit Agreement, of which $3.1 was available for letters of credit and $30.0 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11.9. The Pacific Lumber Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes, and the Pacific Lumber Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1995, under the most restrictive of these covenants, approximately $15.7 of dividends could be paid by Pacific Lumber. 11 1/4% MGI Senior Secured Notes due 2003 (the "MGI Senior Notes") and 12 1/4% MGI Senior Secured Discount Notes due 2003 (the "MGI Discount Notes") On August 4, 1993, MGI issued $100.0 aggregate principal amount of the MGI Senior Notes and $126.7 aggregate principal amount (approximately $70.0 net of original issue discount) of the MGI Discount Notes (together, the "MGI Notes"). The MGI Notes are secured by MGI's pledge of 100% of the common stock of Pacific Lumber, Britt and MAXXAM Properties Inc. (a wholly owned subsidiary of MGI) and by the pledge of 28 million shares of Kaiser's common stock owned by the Company. The indenture governing the MGI Notes, among other things, restricts the ability of MGI to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1995, under the most restrictive of these covenants, approximately $1.9 of dividends could be paid by MGI, of which $1.6 was paid in January 1996. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33.2 and $43.9 at December 31, 1995 and 1994, respectively. The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of each year. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semi-annual interest payments will become due on each February 1 and August 1 thereafter. MGI used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its former 12 3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. MGI used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20.0 dividend to the Company. The Company used such proceeds to redeem, on August 20, 1993, $20.0 aggregate principal amount of its Reset Notes at 100% of their principal amount plus accrued interest thereon. The early retirement of the 12 3/4% Notes and the redemption of $20.0 aggregate principal amount of the Reset Notes resulted in a pre-tax extraordinary loss of $9.8 consisting of net interest cost, the write-off of unamortized deferred financing costs, premiums and the write-off of unamortized original issue discount REAL ESTATE AND OTHER OPERATIONS 11% SHRP, Ltd. Senior Secured Extendible Notes due 2001 (the "SHRP Notes") The SHRP Notes were issued on October 6, 1995 at an aggregate principal amount of $37.9, maturing on September 1, 2001. The SHRP Notes were recorded at their estimated fair value which resulted in a discount of approximately $17.1. At December 31, 1995, the aggregate principal amount (including accrued interest thereon) of the SHRP Notes and the unamortized discount were $38.8 and $17.0, respectively. On October 20, 1995, a wholly owned subsidiary of the Company purchased approximately 39% of the SHRP F-55 251 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Notes from an unrelated party. Accordingly, the amount of indebtedness shown in the accompanying table has been adjusted to reflect the elimination of the Company's holdings. Should the Texas Legislature pass certain gaming legislation, the SHRP Notes may be extended to September 1, 2003; such extension would increase the rate of interest to 13% per annum. The SHRP Notes are secured by substantially all of the assets of SHRP, Ltd., which aggregate $33.6 of the assets reflected on the accompanying Consolidated Balance Sheet at December 31, 1995. Interest on the SHRP Notes is payable in-kind on April 1 and October 1, and will not be payable in cash until a specified level of cash flow from operations has been achieved. Once cash interest payments commence, subsequent interest payments may not be paid in-kind. The indenture governing the SHRP Notes generally precludes the payment of cash distributions until two consecutive cash interest payments have been made. RTC Portfolio Secured Notes due 1999 (the "RTC Portfolio Loan") As of December 31, 1995, approximately $8.0 was outstanding pursuant to the RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan provides for additional borrowings of up to approximately $12.1 on or before March 31, 1996. The Company anticipates that such amount will be borrowed if such date is not extended. Upon the sale of any secured property or loan, principal payments are required based on the release price (as defined) of such property or loan. The entire amount of the loan must also be paid if the principal balance declines to less than $8.0. The MCOP Credit Agreement (as amended, the "MCOP Credit Agreement") On July 15, 1995, a real estate subsidiary of the Company, MCO Properties Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank which will expire on May 15, 1998. Borrowings under the MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables and real estate held for investment or development and sale, (ii) MCOP's pledge of the common stock of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's subsidiaries and the Company. Further, the Company has pledged MCOP's common stock as additional security. Interest is computed at the bank's prime rate plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit Agreement contains various covenants including a minimum net worth requirement and limitations on the payment of dividends, investments and the incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0, of which $8.5 may be used for standby letters of credit. The available credit is subject to borrowing base limitation calculations. As of December 31, 1995, $10.6 of additional borrowings was available under the MCOP Credit Agreement and outstanding letters of credit amounted to $2.1. F-56 252 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) OTHER Maturities Scheduled maturities of long-term debt outstanding at December 31, 1995 are as follows:
YEARS ENDING DECEMBER 31, -------------------------------------------------- 1996 1997 1998 1999 2000 THEREAFTER ----- ----- ----- ----- ----- ---------- 14% MAXXAM Senior Subordinated Reset Notes................................... $ -- $ -- $ -- $ -- $25.0 $ -- 12 1/2% MAXXAM Subordinated Debentures.... -- 3.2 3.3 11.1 -- -- 1994 KACC Credit Agreement................ -- -- -- 13.1 -- -- 9 7/8% KACC Senior Notes.................. -- -- -- -- -- 225.0 Alpart CARIFA Loan........................ -- -- -- -- -- 60.0 12 3/4% KACC Senior Subordinated Notes.... -- -- -- -- -- 400.0 7.95% Scotia Pacific Timber Collateralized Notes................................... 14.1 16.2 19.3 21.6 24.0 255.0 11 1/4% MGI Senior Secured Notes.......... -- -- -- -- -- 100.0 12 1/4% MGI Senior Secured Discount Notes................................... -- -- -- -- -- 125.7 10 1/2% Pacific Lumber Senior Notes....... -- -- -- -- -- 235.0 11% SHRP, Ltd. Senior Secured Extendible Notes................................... -- -- -- -- -- 43.4 RTC Portfolio secured notes............... -- -- -- 8.0 -- -- Other..................................... 11.0 10.2 10.1 1.6 2.0 38.0 ----- ----- ----- ----- ----- -------- $25.1 $29.6 $32.7 $55.4 $51.0 $1,482.1 ===== ===== ===== ===== ===== ========
Capitalized Interest Interest capitalized during the years ended December 31, 1995, 1994 and 1993 was $2.8, $3.0 and $4.4, respectively. Restricted Net Assets of Subsidiaries Certain debt instruments restrict the ability of the Company's subsidiaries to transfer assets, make loans and advances and pay dividends to the Company. As of December 31, 1995, all of the assets relating to the Company's aluminum, forest products, real estate and other operations are subject to such restrictions. The Company could eliminate all of such restrictions with respect to approximately $200.2 (see Note 11) of the Company's real estate assets with the extinguishment of $18.7 of debt. 5. INCOME TAXES Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles by geographic area is as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------ ------- ------- Domestic............................................... $(49.4) $(177.9) $(223.4) Foreign................................................ 143.9 6.1 12.0 ------ ------- ------- $ 94.5 $(171.8) $(211.4) ====== ======= =======
F-57 253 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Income taxes are classified as either domestic or foreign based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is subject to domestic income taxes. The credit (provision) for income taxes on income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles consists of the following:
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 ------ ------ ------ Current: Federal................................................ $ (4.3) $ -- $ (.1) State and local........................................ (.4) (.2) (1.3) Foreign................................................ (40.2) (18.0) (7.9) ------ ------ ------ (44.9) (18.2) (9.3) ------ ------ ------ Deferred: Federal................................................ 35.4 94.3 77.1 State and local........................................ (.4) .4 2.7 Foreign................................................ (4.9) .6 12.0 ------ ------ ------ 30.1 95.3 91.8 ------ ------ ------ $(14.8) $ 77.1 $ 82.5 ====== ====== ======
The 1994 federal deferred credit for income taxes of $94.3 includes $36.0 for the benefit of operating loss carryforwards generated in 1994. The 1993 federal deferred credit for income taxes of $77.1 includes $29.2 for the benefit of operating loss carryforwards generated in 1993 and a $7.0 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles is as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------ ------- ------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles.................................... $ 94.5 $(171.8) $(211.4) ====== ======= ======= Amount of federal income tax based upon the statutory rate..................................................... $(33.1) $ 60.1 $ 74.0 Revision of prior years' tax estimates and other changes in valuation allowances..................................... 24.2 16.7 (.6) Percentage depletion....................................... 4.2 5.6 6.4 Foreign taxes, net of federal tax benefit.................. (6.9) (5.3) (5.0) State and local taxes, net of federal tax benefit.......... (2.4) .1 .9 Increase in net deferred income tax assets due to tax rate change................................................... -- 1.8 7.0 Removal of Kaiser from the Company's consolidated federal return group............................................. -- -- 3.5 Other...................................................... (.8) (1.9) (3.7) ------ ------- ------- $(14.8) $ 77.1 $ 82.5 ====== ======= =======
F-58 254 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The caption entitled "Revision of prior years' tax estimates and other changes in valuation allowances," as shown in the preceding table, includes amounts for the reversal of reserves which the Company no longer believes are necessary, other changes in prior year tax estimates and changes in valuation allowances with respect to deferred income tax assets. Generally, the reversal of reserves relate to the expiration of the relevant statute of limitations with respect to certain income tax returns, or the resolution of specific income tax matters with the relevant tax authorities. For the years ended December 31, 1995, 1994 and 1993, the reversal of reserves which the Company believes are no longer necessary amounted to $20.0, $20.1 and $2.9, respectively. As shown in the Consolidated Statement of Operations for the years ended December 31, 1994 and 1993, the Company reported extraordinary losses on the early extinguishment of debt. The Company reported the losses net of related deferred federal income taxes of $2.9 and $27.5, respectively, which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $26.6. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of various subsidiaries in prior years. As a result of restating these assets and liabilities, the loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was increased by $5.9. F-59 255 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Certain of the deferred income tax assets and liabilities listed in the following table are included in the Consolidated Balance Sheet in the captions entitled prepaid expenses and other current assets, other accrued liabilities and other noncurrent liabilities. The components of the Company's net deferred income tax assets (liabilities) are as follows:
DECEMBER 31, ------------------- 1995 1994 ------- ------- Deferred income tax assets: Postretirement benefits other than pensions.................... $ 293.6 $ 297.2 Loss and credit carryforwards.................................. 190.5 208.8 Other liabilities.............................................. 139.0 133.5 Real estate.................................................... 58.1 71.5 Pensions....................................................... 56.0 51.0 Timber and timberlands......................................... 41.9 46.2 Foreign and state deferred income tax liabilities.............. 30.8 28.1 Property, plant and equipment.................................. 23.3 23.7 Other.......................................................... 32.5 26.7 Valuation allowances........................................... (141.5) (147.0) ------- ------- Total deferred income tax assets, net.................. 724.2 739.7 ------- ------- Deferred income tax liabilities: Property, plant and equipment.................................. (177.9) (202.7) Investments in and advances to unconsolidated affiliates....... (66.4) (63.8) Inventories.................................................... (15.5) (27.4) Other.......................................................... (22.8) (20.0) ------- ------- Total deferred income tax liabilities.................. (282.6) (313.9) ------- ------- Net deferred income tax assets................................... $ 441.6 $ 425.8 ======= =======
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1995, approximately $291.8 of the net deferred income tax assets listed above are attributable to Kaiser. Of this amount, approximately $97.7 relates to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for these carryforwards, including any limitations concerning their use, the year the carryforwards expire and the levels of taxable income necessary for utilization. For example, full valuation allowances were provided for certain credit carryforwards that expire in the near term. With regard to future levels of income, the Company believes that Kaiser, based on the cyclical nature of its business, its history of prior operating earnings and its expectations for future years, will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. The remaining portion of Kaiser's net deferred income tax assets is approximately $194.1 at December 31, 1995. A principal component of this amount is the tax benefit associated with the accrual for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of this accrual will occur over a thirty to forty-year period. If such deductions create or increase a net operating loss in any one year, Kaiser has the ability to carry forward such loss for fifteen taxable years. For these reasons, the Company believes a long-term view of profitability is appropriate and has concluded that this net deferred income tax asset will more likely than not be realized despite Kaiser's operating losses incurred in recent years. The net deferred income tax assets listed above which are not attributable to Kaiser are approximately $149.8 as of December 31, 1995. This amount includes approximately $91.2 which relates to the excess of the tax basis over financial statement basis with respect to timber and F-60 256 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) timberlands and real estate. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. The Company files consolidated federal income tax returns together with its domestic subsidiaries. As a consequence of Kaiser's public offering of shares on June 30, 1993, as discussed in Note 7, Kaiser and its subsidiaries are no longer included in the consolidated federal income tax return group of the Company. Kaiser and its subsidiaries have become members of a new consolidated return group of which Kaiser is the common parent corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group files consolidated federal income tax returns for taxable periods beginning on or after July 1, 1993. The following table presents the tax attributes for federal income tax purposes at December 31, 1995 attributable to the Company and to the New Kaiser Tax Group. The utilization of certain of these tax attributes is subject to limitations.
NEW KAISER TAX GROUP THE COMPANY -------------------- -------------------- EXPIRING EXPIRING THROUGH THROUGH ----------- ----------- Regular Tax Attribute Carryforwards: Current year net operating loss................ $26.4 2010 $ -- -- Prior year net operating losses................ 51.2 2009 32.9 2007 General business tax credits................... .9 2002 28.4 2008 Foreign tax credits............................ -- -- 89.7 2000 Alternative minimum tax credits................ 1.5 Indefinite 19.4 Indefinite Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss................ $21.6 2010 $ -- -- Prior year net operating losses................ 42.4 2009 17.1 2002 Foreign tax credits............................ -- -- 83.5 2000
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has unfunded defined postretirement benefit plans which cover most of its employees. Under the plans, employees are eligible for health care benefits (and life insurance benefits for Kaiser employees) upon retirement. Retirees from companies other than Kaiser make contributions for a portion of the cost of their health care benefits. The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $437.9, net of related benefits for minority interests of $63.6 and income taxes of $236.8. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal statutory rate in effect on the date SFAS 106 was adopted, before giving effect to certain valuation allowances. The adoption of SFAS 106 increased the Company's loss before extraordinary item and cumulative effect of changes in accounting principles by $13.3, or $1.41 per share ($19.9 before income taxes), for the year ended December 31, 1993. F-61 257 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for the United Steelworkers of America ("USWA") retirees who retire after December 31, 1995, and when they become 65, and voluntary for other hourly retirees of Kaiser's operations in California, Louisiana, and Washington. The USWA contract, ratified on February 28, 1995, also contained changes to the retiree health benefits including increased retirees' copayments, deductibles, and coinsurance, and restricted Medicare Part B premium reimbursement to the 1995 level for employees retiring after November 1, 1994. These changes will lower Kaiser's expenses for retiree medical care. Postretirement benefits other than pensions are generally provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. A summary of the components of net periodic postretirement benefit cost is as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ----- ----- ----- Service cost-benefits earned during the year................ $ 4.9 $ 8.8 $ 7.4 Interest cost on accumulated postretirement benefit obligation................................................ 52.7 57.5 59.0 Net amortization and deferral............................... (9.1) (3.2) -- ----- ----- ----- Net periodic postretirement benefit cost.................... $48.5 $63.1 $66.4 ===== ===== =====
The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Retirees........................................................... $558.9 $568.3 Actives eligible for benefits...................................... 31.5 31.4 Actives not eligible for benefits.................................. 65.5 102.8 ------ ------ Accumulated postretirement benefit obligation............ 655.9 702.5 Unrecognized prior service cost.................................... 111.1 31.8 Unrecognized net gain (loss)....................................... 22.4 55.8 ------ ------ Postretirement benefit liability......................... $789.4 $790.1 ====== ======
The annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rates) are approximately 8.0% and 7.5% for retirees under age 65 and over age 65, respectively, and are assumed to decrease gradually to approximately 5.0% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $69.7 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $7.9. The discount rates and rates of compensation increase used in determining the accumulated postretirement benefit obligation were 7.5% and 5.0% at December 31, 1995, respectively, and 8.5% and 5.0% at December 31, 1994, respectively. RETIREMENT PLANS The Company has various retirement plans which cover essentially all employees. Most of the Company's employees are covered by defined benefit plans. The benefits are determined under formulas based on years of F-62 258 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) service and the employee's compensation. The Company's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by ERISA. The Company has various defined contribution savings plans designed to enhance the existing retirement programs of participating employees. Under the MAXXAM Inc. Savings Plan (the "MAXXAM Savings Plan"), employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the MAXXAM Savings Plan, the Company's contributions consist of a matching contribution of up to 4% of the compensation of participants for each calendar quarter. Under the Kaiser Aluminum Savings and Retirement Plan, salaried employees may elect to contribute from 2% to 18% of their compensation to the plan. For those eligible participants who have elected to make contributions to the plan, Kaiser's contributions are determined based on earnings and net worth formulas. In 1995, Kaiser adopted the Kaiser Aluminum Total Compensation System, an unfunded incentive compensation program, which provides incentive pay based upon performance against plan over a three-year period. A summary of the components of net periodic pension costs for the defined benefit plans and total pension costs for the defined contribution plans and non-qualified retirement and incentive plans is as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 ------- ------ ------ Defined benefit plans: Service cost-benefits earned during the year.......... $ 12.1 $ 13.6 $ 13.0 Interest cost on projected benefit obligations........ 62.5 59.5 60.8 Return on assets: Actual gain........................................ (118.7) (.8) (73.9) Deferred gain (loss)............................... 64.6 (53.0) 15.9 Net amortization and deferral......................... 8.7 2.8 4.7 ------- ------ ------ Net periodic pension cost............................. 29.2 22.1 20.5 Defined contribution plans.............................. 5.4 2.8 1.7 Non-qualified retirement and incentive plans............ 8.2 5.0 4.3 ------- ------ ------ $ 42.8 $ 29.9 $ 26.5 ======= ====== ======
F-63 259 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The following table sets forth the funded status and amounts recognized for the defined benefit plans in the Consolidated Balance Sheet:
DECEMBER 31, ------------------- 1995 1994 ------- ------- Actuarial present value of accumulated plan benefits: Vested benefit obligation...................................... $ 781.7 $ 684.3 Non-vested benefit obligation.................................. 31.1 42.9 ------- ------- Total accumulated benefit obligation................... $ 812.8 $ 727.2 ======= ======= Projected benefit obligation..................................... $ 853.1 $ 761.2 Plan assets at fair value, primarily common stocks and fixed income obligations............................................. (623.1) (546.9) ------- ------- Projected benefit obligation in excess of plan assets............ 230.0 214.3 Unrecognized net transition obligation........................... (.6) (.9) Unrecognized net loss............................................ (54.9) (40.4) Unrecognized prior service cost.................................. (29.1) (31.6) Adjustment required to recognize minimum liability............... 49.8 42.9 ------- ------- Accrued pension cost................................... $ 195.2 $ 184.3 ======= =======
The assumptions used in accounting for the defined benefit plans were as follows:
DECEMBER 31, ----------------------- 1995 1994 1993 ---- ---- ----- Rate of increase in compensation levels...................... 5.0% 5.0% 5.0% Discount rate................................................ 7.5% 8.5% 7.5% Expected long-term rate of return on assets.................. 9.5% 9.5% 10.0%
The Company has recorded an additional pension liability equal to the excess of the accumulated benefit obligation over the fair value of plan assets. The amount of the additional pension liability in excess of unrecognized prior service cost is recorded as a reduction to stockholders' equity. In 1995 and 1994, the pension liability adjustment increased by $4.7 and decreased by $12.5, respectively. These adjustments were recorded net of a related deferred federal and state income tax credit (provision) of $2.8 and ($7.3), respectively, which approximated the federal and state statutory rates. POSTEMPLOYMENT BENEFITS The Company adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") as of January 1, 1993. The costs of postemployment benefits are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 was recorded as a charge to results of operations of $6.4, net of related benefits for minority interests of $1.0 and income taxes of $3.4. F-64 260 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 7. MINORITY INTERESTS Minority interests represent the following:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Kaiser Aluminum Corporation: Common stock, par $.01........................................... $ -- $ -- $.65 Depositary Shares........................................... -- 128.0 8.255% PRIDES.................................................... 98.1 100.1 Subsidiary redeemable preference stock: KACC Series A and B Cumulative Preference Stock, par $1.......... 29.7 29.1 KACC Cumulative Convertible Preference Stock, par $100........... 1.7 1.7 KACC Minority Interests: Alumina Partners of Jamaica...................................... 73.9 70.4 Volta Aluminium Company Limited.................................. 14.9 13.6 Kaiser LaRoche Hydrate Partners.................................. 2.5 1.4 Sam Houston Race Park, Ltd......................................... 2.4 -- ------ ------ $223.2 $344.3 ====== ======
As a result of Kaiser's issuance of preferred stock in 1993 and 1994, the 1995 redemption of the Depositary Shares (each as described below), and the issuance of Kaiser's common stock in connection with the LTIP (as described below), the Company's equity interest in Kaiser has decreased to approximately 62% on a fully diluted basis, as of December 31, 1995. KAISER PROPOSED RECAPITALIZATION On February 5, 1996, Kaiser announced that it had filed a preliminary proxy statement with the Securities and Exchange Commission relating to a proposed recapitalization. Under the terms of the proposed recapitalization, the relative ownership interest and voting power of stockholders would be unchanged as a result of the recapitalization (except as a result of the treatment of fractional shares). The proposed recapitalization would (i) provide for two classes of common stock: Class A Common Shares, $.01 par value, with one vote per share and a new lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote per share, (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorize 250 million shares to be designated as Common Stock, and (iii) change each issued share of Kaiser's existing common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock. Kaiser would pay cash in lieu of fractional shares. Kaiser anticipates that both the Class A Common Shares and the Common Stock would be approved for trading on the New York Stock Exchange. Upon the effective date of the recapitalization, approximately 23.6 million Class A Common Shares and 48.0 million shares of Common Stock would be issued and outstanding. The proportionate voting power of the holders of the PRIDES would increase immediately after the effectiveness of the recapitalization until such shares are redeemed or converted, which would occur on or before December 31, 1997. As of January 31, 1996, holders of the existing common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all stockholders. Immediately after the recapitalization, the voting power of such holders of the PRIDES would increase to 19.6% in the aggregate, with a corresponding reduction in the voting power of such holders of the existing common stock. At such time as the PRIDES were redeemed or converted, the relative voting power of such holders of the PRIDES would decrease and the relative voting power for both such holders of the PRIDES and the existing common stock would be approximately the same as it would have been had the recapitalization not occurred. F-65 261 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) $.65 DEPOSITARY SHARES On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). In connection with the issuance of the Depositary Shares, Kaiser issued an additional 2,132,950 of its Depositary Shares to MGI in exchange for a $15.0 promissory note issued by KACC which evidenced a $15.0 cash loan made by MGI to KACC in January 1993 (the "MGI Loan"). Kaiser made capital contributions and intercompany loans to KACC from the proceeds of the sale of the Series A Shares. KACC used approximately $13.7 of such funds to prepay the remaining balance of the term loan under the 1989 KACC Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement. The Depositary Shares called for the payment of quarterly dividends (when and as declared by Kaiser's Board of Directors) of approximately $3.2 ($.1625 per share). The Company accounted for Kaiser's issuance of the Depositary Shares as additional minority interest. On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted in the simultaneous redemption of all 19,382,950 Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and unpaid dividends up to and including the day immediately prior to the redemption date of $2.8, and (iii) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. During 1994, the Company sold 1,239,400 of the Depositary Shares for aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. From January through May of 1995, the Company sold the remaining Depositary Shares that it owned for aggregate net proceeds of $7.6, resulting in pre-tax gains of $1.3. As a result of these sales, the shares of Kaiser's common stock which were issued upon redemption of the Series A Shares are held by minority stockholders. The Company has recorded 100% of the losses attributable to Kaiser's common stock since July 1993, as Kaiser's cumulative losses through that date had eliminated Kaiser's equity with respect to its common stock. The redemption of Kaiser's Series A Shares, together with the voluntary redemption of 181,700 shares of PRIDES in 1995, decreased Kaiser's preferred equity, and reduced Kaiser's deficit in common equity, by $136.2. Accordingly, the Company recorded an adjustment to reduce the minority interests reflected on its Consolidated Balance Sheet for that same amount, with an offsetting decrease in the Company's stockholders' deficit. 8.255% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES During the first quarter of 1994, Kaiser consummated a public offering for the sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of the PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds to make non-interest bearing loans to KACC (evidenced by notes) which are designed to provide sufficient funds to make the required dividend payments on the PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $66.9 of such net proceeds to make capital contributions to KACC. Holders of shares of PRIDES have a 4/5 vote for each share held of record and, except as required by law, are entitled to vote together with the holders of Kaiser's common stock and together with the holders of any other classes or series of Kaiser's stock who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed or converted at the option of the holder, each outstanding share of PRIDES will mandatorily convert into one share of Kaiser's common stock. subject to adjustment in certain events, and the right to receive an amount in cash equal to all accrued and unpaid dividends thereon. Shares of PRIDES are not redeemable, at the election of Kaiser, prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, Kaiser may redeem any or all of the outstanding shares of PRIDES. Upon any such redemption, each holder will receive, in exchange for each share of PRIDES, the number of shares of Kaiser's common stock equal to F-66 262 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) (i) the sum of $11.9925, declining after December 31, 1996 to $11.75 until December 31, 1997, plus, in the event Kaiser does not elect to pay cash dividends to the redemption date, all accrued and unpaid dividends thereon divided by (ii) the Current Market Price (as defined) on the applicable date of determination, but in no event less than .8333 of a share of Kaiser's common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of Kaiser's common stock (equivalent to a conversion price of $14.10 per share of Kaiser's common stock), subject to adjustment in certain events. The number of shares of Kaiser's common stock a holder will receive upon redemption, and the value of the shares received upon conversion, will vary depending on the market price of Kaiser's common stock from time to time. The PRIDES call for the payment of quarterly dividends of approximately $2.1 ($.2425 per share). The Company accounted for Kaiser's issuance of the PRIDES as, additional minority interest. SUBSIDIARY REDEEMABLE PREFERENCE STOCK In March 1985, KACC entered into a three-year agreement with the USWA whereby shares of a new series of KACC Cumulative (1985 Series A) Preference Stock (the "Series A Stock") would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbargaining employees which provided for the issuance of KACC Cumulative (1985 Series B) Preference Stock (the "Series B Stock"). The Series A Stock and the Series B Stock ("Series A and B Stock") each have a liquidation and redemption value of $50 per share plus accrued dividends, if any, and have a total redemption value of $36.9 at December 31, 1995. Changes in Series A and B Stock are as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 -------- --------- --------- Shares: Beginning of year........................................... 912,167 1,081,548 1,163,221 Redeemed.................................................... (174,804) (169,381) (81,673) -------- --------- --------- End of year................................................. 737,363 912,167 1,081,548 ======== ========= =========
No additional Series A or B Stock will be issued. While held by the plan trustee, Series B Stock is entitled to cumulative annual dividends, when and as declared by KACC's Board of Directors, payable in Series B Stock or in cash at the option of KACC, based on a formula tied to KACC's income before tax from aluminum operations. When distributed to plan participants (generally upon separation from KACC, the Series A and B Stock is entitled to an annual cash dividend of $5 per share, payable quarterly, when and as declared by KACC's Board of Directors. Redemption fund agreements require KACC to make annual payments by March 31 of each year based on a formula tied to KACC's consolidated net income until the redemption funds are sufficient to redeem all Series A and B Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March 1994 and 1995, KACC contributed $4.3 for each of the years ended December 31, 1993 and 1994, and will contribute $4.3 in March 1996 for the year ended December 31, 1995. Under the USWA labor contract effective November 1, 1990, KACC was obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1994 at a price equal to its redemption value of $50 per share. The employees could elect to receive their shares, accept cash or place the proceeds into KACC's 401(k) savings plan. Under separate action, KACC also offered to purchase 40 shares of Series B Stock from active participants in 1994. Under the provisions of these contracts, in February 1994, KACC purchased $4.6 and $.8 of the Series A Stock and Series B Stock, respectively. F-67 263 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Under the USWA labor contract effective November 1, 1994, KACC was obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1995 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 80 shares from each participant in 1998. In addition, a profitability test was satisfied for 1995; therefore, KACC will offer to purchase from each active participant an additional 20 shares of such preference stock held in the stock ownership plan for the benefit of substantially the same employees in 1996. The employees may elect to receive their shares. accept cash or place the proceeds into KACC's 401(k) savings plan. KACC also will offer to make comparable purchases of Series B Stock from active participants. The Series A and B Stock is distributed in the event of death or retirement of the plan participant, or in other specified circumstances. KACC may also redeem such stock at $50 per share plus accrued dividends, if any. At the option of the plan participant, the trustee shall redeem stock distributed from the plans at the redemption value to the extent funds are available in the redemption fund. Under the Tax Reform Act of 1986, at the option of the plan participant, KACC must purchase distributed shares earned after December 31, 1985 at the redemption value on a five-year installment basis, with interest at market rates. The obligation of KACC to make such installment payments must be secured. The Series A and B Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates, or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restricts the ability of KACC to redeem or pay dividends on its common stock if KACC is in default on any dividends payable on the Series A and B Stock. KAISER STOCK INCENTIVE PLANS Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees. All compensation vested at December 31, 1993 under the LTIP was paid to the participants in cash or common stock of Kaiser. Under the LTIP, as amended, 764,092 restricted shares of Kaiser common stock were distributed to six Kaiser executives during 1993 for benefits generally earned but not vested as of December 31, 1992. These shares generally vest at the rate of 25% per year. Kaiser is recording the related expense of $6.5 over the four-year period ending December 31, 1996. In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock were reserved for awards or for payment of rights granted under the plan, of which 544,839 shares were available to be awarded at December 31, 1995. During 1994, 102,564 restricted shares, which vest at the rate of 25% per year, were distributed to two Kaiser executives. Kaiser is recording the related expense of $1.0 over the four-year period ending December 31, 1998. F-68 264 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) In 1993 and 1994, the Compensation Committee of Kaiser's Board of Directors approved the award of "nonqualified stock options" to members of management other than those participating in the LTIP. These options generally will vest at the rate of 20-25% per year. Information relating to nonqualified stock options is shown below:
1995 1994 1993 --------- --------- ------- Outstanding at beginning of year................... 1,119,680 664,400 -- Granted............................................ -- 494,800 664,400 Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920) -- Expired or forfeited............................... (38,095) (32,600) -- --------- --------- ------- Outstanding at end of year (prices ranging from $7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400 ========= ========= ======= Exercisable at end of year......................... 211,755 120,180 -- ========= ========= =======
8. STOCKHOLDERS' DEFICIT PREFERRED STOCK The holders of the Company's Class A $.05 Non-Cumulative Participating Convertible Preferred Stock (the "Class A Preferred Stock") are entitled to receive, if and when declared, preferential cash dividends at the rate of $.05 per share per annum and will participate thereafter on a share for share basis with the holders of stock in all cash dividends, other than cash dividends on the common stock in any fiscal year to the extent not exceeding $.05 per share. Stock dividends declared on the common stock will result in the holders of the Class A Preferred Stock receiving an identical stock dividend payable in shares of Class A Preferred Stock. At the option of the holder, the Class A Preferred Stock is convertible at any time into shares of common stock at the rate of one share of common stock for each share of Class A Preferred Stock. Each holder of Class A Preferred Stock is generally entitled to ten votes per share on all matters presented to a vote of the Company's stockholders. STOCK OPTION PLANS In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive Plan (the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and 1,000,000 shares of Class A Preferred Stock were reserved for awards or for payment of rights granted under the 1994 Omnibus Plan. The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984 Plan") which expired in June 1994, although previous grants thereunder remain outstanding. In December 1994, options to purchase 25,000 shares of common stock of the Company were granted to an executive officer. In addition, also in December 1994, another executive officer relinquished stock appreciation rights relating to 50,000 shares of common stock of the Company in exchange for options to purchase 45,000 shares of Class A Preferred Stock. The exercise price of these options is $30.375 per share (the quoted market price at the date of grant). In November 1995, stock appreciation rights equivalent to 36,000 shares of common stock of the Company were granted to certain employees with an exercise price of $45.15 (reflecting a 20% premium above the quoted market price at the date of grant). These options (or rights, as applicable) vest at the rate of 20% per year commencing one year from the date of grant. At December 31, 1995, 14,000 of rights granted pursuant to the 1994 Omnibus Plan were exercisable. The Company paid $2.7 with respect to the 1984 Plan for the year ended December 31, 1995. Amounts paid with respect to the 1984 Plan for the years ended December 31, F-69 265 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1994 and 1993 were not significant. The following table summarizes the options or rights outstanding and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan:
1995 1994 1993 ------- ------- ------- Outstanding at beginning of year...................... 238,000 267,800 226,300 Granted............................................... 36,000 70,000 50,000 Exercised............................................. (66,100) (37,050) (8,500) Expired or forfeited.................................. -- (62,750) -- ------- ------- ------- Outstanding at end of year (prices ranging from $13.75 to $45.15 per share)................................ 207,900 238,000 267,800 ======= ======= ======= Exercisable at end of year............................ 93,900 124,100 133,725 ======= ======= =======
Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted the MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to 35,000 shares of common stock are reserved for awards under the 1994 Director Plan. In May 1995 and 1994, options to purchase 900 shares and 1,500 shares of common stock, respectively, were granted to three non-employee directors. The exercise prices of there options are $31.60 and $36.50 per share, respectively, based on the quoted market price at the date of grant. The options vest at the rate of 25% per year commencing one year from the date of grant At December 31, 1995, 375 of such options were exercisable. In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the "MGI 1976 Plan") were converted into the right to receive, upon exercise of each option, $6.11 in cash, .25 shares of the Company's common stock (88,500 shares) and $6.00 principal amount of the Reset Notes. Options granted under the MGI 1976 Plan generally were exercisable for a period of ten years from the date of grant. During 1993, 60,000 options granted under the MGI 1976 Plan at a price of $10.875 per share were surrendered for a cash payment in lieu of the consideration referred to above. At December 31, 1993, all options granted under the MGI 1976 Plan bad been exercised. SHARES RESERVED FOR ISSUANCE At December 31, 1995, the Company had the following shares reserved for future issuance: Common shares: Class A Preferred Stock................................................. 668,856 1994 Omnibus Plan....................................................... 939,000 1994 Director Plan...................................................... 32,600 --------- 1,640,456 ========= Class A Preferred Stock: 1994 Omnibus Plan....................................................... 955,000 =========
RIGHTS On November 29, 1989, the Board of Directors of the Company declared a dividend to its stockholders consisting of (i) one Series A Preferred Stock Purchase Right (the "Series A Right") for each outstanding share of the Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase Right (the "Series B Right") for each outstanding share of the Company's common stock. The Series A Right and the Series B Right are collectively referred to herein as the "Rights." The Rights are exercisable only if a person or group of affiliated or associated persons (an "Acquiring Person") acquires beneficial ownership, or the right F-70 266 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) to acquire beneficial ownership, of 15% or more of the Company's common stock, or announces a tender offer that would result in beneficial ownership of 15% or more of the outstanding common stock. Any person or group of affiliated or associated persons who, as of November 29, 1989, was the beneficial owner of at least 15% of the outstanding common stock will not be deemed to be an Acquiring Person unless such person or group acquires beneficial ownership of additional shares of common stock (subject to certain exception). Each Series A Right, when exercisable, entities the registered holder to purchase from the Company one share of Class A Preferred Stock at an exercise price of $165.00, subject to adjustment. Each Series B Right, when exercisable, entities the registered holder to purchase from the Company one one-hundredth of a share of the Company's new Class B Junior Participating Preferred Stock, with a par value of $.50 per share (the "Junior Preferred Stock"), at an exercise price of $165.00, subject to adjustment. Under certain circumstances, including if any person becomes an Acquiring Person other than through certain offers for all outstanding shares of stock of the Company, or if an Acquiring Person engages in certain "self-dealing" transactions, each Series A Right would enable its holder to buy Class A Preferred Stock (or, under certain circumstances, preferred stock of an acquiring company) having a value equal to two times the exercise price of the Series A Right, and each Series B Right shall enable its holder to buy common stock of the Company (or, under certain circumstances, common stock of an acquiring company) having a value equal to two times the exercise price of the Series B Right. Under certain circumstances, Rights held by an Acquiring Person will be null and void. In addition, under certain circumstances, the Board is authorized to exchange all outstanding and exercisable Rights for stock, in the ratio of one share of Class A Preferred Stock per Series A Right and one share of common stock of the Company per Series B Right. The Rights, which do not have voting privileges, expire in 1999, but may be redeemed by action of the Board prior to that time for $.01 per right, subject to certain restrictions. VOTING CONTROL Federated Development Inc., a wholly owned subsidiary of Federated Development Company ("Federated"), and Mr. Charles E. Hurwitz collectively own 99.1% of the Company's Class A Preferred Stock and 31.1 % of the Company's common stock (resulting in combined voting control of approximately 60.7% of the Company). Mr. Hurwitz is the Chairman of the Board, President and Chief Executive Officer of the Company and Chairman and Chief Executive Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. 9. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company, principally through KACC, has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 10), letters of credit and other guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs and certain other costs of this joint venture. At December 31, 1995, such indebtedness was $88.9, with $26.7 due in 1997 and $62.2 due in 2002. KACC's share of payments, including operating costs and certain other expenses under the agreement, was $77.5, $85.6 and $86.7 for the years ended December 31, 1995, 1994 and 1993, respectively. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1995 are as follows: years ending December 31, 1996 -- $27.7; 1997 -- $25.5; 1998 -- $28.3; 1999 -- $33.0; 2000 -- $29.9; thereafter -- $187.3. Rental expense for operating leases was $31.4, $29.2 and $31.3 for the years ended December 31, F-71 267 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1995, 1994 and 1993, respectively. The minimum future rentals receivable under noncancelable subleases at December 31, 1995 were $67.6. ENVIRONMENTAL CONTINGENCIES Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to claim and litigation based upon such laws. KACC is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, (as amended by the Superfund Amendments Reauthorization Act of 1986, "CERCLA") and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on Kaiser's evaluation of these and other environmental matters. Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in other noncurrent liabilities:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ----- ----- ----- Balance at beginning of year................................ $40.1 $40.9 $46.4 Additional amounts.......................................... 3.3 2.8 1.7 Less expenditures........................................... (4.5) (3.6) (7.2) ----- ----- ----- Balance at end of year...................................... $38.9 $40.1 $40.9 ===== ===== =====
These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation action to be taken. Kaiser expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an aggregate of approximately $10.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $23.0 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved over the next twelve months. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ASBESTOS CONTINGENCIES KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At December 31, 1995, the number of claims pending was approximately 59,700, F-72 268 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) compared to 25,200 at December 31, 1994. During 1995, approximately 41,700 claims were received and approximately 7,200 were settled or dismissed. KACC believes that, although there can be no assurance, the recent increase in pending claims may be attributable in part to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to September 1, 1995. Based on past experience and reasonably anticipated future activity, KACC has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and KACC's actual costs could exceed these estimates. KACC's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $160.1, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at December 31, 1995. KACC estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While KACC does not believe there is a reasonable basis for estimating such costs beyond 2008, and, accordingly, did not accrue such costs, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. KACC believes that it has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. KACC believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of these policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $137.9 determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at December 31, 1995. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS CONTINGENCY AND RELATED MATTERS On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated formal administrative proceedings against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of United Savings Association of Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc. ("UFG"). The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore F-73 269 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 from the Company, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate impact, if any, of the outcome this matter may have on the Company's consolidated financial position, results of operations or liquidity. On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern District of Texas (the "Court"). The FDIC action did not name the Company as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that M. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. On December 8, 1995, the Company filed a motion to intervene in this action and conditioned it on the Court joining the OTS to this action. The Company filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting the Company's bid for USAT. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. It is impossible to assess the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS KACC enters into a number of financial instruments in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates, alumina, primary aluminum and fabricated aluminum products prices and the cost of purchased commodities. KACC has significant expenditures which are denominated in foreign currencies related to long-term purchase commitments with its affiliates in Australia and the United Kingdom, which expose KACC to certain exchange rate risks. In order to mitigate its exposure, KACC periodically enters into forward foreign exchange and currency option contracts in Australian dollars and Pounds Sterling to hedge these commitments. The forward foreign currency exchange contracts are agreements to purchase or sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1995, KACC had net forward foreign exchange contracts totaling $102.8 for the purchase of 142.4 Australian dollars through April 30, 1997. F-74 270 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) To mitigate its exposure to declines in the market prices of alumina, primary aluminum and fabricated aluminum products, while retaining the ability to participate in favorable pricing environments that may materialize, KACC has developed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. Under the principal components of KACC's price risk management strategy, which can be modified at any time, (i) varying quantities of KACC's anticipated production are sold forward at fixed prices, (ii) call options are purchased to allow KACC to participate in certain higher market prices, should they materialize, for a portion of KACC's primary aluminum and alumina sold forward, (iii) option contracts are entered into to establish a price range KACC will receive for a portion of its primary aluminum and alumina, and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its primary aluminum and alumina. In this regard, with respect to its 1996 anticipated production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of primary aluminum at fixed prices. In addition, KACC enters into forward fixed price arrangements with certain customers which provide for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In order to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward sales and options contracts. In this regard, at December 31, 1995, KACC had purchased 53,300 metric tons of primary aluminum under forward purchase contracts at fixed prices that expire at various times through December 1996. At December 31, 1995, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,721 per metric ton ($.78 per pound) of primary aluminum, and forward foreign exchange contracts was $4.1. KACC has established margin accounts with its counterparties related to aluminum forward sales and option contracts. KACC is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At December 31, 1995, KACC was not required to maintain any such margin deposits. At December 31, 1994, KACC had $50.5 on deposit with various counterparties with respect to such deposit requirements. These amounts were included in prepaid expenses and other current assets. KACC is exposed to credit risk in the event of non-performance by other parties to these currency and commodity contracts, but KACC does not anticipate non-performance by any of these counterparties given their creditworthiness. When appropriate, KACC arranges master netting agreements. F-75 271 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 11. SEGMENT INFORMATION The following tables present financial information by industry segment and by geographic area at December 31, 1995 and 1994 and for the three years ended December 31, 1995, 1994 and 1993. INDUSTRY SEGMENTS
REAL BAUXITE FOREST ESTATE AND YEARS AND ALUMINUM PRODUCTS OTHER ENDED ALUMINA PROCESSING OPERATIONS OPERATIONS CORPORATE TOTAL ----- ------- -------- ---------- ---------- --------- -------- Sales to unaffiliated customers.................... 1995 $514.2 $1,723.6 $242.6 $ 84.8 $ -- $2,565.2 1994 432.5 1,349.0 249.6 84.6 -- 2,115.7 1993 423.4 1,295.7 233.5 78.5 -- 2,031.1 Operating income (loss)........ 1995 37.2 179.3 74.3 (13.6) (19.6) 257.6 1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3 1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1) Effect of changes in accounting principles on operating income (loss): Postretirement benefits other than pensions.............. 1993 (2.3) (16.9) (.4) (.2) (.1) (19.9) Income taxes................. 1993 (6.3) (5.6) .1 .7 -- (11.1) Equity in earnings (loss) of unconsolidated affiliates.... 1995 3.5 15.7 -- (.1) -- 19.1 1994 (4.6) 2.7 -- -- (13.1) (15.0) 1993 (2.5) (.8) -- -- (1.6) (4.9) Depreciation and depletion..... 1995 30.0 58.4 25.3 6.2 1.0 120.9 1994 32.3 57.2 24.7 5.9 1.0 121.1 1993 33.8 57.3 24.5 4.1 1.1 120.8 Capital expenditures........... 1995 30.2 49.2 9.9 10.5 .2 100.0 1994 29.4 40.6 11.3 7.6 .4 89.3 1993 35.8 31.9 11.1 7.1 .3 86.2 Investments in and advances to unconsolidated affiliates.... 1995 130.3 47.9 -- 10.9 -- 189.1 1994 137.1 32.6 -- -- -- 169.7 Identifiable assets............ 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3 1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
Sales to unaffiliated customers exclude intersegment sales between bauxite and alumina and aluminum processing of $159.7, $146.8 and $129.4 for the years ended December 31, 1995, 1994 and 1993, respectively. Intersegment sales are made on a basis intended to reflect the market value of the products. Operating losses for Corporate represent general and administrative expenses of MAXXAM Inc. that are not attributable to the Company's industry segments. General and administrative expenses of Kaiser are allocated in, the Company's industry segment presentation based upon those segments' ratio of sales to unaffiliated customers. F-76 272 MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) GEOGRAPHICAL INFORMATION
YEARS OTHER ENDED DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL ----- -------- --------- ------ ------- ------------ -------- Sales to unaffiliated customers... 1995 $1,916.9 $ 191.7 $239.4 $217.2 $ -- $2,565.2 1994 1,597.4 169.9 180.0 168.4 -- 2,115.7 1993 1,489.8 155.4 207.5 178.4 -- 2,031.1 Sales and transfers among geographic areas................ 1995 -- 79.6 -- 191.5 (271.1) -- 1994 -- 98.7 -- 139.4.. (238.1) -- 1993 -- 88.2 -- 79.6.. (167.8) -- Operating income (loss)........... 1995 79.0 9.8 83.5 85.3 -- 257.6 1994 (65.3) 9.9 18.3 44.4 -- 7.3 1993 (118.6) (11.8) 21.9 12.4 -- (96.1) Equity in earnings (loss) of unconsolidated affiliates....... 1995 (.3) -- -- 19.4 -- 19.1 1994 (12.9) -- -- (2.1) -- (15.0) 1993 (1.6) -- -- (3.3) -- (4.9) Investments in and advances to unconsolidated affiliates....... 1995 12.1 27.1 -- 149.9 -- 189.1 1994 1.2 28.8 -- 139.7 -- 169.7 Identifiable assets............... 1995 3,037.0 381.9 196.5 216.9 -- 3,832.3 1994 2,926.5 364.8 200.0 199.5 -- 3,690.8
Sales and transfers among geographic areas are made on a basis intended to reflect the market value of the products. Included in results of operations are aggregate foreign currency translation and transaction gains of $5.3, $.8 and $4.9 for the years ended December 31, 1995, 1994 and 1993, respectively. Export sales were less than 10% of total revenues during the years ended December 31, 1995, 1994 and 1993. For the year ended December 31, 1995, sales to any one customer did not exceed 10% of consolidated revenues. For the years ended December 31, 1994 and 1993, the Company had bauxite and alumina sales of $58.2 and $40.7, respectively, and aluminum processing sales of $147.7 and $145.7, respectively, to one customer. F-77 273 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, ASSETS 1996 1995 ------------- ------------ (UNAUDITED) (IN MILLIONS OF DOLLARS) Current assets: Cash and cash equivalents........................................ $ 120.5 $ 104.2 Marketable securities............................................ 50.6 45.9 Receivables: Trade, net of allowance for doubtful accounts of $5.8 and $5.5 at September 30, 1996 and December 31, 1995, respectively.... 220.8 246.2 Other......................................................... 67.8 98.9 Inventories...................................................... 623.6 606.8 Prepaid expenses and other current assets........................ 156.5 129.7 -------- -------- Total current assets..................................... 1,239.8 1,231.7 Property, plant and equipment, net of accumulated depreciation of $750.6 and $678.1 at September 30, 1996 and December 31, 1995, respectively..................................................... 1,252.4 1,231.9 Timber and timberlands, net of depletion of $151.3 and $139.6 at September 30, 1996 and December 31, 1995, respectively........... 303.0 313.0 Investments in and advances to unconsolidated affiliates........... 186.3 189.1 Deferred income taxes.............................................. 435.5 414.0 Long-term receivables and other assets............................. 466.1 452.6 -------- -------- $ 3,883.1 $3,832.3 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................................. $ 170.7 $ 196.7 Accrued interest................................................. 24.8 58.0 Accrued compensation and related benefits........................ 126.2 166.5 Other accrued liabilities........................................ 170.6 148.4 Payable to affiliates............................................ 96.6 90.2 Long-term debt, current maturities............................... 26.4 25.1 -------- -------- Total current liabilities................................ 615.3 684.9 Long-term debt, less current maturities............................ 1,683.9 1,585.1 Accrued postretirement benefits.................................... 736.7 742.6 Other noncurrent liabilities....................................... 684.5 680.3 -------- -------- Total liabilities........................................ 3,720.4 3,692.9 -------- -------- Commitments and contingencies Minority interests................................................. 217.9 223.2 Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 669,701....................... .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,685..................................... 5.0 5.0 Additional capital............................................... 155.6 155.0 Accumulated deficit.............................................. (180.5) (208.5) Pension liability adjustment..................................... (16.1) (16.1) Treasury stock, at cost (shares held: preferred -- 845; common -- 1,355,512).................................................... (19.5) (19.5) -------- -------- Total stockholders' deficit.............................. (55.2) (83.8) -------- -------- $ 3,883.1 $3,832.3 ======== ========
The accompanying notes are an integral part of these financial statements. F-78 274 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Net sales: Aluminum operations................................................... $1,652.1 $1,646.7 Forest products operations............................................ 199.6 180.9 Real estate and other operations...................................... 69.4 65.0 -------- -------- 1,921.1 1,892.6 -------- -------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations................................................ 1,394.8 1,329.8 Forest products operations......................................... 114.6 96.0 Real estate and other operations................................... 57.1 48.4 Selling, general and administrative expenses.......................... 152.9 140.5 Depreciation and depletion............................................ 92.9 91.0 -------- -------- 1,812.3 1,705.7 -------- -------- Operating income........................................................ 108.8 186.9 Other income (expense): Investment, interest and other income (expense)....................... 35.1 8.7 Interest expense...................................................... (135.5) (136.1) -------- -------- Income (loss) before income taxes and minority interests................ 8.4 59.5 Credit (provision) for income taxes..................................... 27.1 (4.6) Minority interests...................................................... (7.5) (19.8) -------- -------- Net income.............................................................. $ 28.0 $ 35.1 ======== ======== Net income per common and common equivalent share....................... $ 2.96 $ 3.71 ======== ========
The accompanying notes are an integral part of these financial statements. F-79 275 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1995 ------- ------ (IN MILLIONS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 28.0 $ 35.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion.......................................... 92.9 91.0 Net sales of marketable securities.................................. 1.0 8.9 Minority interests.................................................. 7.5 19.8 Amortization of deferred financing costs and discounts on long-term debt............................................................... 15.9 14.3 Amortization of excess investment over equity in net assets of unconsolidated affiliates.......................................... 9.1 8.7 Equity in income of unconsolidated affiliates....................... (7.5) (17.1) Net gain on sale of real estate, mortgage loans and other assets.... (17.4) (3.8) Decrease (increase) in receivables.................................. 57.1 (72.9) Increase (decrease) in payable to affiliates and other liabilities........................................................ (40.5) 9.0 Increase in inventories............................................. (18.2) (68.6) Decrease in accrued interest........................................ (31.2) (33.1) Decrease (increase) in prepaid expenses and other assets............ (27.4) 82.9 Decrease in accounts payable........................................ (25.9) (4.8) Increase in accrued and deferred income taxes....................... (25.9) (11.1) Other............................................................... (4.0) (5.3) ------- ------ Net cash provided by operating activities...................... 13.5 53.0 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments.............. 35.0 24.8 Capital expenditures................................................... (108.0) (54.9) Other.................................................................. (2.4) (9.6) ------- ------ Net cash used for investing activities......................... (75.4) (39.7) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit agreements....................... 117.3 53.0 Proceeds from issuance of long-term debt............................... 4.3 7.2 Principal payments on long-term debt................................... (32.6) (35.3) Dividends paid to Kaiser's minority preferred stockholders............. (8.4) (18.4) Redemption of preference stock......................................... (5.2) (8.8) Other.................................................................. 2.8 4.6 ------- ------ Net cash provided by financing activities...................... 78.2 2.3 ------- ------ NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 16.3 15.6 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 104.2 84.6 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 120.5 $100.2 ======= ====== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net repayments of margin borrowings for marketable securities.......... $ -- $ 6.9 Reduction of stockholders' deficit due to redemption of Kaiser preferred stock..................................................... $ -- $134.3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest............................. $ 150.9 $154.8 Income taxes paid...................................................... 21.7 21.4
The accompanying notes are an integral part of these financial statements. F-80 276 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. GENERAL The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and related notes thereto contained in the Annual Report on Form 10-K filed by MAXXAM Inc. with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (the "Form 10-K"). All references to the "Company" include MAXXAM Inc. and its subsidiary companies unless otherwise noted or the context indicates otherwise. Any capitalized terms used but not defined in the following Condensed Notes to the Consolidated Financial Statements have the same meaning given to them as in the Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 1996, the consolidated results of operations for the nine months ended September 30, 1996 and 1995 and consolidated cash flows for the nine months ended September 30, 1996 and 1995. Certain reclassifications of prior period information have been made to conform to the current presentation. 2. RESTRICTED CASH Long-term receivables and other assets, as reflected on the accompanying consolidated balance sheet, includes restricted cash in the amount of $30.5 and $31.4 at September 30, 1996 and December 31, 1995, respectively. Such restricted cash represents the amount deposited into an account held by the Trustee under the indenture governing the Timber Notes of the Company's indirect wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"). At September 30, 1996 and December 31, 1995, cash and cash equivalents also includes $5.7 and $19.7, respectively, which is restricted for debt service payments on the succeeding note payment date for the Timber Notes. 3. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Aluminum Operations: Finished fabricated products............................. $ 108.4 $ 91.5 Primary aluminum and work in process..................... 190.0 195.9 Bauxite and alumina...................................... 122.5 119.6 Operating supplies and repair and maintenance parts...... 124.6 118.7 ------ ------ 545.5 525.7 ------ ------ Forest Products Operations: Lumber................................................... 58.8 65.5 Logs..................................................... 19.3 15.6 ------ ------ 78.1 81.1 ------ ------ $ 623.6 $606.8 ====== ======
F-81 277 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Corporate: 14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000............................................ $ 25.0 $ 25.0 12 1/2% MAXXAM Subordinated Debentures due December 15, 1999, net of discount................................... 16.7 16.5 Other...................................................... -- .1 Aluminum Operations: 1994 KACC Credit Agreement................................. 131.2 13.1 9 7/8% KACC Senior Notes due February 15, 2002, net of discount................................................ 224.0 223.8 Alpart CARIFA Loan......................................... 60.0 60.0 12 3/4% KACC Senior Subordinated Notes due February 1, 2003.................................................... 400.0 400.0 Other...................................................... 52.1 61.2 Forest Products Operations: 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015........................................... 336.1 350.2 10 1/2% Pacific Lumber Senior Notes due March 1, 2003...... 235.0 235.0 11 1/4% MGI Senior Secured Notes due August 1, 2003........ 100.0 100.0 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount................................... 101.0 92.5 Other...................................................... .8 .8 Real Estate and Other Operations: 11% SHRP, Ltd. Senior Secured Extendible Notes due September 1, 2001, net of discount...................... 15.6 13.3 RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3%........................................ 3.8 8.0 Other notes and contracts, secured by receivables, buildings, real estate and equipment.................... 9.0 10.7 -------- -------- 1,710.3 1,610.2 Less: current maturities..................................... (26.4) (25.1) -------- -------- $ 1,683.9 $1,585.1 ======== ========
On April 24, 1996, the Securities and Exchange Commission ("SEC") declared effective a shelf registration statement which the Company had filed with respect to up to $200.0 aggregate principal amount of debt securities. The Company has not determined the amount, interest rates, maturity, collateral (if any) or other terms of such debt securities or the timing of any offering of such debt securities. The debt securities could be secured by, or convertible into, shares of common stock of Kaiser Aluminum Corporation ("Kaiser," a majority-owned subsidiary of the Company) owned by the Company. In that regard, Kaiser also filed a shelf registration statement with the SEC, which was also declared effective on April 24, 1996, covering 10 million shares of its common stock owned by the Company. The Company would use the net proceeds (or portions thereof) from the sale of such debt securities to retire outstanding debt, for working capital and general corporate purposes. F-82 278 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) SUBSEQUENT EVENT -- KAISER OFFERING OF 10 7/8% SENIOR NOTES On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the "Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the "10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at maturity. The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness under KACC's credit agreement dated as of February 15, 1994, as amended (the "1994 KACC Credit Agreement") and KACC's 9 7/8% Senior Notes due 2002 (the "Senior Notes") in right and priority of payment and are guaranteed on a senior, unsecured basis by certain of Kaiser's subsidiaries (the "Subsidiary Guarantors"). Net proceeds from the Offering on the Issuance Date, after estimated expenses, were approximately $168.9, of which $91.7 were utilized to reduce the outstanding borrowings under the revolving credit facility of the 1994 KACC Credit Agreement to zero. The remaining net proceeds (approximately $77.2) were invested in short-term investments pending their application for working capital and general corporate purposes, including capital projects. On a pro forma basis, at September 30, 1996, after giving effect to the Offering and the application of proceeds therefrom, the Company's total consolidated indebtedness would have increased from $1,710.3 to $1,753.2, borrowing capacity of $273.1 would have been available for use under the 1994 KACC Credit Agreement and the Company would have had available additional cash proceeds from the Offering of $37.7. During October 1996, the 1994 KACC Credit Agreement was amended to, among other things, provide for the Offering of the 10 7/8% Senior Notes discussed above and to modify certain of the financial covenants contained in the 1994 KACC Credit Agreement. 5. PER SHARE INFORMATION Per share calculations are based on the weighted average number of common shares outstanding in each period and, if dilutive, weighted average common equivalent shares assumed to be issued from the exercise of common stock options based upon the average price of the Company's common stock during the period. 6. CREDIT (PROVISION) FOR INCOME TAXES The Company's credit (provision) for income taxes differs from the federal statutory rate due principally to (i) the revision of prior years' tax estimates and other changes in valuation allowances, (ii) percentage depletion, and (iii) foreign, state and local taxes, net of related federal tax benefits. Revision of prior years' tax estimates includes amounts for the reversal of reserves which the Company no longer believes are necessary. Generally, the reversal of reserves relate to the expiration of the relevant statute of limitations with respect to certain income tax returns, or the resolution of specific income tax matters with the relevant tax authorities. The credit for income taxes for the nine months ended September 30, 1996 includes a benefit of $30.4 relating to the reversal of reserves the Company no longer believes are necessary. The Company's provision for income taxes for the nine months ended September 30, 1995, reflects a benefit of $17.7 relating to the reversal of reserves the Company no longer believes are necessary. 7. CONTINGENCIES ENVIRONMENTAL CONTINGENCIES Kaiser and its principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based on such laws. KACC is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CER- F-83 279 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) CLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1996, the balance of such accruals, which is primarily included in other noncurrent liabilities, was $32.9. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations currently available facts, existing technology, and Kaiser's assessment of the likely remediation action to be taken. Kaiser expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $2.0 to $10.0 for the years 1996 through 2000 and an aggregate of approximately $7.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $26.5 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved in early 1997. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ASBESTOS CONTINGENCIES KACC is a defendant in a substantial number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At September 30, 1996, the number of such lawsuits pending was approximately 75,900, as compared to 59,700 at December 31, 1995. In 1995, approximately 41,700 of such claims were received and approximately 7,200 were settled or dismissed. During the first nine months of 1996, approximately 20,000 of such claims were received and approximately 3,800 were settled or dismissed. Based on past experience and reasonably anticipated future activity, Kaiser has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and Kaiser's actual costs could exceed these estimates. Kaiser's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an estimated asbestos-related cost accrual of $160.0 before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at September 30, 1996. Kaiser estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While Kaiser does not believe there is a reasonable basis for estimating such costs beyond 2008, and, accordingly, did not accrue such costs, there is a reasonable possibility that such costs may continue beyond 2008, and that such costs may be substantial. A substantial portion of the asbestos-related claims that were filed and served on KACC during 1995 and the first nine months of 1996 were filed in Texas. KACC has been advised by its regional counsel that, F-84 280 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) although there can be no assurance, the increase in pending claims may have been attributable in part to tort reform legislation in Texas. Although asbestos-related claims are currently exempt from certain aspects of the Texas tort reform legislation, management has been advised that efforts to remove the asbestos-related exemption in the tort reform legislation relating to the doctrine forum non conveniens, as well as other developments in the legislative and legal environment in Texas, may be responsible for the accelerated pace of new claims experienced in late 1995 and its continuance through the first nine months of 1996, albeit at a somewhat reduced rate. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. Kaiser believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $142.3, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at September 30, 1996. Management continues to monitor claims activity, the status of the lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from Kaiser's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS CONTINGENCY AND RELATED MATTERS On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated formal administrative proceedings against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges misconduct by the Company, Federated Development Company ("Federated," a New York business trust wholly owned by Mr. Charles E. Hurwitz, members of his immediate family and trusts for the benefit thereof), Mr. Hurwitz and others (the "Respondents") with respect to the failure of United Savings Association of Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc. ("UFG"). The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other Respondents, including, among other things, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 from the Company, civil money penalties and a removal from, and prohibition against the Company and the other Respondents engaging in, the banking industry. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate impact, if any, of the outcome this matter may have on the Company's consolidated financial position, results of operations or liquidity. On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz F-85 281 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern District of Texas (the "Court"). The FDIC action did not name the Company as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. On December 8, 1995, the Company filed a motion to intervene in this action and conditioned it on the Court joining the OTS to this action. The Company also filed a proposed complaint with its motion to intervene which alleges that the OTS violated the Administrative Procedures Act by rejecting the Company's bid for USAT. The Court has scheduled a pre-trial conference for November 19, 1996. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. It is impossible to assess the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. OTHER CONTINGENCIES The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 8. HEADWATERS AGREEMENT On September 28, 1996, the Company and Pacific Lumber (the "Pacific Lumber Parties") entered into an agreement (the "Headwaters Agreement") which provides the framework for the acquisition by the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). The Headwaters Timberlands would be transferred in exchange for (a) property and consideration (including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California (the "Elk River Timberlands"). The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions, including completion within ten months of specified closing items. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP covering all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of an SYP. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP, and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by F-86 282 MAXXAM INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings litigation. 9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. KACC enters into primary aluminum hedging transactions from time to time in the normal course of business. Primary aluminum hedging transactions are designed to mitigate Kaiser's exposure to declines in the market price of primary aluminum, while retaining the ability to participate in favorable environments that may materialize. KACC has employed strategies which include forward sales and purchases of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. At September 30, 1996, KACC had sold forward, at fixed prices, approximately 69,000 and 93,600 tons (all references to tons in this report refer to metric tons of 2,204.6 pounds) of primary aluminum in excess of its projected internal fabrication requirements for 1997 and 1998, respectively, and had purchased put options to establish a minimum price for 66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. During October 1996, KACC purchased put options to establish a minimum price for an additional 126,000 tons of primary aluminum in excess of its projected 1997 internal fabrication requirements and entered into options contracts that established a price range for an additional 48,000 tons of Kaiser's 1998 surplus. In addition, at September 30, 1996, KACC had sold forward approximately 73% and 85% of the alumina available to it in excess of its projected internal smelting requirements for 1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made at prices indexed to future prices of primary aluminum. From time to time, KACC also enters into forward purchase and option transactions to limit its exposure to increases in natural gas and fuel oil costs. As of September 30, 1996, KACC had option contracts for the purchase of approximately 40,000 MMBtu of natural gas per day during the first quarter of 1997, and a combination of fixed price purchase and option contracts for 20,000 MMBtu of natural gas per day for the period April 1997 to December 1998. At September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel oil per month for the period January 1997 through December 1998. KACC also enters into hedging transactions in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates. At September 30, 1996, KACC had net forward foreign exchange contracts totaling approximately $81.6 for the purchase of 110.0 Australian dollars from January 1997 through June 1998, in respect of its commitments for 1997 and 1998 expenditures denominated in Australian dollars. At September 30, 1996, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,481 per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts was approximately $46.4. F-87 283 MAXXAM INC. AND SUBSIDIARIES UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1996 QUARTERLY INFORMATION: Net sales.......................................... $612.2 $ 667.7 $641.2 Gross profit....................................... 128.5 126.8 99.3 Operating income................................... 53.2 46.0 9.6 Net income......................................... 5.8 16.9 5.3 Per common and common equivalent share: Net income...................................... 0.61 1.79 0.56 1995 QUARTERLY INFORMATION: Net sales.......................................... $581.3 $ 673.3 $638.0 $ 672.6 Gross profit....................................... 113.0 160.2 145.2 155.9 Operating income (loss)............................ 40.6 81.9 64.4 70.7 Net income (loss).................................. (1.0) 25.4 10.7 22.4 Per common and common equivalent share: Net income (loss)............................... (0.11) 2.69 1.13 2.37 1994 QUARTERLY INFORMATION: Net sales.......................................... $489.0 $ 543.8 $544.9 $ 538.0 Gross profit....................................... 55.6 78.0 79.1 85.1 Operating income (loss)............................ (15.0) 6.5 9.0 6.8 Loss before extraordinary item..................... (34.5) (43.2) (14.9) (24.1) Extraordinary item, net............................ (5.4) -- -- -- Net loss........................................... (39.9) (43.2) (14.9) (24.1) Per common and common equivalent share: Loss before extraordinary item.................. (3.65) (4.57) (1.58) (2.55) Extraordinary item, net......................... (0.57) -- -- -- Net loss........................................ (4.22) (4.57) (1.58) (2.55)
F-88 284 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of MAXXAM Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of MAXXAM Inc. (included on pages F-40 through F-77), and have issued our report thereon dated February 16, 1996. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The condensed financial information of MAXXAM Inc. (included on pages F-90 through F-93) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This condensed financial information has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 F-89 285 MAXXAM INC. BALANCE SHEET (UNCONSOLIDATED)
DECEMBER 31, ------------------- ASSETS 1995 1994 ------- ------- (IN MILLIONS OF DOLLARS) Current assets: Cash and cash equivalents.............................................. $ 20.4 $ 15.5 Marketable securities.................................................. 9.3 20.8 Other current assets................................................... 1.8 4.4 ------- ------- Total current assets........................................... 31.5 40.7 Deferred income taxes.................................................... 64.2 68.4 Other assets............................................................. 3.7 4.6 ------- ------- $ 99.4 $ 113.7 ======= ======= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities............................... $ 7.4 $ 10.5 Long-term debt, current maturities..................................... .2 2.4 ------- ------- Total current liabilities...................................... 7.6 12.9 Long-term debt, less current maturities.................................. 41.6 44.6 Losses recognized in excess of investment in subsidiaries................ 12.4 198.9 Notes payable to subsidiaries, net of notes receivable and advances...... 18.8 12.2 Other noncurrent liabilities............................................. 102.8 120.4 ------- ------- Total liabilities.............................................. 183.2 389.0 ------- ------- Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1995 -- 669,701 and 1994 -- 669,957.................. .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359.................................................. 5.0 5.0 Additional capital..................................................... 155.0 53.2 Accumulated deficit.................................................... (208.5) (302.9) Pension liability adjustment........................................... (16.1) (11.4) Treasury stock, at cost (shares held: preferred -- 845; common: 1995 -- 1,355,512 and 1994 -- 1,355,768)............................ (19.5) (19.5) ------- ------- Total stockholders' deficit.................................... (83.8) (275.3) ------- ------- $ 99.4 $ 113.7 ======= =======
See notes to consolidated financial statements and accompanying notes. F-90 286 MAXXAM INC. STATEMENT OF OPERATIONS (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------ ------- ------- (IN MILLIONS OF DOLLARS) Investment, interest and other income.......................... $ 5.6 $ 12.6 $ 3.0 Interest expense............................................... (6.2) (11.7) (13.7) General and administrative expenses............................ (18.9) (11.0) (15.4) Equity in earnings (losses) of subsidiaries.................... 43.6 (132.0) (615.5) ------ ------- ------- Income (loss) before income taxes and cumulative effect of changes in accounting principles............................. 24.1 (142.1) (641.6) Credit (provision) for income taxes............................ 33.4 20.0 (3.1) ------ ------- ------- Income (loss) before cumulative effect of changes in accounting principles................................................... 57.5 (122.1) (644.7) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit for income taxes of $.2............................ -- -- (.4) Accounting for income taxes.................................. -- -- 44.9 ------ ------- ------- Net income (loss).............................................. $ 57.5 $(122.1) $(600.2) ====== ======= =======
See notes to consolidated financial statements and accompanying notes. F-91 287 MAXXAM INC. STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
YEARS ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------ ------- ------- (IN MILLIONS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................ $ 57.5 $(122.1) $(600.2) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Equity in losses (earnings) of subsidiaries................... (43.6) 132.0 615.5 Net sales of marketable securities............................ 14.5 6.8 18.3 Amortization of deferred financing costs and discounts on long-term debt............................................... .3 .3 .5 Cumulative effect of changes in accounting principles, net.... -- -- (44.5) Decrease in receivables....................................... .6 1.1 .8 Increase in accrued and deferred income taxes................. (18.9) (7.9) (13.1) Increase (decrease) in accounts payable and other liabilities.................................................. (14.5) (5.3) 24.3 Other......................................................... 2.3 (.2) 2.6 ------ ------- ------- Net cash provided by (used for) operating activities..... (1.8) 4.7 4.2 ------ ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of Kaiser Depositary Shares................... 7.6 10.3 -- Dividends received from subsidiaries............................. 4.8 7.5 66.1 Investments in and net advances from (to) subsidiaries........... .4 (27.5) (22.2) Capital expenditures............................................. (.2) (.4) (.3) ------ ------- ------- Net cash provided by (used for) investing activities..... 12.6 (10.1) 43.6 ------ ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption, repurchase of and principal payments on long-term debt.......................................................... (5.9) (5.8) (24.3) ------ ------- ------- Net cash used for financing activities................... (5.9) (5.8) (24.3) ------ ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 4.9 (11.2) 23.5 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 15.5 26.7 3.2 ------ ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 20.4 $ 15.5 $ 26.7 ====== ======= ======= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reduction of stockholders' deficit due to redemption of Kaiser preferred stock............................................... $136.2 $ -- $ -- Distribution received from subsidiary of the Company's payable... 8.0 132.0 -- Assumption by the Company of subsidiary's payables to the Company and affiliates................................................ -- (63.1) -- Net assets transferred (to) from subsidiary...................... (14.5) -- 30.5 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.................................................... $ 6.0 $ 7.0 $ 6.8 Income taxes paid (refunded)..................................... (.3) 1.1 (.5)
See notes to consolidated financial statements and accompanying notes. F-92 288 MAXXAM INC. NOTES TO FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS) A. DEFERRED INCOME TAXES The deferred income tax assets and liabilities reported in the accompanying unconsolidated balance sheet are determined by computing such amounts on a consolidated basis, for the Company and members of its consolidated federal income tax return group, and then reducing such consolidated amounts by the amounts recorded by the Company's subsidiaries pursuant to their respective tax allocation agreements with the Company. The Company's net deferred income tax assets relate primarily to the excess of the tax basis over financial statement basis with respect to timber and timberlands and real estate held for sale by various subsidiaries. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. B. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------- 1995 1994 ----- ----- 14% Senior Subordinated Reset Notes due May 20, 2000................. $25.0 $25.0 12 1/2% Subordinated Debentures due December 15, 1999, net of discount of $1.1 and $1.7 at December 31, 1995 and 1994, respectively....................................................... 16.5 20.9 Other................................................................ .3 1.1 ----- ----- 41.8 47.0 Less: current maturities............................................. (.2) (2.4) ----- ----- $41.6 $44.6 ===== =====
Scheduled maturities of long-term debt outstanding at December 31, 1995 are as follows: years ending December 31, 1996-$.2; 1997-$3.3; 1998-$3.3; 1999-$11.1; 2000-$25.0. C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES At December 31, 1995, the Company's indebtedness to its subsidiaries, which includes accrued interest, consists of the following:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Unsecured note payable, interest at 6%............................. $ 18.3 $ 60.9 Unsecured notes payable, interest at 7%............................ 13.7 12.9 Secured notes receivable, interest at 12% on first $15.0, at prime plus 1% to 2% on remainder....................................... -- (43.6) Net advances....................................................... (13.2) (18.0) ------ ------ $ 18.8 $ 12.2 ====== ======
In August 1995, the notes receivable reflected above were canceled to reduce the 6% unsecured note payable by $45.5 ($43.6 plus accrued interest). F-93 289 MAXXAM INC. BALANCE SHEET (UNCONSOLIDATED)
ASSETS SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) (IN MILLIONS OF DOLLARS) Current assets: Cash and cash equivalents........................................ $ 37.9 $ 20.4 Marketable securities............................................ 18.7 9.3 Other current assets............................................. 1.6 1.8 ------- -------- Total current assets..................................... 58.2 31.5 Deferred income taxes.............................................. 71.9 64.2 Investment in subsidiaries in excess of losses recognized.......... 18.9 -- Other assets....................................................... 3.8 3.7 ------- -------- $ 152.8 $ 99.4 ======= ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities......................... $ 11.1 $ 7.4 Long-term debt, current maturities............................... -- .2 ------- -------- Total current liabilities................................ 11.1 7.6 Long-term debt, less current maturities............................ 41.7 41.6 Losses recognized in excess of investment in subsidiaries.......... -- 12.4 Notes payable to subsidiaries, net of notes receivable and advances......................................................... 62.9 18.8 Other noncurrent liabilities....................................... 92.3 102.8 ------- -------- Total liabilities........................................ 208.0 183.2 ------- -------- Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 699,701....................... .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,685..................................... 5.0 5.0 Additional capital............................................... 155.6 155.0 Accumulated deficit.............................................. (180.5) (208.5) Pension liability adjustment..................................... (16.1) (16.1) Treasury stock, at cost (shares held: preferred -- 845; common -- 1,355,512).......................................... (19.5) (19.5) ------- -------- Total stockholders' deficit.............................. (55.2) (83.8) ------- -------- $ 152.8 $ 99.4 ======= ========
See notes to consolidated financial statements and accompanying notes. F-94 290 MAXXAM INC. STATEMENT OF OPERATIONS (UNCONSOLIDATED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1995 ------ ------ (UNAUDITED) (IN MILLIONS OF DOLLARS) Investment, interest and other income.................................... $ (.2) $ 3.4 Interest expense......................................................... (4.5) (4.7) General and administrative expenses...................................... (28.8) (13.8) Equity in earnings of subsidiaries....................................... 15.9 26.6 ------ ------ Income (loss) before income taxes........................................ (17.6) 11.5 Credit for income taxes.................................................. 45.6 23.6 ------ ------ Net income............................................................... $ 28.0 $ 35.1 ====== ======
See notes to consolidated financial statements and accompanying notes. F-95 291 MAXXAM INC. STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1996 1995 ----- ------ (UNAUDITED) (IN MILLIONS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $28.0 $ 35.1 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Equity in earnings of subsidiaries.................................. (15.9) (26.6) Net sales (purchases) of marketable securities...................... (8.0) 18.6 Decrease in receivables, prepaids and other assets.................. .1 2.6 Increase in accrued and deferred income taxes....................... (8.3) (8.1) Decrease in accounts payable and other liabilities.................. (6.8) (14.5) Other............................................................... 1.1 .3 ----- ------ Net cash provided by (used for) operating activities........... (9.8) 7.4 ----- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of Kaiser Depositary Shares......................... -- 7.6 Dividends received from subsidiaries................................... 3.9 4.8 Investments in and net advances from subsidiaries...................... 23.9 1.9 Capital expenditures................................................... (.2) (.2) ----- ------ Net cash provided by investing activities...................... 27.6 14.1 ----- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Redemption, repurchase of and principal payments on long-term debt..... (.3) (5.8) ----- ------ Net cash used for financing activities......................... (.3) (5.8) ----- ------ NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 17.5 15.7 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 20.4 15.5 ----- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $37.9 $ 31.2 ===== ====== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reduction of stockholders' deficit due to redemption of Kaiser preferred stock..................................................... $ -- $134.3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.......................................................... $ 2.8 $ 3.1 Income taxes paid...................................................... .7 .3
See notes to consolidated financial statements and accompanying notes. F-96 292 MAXXAM INC. NOTES TO FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS) A. DEFERRED INCOME TAXES The deferred income tax assets and liabilities reported in the accompanying unconsolidated balance sheet are determined by computing such amounts on a consolidated basis, for the Company and members of its consolidated federal income tax return group, and then reducing such consolidated amounts by the amounts recorded by the Company's subsidiaries pursuant to their respective tax allocation agreements with the Company. The Company's net deferred income tax assets relate primarily to the excess of the tax basis over financial statement basis with respect to timber and timberlands and real estate held for sale by various subsidiaries. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. B. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ 14% Senior Subordinated Reset Notes due May 20, 2000......... $25.0 $25.0 12 1/2% Subordinated Debentures due December 15, 1999, net of discount of $0.9 at September 30, 1996 and $1.1 at December 31, 1995.......................................... 16.7 16.5 Other........................................................ -- .3 ----- ----- 41.7 41.8 Less: current maturities..................................... -- (.2) ----- ----- $41.7 $41.6 ===== =====
C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES At September 30, 1996, the Company's indebtedness to its subsidiaries, which includes accrued interest, consists of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Unsecured note payable, interest at 6%....................... $19.1 $ 18.3 Unsecured notes payable, interest at 7%...................... 14.3 13.7 Net advances................................................. 29.5 (13.2) ----- ------ $62.9 $ 18.8 ===== ======
The increase in net advances is principally due to cash receipts from the sale of real property and notes from the RTC Portfolio. There are no restrictions which would preclude the Company's subsidiaries from declaring a dividend of such advances to the Company. F-97 293 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related statements of consolidated income and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 F-98 294 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- ASSETS 1995 1994 -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Current assets: Cash and cash equivalents............................................. $ 21.9 $ 17.6 Receivables: Trade, less allowance for doubtful receivables of $5.0 in 1995 and $4.2 in 1994....................................................... 222.9 150.7 Other.............................................................. 85.7 48.5 Inventories........................................................... 525.7 468.0 Prepaid expenses and other current assets............................. 76.6 158.0 --------- --------- Total current assets.......................................... 932.8 842.8 Investments in and advances to unconsolidated affiliates................ 178.2 169.7 Property, plant, and equipment -- net................................... 1,109.6 1,133.2 Deferred income taxes................................................... 269.1 271.2 Other assets............................................................ 323.5 281.2 --------- --------- Total......................................................... $2,813.2 $2,698.1 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 184.5 $ 152.1 Accrued interest...................................................... 32.0 32.6 Accrued salaries, wages, and related expenses......................... 105.3 77.7 Accrued postretirement medical benefit obligation -- current portion............................................................ 46.8 47.0 Other accrued liabilities............................................. 129.4 176.9 Payable to affiliates................................................. 94.2 85.3 Long-term debt -- current portion..................................... 8.9 11.5 --------- --------- Total current liabilities..................................... 601.1 583.1 Long-term liabilities................................................... 548.5 495.5 Accrued postretirement medical benefit obligation....................... 734.0 734.9 Long-term debt.......................................................... 749.2 751.1 Minority interests...................................................... 122.7 116.2 Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares; Series A Convertible, stated value $.10, issued and outstanding, nil and 1,938,295 in 1995 and 1994................................ .2 PRIDES Convertible, par value $.05, issued and outstanding, 8,673,850 and 8,855,550 in 1995 and 1994.......................... .4 .4 Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding, 71,638,514 and 58,205,083 in 1995 and 1994........ .7 .6 Additional capital.................................................... 530.3 527.8 Accumulated deficit................................................... (459.9) (502.6) Additional minimum pension liability.................................. (13.8) (9.1) --------- --------- Total stockholders' equity.................................... 57.7 17.3 --------- --------- Total......................................................... $2,813.2 $2,698.1 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-99 295 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS)
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 -------- -------- -------- (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Net sales..................................................... $2,237.8 $1,781.5 $1,719.1 -------- -------- -------- Costs and expenses: Cost of products sold....................................... 1,798.4 1,625.5 1,587.7 Depreciation................................................ 94.3 95.4 97.1 Selling, administrative, research and development, and general.................................................. 134.5 116.8 121.9 Restructuring of operations................................. 35.8 -------- -------- -------- Total costs and expenses............................ 2,027.2 1,837.7 1,842.5 -------- -------- -------- Operating income (loss)....................................... 210.6 (56.2) (123.4) Other expense: Interest expense............................................ (93.9) (88.6) (84.2) Other -- net................................................ (14.1) (7.3) (.9) -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles....................................... 102.6 (152.1) (208.5) (Provision) credit for income taxes........................... (37.2) 53.8 86.9 Minority interests............................................ (5.1) (3.1) (1.5) -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles......................... 60.3 (101.4) (123.1) Extraordinary loss on early extinguishment of debt, net of tax benefit of $2.9 and $11.2 for 1994 and 1993, respectively... (5.4) (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7....................................... (507.3) -------- -------- -------- Net income (loss)............................................. $ 60.3 $ (106.8) $ (652.2) Dividends on preferred stock.................................. (17.6) (20.1) (6.3) -------- -------- -------- Net income (loss) available to common shareholders............ $ 42.7 $ (126.9) $ (658.5) ======== ======== ======== Earnings (loss) per common and common equivalent share: Primary: Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles............. $ .69 $ (2.09) $ (2.25) Extraordinary loss....................................... (.09) (.38) Cumulative effect of changes in accounting principles.... (8.84) -------- -------- -------- Net income (loss)........................................ $ .69 $ (2.18) $ (11.47) ======== ======== ======== Fully diluted............................................... $ .72 ======== Weighted average common and common equivalent shares outstanding (000): Primary..................................................... 62,264 58,139 57,423 ======== ======== ======== Fully diluted............................................... 71,809 ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-100 296 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- --------- (IN MILLIONS OF DOLLARS) Cash flows from operating activities: Net income (loss)........................................... $ 60.3 $(106.8) $ (652.2) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation............................................. 94.3 95.4 97.1 Amortization of excess investment over equity in unconsolidated affiliates.............................. 11.4 11.6 11.9 Amortization of deferred financing costs and discount on long-term debt......................................... 5.4 6.2 11.2 Equity in (income) losses of unconsolidated affiliates... (19.2) 1.9 3.3 Restructuring of operations.............................. 35.8 Minority interests....................................... 5.1 3.1 1.5 Extraordinary loss on early extinguishment of debt -- net............................................ 5.4 21.8 Cumulative effect of changes in accounting principles -- net...................................... 507.3 (Increase) decrease in receivables....................... (109.7) 36.4 (6.1) (Increase) decrease in inventories....................... (57.7) (41.1) 13.0 Decrease (increase) in prepaid expenses and other assets................................................. 82.9 (60.6) (5.2) Increase (decrease) in accounts payable.................. 32.4 25.8 (10.3) (Decrease) increase in accrued interest.................. (.6) 9.3 19.2 Increase in payable to affiliates and accrued liabilities............................................ 10.6 50.8 76.9 Decrease in accrued and deferred income taxes............ (7.4) (68.8) (96.4) Other.................................................... 10.9 9.3 8.1 ------- ------- --------- Net cash provided by (used for) operating activities........................................ 118.7 (22.1) 36.9 ------- ------- --------- Cash flows from investing activities: Net proceeds from disposition of property and investments... 8.6 4.1 13.1 Capital expenditures........................................ (79.4) (70.0) (67.7) Investments in joint ventures............................... (9.0) ------- ------- --------- Net cash used for investing activities.............. (79.8) (65.9) (54.6) ------- ------- --------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit.... (537.7) (345.1) (1,134.5) Borrowings of long-term debt, including revolving credit.... 532.3 378.9 1,068.1 Borrowings from MAXXAM Group Inc. (see supplemental disclosure below)........................................ 15.0 Tender premiums and other costs of early extinguishment of debt..................................................... (27.1) Net short-term debt repayments.............................. (.5) (4.3) Incurrence of financing costs............................... (.8) (19.2) (12.7) Dividends paid.............................................. (20.8) (14.8) (6.3) Capital stock issued........................................ 1.2 100.1 119.3 Redemption of minority interests' preference stock.......... (8.8) (8.5) (4.2) ------- ------- --------- Net cash (used for) provided by financing activities........................................ (34.6) 90.9 13.3 ------- ------- --------- Net increase (decrease) in cash and cash equivalents during the year.................................................... 4.3 2.9 (4.4) Cash and cash equivalents at beginning of year................ 17.6 14.7 19.1 ------- ------- --------- Cash and cash equivalents at end of year...................... $ 21.9 $ 17.6 $ 14.7 ======= ======= ========= Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest.................. $ 88.8 $ 73.1 $ 53.7 Income taxes paid........................................... 35.7 16.0 13.5 Tax allocation payments from MAXXAM Inc..................... (3.9) Supplemental disclosure of non-cash financing activities: Exchange of the borrowings from MAXXAM Group Inc. for capital stock...................... $ 15.0
The accompanying notes to consolidated financial statements are an integral part of these statements. F-101 297 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company") and its majority-owned subsidiaries. The Company is a direct subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all principal aspects of the aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum, and the manufacture of fabricated and semi-fabricated aluminum products. Kaiser's production levels of alumina and primary aluminum exceed its internal processing needs, which allows it to be a major seller of alumina and primary aluminum to domestic and international third parties (see Note 10). The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amount of revenues and expenses during the reporting period. Uncertainties, with respect to such estimates and assumptions, are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operation. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated. Certain reclassifications of prior-year information were made to conform to the current presentation. CHANGES IN ACCOUNTING PRINCIPLES The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"), and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112"), as of January 1, 1993. The costs of postretirement benefits other than pensions and postemployment benefits are now accrued over the period employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the changes in accounting principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to results of operations of $497.7 and $7.3, net of related income taxes of $234.2 and $3.5, respectively. These deferred income tax benefits were recorded at the federal statutory rate in effect on the date the accounting standards were adopted, before giving effect to certain valuation allowances. The new accounting standards had no effect on the Company's cash outlays for postretirement or postemployment benefits, nor did these one-time charges affect the Company's compliance with its existing debt covenants. The Company reserves the right, subject to applicable collective bargaining agreements and applicable legal requirements, to amend or terminate these benefits. The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"), as of January 1, 1993. The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the F-102 298 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle reduced the Company's results of operations by $2.3. The adoption of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisition by MAXXAM in October 1988. As a result of restating these assets and liabilities, the loss before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles for the year ended December 31, 1993, was increased by $9.3. CASH AND CASH EQUIVALENTS The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. INVENTORIES Substantially all product inventories are stated at last-in, first-out ("LIFO") cost, not in excess of market value. Replacement cost is not in excess of LIFO cost. Other inventories, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor, and manufacturing overhead, including depreciation. Inventories consist of the following:
DECEMBER 31, --------------- 1995 1994 ------ ------ Finished fabricated products......................................... $ 91.5 $ 49.4 Primary aluminum and work in process................................. 195.9 203.1 Bauxite and alumina.................................................. 119.6 102.3 Operating supplies and repair and maintenance parts.................. 118.7 113.2 ------ ------ $525.7 $468.0 ====== ======
DEPRECIATION Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of assets. The principal estimated useful lives by class of assets are: Land improvements..................................................... 8 to 25 years Buildings............................................................. 15 to 45 years Machinery and equipment............................................... 10 to 22 years
STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for a stock-based compensation plan. Accordingly, no compensation cost has been recognized for this plan (see Note 6). OTHER EXPENSE Other expense in 1995, 1994, and 1993 includes $17.8, $16.5 and $17.9 of pre-tax charges related principally to establishing additional: (i) litigation reserves for asbestos claims, and (ii) environmental reserves for potential soil and ground water remediation matters, each pertaining to operations which were discontinued prior to the acquisition of the Company by MAXXAM in 1988. F-103 299 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) DEFERRED FINANCING COSTS Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. Amortization of deferred financing costs of $5.3, $6.0, and $11.2 for the years ended December 31, 1995, 1994, and 1993, respectively, are included in interest expense. FOREIGN CURRENCY The Company uses the United States dollar as the functional currency for its foreign operations. DERIVATIVE FINANCIAL INSTRUMENTS Gains and losses arising from the use of derivative financial instruments are reflected in the Company's operating results concurrently with the consummation of the underlying hedged transactions. Deferred gains or losses as of December 31, 1995, are included in Prepaid expenses and other current assets and Other accrued liabilities. The Company does not hold or issue derivative financial instruments for trading purposes (see Note 9). FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the estimated fair value of the Company's financial instruments, together with the carrying amounts of the related assets or liabilities. Unless otherwise noted, the carrying amount of all financial instruments is a reasonable estimate of fair value.
DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Debt................................................... $758.1 $806.3 $762.6 $747.6 Foreign currency contracts............................. 1.9 3.5
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Debt -- The quoted market prices were used for the Senior Notes and 12 3/4% Notes (see Note 4). The fair value of all other debt is based on discounting the future cash flows using the current rate for debt of similar maturities and terms. Foreign Currency Contracts -- The fair value generally reflects the estimated amounts that the Company would receive to enter into similar contracts at the reporting date, thereby taking into account unrealized gains or losses on open contracts (see Note 9). EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Primary earnings (loss) per common and common equivalent share are computed by dividing net income (loss) available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period. Fully diluted earnings per common and common equivalent share are computed as if the Series A Shares and 181,700 shares of PRIDES (the "Converted PRIDES") had been converted to common shares at the beginning of the period. Accordingly, for purposes of the fully diluted calculations, the dividends attributable to the Series A Shares and the Converted PRIDES ($9.2 for the year ended December 31, 1995) have not been deducted from net income, and the weighted average number of common and common equivalent shares outstanding includes the shares issued upon conversion of the Series A Shares and the Converted PRIDES as if they had been outstanding for the entire period. As a result F-104 300 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) of the redemption of the Series A Shares and conversion of the Converted PRIDES during the 1995 period, fully diluted earnings per share are presented for such period, even though the result is antidilutive. For the years ended December 31, 1994 and 1993, common equivalent shares attributable to the preferred stock and non-qualified stock options were excluded from the calculation of weighted average shares because they were antidilutive. 2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Summary combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey Aluminum Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in earnings (losses) before income taxes of such operations is treated as a reduction (increase) in cost of products sold. At December 31, 1995 and 1994, KACC's net receivables from these affiliates were not material. SUMMARY OF COMBINED FINANCIAL POSITION
DECEMBER 31, --------------- 1995 1994 ------ ------ Current assets............................................................... $429.0 $342.3 Property, plant, and equipment -- net........................................ 330.8 349.4 Other assets................................................................. 39.3 42.4 ------ ------ Total assets....................................................... $799.1 $734.1 ====== ====== Current liabilities.......................................................... $125.4 $122.4 Long-term debt............................................................... 331.8 307.6 Other liabilities............................................................ 35.6 31.0 Stockholders' equity......................................................... 306.3 273.1 ------ ------ Total liabilities and stockholders' equity......................... $799.1 $734.1 ====== ======
SUMMARY OF COMBINED OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ------ ------ ------ Net sales............................................................ $685.9 $489.8 $510.3 Costs and expenses................................................... (618.7) (494.8) (527.2) (Provision) credit for income taxes.................................. (18.7) (6.3) 1.9 ------ ------ ------ Net income (loss).................................................... $ 48.5 $(11.3) $(15.0) ====== ====== ====== Company's equity in income (loss).................................... $ 19.2 $ (1.9) $ (3.3) ====== ====== ======
The Company's equity in income (loss) differs from the summary net income (loss) due to various percentage ownerships in the entities and equity method accounting adjustments. At December 31, 1995, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $54.9. The Company is amortizing this amount over a 12-year period, which results in an annual amortization charge of approximately $11.4. The Company and its affiliates have interrelated operations. KACC provides some of its affiliates with services such as financing, management, and engineering. Significant activities with affiliates include the F-105 301 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) acquisition and processing of bauxite, alumina, and primary aluminum. Purchases from these affiliates were $284.4, $219.7, and $206.6 in the years ended December 31, 1995, 1994, and 1993, respectively. Dividends of $8.1, nil, and nil were received from investees in the years ended December 31, 1995, 1994, and 1993, respectively. In 1995, a subsidiary of the Company invested $9.0 in a foreign joint venture. This amount is included in Investments in and advances to unconsolidated affiliates. 3. PROPERTY, PLANT, AND EQUIPMENT The major classes of property, plant, and equipment are as follows:
DECEMBER 31, ------------------- 1995 1994 -------- -------- Land and improvements............................................. $ 151.8 $ 153.5 Buildings......................................................... 198.5 196.8 Machinery and equipment........................................... 1,337.6 1,285.0 Construction in progress.......................................... 59.6 45.0 -------- -------- 1,747.5 1,680.3 Accumulated depreciation.......................................... 637.9 547.1 -------- -------- Property, plant, and equipment -- net........................... $1,109.6 $1,133.2 ======== ========
4. LONG-TERM DEBT Long-term debt and its maturity schedule are as follows:
DECEMBER 31, 2001 --------------- AND 1995 1994 1996 1997 1998 1999 2000 AFTER TOTAL TOTAL ---- ---- ---- ----- ---- ------ ------ ------ 1994 Credit Agreement (9.00% at December 31, 1995)................................ $13.1 $ 13.1 $ 6.7 9 7/8% Senior Notes, net................... $223.8 223.8 223.6 Pollution Control and Solid Waste Disposal Facilities Obligations (6.00% -- 7.75%).. $1.2 $1.3 $1.4 .2 $.2 32.6 36.9 38.1 Alpart CARIFA Loan (fixed and variable rates)................................... 60.0 60.0 60.0 Alpart Term Loan (8.95%)................... 6.3 6.2 12.5 18.7 12 3/4% Senior Subordinated Notes.......... 400.0 400.0 400.0 Other borrowings (fixed and variable rates)................................... 1.4 1.4 7.7 .3 .2 .8 11.8 15.5 ---- ---- ---- ----- --- ------ ------ ------ Total............................. $8.9 $8.9 $9.1 $13.6 $.4 $717.2 $758.1 $762.6 ==== ==== ==== ===== === ====== Less current portion....................... 8.9 11.5 ------ ------ Long-term debt.................... $749.2 $751.1 ====== ======
1994 CREDIT AGREEMENT On February 17, 1994, the Company and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. and certain other lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a $325.0 five-year secured, revolving line of credit, scheduled to mature in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base relating to eligible accounts receivable plus eligible inventory. The Company recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the F-106 302 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the previous credit agreement. As of December 31, 1995, $259.3 (of which $72.4 could have been used for letters of credit) was available to KACC under the 1994 Credit Agreement. The 1994 Credit Agreement is unconditionally guaranteed by the Company and by certain significant subsidiaries of KACC. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus 1 1/2% or LIBO Rate (Reserve Adjusted) (as defined) plus 3 1/4%. After June 30, 1995, the interest rate margins applicable to borrowings under the 1994 Credit Agreement may be reduced by up to 1 1/2% (non-cumulatively), based on a financial test, determined quarterly. As of December 31, 1995, the financial test permitted a reduction of 1 1/2% per annum in margins effective January 1, 1996. The 1994 Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on the Company's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. Neither the Company nor KACC currently is permitted to pay dividends on its common stock. The 1994 Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding the Gramercy plant); (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks, and substantially all other personal property of KACC and certain of its subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries, and pledges of a portion of the stock of certain partially owned foreign affiliates. SENIOR NOTES Concurrent with the offering by the Company of its 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES") (see Note 7), KACC issued $225.0 of its 9 7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the offering of the Senior Notes were used to reduce outstanding borrowings under the revolving credit facility of the 1989 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. GRAMERCY SOLID WASTE DISPOSAL REVENUE BONDS In December 1992, KACC entered into an installment sale agreement (the "Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate principal amount of its 7 3/4% Bonds due August 1, 2022 (the "Bonds") to finance the construction of certain solid waste disposal facilities at KACC's Gramercy plant. The proceeds from the sale of the Bonds were deposited into a construction fund and may be withdrawn, from time to time, pursuant to the terms of the Sale Agreement and the Bond indenture. At December 31, 1995, $3.8 remained in the construction fund. The Sale Agreement requires KACC to make payments to the Louisiana Parish in installments due on the dates and in the amounts required to permit the Louisiana Parish to satisfy all of its payment obligations under the Bonds. ALPART CARIFA LOAN In December 1991, Alpart entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal amount of Series A bonds matures on June 1, 2008. Substantially all of the Series A bonds bear interest at a floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B bonds matures on June 1, 2007, and bears interest at a fixed rate of 8.25%. F-107 303 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Proceeds from the sale of the bonds were used by Alpart to refinance interim loans from the partners in Alpart, to pay eligible project costs for the expansion and modernization of its alumina refinery and related port and bauxite mining facilities, and to pay certain costs of issuance. Under the terms of the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined in applicable laws. Alpart has agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. Alpart's obligations under the loan agreement are secured by a $64.2 letter of credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed by the Company's minority partner in Alpart). SENIOR SUBORDINATED NOTES On February 1, 1993, KACC issued $400.0 of its 12 3/4% Senior Subordinated Notes due 2003 (the "12 3/4% Notes"). The net proceeds from the sale of the 12 3/4% Notes were used to retire the 14 1/4% Senior Subordinated Notes due 1995 (the "14 1/4% Notes"), to prepay $18.0 of the term loan, and to reduce outstanding borrowings under the revolving credit facility of the 1989 Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0 in the first quarter of 1993, consisting primarily of the write-off of unamortized discount and deferred financing costs related to the 14 1/4% Notes. The obligations of KACC with respect to the Senior Notes and the 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the Senior Notes and the 12 3/4% Notes (the "Indentures") restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Further, the Indentures provide that KACC must offer to purchase the Senior Notes and the 12 3/4% Notes, respectively, upon the occurrence of a Change of Control (as defined therein), and the 1994 Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. CAPITALIZED INTEREST Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4, respectively. RESTRICTED NET ASSETS OF SUBSIDIARY Certain debt instruments restrict the ability of KACC to transfer assets, make loans and advances, and pay dividends to the Company. The restricted net assets of KACC totaled $24.0 at December 31, 1995. 5. INCOME TAXES Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles by geographic area is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------ ------- ------- Domestic............................................... $(55.9) $(168.4) $(232.0) Foreign................................................ 158.5 16.3 23.5 ------ ------- ------- Total........................................ $102.6 $(152.1) $(208.5) ====== ======= =======
Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes. F-108 304 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The (provision) credit for income taxes on income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles consists of:
FEDERAL FOREIGN STATE TOTAL ------- ------- ----- ------ 1995 Current........................................ $(4.3) $ (40.2) $ (.1) $(44.6) Deferred....................................... 15.2 (4.9) (2.9) 7.4 ----- ------ ----- ------ Total.................................. $10.9 $ (45.1) $(3.0) $(37.2) ===== ====== ===== ====== 1994 Current........................................ $ (18.0) $ (.1) $(18.1) Deferred....................................... $71.2 .6 .1 71.9 ----- ------ ----- ------ Total.................................. $71.2 $ (17.4) -- $ 53.8 ===== ====== ===== ====== 1993 Current........................................ $12.6 $ (7.9) $ (.1) $ 4.6 Deferred....................................... 68.5 12.0 1.8 82.3 ----- ------ ----- ------ Total.................................. $81.1 $ 4.1 $ 1.7 $ 86.9 ===== ====== ===== ======
The 1994 federal deferred credit for income taxes of $71.2 includes $29.3 for the benefit of operating loss carryforwards generated in 1994. The 1993 federal deferred credit for income taxes of $68.5 includes $29.2 for the benefit of operating loss carryforwards generated in 1993 and a $3.4 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the (provision) credit for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles is as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ------ ----- ----- Amount of federal income tax (provision) credit based on the statutory rate............................................... $(35.9) $53.2 $73.0 Percentage depletion........................................... 4.2 5.6 6.4 Revision of prior years' tax estimates and other changes in valuation allowances......................................... 1.5 .2 3.9 Foreign taxes, net of federal tax benefit...................... (5.4) (5.3) (2.6) Increase in net deferred income tax assets due to tax rate change....................................................... 1.8 3.4 Other.......................................................... (1.6) (1.7) 2.8 ------ ----- ----- (Provision) credit for income taxes............................ $(37.2) $53.8 $86.9 ====== ===== =====
As shown in the Statements of Consolidated Income (Loss) for the years ended December 31, 1994 and 1993, the Company reported extraordinary losses related to the early extinguishment of debt. The Company reported the 1994 extraordinary loss net of related deferred federal income taxes of $2.9 and reported the 1993 extraordinary loss net of related current federal income taxes of $11.2, which approximated the federal statutory rate in effect on the dates the transactions occurred. F-109 305 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Company adopted SFAS 109 as of January 1, 1993, as discussed in Note 1. The components of the Company's net deferred income tax assets are as follows:
DECEMBER 31, ------------------- 1995 1994 ------- ------- Deferred income tax assets: Postretirement benefits other than pensions.................... $ 289.9 $ 293.7 Loss and credit carryforwards.................................. 156.1 187.6 Other liabilities.............................................. 107.8 109.6 Pensions....................................................... 56.0 51.0 Foreign and state deferred income tax liabilities.............. 30.8 28.1 Property, plant, and equipment................................. 22.9 23.1 Inventories.................................................... 1.8 Other.......................................................... 10.7 3.5 Valuation allowances........................................... (128.5) (133.9) ------- ------- Total deferred income tax assets -- net................ 547.5 562.7 ------- ------- Deferred income tax liabilities: Property, plant, and equipment................................. (179.8) (203.2) Investments in and advances to unconsolidated affiliates....... (66.4) (63.8) Inventories.................................................... (8.3) Other.......................................................... (9.5) (6.4) ------- ------- Total deferred income tax liabilities.................. (255.7) (281.7) ------- ------- Net deferred income tax assets................................... $ 291.8 $ 281.0 ======= =======
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1995, approximately $97.7 of the net deferred income tax assets listed above relate to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for these carryforwards, including any limitations concerning their use and the year the carryforwards expire, as well as the levels of taxable income necessary for utilization. For example, full valuation allowances were provided for certain credit carryforwards that expire in the near term. With regard to future levels of income, the Company believes, based on the cyclical nature of its business, its history of prior operating earnings, and its expectations for future years, that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. The remaining portion of the Company's net deferred income tax assets at December 31, 1995, is approximately $194.1. A principal component of this amount is the tax benefit associated with the accrual for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of this accrual will occur over a 30- to 40-year period. If such deductions create or increase a net operating loss in any one year, the Company has the ability to carry forward such loss for 15 taxable years. For these reasons, the Company believes a long-term view of profitability is appropriate and has concluded that this net deferred income tax asset will more likely than not be realized, despite the operating losses incurred in recent years. As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of the net deferred income tax assets listed above are included on the Consolidated Balance Sheets in the caption entitled Prepaid expenses and other current assets. Certain other portions of the deferred income tax assets and liabilities listed above are included on the Consolidated Balance Sheets in the captions entitled Other accrued liabilities and Long-term liabilities. F-110 306 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Company and its subsidiaries were included in the consolidated federal income tax returns of MAXXAM for the period from October 28, 1988, through June 30, 1993. As a consequence of the issuance of the Depositary Shares on June 30, 1993, as discussed in Note 7, the Company and its subsidiaries are no longer included in the consolidated federal income tax returns of MAXXAM. The Company and its subsidiaries have become members of a new consolidated return group of which the Company is the common parent corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group files consolidated federal income tax returns for taxable periods beginning on or after July 1, 1993. The tax allocation agreement between the Company and MAXXAM (the "Company Tax Allocation Agreement") and the tax allocation agreement between KACC and MAXXAM (the "KACC Tax Allocation Agreement") (collectively, the "Tax Allocation Agreements"), terminated pursuant to their terms, effective for taxable periods beginning after June 30, 1993. Any unused federal income tax attribute carryforwards under the terms of the Tax Allocation Agreements were eliminated and are not available to offset federal income tax liabilities for taxable periods beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993 consolidated federal income tax return, the tax attribute carryforwards of the MAXXAM consolidated return group as of December 31, 1993, were apportioned in part to the New Kaiser Tax Group, based on the provisions of the relevant consolidated return regulations. The benefit of such tax attribute carryforwards apportioned to the New Kaiser Tax Group approximated the benefit of tax attribute carryforwards eliminated under the Tax Allocation Agreements. To the extent the New Kaiser Tax Group generates unused tax losses or tax credits for periods beginning on or after July 1, 1993, such amounts will not be available to obtain refunds of amounts paid by the Company or KACC to MAXXAM for periods ending on or before June 30, 1993, pursuant to the Tax Allocation Agreements. KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which became effective as of October 28, 1988. Under the terms of the KACC Tax Allocation Agreement, MAXXAM computed the federal income tax liability for KACC and its subsidiaries (collectively, the "Subgroup") as if the Subgroup were a separate affiliated group of corporations which was never connected with MAXXAM. During 1991, the Company and MAXXAM entered into the Company Tax Allocation Agreement, which became effective as of January 1, 1991. Under the terms of the Company Tax Allocation Agreement, MAXXAM computed a tentative federal income tax liability for the Company as if it and its subsidiaries, including KACC and its subsidiaries, were a separate affiliated group of corporations which was never connected with MAXXAM. The federal income tax liability of the Company was the difference between the tentative federal income tax liability and the liability computed under the KACC Tax Allocation Agreement. The provisions of the Tax Allocation Agreements will continue to govern for periods ended prior to July 1, 1993. Therefore, payments or refunds may still be required by or payable to the Company or KACC under the terms of their respective tax allocation agreements for these periods due to the final resolution of audits, amended returns, and related matters. However, the 1994 Credit Agreement prohibits the payment by KACC to MAXXAM of any amounts due under the KACC Tax Allocation Agreement, except for certain payments that are required as a result of audits and only to the extent of any amounts paid after February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement. F-111 307 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The following table presents the Company's tax attributes for federal income tax purposes as of December 31, 1995. The utilization of certain of these tax attributes is subject to limitations:
EXPIRING THROUGH ----------- Regular tax attribute carryforwards: Net operating losses........................................... $32.9 2007 General business tax credits................................... 28.4 2008 Foreign tax credits............................................ 89.7 2000 Alternative minimum tax credits................................ 19.4 Indefinite Alternative minimum tax attribute carryforwards: Net operating losses........................................... $17.1 2002 Foreign tax credits............................................ 83.5 2000
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS RETIREMENT PLANS Retirement plans are non-contributory for salaried and hourly employees and generally provide for benefits based on a formula which considers length of service and earnings during years of service. The Company's funding policies meet or exceed all regulatory requirements. The funded status of the employee pension benefit plans and the corresponding amounts that are included in the Company's Consolidated Balance Sheets are as follows:
PLANS WITH ACCUMULATED BENEFITS EXCEEDING ASSETS(1) DECEMBER 31, --------------------- 1995 1994 ------- ------- Accumulated benefit obligation: Vested employees............................................. $ 753.0 $ 663.9 Nonvested employees.......................................... 28.7 41.1 ------ ------ Accumulated benefit obligation............................... 781.7 705.0 Additional amounts related to projected salary increases....... 34.2 30.0 ------ ------ Projected benefit obligation................................... 815.9 735.0 Plan assets (principally common stocks and fixed income obligations) at fair value................................... (592.3) (524.6) ------ ------ Plan assets less than projected benefit obligation............. 223.6 210.4 Unrecognized net losses........................................ (54.7) (42.5) Unrecognized net obligations................................... (.5) (.8) Unrecognized prior-service cost................................ (28.2) (30.9) Adjustment required to recognize minimum liability............. 49.8 42.9 ------ ------ Accrued pension obligation included in the Consolidated Balance Sheets (principally in Long-term liabilities)................ $ 190.0 $ 179.1 ====== ======
- --------------- (1) Includes plans with assets exceeding accumulated benefits by approximately $.1 and $.3 in 1995 and 1994, respectively. As required by Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, the Company recorded an after-tax credit (charge) to equity of $(4.7) and $12.5 at December 31, F-112 308 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1995 and 1994, respectively, for the reduction (excess) of the minimum liability over the unrecognized net obligation and prior-service cost. These amounts were recorded net of the related income tax (provision) credit of $2.8 and $(7.3) as of December 31, 1995 and 1994, respectively, which approximated the federal and state statutory rates. The components of net periodic pension cost are:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ------- ------ ------ Service cost -- benefits earned during the period........... $ 10.0 $ 11.2 $ 10.8 Interest cost on projected benefit obligation............... 59.8 57.3 59.2 Return on assets: Actual gain............................................... (112.2) (.8) (70.3) Deferred gain (loss)...................................... 64.6 (53.0) 15.9 Net amortization and deferral............................... 4.2 4.1 2.3 ------ ----- ----- Net periodic pension cost................................... $ 26.4 $ 18.8 $ 17.9 ====== ===== =====
Assumptions used to value obligations at year-end, and to determine the net periodic pension cost in the subsequent year are:
1995 1994 1993 ---- ---- ---- Discount rate................................................... 7.5% 8.5 % 7.5% Expected long-term rate of return on assets..................... 9.5% 9.5 % 10.0% Rate of increase in compensation levels......................... 5.0% 5.0 % 5.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and its subsidiaries provide postretirement health care and life insurance benefits to eligible retired employees and their dependents. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company or its subsidiaries. These benefits are provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. The Company adopted SFAS 106 to account for postretirement benefits other than pensions as of January 1, 1993, as discussed in Note 1. In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for USWA retirees who retire after December 31, 1995, when they become 65, and voluntary for other hourly retirees of the Company's operations in the states of California, Louisiana, and Washington. The USWA contract, ratified on February 28, 1995, also contained changes to the retiree health benefits. These changes included increased retirees' copayments, deductibles, and coinsurance, and restricted Medicare Part B premium reimbursement to the 1995 level for employees retiring after November 1, 1994. These changes will lower the Company's expenses for retiree medical care. F-113 309 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Company's accrued postretirement benefit obligation is composed of the following:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Accumulated postretirement benefit obligation: Retirees......................................................... $557.6 $566.2 Active employees eligible for postretirement benefits............ 30.7 30.2 Active employees not eligible for postretirement benefits........ 61.1 98.7 ------ ------ Accumulated postretirement benefit obligation.................... 649.4 695.1 Unrecognized net gains............................................. 20.5 55.0 Unrecognized gains related to prior-service costs.................. 110.9 31.8 ------ ------ Accrued postretirement benefit obligation.......................... $780.8 $781.9 ====== ======
The components of net periodic postretirement benefit cost are:
YEAR ENDED DECEMBER 31, --------------------- 1995 1994 1993 ----- ----- ----- Service cost.................................................... $ 4.5 $ 8.2 $ 7.1 Interest cost................................................... 52.3 56.9 58.5 Amortization of prior service cost.............................. (8.9) (3.2) ----- ----- ----- Net periodic postretirement benefit cost........................ $47.9 $61.9 $65.6 ===== ===== =====
The 1996 annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) are 8.0% and 7.5% for retirees under 65 and over 65, respectively, and are assumed to decrease gradually to 5.0% in 2007 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995, by approximately $68.7 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by approximately $7.8. The weighted average discount rate used to determine the accumulated postretirement benefit obligation at December 31, 1995 and 1994, was 7.5% and 8.5%, respectively. POSTEMPLOYMENT BENEFITS The Company provides certain benefits to former or inactive employees after employment but before retirement. The Company adopted SFAS 112 to account for postemployment benefits as of January 1, 1993, as discussed in Note 1. INCENTIVE PLANS Effective January 1, 1989, the Company and KACC adopted an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company, KACC, and their consolidated subsidiaries. All compensation vested as of December 31, 1992, under the LTIP, as amended in 1991 and 1992, has been paid to the participants in cash or common stock of the Company as of December 31, 1993. Under the LTIP, as amended, 764,092 restricted shares were distributed to six Company executives during 1993 for benefits generally earned but not vested as of December 31, 1992. These shares generally will vest at the rate of 25% per year. The Company will record the related expense of $6.5 over the four-year period ending December 31, 1996. In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock were reserved for awards or for payment of rights granted under the Plan, of F-114 310 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) which 544,839 shares were available to be awarded at December 31, 1995. Under the Kaiser 1993 Omnibus Stock Incentive Plan, 102,564 restricted shares were distributed to two Company executives during 1994, which will vest at the rate of 25% per year. The Company will record the related expense of $1.0 over the four-year period ending December 31, 1998. In 1993 and 1994, the Compensation Committee of the Board of Directors approved the award of "nonqualified stock options" to members of management other than those participating in the LTIP. These options generally will vest at the rate of 20-25% per year. Information relating to nonqualified stock options is shown below:
1995 1994 1993 --------- ---------- ------- Outstanding at beginning of year................... 1,119,680 664,400 Granted............................................ 494,800 664,400 Exercised (at $7.25 and $9.75 per share)........... (155,500) (6,920) Expired or forfeited............................... (38,095) (32,600) --------- --------- ------- Outstanding at end of year (prices ranging from $7.25 to $12.75 per share)....................... 926,085 1,119,680 664,400 ========= ========= ======= Exercisable at end of year......................... 211,755 120,180 ========= =========
In 1995, the Company adopted the Kaiser Aluminum Total Compensation System, an unfunded incentive compensation program. The program provides incentive pay based on performance against plan over a three-year period. KACC also has a supplemental savings and retirement plan for salaried employees, under which the participants contribute a percentage of their base salaries. The Company's expense for the above plans was $11.9, $6.1, and $5.3 for the years ended December 31, 1995, 1994, and 1993, respectively. F-115 311 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS Changes in stockholders' equity and minority interests were:
STOCKHOLDERS' EQUITY MINORITY INTERESTS ----------------------------------------------------------- ------------------ RETAINED ADDITIONAL REDEEMABLE EARNINGS MINIMUM PREFERENCE PREFERRED COMMON ADDITIONAL (ACCUMULATED PENSION STOCK OTHER STOCK STOCK CAPITAL DEFICIT) LIABILITY ---------- ----- --------- ------ ---------- ------------ ---------- BALANCE, DECEMBER 31, 1992........ $ 32.8 $72.1 $ .6 $288.5 $ 282.8 $ (6.7) Net loss........................ (652.2) Redeemable preference stock: Accretion..................... 4.8 Stock redemption.............. (4.0) Conversions (1,967 preference shares into cash)............. (.2) Common stock issued............. 3.3 Preferred stock issued.......... $.2 134.1 Dividends on preferred stock.... (6.3) Minority interest in majority-owned subsidiaries... (.5) Additional minimum pension liability..................... (14.9) ----- ----- --- --- ------ ------- ------ BALANCE, DECEMBER 31, 1993........ 33.6 71.4 .2 .6 425.9 (375.7) (21.6) Net loss........................ (106.8) Redeemable preference stock: Accretion..................... 4.0 Stock redemption.............. (8.5) Common stock issued............. 2.2 Preferred stock issued.......... .4 99.7 Dividends on preferred stock.... (20.1) Minority interest in majority-owned subsidiaries... 15.7 Reduction of minimum pension liability..................... 12.5 ----- ----- --- --- ------ ------- ------ BALANCE, DECEMBER 31, 1994........ 29.1 87.1 .6 .6 527.8 (502.6) (9.1) Net income...................... 60.3 Redeemable preference stock: Accretion..................... 3.9 Stock redemption.............. (8.7) Stock repurchase.............. 5.4 Conversions (1,222 preference shares into cash)............. (.1) Common stock issued upon redemption and conversion of preferred stock............... (.2) .1 1.1 Dividends on preferred stock.... (17.6) Minority interest in majority-owned subsidiaries... 6.0 Incentive plans accretion....... 1.4 Additional minimum pension liability..................... (4.7) ----- ----- --- --- ------ ------- ------ BALANCE, DECEMBER 31, 1995........ $ 29.7 $93.0 $.4 $ .7 $530.3 $ (459.9) $(13.8) ===== ===== === === ====== ======= ======
F-116 312 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) REDEEMABLE PREFERENCE STOCK In March 1985, KACC entered into a three-year agreement with the USWA whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock" would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbargaining employees which provided for the issuance of "Cumulative (1985 Series B) Preference Stock." Series A Stock and Series B Stock ("Series A and B Stock") each have a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any. For financial reporting purposes, Series A and B Stock were recorded at fair market value when issued, based on independent appraisals, with a corresponding charge to compensation cost. Carrying values have been increased each year to recognize accretion of redemption values and, in certain years, there have been other increases for reasons described below. Changes in Series A and B Stock are shown below.
1995 1994 1993 -------- --------- --------- Shares: Beginning of year........................................... 912,167 1,081,548 1,163,221 Redeemed.................................................... (174,804) (169,381) (81,673) ------- ------- --------- End of year................................................. 737,363 912,167 1,081,548 ======= ======= =========
No additional Series A or B Stock will be issued. While held by the plan trustee, Series B Stock is entitled to cumulative annual dividends, when and as declared by the Board of Directors, payable in stock or in cash at the option of KACC on or after March 1, 1991, in respect to years commencing January 1, 1990, based on a formula tied to KACC's income before tax from aluminum operations. When distributed to plan participants (generally upon separation from KACC), the Series A and B Stocks are entitled to an annual cash dividend of $5 per share, payable quarterly, when and as declared by the Board of Directors. Redemption fund agreements require KACC to make annual payments by March 31 each year based on a formula tied to consolidated net income until the redemption funds are sufficient to redeem all Series A and B Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March 1994 and 1995, KACC contributed $4.3 for each of the years 1993 and 1994, and will contribute $4.3 in March 1996 for 1995. Under the USWA labor contract effective November 1, 1994, KACC is obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1995 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 80 shares from each participant in 1998. In addition, a profitability test was satisfied for 1995; therefore, KACC will offer to purchase from each active participant an additional 20 shares of such preference stock held in the stock ownership plan for the benefit of substantially the same employees in 1996. The employees could elect to receive their shares, accept cash, or place the proceeds into KACC's 401(k) savings plan. KACC will provide comparable purchases of Series B Stock from active participants. The Series A and B Stock is distributed in the event of death, retirement, or in other specified circumstances. KACC also may redeem such stock at $50 per share plus accrued dividends, if any. At the option of the plan participant, the trustee shall redeem stock distributed from the plans at redemption value to the extent funds are available in the redemption fund. Under the Tax Reform Act of 1986, at the option of the plan participant, KACC must purchase distributed shares earned after December 31, 1985, at redemption value on a five-year installment basis, with interest at market rates. The obligation of KACC to make such installment payments must be secured. F-117 313 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The Series A and B Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restricts the ability of KACC to redeem or pay dividends on common stock if KACC is in default on any dividends payable on the Series A and B Stock. PREFERENCE STOCK KACC Cumulative Convertible Preference Stock, $100 par value ("$100 Preference Stock"), restricts acquisition of junior stock and payment of dividends. At December 31, 1995, such provisions were less restrictive as to the payment of cash dividends than the 1994 Credit Agreement provisions. KACC has the option to redeem the $100 Preference Stocks at par value plus accrued dividends. KACC does not intend to issue any additional shares of the $100 Preference Stocks. The 4 1/8% and 4 3/4% (1957 Series, 1959 Series, and 1966 Series) $100 Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84, $78.38, and $76.46, respectively. KACC records the $100 Preference Stock at their exchange amounts for financial statement presentation and the Company includes such amounts in minority interests. The outstanding shares of KACC preference stock were:
DECEMBER 31, ------------------- 1995 1994 ------ ------ 4 1/8%........................................................... 3,237 3,657 4 3/4% (1957 Series)............................................. 2,342 2,605 4 3/4% (1959 Series)............................................. 13,162 13,534 4 3/4% (1966 Series)............................................. 3,473 3,640
PREFERRED STOCK Series A Convertible -- In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). On September 19, 1995, the Company redeemed all 1,938,295 Series A Shares, which resulted in the simultaneous redemption of all Depositary Shares in exchange for (i) 13,126,521 shares of the Company's common stock and (ii) $2.8 in cash comprised of (a) an amount equal to all accrued and unpaid dividends up to and including the day immediately prior to redemption date and (b) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. PRIDES Convertible -- In the first quarter of 1994, the Company consummated the public offering of 8,855,550 shares of the PRIDES. The net proceeds from the sale of the shares of PRIDES were approximately $100.1. The Company used such net proceeds to make non-interest-bearing loans to KACC in the aggregate principal amount of $33.2 (the aggregate dividends scheduled to accrue on the shares of PRIDES from the issuance date until December 31, 1997, the date on which the outstanding PRIDES will be mandatorily converted into shares of the Company's common stock), evidenced by intercompany notes, and used the balance of such net proceeds to make capital contributions to KACC in the aggregate amount of $66.9. Holders of shares of PRIDES are entitled to receive (when, as, and if the Board of Directors declares dividends on the PRIDES) cumulative preferential cash dividends at a rate per annum of 8.255% of the per share offering price (equivalent to $.97 per annum for each share of PRIDES), from the date of initial issuance, payable quarterly in arrears on the last day of March, June, September, and December of each year. F-118 314 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Holders of shares of PRIDES have a 4/5 vote for each share held of record and, except as required by law, are entitled to vote together with the holders of common stock and together with the holders of any other classes or series of stock who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed or converted at the option of the holder, each of the outstanding shares of PRIDES will mandatorily convert into one share of the Company's common stock, subject to adjustment in certain events, and the right to receive an amount in cash equal to all accrued and unpaid dividends thereon (other than previously declared dividends payable to a holder of record on a prior date). Shares of PRIDES are not redeemable at the election of the Company, prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, the Company may redeem any or all of the outstanding shares of PRIDES. Upon any such redemption, each holder will receive, in exchange for each share of PRIDES, the number of shares of common stock equal to (A) the sum of $11.9925, declining after December 31, 1996, to $11.75 until December 31, 1997, plus, in the event the Company does not elect to pay cash dividends to the redemption date, all accrued and unpaid dividends thereon divided by (B) the Current Market Price (as defined) on the applicable date of determination, but in no event less than .8333 of a share of common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of common stock (equivalent to a conversion price of $14.10 per share of common stock), subject to adjustment in certain events. The number of shares of common stock a holder will receive upon redemption, and the value of the shares received upon conversion, will vary depending on the market price of the common stock from time to time. DIVIDENDS ON COMMON STOCK The indentures governing the Senior Notes and the 12 3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Under the most restrictive of these covenants, neither the Company nor KACC currently is permitted to pay dividends on its common stock. At December 31, 1995, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security for debt of a wholly owned subsidiary of MAXXAM, consisting of $100.0 aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 and $125.7 aggregate principal amount of 12 1/4% Senior Secured Discount Notes due 2003. PROPOSED RECAPITALIZATION On February 5, 1996, the Company announced that it filed with the SEC a preliminary proxy statement relating to a proposed recapitalization and a special meeting of stockholders to consider and vote upon the proposal. The proposed recapitalization would: (i) provide for two classes of common stock: Class A Common Shares, $.01 par value, with one vote per share and a new lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote per share: (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorize an additional 250 million shares to be designated as Common Stock; and (iii) change each issued share of the Company's existing common stock, par value $.01 per share, into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock. The Company would pay cash in lieu of fractional shares. The Company anticipates that both the Class A Common Shares and the Common Stock will be approved for trading on the New York Stock Exchange. Upon the effective date of the recapitalization, approximately 23,640,000 Class A Common Shares and 47,998,000 shares of Common Stock would be issued and outstanding. The proportionate voting power of the F-119 315 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) holders of the PRIDES will increase immediately after the effectiveness of the recapitalization until such shares are redeemed or converted, which will occur on or before December 31, 1997. As of January 31, 1996, holders of the existing common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all stockholders. Immediately after the recapitalization, the voting power of such holders of the PRIDES will increase to 19.6% in the aggregate, with a corresponding reduction in the voting power of such holders of the existing common stock. At such time as the PRIDES are redeemed or converted, the relative voting power of such holders of the PRIDES will decrease and the relative voting power for both such holders of the PRIDES and the existing common stock will be approximately the same as it would have been had the recapitalization not occurred. 8. COMMITMENTS AND CONTINGENCIES COMMITMENTS KACC has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 9), letters of credit, and guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs, and certain other costs of QAL. The aggregate minimum amount of required future principal payments at December 31, 1995, is $88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The KACC share of payments, including operating costs and certain other expenses under the agreement, was $77.5, $85.6, and $86.7 for the years ended December 31, 1995, 1994, and 1993, respectively. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1995, are as follows: years ending December 31, 1996 -- $22.7; 1997 -- $21.6; 1998 -- $24.6; 1999 -- $29.7; 2000 -- $27.3; thereafter -- $187.0. The future minimum rentals receivable under noncancelable subleases was $67.0 at December 31, 1995. Rental expenses were $29.0, $26.8, and $29.0 for the years ended December 31, 1995, 1994, and 1993, respectively. ENVIRONMENTAL CONTINGENCIES The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals, primarily related to potential solid waste disposal and soil and ground- F-120 316 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) water remediation matters. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the years ended December 31, 1995, 1994, and 1993:
1995 1994 1993 ----- ----- ----- Balance at beginning of period.................................. $40.1 $40.9 $46.4 Additional amounts.............................................. 3.3 2.8 1.7 Less expenditures............................................... (4.5) (3.6) (7.2) ----- ----- ----- Balance at end of period........................................ $38.9 $40.1 $40.9 ===== ===== =====
These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an aggregate of approximately $10.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $23.0 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved over the next twelve months. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. ASBESTOS CONTINGENCIES KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. The following table presents the changes in number of such claims pending for the years ended December 31, 1995, 1994, and 1993.
1995 1994 1993 ------ ------- ------ Number of claims at beginning of period............................. 25,200 23,400 13,500 Claims received..................................................... 41,700 14,300 11,400 Claims settled or dismissed......................................... (7,200) (12,500) (1,500) ------ ------ ------ Number of claims at end of period................................... 59,700 25,200 23,400 ====== ====== ======
KACC has been advised by its regional counsel that, although there can be no assurance, the recent increase in pending claims may be attributable in part to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to F-121 317 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995, and November 30, 1995, were filed in Texas prior to September 1, 1995. Based on past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and the Company's actual costs could exceed these estimates. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $160.1, before consideration of insurance recoveries, is included primarily in Long-term liabilities at December 31, 1995. The Company estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While the Company does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. The Company believes, based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $137.9, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at December 31, 1995. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. OTHER CONTINGENCIES The Company or KACC is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS KACC enters into a number of financial instruments in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates, alumina, primary aluminum, and fabricated aluminum products prices, and the cost of purchased commodities. F-122 318 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) KACC has significant expenditures which are denominated in foreign currencies related to long-term purchase commitments with its affiliates in Australia and the United Kingdom, which expose KACC to certain exchange rate risks. In order to mitigate its exposure, KACC periodically enters into forward foreign exchange and currency option contracts in Australian dollars and Pounds Sterling to hedge these commitments. The forward foreign currency exchange contracts are agreements to purchase or sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1995, KACC had net forward foreign exchange contracts totaling approximately $102.8 for the purchase of 142.4 Australian dollars through April 30, 1997. To mitigate its exposure to declines in the market prices of alumina, primary aluminum, and fabricated aluminum products, while retaining the ability to participate in favorable pricing environments that may materialize, KACC has developed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. Under the principal components of KACC's price risk management strategy, which can be modified at any time, (i) varying quantities of KACC's anticipated production are sold forward at fixed prices; (ii) call options are purchased to allow KACC to participate in certain higher market prices, should they materialize, for a portion of KACC's primary aluminum and alumina sold forward; (iii) option contracts are entered into to establish a price range KACC will receive for a portion of its primary aluminum and alumina; and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its primary aluminum and alumina. In this regard, in respect of its 1996 anticipated production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of primary aluminum at fixed prices. In addition, KACC enters into forward fixed price arrangements with certain customers which provide for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In order to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward and option contracts. In this regard, at December 31, 1995 KACC had purchased 53,300 metric tons of primary aluminum under forward purchase contracts at fixed prices that expire at various times through December 1996. At December 31, 1995, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,721 per metric ton ($.78 per pound) of aluminum, and forward foreign exchange contracts was $4.1. KACC is exposed to credit risk in the event of non-performance by other parties to these currency and commodity contracts, but KACC does not anticipate non-performance by any of these counterparties, given their creditworthiness. When appropriate, KACC arranges master netting agreements. 10. SEGMENT AND GEOGRAPHICAL AREA INFORMATION Sales and transfers among geographic areas are made on a basis intended to reflect the market value of products. The aggregate foreign currency gain included in determining net income was $5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994, and 1993, respectively. Sales of more than 10% of total revenue to a single customer were nil in 1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and $145.7 of aluminum processing for the years ended December 31, 1994, and 1993, respectively. Export sales were less than 10% of total revenue during the years ended December 31, 1995, 1994, and 1993, respectively. F-123 319 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Geographical area information relative to operations is summarized as follows:
YEAR ENDED OTHER DECEMBER 31, DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL ------------ -------- --------- ------ ------- ------------ -------- Net sales to unaffiliated customers................ 1995 $1,589.5 $ 191.7 $239.4 $217.2 $2,237.8 1994 1,263.2 169.9 180.0 168.4 1,781.5 1993 1,177.8 155.4 207.5 178.4 1,719.1 Sales and transfers among geographic areas......... 1995 $ 79.6 $191.5 $ (271.1) 1994 98.7 139.4 (238.1) 1993 88.2 79.6 (167.8) Equity in income (losses) of unconsolidated affiliates............... 1995 $ (.2) $ 19.4 $ 19.2 1994 .2 (2.1) (1.9) 1993 (3.3) (3.3) Operating income (loss).... 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6 1994 (128.8) 9.9 18.3 44.4 (56.2) 1993 (145.9) (11.8) 21.9 12.4 (123.4) Investment in and advances to unconsolidated affiliates............... 1995 $ 1.2 $ 27.1 $149.9 $ 178.2 1994 1.2 28.8 139.7 169.7 Identifiable assets........ 1995 $2,017.9 $ 381.9 $196.5 $216.9 $2,813.2 1994 1,933.8 364.8 200.0 199.5 2,698.1
F-124 320 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Financial information by industry segment at December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994, and 1993, is as follows:
YEAR ENDED BAUXITE & ALUMINUM DECEMBER 31, ALUMINA PROCESSING CORPORATE TOTAL ------------ --------- ---------- --------- -------- Net sales to unaffiliated customers......................... 1995 $ 514.2 $1,723.6 $2,237.8 1994 432.5 1,295.7 1,781.5 1993 423.4 1,349.0 1,719.1 Intersegment sales.................. 1995 $ 159.7 $ 159.7 1994 146.8 146.8 1993 129.4 129.4 Equity in income (losses) of unconsolidated affiliates......... 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2 1994 (4.7) 2.6 .2 (1.9) 1993 (2.5) (.8) (3.3) Operating income (loss)............. 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6 1994 19.8 (8.4) (67.6) (56.2) 1993 (4.5) (46.3) (72.6) (123.4) Effect of changes in accounting principles on operating income (loss) SFAS 106.......................... 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2) SFAS 109.......................... 1993 (7.7) (7.8) .3 (15.2) Depreciation........................ 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3 1994 33.5 59.1 2.8 95.4 1993 35.3 59.9 1.9 97.1 Capital expenditures................ 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4 1994 28.9 39.9 1.2 70.0 1993 35.3 31.2 1.2 67.7 Investment in and advances to unconsolidated affiliates......... 1995 $ 129.9 $ 47.1 $ 1.2 $ 178.2 1994 136.6 31.9 1.2 169.7 Identifiable assets................. 1995 $ 746.0 $1,341.2 $ 726.0 $2,813.2 1994 749.6 1,242.3 706.2 2,698.1
F-125 321 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, ASSETS 1996 1995 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents........................................ $ 21.6 $ 21.9 Receivables...................................................... 261.6 308.6 Inventories...................................................... 545.5 525.7 Prepaid expenses and other current assets........................ 111.7 76.6 -------- -------- Total current assets.......................................... 940.4 932.8 Investments in and advances to unconsolidated affiliates........... 174.6 178.2 Property, plant, and equipment -- net.............................. 1,126.4 1,109.6 Deferred income taxes.............................................. 284.7 269.1 Other assets....................................................... 343.1 323.5 -------- -------- Total.................................................... $ 2,869.2 $2,813.2 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................. $ 160.5 $ 184.5 Accrued interest................................................. 13.6 32.0 Accrued salaries, wages, and related expenses.................... 64.9 105.3 Accrued postretirement medical benefit obligation -- current portion....................................................... 46.8 46.8 Other accrued liabilities........................................ 151.7 129.4 Payable to affiliates............................................ 95.6 94.2 Long-term debt -- current portion................................ 8.9 8.9 -------- -------- Total current liabilities..................................... 542.0 601.1 Long-term liabilities.............................................. 558.3 548.5 Accrued postretirement medical benefit obligation.................. 727.7 734.0 Long-term debt..................................................... 858.4 749.2 Minority interests................................................. 119.4 122.7 Stockholders' equity: Preferred stock.................................................. .4 .4 Common stock..................................................... .7 .7 Additional capital............................................... 530.8 530.3 Accumulated deficit.............................................. (454.7) (459.9) Additional minimum pension liability............................. (13.8) (13.8) -------- -------- Total stockholders' equity.................................... 63.4 57.7 -------- -------- Total.................................................... $ 2,869.2 $2,813.2 ======== ========
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-126 322 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1996 1995 ------- ------- Net sales.............................................................. $1,652.1 $1,646.7 -------- -------- Costs and expenses: Cost of products sold................................................ 1,394.8 1,329.8 Depreciation......................................................... 72.5 71.1 Selling, administrative, research and development, and general....... 97.4 96.4 -------- -------- Total costs and expenses.......................................... 1,564.7 1,497.3 -------- -------- Operating income....................................................... 87.4 149.4 Other income (expense): Interest expense..................................................... (68.3) (71.3) Other -- net......................................................... 3.0 (9.8) -------- -------- Income before income taxes and minority interests...................... 22.1 68.3 Provision for income taxes............................................. (8.4) (24.6) Minority interests..................................................... (2.2) (4.4) -------- -------- Net income............................................................. 11.5 39.3 Dividends on preferred stock........................................... (6.3) (15.5) -------- -------- Net income available to common shareholders............................ $ 5.2 $ 23.8 ======== ======== Earnings per common and common equivalent share: Primary.............................................................. $ .07 $ .40 ======== ======== Fully diluted........................................................ $ .46 ======== Weighted average common and common equivalent shares outstanding (000): Primary........................................................... 71,843 59,015 Fully diluted..................................................... 71,613
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-127 323 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (IN MILLIONS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1996 1995 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................................. $ 11.5 $ 39.3 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation......................................................... 72.5 71.1 Amortization of excess investment over equity in net assets of unconsolidated affiliates........................................... 8.7 8.7 Amortization of deferred financing costs and discount on long-term debt................................................................ 4.1 4.1 Equity in income of unconsolidated affiliates........................ (7.5) (17.2) Minority interests................................................... 2.2 4.4 Decrease (increase) in receivables................................... 41.0 (86.6) Increase in inventories.............................................. (19.8) (62.6) (Increase) decrease in prepaid expenses and other assets............. (38.1) 70.5 Decrease in accounts payable......................................... (24.1) (5.2) Decrease in accrued interest......................................... (18.4) (18.0) (Decrease) increase in payable to affiliates and accrued liabilities......................................................... (23.1) 12.3 Decrease in accrued and deferred income taxes........................ (18.6) (8.5) Other................................................................ 4.6 7.8 ------ ------ Net cash (used for) provided by operating activities............... (5.0) 20.1 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from disposition of property and investments............... 1.6 6.9 Expenditures for property, plant, and equipment......................... (90.8) (44.2) Investments in unconsolidated affiliates................................ (.3) (9.0) Redemption fund for minority interests' preference stock................ (1.3) (.2) ------ ------ Net cash used for investing activities............................. (90.8) (46.5) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under revolving credit facility, net............ 118.1 55.6 Repayments of long-term debt............................................ (9.0) (8.5) Incurrence of financing costs........................................... -- (.8) Dividends paid.......................................................... (8.4) (18.7) Capital stock issued.................................................... -- 1.2 Redemption of minority interests' preference stock...................... (5.2) (8.8) ------ ------ Net cash provided by financing activities............................ 95.5 20.0 ------ ------ Net decrease in cash and cash equivalents during the period............... (.3) (6.4) Cash and cash equivalents at beginning of period.......................... 21.9 17.6 ------ ------ Cash and cash equivalents at end of period................................ $ 21.6 $ 11.2 ====== ====== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest.............................. $ 82.7 $ 85.2 Income taxes paid....................................................... 22.4 26.6 Tax allocation payments to MAXXAM Inc................................... 1.1 --
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-128 324 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS) 1. GENERAL Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM owns approximately 62% of the Company's common stock, assuming the conversion of each outstanding share of 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES"), into one share of the Company's common stock, with the remaining approximately 38% publicly held. The Company operates through its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1995. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. Operating results for the nine month period ended September 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 2. INVENTORIES The classification of inventories is as follows:
SEPTEMBER DECEMBER 30, 31, 1996 1995 ----------- ---------- Finished fabricated aluminum products..................... $ 108.4 $ 91.5 Primary aluminum and work in process...................... 190.0 195.9 Bauxite and alumina....................................... 122.5 119.6 Operating supplies and repair and maintenance parts....... 124.6 118.7 ------ ------ Total........................................... $ 545.5 $525.7 ====== ======
Substantially all product inventories are stated at last-in, first-out (LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO cost. 3. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Primary -- Earnings per common and common equivalent share are computed by deducting preferred stock dividends from net income in order to determine net income available to common shareholders. This amount is then divided by the weighted average number of common and common equivalent shares outstanding during the period. The impact of outstanding stock options on the weighted average number of common and common equivalent shares for the nine months ended September 30, 1996 and 1995, was immaterial. Fully Diluted -- The PRIDES were excluded from the calculation of the weighted average number of common and common equivalent shares outstanding for all periods presented because they were antidilutive. For the nine months ended September 30, 1995, a dividend of $9.1, attributable to the Company's Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares") which were exchanged for approximately 13.1 million shares of the Company's common stock and certain cash payments on September 19, 1995, have not been deducted from net income and the weighted average number of common and F-129 325 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS) common equivalent shares outstanding have been adjusted to reflect the shares of common stock issued in the exchange as if they had been outstanding for the entire period. As a result of the conversion of the Series A Shares, fully diluted earnings per share for the 1995 period are presented even though the results are antidilutive. 4. CONTINGENCIES Environmental Contingencies -- The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based upon the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1996, the balance of such accruals, which is primarily included in Long-term liabilities, was $32.9. These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $2.0 to $10.0 for the years 1996 through 2000 and an aggregate of approximately $7.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $26.5 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved in early 1997. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Asbestos Contingencies -- KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At September 30, 1996, the number of such lawsuits pending was approximately 75,900 as compared to 59,700 at December 31, 1995. During the year 1995, approximately 41,700 of such claims were received and 7,200 were settled or dismissed. During the nine months ended September 30, 1996, approximately 20,000 of such claims were received and 3,800 were settled or dismissed. Based on past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and the Company's actual costs could exceed these estimates. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice F-130 326 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS) of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an estimated asbestos-related cost accrual of $160.0, before consideration of insurance recoveries, is included primarily in Long-term liabilities at September 30, 1996. The Company estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While the Company does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. A substantial portion of the asbestos-related claims that were filed and served on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its counsel that, although there can be no assurance, the increase in pending claims may have been attributable in part to tort reform legislation in Texas. Although asbestos-related claims are currently exempt from certain aspects of the Texas tort reform legislation, management has been advised that efforts to remove the asbestos-related exemption in the tort reform legislation, relating to the doctrine of forum non conveniens, as well as other developments in the legislative and legal environment in Texas, may be responsible for the accelerated pace of new claims experienced in late 1995 and its continuance in 1996, albeit at a somewhat reduced rate. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. The Company believes, based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $142.3, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at September 30, 1996. Management continues to monitor claims activity, the status of the lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from the Company's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Other Contingencies -- The Company and KACC are involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS The Company's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all F-131 327 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS) products sold. KACC enters into primary aluminum hedging transactions from time to time in the normal course of business. Primary aluminum hedging transactions are designed to mitigate the Company's exposure to declines in the market price of primary aluminum, while retaining the ability to participate in favorable environments that may materialize. KACC has employed strategies which include forward sales and purchases of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. At September 30, 1996, KACC had sold forward, at fixed prices, approximately 69,000 and 93,600 tons* of primary aluminum in excess of its projected internal fabrication requirements for 1997 and 1998, respectively, and had purchased put options to establish a minimum price for 66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively. During October 1996, KACC purchased put options to establish a minimum price for an additional 126,000 tons of primary aluminum in excess of its projected 1997 internal fabrication requirements and entered into options contracts that established a price range for an additional 48,000 tons of the Company's 1998 surplus. In addition, at September 30, 1996, KACC had sold forward approximately 73% and 85% of the alumina available to it in excess of its projected internal smelting requirements for 1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made at prices indexed to future prices of primary aluminum. From time to time, KACC also enters into forward purchase and option transactions to limit its exposure to increases in natural gas and fuel oil costs. As of September 30, 1996, KACC had option contracts for the purchase of approximately 40,000 MMBtu of natural gas per day during the first quarter of 1997, and a combination of fixed price purchase and option contracts for 20,000 MMBtu of natural gas per day for the period April 1997 to December 1998. At September 30, 1996, KACC also held option contracts for 54,000 barrels of fuel oil per month for the period January 1997 through December 1998. KACC also enters into hedging transactions in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates. At September 30, 1996, KACC had net forward foreign exchange contracts totaling approximately $81.6 for the purchase of 110.0 Australian dollars from January 1997 through June 1998, in respect of its commitments for 1997 and 1998 expenditures denominated in Australian dollars. At September 30, 1996, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,481 per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts, was approximately $46.4. See Note 9 of the Notes to Consolidated Financial Statements of Kaiser for the year ended December 31, 1995. 6. SUBSEQUENT EVENTS On October 23, 1996, (the "Issuance Date"), KACC completed an offering (the "Offering") of $175.0 principal amount of 10 7/8% Senior Notes due 2006 (the "10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% at maturity. The 10 7/8% Senior Notes were not registered under the Securities Act of 1933, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness under KACC's Credit Agreement dated as of February 15, 1994, as amended (the "Credit Agreement") and KACC's 9 7/8% Senior Notes due 2002 (the 9 7/8% Senior Notes) in right and priority of payment and are guaranteed on a senior, unsecured basis by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). Net proceeds from the Offering on the Issuance Date, after estimated expenses, were approximately - --------------- * All references to tons in this report refer to metric tons of 2,204.6 pounds. F-132 328 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS) $168.9, of which $91.7 were utilized to reduce the outstanding borrowings under the revolving credit facility of the Credit Agreement to zero. The remaining net proceeds (approximately $77.2) were invested in short-term investments pending their application for working capital and general corporate purposes, including capital projects. Pursuant to an agreement with the initial purchasers of the 10 7/8% Senior Notes, KACC and the Subsidiary Guarantors agreed to file a registration statement (the "Registration Statement") with the Securities & Exchange Commission within 30 days of the Issuance Date with respect to a registered offer to exchange the 10 7/8% Senior Notes for new notes with substantially identical terms (the "Exchange Offer"), and to use their reasonable best efforts to have the Registration Statement declared effective within 90 days of the Issuance Date and the Exchange Offer consummated within 130 days of the Issuance Date. The Exchange Offer will be made only by means of a prospectus. On a pro forma basis, at September 30, 1996, after giving effect to the Offering and the application of proceeds therefrom, the Company's total consolidated indebtedness would have increased from $867.3 to $910.2, borrowing capacity of $273.1 would have been available for use under the Credit Agreement and the Company would have had available additional cash proceeds from the Offering of $37.7. During October 1996, the Credit Agreement was amended to, among other things, provide for the Offering of the 10 7/8% Senior Notes discussed above and to modify certain of the financial covenants contained in the Credit Agreement. F-133 329 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1996 QUARTERLY INFORMATION: Net sales................................. $531.1 $567.6 $553.4 Gross profit.............................. 97.4 91.5 68.4 Operating income.......................... 40.3 36.6 10.5 Net income (loss)......................... 9.9 8.2 (6.6) Per common and common equivalent share: Net income (loss)...................... 0.11 0.09 (0.12) 1995 QUARTERLY INFORMATION: Net Sales................................. $513.0 $583.4 $550.3 $591.1 Gross profit.............................. 86.3 119.6 111.0 122.5 Operating income.......................... 32.6 63.6 53.2 61.2 Net income................................ 3.5 23.3 12.5 21.0 Per common and common equivalent share: Net income (loss)...................... (0.03)(2) 0.31 0.13 0.26 1994 QUARTERLY INFORMATION: Net sales................................. $415.1 $459.5 $461.1 $445.8 Gross profit.............................. 27.3 40.5 45.1 43.1 Operating income (loss)................... (25.6) (14.2) (6.9) (9.5) Loss before extraordinary item............ (29.3) (23.6) (20.8) (27.7)(1) Extraordinary loss-net.................... (5.4) -- -- -- Net loss.................................. (34.7) (23.6) (20.8) (27.7)(1) PER COMMON AND COMMON EQUIVALENT SHARE: Loss before extraordinary loss............ (0.58) (0.50) (0.45) (0.57) Extraordinary loss-net.................... (0.09) -- -- -- Net loss.................................. (0.67) (0.50) (0.45) (0.57)
- --------------- (1) Includes pre-tax charges of approximately $10.3 and $10.8 principally related to establishing additional litigation and environmental reserves in the fourth quarters of 1994 and 1993, respectively. (2) After deduction of $5.3 dividends on preferred stock from net income. F-134 330 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder and Board of Directors of MAXXAM Group Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholder's equity (deficit) for each of the three years in the period ended December 31, 1995. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Notes 6 and 7 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. ARTHUR ANDERSEN LLP San Francisco, California January 19, 1996 F-135 331 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ----------------------- 1995 1994 --------- --------- (IN THOUSANDS OF DOLLARS) ASSETS Current assets: Cash and cash equivalents.......................................... $ 48,396 $ 48,575 Marketable securities.............................................. 36,568 19,514 Receivables: Trade........................................................... 20,576 23,170 Other........................................................... 1,624 7,435 Inventories........................................................ 77,904 70,098 Prepaid expenses and other current assets.......................... 7,101 3,717 --------- --------- Total current assets....................................... 192,169 172,509 Timber and timberlands, net of depletion of $204,856 and $188,003 at December 31, 1995 and 1994, respectively........................... 337,390 350,871 Property, plant and equipment, net................................... 100,142 103,183 Deferred financing costs, net........................................ 27,288 30,096 Deferred income taxes................................................ 58,485 61,498 Restricted cash...................................................... 31,367 32,402 Other assets......................................................... 5,542 6,122 --------- --------- $ 752,383 $ 756,681 ========= ========= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable................................................... $ 4,166 $ 3,703 Accrued interest................................................... 25,354 25,765 Accrued compensation and related benefits.......................... 9,611 10,622 Deferred income taxes.............................................. 10,244 12,986 Other accrued liabilities.......................................... 4,435 3,266 Long-term debt, current maturities................................. 14,195 13,670 --------- --------- Total current liabilities.................................. 68,005 70,012 Long-term debt, less current maturities.............................. 764,310 768,786 Other noncurrent liabilities......................................... 33,813 30,365 --------- --------- Total liabilities.......................................... 866,128 869,163 --------- --------- Contingencies Stockholder's deficit: Common stock, $.08 1/3 par value; 1000 shares authorized; 100 shares issued................................................... -- -- Additional capital................................................. 81,287 81,287 Accumulated deficit................................................ (195,032) (193,769) --------- --------- Total stockholder's deficit................................ (113,745) (112,482) --------- --------- $ 752,383 $ 756,681 ========= =========
The accompanying notes are an integral part of these financial statements. F-136 332 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 -------- -------- --------- (IN THOUSANDS OF DOLLARS) Net sales: Lumber and logs......................................... $216,898 $227,430 $ 215,743 Other................................................... 25,694 22,199 17,696 -------- -------- --------- 242,592 249,629 233,439 -------- -------- --------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation)........................................ 127,124 129,598 134,563 Selling, general and administrative..................... 15,884 16,250 20,108 Depletion and depreciation.............................. 26,405 25,946 25,811 -------- -------- --------- 169,413 171,794 180,482 -------- -------- --------- Operating income.......................................... 73,179 77,835 52,957 Other income (expense): Investment, interest and other income................... 9,393 14,367 9,718 Interest expense........................................ (77,824) (77,383) (80,339) -------- -------- --------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles........................ 4,748 14,819 (17,664) Credit (provision) in lieu of income taxes................ (1,211) 3,616 3,355 -------- -------- --------- Income (loss) from continuing operations before extraordinary items and cumulative effect of changes in accounting principles................................... 3,537 18,435 (14,309) Loss from net assets transferred to MAXXAM, net of minority interests and related income taxes............. -- -- (512,970) -------- -------- --------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles.............. 3,537 18,435 (527,279) Extraordinary items: Loss on litigation settlement, net of related credit in lieu of income taxes of $6,312....................... -- (14,866) -- Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $8,856............. -- -- (17,189) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit in lieu of income taxes of $1,566..... -- -- (2,348) Accounting for income taxes............................. -- -- 14,916 -------- -------- --------- Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900) ======== ======== =========
The accompanying notes are an integral part of these financial statements. F-137 333 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- -------- --------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 3,537 $ 3,569 $(531,900) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion and depreciation............................. 26,405 25,946 25,811 Amortization of deferred financing costs and discounts on long-term debt.................................... 13,328 12,127 7,435 Net (purchases) sales of marketable securities......... (19,533) 5,321 12,389 Net losses (gains) on marketable securities............ (4,175) (1,669) (6,414) Loss (income) from net assets transferred to MAXXAM, net.................................................. -- -- 512,970 Extraordinary loss on early extinguishment of debt, net.................................................. -- -- 17,189 Cumulative effect of changes in accounting principles, net.................................................. -- -- (12,568) Decrease (increase) in inventories, net of depletion... (7,695) 3,634 (2,077) Increase (decrease) in accounts payable................ 463 832 471 Decrease (increase) in receivables..................... 5,778 (7,660) 7,558 Decrease (increase) in prepaids and other assets....... (3,384) (528) 212 Increase in accrued and deferred income taxes.......... 2,303 (3,815) (5,123) Decrease in other liabilities.......................... 7,734 (2,283) (185) Decrease in accrued interest........................... (411) (451) (7,284) Other.................................................. 1,020 (86) 848 -------- -------- --------- Net cash provided by operating activities......... 25,370 34,937 19,332 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment of note receivable from affiliate................. 2,500 -- -- Net proceeds from sale of assets.......................... 18 1,149 256 Capital expenditures...................................... (9,852) (11,322) (11,120) Increase in net assets transferred to MAXXAM.............. -- -- (11,770) -------- -------- --------- Net cash used for investing activities............ (7,334) (10,173) (22,634) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions, repurchase of and principal payments on long-term debt......................................... (14,300) (13,237) (716,551) Net borrowings (payments) under revolving credit agreements............................................. -- (2,900) 2,900 Incurrence of financing costs............................. (150) (213) (34,738) Proceeds from issuance of long-term debt.................. -- -- 790,000 Restricted cash deposits, net............................. 1,035 1,160 (33,562) Dividends paid............................................ (4,800) -- (20,000) -------- -------- --------- Net cash used for financing activities............ (18,215) (15,190) (11,951) -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (179) 9,574 (15,253) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 48,575 39,001 54,254 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 48,396 $ 48,575 $ 39,001 ======== ======== ========= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net margin borrowings (payments) for marketable securities............................................. $ (6,648) $ 5,628 $ 1,020 Timber and timberlands acquired subject to loan from seller................................................. 615 910 -- Net assets transferred to MAXXAM.......................... -- -- 30,531 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest................ $ 64,907 $ 65,707 $ 80,188 Income taxes paid (refunded).............................. (5,190) 1,170 46 Tax allocation payments to MAXXAM......................... -- 397 1,722
The accompanying notes are an integral part of these financial statements. F-138 334 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
COMMON STOCK RETAINED ($.08 1/3 ADDITIONAL EARNINGS PAR) CAPITAL (DEFICIT) TOTAL ----------- ---------- --------- --------- (IN THOUSANDS OF DOLLARS) Balance, January 1, 1993........................ $-- $ 81,257 $ 385,093 $ 466,350 Net loss...................................... -- -- (531,900) (531,900) Dividend...................................... -- -- (20,000) (20,000) Gain from issuance of Kaiser Aluminum Corporation common stock................... -- 30 -- 30 Net assets transferred to MAXXAM.............. -- -- (30,531) (30,531) --- ------- --------- --------- Balance, December 31, 1993...................... -- 81,287 (197,338) (116,051) Net income.................................... -- -- 3,569 3,569 --- ------- --------- --------- Balance, December 31, 1994...................... -- 81,287 (193,769) (112,482) Net income.................................... -- -- 3,537 3,537 Dividend...................................... -- -- (4,800) (4,800) --- ------- --------- --------- Balance, December 31, 1995...................... $-- $ 81,287 $(195,032) $(113,745) === ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-139 335 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to herein as the "Company." MGI is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to be consistent with the current year's presentation. The Company conducts its business primarily through the operations of its subsidiaries. Prior to the Forest Products Group Formation (as defined below), the Company operated in three industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real estate management and development, through the Palmas del Mar development located in Puerto Rico ("Palmas") which was owned by the Company's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the consummation of the sale of the MGI Notes (as defined in Note 5), the Company (i) transferred to MAXXAM 50 million common shares of Kaiser held by a subsidiary of the Company, representing the Company's (and MAXXAM's) entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of MAXXAM common stock held by a subsidiary of the Company, (iii) transferred to MAXXAM certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to the Company of approximately $1,100, and (iv) exchanged with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being in satisfaction of a $15,000 promissory note evidencing a cash loan made by MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed approximately $17,500 of certain liabilities of the Company that were unrelated to the Company's forest products operations or were related to operations which have been disposed of by the Company. Additionally, on September 28, 1993, the Company transferred to MAXXAM its interest in Palmas. The foregoing transactions are collectively referred to as the "Forest Products Group Formation." The Company presented the loss from net assets transferred to MAXXAM pursuant to the Forest Products Group Formation (including certain allocated costs from MAXXAM for general and administrative expenses unrelated to the Company's forest products operations) in a manner similar to that which would have been presented if the Company had discontinued the operations relating to such net assets. See Note 2. As a result of the Forest Products Group Formation, the Company is engaged in forest products operations conducted through its wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber is engaged in several principal aspects of the lumber industry, including the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the manufacture of lumber into a variety of finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which is obtained from Pacific Lumber. Housing, construction and remodeling are the principal markets for the Company's lumber products. Export sales generally constitute less than 4% of forest product sales. A significant portion of forest product sales are made to third parties located west of the Mississippi river. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with F-140 336 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 9 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. Marketable Securities Marketable securities are carried at fair value. Prior to December 31, 1993, marketable securities portfolios were carried at the lower of cost or market at the balance sheet date. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income for each of the three years ended December 31, 1995 were: 1995 -- net unrealized holding gains of $1,666 and net realized gains of $2,509; 1994 -- net unrealized holding losses of $1,094 and net realized gains of $2,763; and 1993 -- net realized gains of $3,510, the recovery of $2,063 of net unrealized losses and net unrealized gains of $841. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out ("LIFO") method. Timber and Timberlands Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount initially deposited into an account (the "Liquidity Account") held by the trustee under the indenture governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific Lumber. See Note 5. The Liquidity Account is not available, except under certain limited circumstances, for Scotia F-141 337 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Pacific's working capital purposes; however, it is available to pay the Rated Amortization (as defined in Note 5) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. Investment, interest and other income for the years ended December 31, 1995, 1994 and 1993 includes interest of approximately $2,560, $2,638 and $2,101, respectively, attributable to an investment rate agreement (at 7.95% per annum) with the financial institution which holds the Liquidity Account. At December 31, 1995 and 1994, cash and cash equivalents include $19,742 and $19,439, respectively, (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 5). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Stockholder's Equity (Deficit) The adjustment to the Company's additional capital for the year ended December 31, 1993 resulted from a transaction relating to Kaiser's common stock prior to the Forest Products Group Formation. Pursuant to the terms of an amended compensation plan, Kaiser issued 4,228 shares to certain members of its management in 1993. As a result of this transaction, the Company's equity in Kaiser's net assets differed from the Company's historical cost. The Company accounted for this difference as an adjustment to additional capital. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the Timber Notes, the 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes"), the 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and the 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes"), and on the current rates offered for borrowings similar to the other debt. The Timber Notes, the Pacific Lumber Senior Notes, the MGI Senior Notes and the MGI Discount Notes are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- Cash and cash equivalents................. $ 48,396 $ 48,396 $ 48,575 $ 48,575 Marketable securities (held for trading purposes)............................... 36,568 36,568 19,514 19,514 Restricted cash........................... 31,367 31,367 32,402 32,402 Long-term debt............................ (778,505) (772,841) (782,456) (725,031)
F-142 338 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 2. NET ASSETS TRANSFERRED TO MAXXAM As a result of the Forest Products Group Formation (as described in Note 1), the Company transferred all of its interest in Kaiser's common stock, the assets and related liabilities of Palmas, and certain other net assets that were unrelated to the Company's forest products operations, to MAXXAM. The Company did not incur any gain or loss relating to the transfer of such assets and liabilities to MAXXAM. The net loss from net assets transferred to MAXXAM is as follows:
SEVEN MONTHS ENDED JULY 31, 1993 ------------ Net sales: Aluminum operations................................................... $1,016,966 Real estate and other................................................. 19,654 ---------- 1,036,620 ---------- Costs and expenses: Aluminum operations................................................... 1,091,353 Real estate and other................................................. 28,132 ---------- 1,119,485 ---------- Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................. (82,865) Credit for income taxes................................................. 31,050 Minority interests...................................................... 3,641 ---------- Loss before extraordinary item and cumulative effect of changes in accounting principles................................................. (48,174) Extraordinary item: Loss on redemption of debt, net of related benefits for income taxes and minority interests of $11,249 and $2,791, respectively......... (19,045) Cumulative effect of changes in accounting principles: Postretirement and postemployment benefits, net of related benefits for income taxes and minority interests of $237,682 and $64,554, respectively....................................................... (440,519) Accounting for income taxes........................................... (5,232) ---------- Loss from net assets transferred to MAXXAM.............................. $ (512,970) ==========
F-143 339 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Net assets transferred to MAXXAM are as follows as of the date of transfer: Current assets: Aluminum operations.................................................... $ 780,791 Real estate and other.................................................. 16,480 ---------- 797,271 ---------- Current liabilities: Aluminum operations.................................................... 477,805 Real estate and other.................................................. 28,853 ---------- 506,658 ---------- Net current assets....................................................... 290,613 ---------- Non-current assets: Aluminum operations.................................................... 1,722,362 Real estate and other.................................................. 56,422 ---------- 1,778,784 ---------- Non-current liabilities: Aluminum operations.................................................... 1,790,946 Minority interests in aluminum operations.............................. 221,907 Real estate and other.................................................. 26,013 ---------- 2,038,866 ---------- Net assets transferred to MAXXAM......................................... $ 30,531 ==========
3. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------- 1995 1994 ------- ------- Lumber........................................................... $59,563 $55,310 Logs............................................................. 18,341 14,788 ------- ------- $77,904 $70,098 ======= =======
During 1993, Pacific Lumber's inventory quantities were reduced. This reduction resulted in the liquidation of Pacific Lumber's LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory. The effect of this inventory liquidation increased cost of goods sold by approximately $222 for the year ended December 31, 1993. F-144 340 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
DECEMBER 31, ESTIMATED --------------------- USEFUL LIVES 1995 1994 ------------ -------- -------- Logging roads, land and improvements............. 15 years $ 7,929 $ 7,545 Buildings........................................ 33 years 29,661 28,209 Machinery and equipment.......................... 5 - 15 years 129,764 126,480 Construction in progress......................... 520 30 -------- -------- 167,874 162,264 Less: accumulated depreciation................... (67,732) (59,081) -------- -------- $100,142 $103,183 ======== ========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $9,663, $9,269 and $8,670, respectively. 5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015......................................................... $350,233 $363,811 11 1/4% MGI Senior Secured Notes due August 1, 2003............ 100,000 100,000 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount.............................................. 92,498 82,779 10 1/2% Pacific Lumber Senior Notes due March 1, 2003.......... 235,000 235,000 Other.......................................................... 774 866 -------- -------- 778,505 782,456 Less: current maturities....................................... (14,195) (13,670) -------- -------- $764,310 $768,786 ======== ========
On March 23, 1993, Pacific Lumber issued $235,000 of the Pacific Lumber Senior Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued $385,000 of the Timber Notes. Pacific Lumber and Scotia Pacific used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes"), and (c) $41,750 aggregate principal amount of Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a subsidiary of the Company. These transactions resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the payment of premiums and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities. F-145 341 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179,364 of the Company's consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract rights and certain other assets, (iii) the funds deposited in the Payment Account and the Liquidity Account, and (iv) substantially all of Scotia Pacific's other property and equipment. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's assets are owned by Scotia Pacific. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and the holders of the Pacific Lumber Senior Notes have priority over the claims and creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Principal and interest on the Timber Notes are payable semi-annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber has a revolving credit agreement with a bank (as amended and restated, the "Revolving Credit Agreement") which expires on May 31, 1998. Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1 1/4% or the bank's offshore rate plus 2 1/4%. The Revolving Credit Agreement provides for borrowings of up to $60,000, of which $15,000 may be used for standby letters of credit and $30,000 is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland F-146 342 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48,090 of borrowings was available under the Revolving Credit Agreement, of which $3,090 was available for letters of credit and $30,000 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11,910. The Revolving Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes and the Revolving Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1995, under the most restrictive of these covenants, approximately $15,663 of dividends could be paid by Pacific Lumber. On August 4, 1993, the Company issued $100,000 aggregate principal amount of the MGI Senior Notes and $126,720 aggregate principal amount (approximately $70,000 net of original issue discount) of the MGI Discount Notes, which, together with the MGI Senior Notes, are referred to collectively as the "MGI Notes". The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1995, under the most restrictive of these covenants, approximately $1,899 of dividends could be paid by the Company, of which $1,600 was paid in January 1996. The MGI Notes are senior indebtedness of the Company; however, they are effectively subordinate to the liabilities of the Company's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33,222 and $43,941 at December 31, 1995 and 1994, respectively. The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of each year. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semi-annual interest payments will become due on each February 1 and August 1 thereafter. The Company used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its 12 3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. The Company used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20,000 dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 at 100% of their principal amount plus accrued interest thereon. The Company incurred a pre-tax extraordinary loss associated with the early retirement of the 12 3/4% Notes of $9,677 consisting of net interest cost of $3,763, the write-off of $3,472 of unamortized deferred financing costs, a premium of $1,500 and the write-off of $942 of unamortized original issue discount. F-147 343 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Maturities The following table of scheduled maturities of long-term debt outstanding at December 31, 1995 reflects Scheduled Amortization with respect to the Timber Notes:
YEARS ENDING DECEMBER 31, ------------------------------------------------------------ 1996 1997 1998 1999 2000 THEREAFTER ------- ------- ------- ------- ------- ---------- 7.95% Scotia Pacific Timber Collateralized Notes........... $14,103 $16,165 $19,335 $21,651 $23,970 $ 255,009 11 1/4% MGI Senior Secured Notes.......................... -- -- -- -- -- 100,000 12 1/4% MGI Senior Secured Discount Notes................. -- -- -- -- -- 125,720 10 1/2% Pacific Lumber Senior Notes.......................... -- -- -- -- -- 235,000 Other............................ 92 93 94 94 95 306 ------- ------- ------- ------- ------- -------- $14,195 $16,258 $19,429 $21,745 $24,065 $ 716,035 ======= ======= ======= ======= ======= ========
Restricted Net Assets of Subsidiaries At December 31, 1995, certain debt instruments restricted the ability of Pacific Lumber to transfer assets, make loans and advances and pay dividends to the Company. As of December 31, 1995, all of the assets of Pacific Lumber and its subsidiaries are subject to such restrictions. 6. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The Company and its subsidiaries are members of MAXXAM's consolidated return group for federal income tax purposes. Prior to August 4, 1993, the Company and each of its subsidiaries computed their tax liabilities or tax benefits on a separate company basis (except as discussed in the following paragraph), in accordance with their respective tax allocation agreements with MAXXAM. Effective on March 23, 1993, MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation agreement that, among other things, amended the tax calculations with respect to Pacific Lumber (as amended, the "PL Tax Allocation Agreement"). Under the terms of the PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, Scotia Pacific and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never connected with MAXXAM. The PL Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for its federal income tax liability computed on a separate company basis as if it was never connected with MAXXAM. The remaining subsidiaries of MGI are each liable to MAXXAM for their respective income tax liabilities computed on a separate company basis as if they were never connected with MAXXAM, pursuant to their respective tax allocation agreements. MGI's tax allocation agreement with MAXXAM, (as amended on August 4, 1993, the "Tax Allocation Agreement"), provides that the Company's federal income tax liability is computed as if MGI files a consolidated tax return with all of its subsidiaries except Salmon Creek, and that such corporations were never connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income tax liability of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities for the Company's subsidiaries (computed as discussed above), but excluding Salmon Creek. To the F-148 344 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) extent that the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. The credit (provision) in lieu of income taxes on income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------- ------ ------- Current: Federal credit (provision) in lieu of income taxes... $ (167) $ -- $ (988) State and local...................................... (35) (55) (253) ------- ------ ------- (202) (55) (1,241) ------- ------ ------- Deferred: Federal credit (provision) in lieu of income taxes... (33) 2,366 4,825 State and local...................................... (976) 1,305 (229) ------- ------ ------- (1,009) 3,671 4,596 ------- ------ ------- $(1,211) $3,616 $ 3,355 ======= ====== =======
The 1994 deferred federal credit in lieu of income taxes of $2,366 includes a credit relating to reserves the Company no longer believes are necessary. The 1993 deferred federal credit in lieu of income taxes of $4,825 includes $2,601 for the benefit of operating loss carryforwards generated in 1993 and includes an $850 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993 which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) in lieu of income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles is as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ------- ------- -------- Income (loss) from continuing operations before income taxes, extraordinary items and cumulative effect of changes in accounting principles......... $ 4,748 $14,819 $(17,664) ======= ======= ======== Amount of federal income tax based upon the statutory rate..................................... $(1,662) $(5,187) $ 6,182 Revision of prior years' tax estimates and other changes in valuation allowances.................... 907 7,739 (3,468) Increase in net deferred income tax assets due to tax rate change ....................................... -- -- 850 State and local taxes, net of federal tax benefit.... (657) 812 (313) Other................................................ 201 252 104 ------- ------- -------- $(1,211) $ 3,616 $ 3,355 ======= ======= ========
As shown in the Consolidated Statement of Operations for the year ended December 31, 1994, the Company recorded an extraordinary loss related to the settlement of litigation in connection with the F-149 345 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Company's acquisition of Pacific Lumber (see Note 9). The Company reported the loss net of related deferred income taxes of $6,312 which is less than the federal and state statutory income tax rates due to expenses for which no tax benefit was recognized. As shown in the Consolidated Statement of Operations for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related deferred income taxes of $8,856 which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by APB 11. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $14,916. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of Pacific Lumber in 1986 and Britt in 1990. As a result of restating these assets and liabilities, the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was decreased by $377. The components of the Company's net deferred income tax assets (liabilities) are as follows:
DECEMBER 31, --------------------- 1995 1994 -------- -------- Deferred income tax assets: Loss and credit carryforwards................................ $ 83,705 $ 86,864 Timber and timberlands....................................... 32,528 37,209 Other liabilities............................................ 17,203 10,460 Postretirement benefits other than pensions.................. 2,316 2,145 Other........................................................ 327 1,818 Valuation allowances......................................... (51,595) (52,060) -------- -------- Total deferred income tax assets, net................ 84,484 86,436 -------- -------- Deferred income tax liabilities: Inventories.................................................. (16,068) (17,934) Property, plant and equipment................................ (16,560) (16,563) Other........................................................ (3,615) (3,427) -------- -------- Total deferred income tax liabilities................ (36,243) (37,924) -------- -------- Net deferred income tax assets................................. $ 48,241 $ 48,512 ======== ========
The valuation allowances listed above relate primarily to loss and credit carryforwards. As of December 31, 1995, approximately $32,528 of the net deferred income tax assets listed above relate to the excess of the tax basis over financial statement basis with respect to timber and timberlands. The Company believes that it is more likely than not that this net deferred income tax asset will be realized, based primarily upon the estimated value of its timber and timberlands which is well in excess of its tax basis. Also included in net deferred income tax assets as of December 31, 1995 is $32,110 which relates to the benefit of loss and credit F-150 346 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for loss and credit carryforwards. These factors included any limitations concerning use of the carryforwards, the year the carryforwards expire and the levels of taxable income necessary for utilization. The Company has concluded that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. Included in the net deferred income tax assets listed above are $43,731 and $44,351 at December 31, 1995 and 1994, respectively, which are recorded pursuant to the tax allocation agreements with MAXXAM. The following table presents the estimated tax attributes for federal income tax purposes for the Company and its subsidiaries as of December 31, 1995, under the terms of the respective tax allocation agreements. The utilization of certain of these attributes is subject to limitations.
EXPIRING THROUGH ------- Regular Tax Attribute Carryforwards: Net operating losses.................................................. $224,485 2010 Net capital losses.................................................... 5,177 1997 Minimum tax credit.................................................... 167 -- Alternative Minimum Tax Attribute Carryforwards: Net operating losses.................................................. $185,803 2010
7. EMPLOYEE BENEFIT PLANS The Company has a defined benefit plan which covers all employees of Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or earlier, if certain provisions are met. The benefits are determined under a career average formula based on each year of service with Pacific Lumber and the employee's compensation for that year. Pacific Lumber's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by The Employee Retirement Income Security Act of 1974, as amended. A summary of the components of net periodic pension cost is as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------- ------ ------- Service cost -- benefits earned during the year................ $ 1,483 $1,643 $ 1,600 Interest cost on projected benefit obligation.................. 1,693 1,263 918 Actual loss (gain) on plan assets.............................. (3,900) 10 (2,128) Net amortization and deferral.................................. 2,460 (859) 1,359 ------- ------ ------- Net periodic pension cost...................................... $ 1,736 $2,057 $ 1,749 ======= ====== =======
F-151 347 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
DECEMBER 31, --------------------- 1995 1994 -------- -------- Actuarial present value of accumulated plan benefits: Vested benefit obligation.................................... $ 16,910 $ 11,809 Non-vested benefit obligation................................ 1,214 779 -------- -------- Total accumulated benefit obligation................. $ 18,124 $ 12,588 ======== ======== Projected benefit obligation................................... $ 21,841 $ 15,047 Plan assets at fair value, primarily equity and debt securities................................................... (18,363) (13,184) -------- -------- Projected benefit obligation in excess of plan assets.......... 3,478 1,863 Unrecognized net transition asset.............................. 24 29 Unrecognized net gain (loss)................................... (27) 1,475 Unrecognized prior service cost................................ (45) (50) -------- -------- Accrued pension liability............................ $ 3,430 $ 3,317 ======== ========
The assumptions used in accounting for the defined benefit plan were as follows:
1995 1994 1993 ----- ---- ---- Rate of increase in compensation levels...................... 5.0% 5.0% 5.0% Discount rate................................................ 7.25% 8.5% 7.5% Expected long-term rate of return on assets.................. 8.0% 8.0% 8.0%
The Company has an unfunded defined benefit plan for certain postretirement and other benefits which covers substantially all employees of Pacific Lumber. Participants of the plan are eligible for certain health care benefits upon termination of employment and retirement and commencement of pension benefits. Participants make contributions for a portion of the cost of their health care benefits. The Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $2,348, net of related income taxes of $1,566. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal and state statutory rates in effect on the date SFAS 106 was adopted. A summary of the components of net periodic postretirement benefit cost is as follows:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ---- ---- ---- Service cost -- benefits earned during the year............... $228 $216 $153 Interest cost on accumulated postretirement benefit obligation.................................................. 317 294 315 Net amortization and deferral................................. (53) (7) -- ---- ---- ---- Net periodic postretirement benefit cost...................... $492 $503 $468 ==== ==== ====
F-152 348 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) The adoption of SFAS 106 increased the Company's loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles by $212 ($360 before tax) for the year ended December 31, 1993. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
DECEMBER 31, ----------------- 1995 1994 ------ ------ Retirees........................................................... $ 634 $ 860 Actives eligible for benefits...................................... 726 656 Actives not eligible for benefits.................................. 3,317 2,355 ------ ------ Accumulated postretirement benefit obligation.................... 4,677 3,871 Unrecognized net gain.............................................. 553 972 ------ ------ Postretirement benefit liability................................. $5,230 $4,843 ====== ======
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and is assumed to decrease gradually to 5.5% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $674 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $90. The discount rates used in determining the accumulated postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995 and 1994, respectively. Subsequent to December 31, 1993, Pacific Lumber's employees were eligible to participate in a defined contribution savings plan sponsored by MAXXAM. This plan is designed to enhance the existing retirement programs of participating employees. Employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the plan, Pacific Lumber's contributions consist of a matching contribution of up to 4% of the compensation of participants for each calendar quarter. The cost to the Company of this plan was $1,281 and $1,215 for the years ended December 31, 1995 and 1994, respectively. Pacific Lumber is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $8,900 and $9,233 at December 31, 1995 and 1994, respectively. Workers' compensation expenses amounted to $3,579, $4,069 and $3,776 for the years ended December 31, 1995, 1994 and 1993, respectively. 8. RELATED PARTY TRANSACTIONS MAXXAM provides the Company and certain of the Company's subsidiaries with accounting and data processing services. In addition, MAXXAM provides the Company with office space and various office personnel, insurance, legal, operating, financial and certain other services. MAXXAM's expenses incurred on behalf of the Company are reimbursed by the Company through payments consisting of (i) an allocation of the lease expense for the office space utilized by or on behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor costs of MAXXAM personnel rendering services to the Company. Charges by MAXXAM for such services were $1,994, $2,254 and $3,347 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company F-153 349 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) believes that the services being rendered are on terms not less favorable to the Company than those which would be obtainable from unaffiliated third parties. In 1994, in connection with the litigation settlement described in Note 9, Pacific Lumber paid approximately $3,185 to a law firm in which a director of Pacific Lumber is also a partner. In 1993, Pacific Lumber paid approximately $1,931 in connection with the offering of the Pacific Lumber Senior Notes and the Timber Notes to this same law firm. 9. LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES During 1994, MAXXAM, Pacific Lumber and others agreed to a settlement, subsequently approved by the court, of class and related individual claims brought by former stockholders of Pacific Lumber against MAXXAM, the Company, Pacific Lumber, former directors of Pacific Lumber and others concerning the Company's acquisition of Pacific Lumber. Of the $52,000 settlement, $33,000 was paid by insurance carriers of MAXXAM and Pacific Lumber, $14,800 was paid by Pacific Lumber, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded an extraordinary loss of $14,866 related to the settlement and associated costs, including a $2,000 accrual for certain contingent claims and $4,400 of related legal fees, net of benefits for federal and state income taxes of $6,312. The Company's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future consolidated operating results, financial position or liquidity; however, these laws are modified from time to time and there can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not adversely affect the Company or its ability to sell lumber, logs or timber. In 1995, the U.S. Fish and Wildlife Service (the "USFWS") published its proposed final designation of critical habitat for the marbled murrelet (the "Proposed Designation"), seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed Designation was subject to a 60-day comment period and Pacific Lumber filed comments vigorously opposing the Proposed Designation. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. Pacific Lumber is unable to predict when or if it would be able to harvest on any acreage finally designated as critical habitat. Furthermore, it is impossible to determine the future adverse impact of such designation on the Company's consolidated financial position, results of operations or liquidity until such time as the Proposed Designation is finalized and related regulatory and legal issues are fully resolved. However, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on the Company's liquidity, consolidated financial position and results of operations. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act and/or the California Endangered Species Act and to designate critical habitat for such species. It is uncertain what impact, if any, such listings and/or designations of critical habitat will have on the Company's consolidated financial position, results of operations or liquidity. In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require timber companies to project the average annual growth they will have on their timberlands during the last decade of a 100-year planning period F-154 350 MAXXAM GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) ("Projected Annual Growth"). During any rolling ten-year period, the average annual harvest over such ten-year period may not exceed Projected Annual Growth. The first ten-year period began in May 1994. Pacific Lumber is required to submit, by October 1996, a plan setting forth, among other things, its Projected Annual Growth. Pacific Lumber has not completed its analysis of the projected productivity of its timberlands and is therefore unable to predict the impact that these regulations will have on its future timber harvesting practices; however, the final results of this analysis could require Pacific Lumber to reduce (or permit it to increase) its timber harvest in future years from the average annual harvest that it has experienced in recent years. Pacific Lumber believes that it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and by increasing the productivity of its timberlands. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future consolidated financial position, results of operations or liquidity. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs"), and the Company expects that such groups and individuals will continue to file objections to certain of the Company's THPs. In addition, lawsuits are pending which seek to prevent the Company from implementing certain of its approved THPs and other timber operations. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth redwood timber on its property (and, to a lesser extent, its residual old growth timber). To date, challenges with respect to the Company's THPs relating to young growth and residual old growth have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its THPs are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of the Company. The Company is also involved in various claims, lawsuits and proceedings relating to a wide variety of other matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. OTHER ITEMS Investment, Interest and Other Income In February 1994, Pacific Lumber received a franchise tax refund of $7,243, the substantial portion of which represents interest, from the State of California relating to tax years 1972 through 1985. This amount is included in investment, interest and other income for the year ended December 31, 1994. Items Related to 1992 Earthquake In 1995 and 1993, Pacific Lumber recorded reductions in cost of sales of $1,527 and $1,200, respectively, resulting from business interruption insurance reimbursements for higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. Other receivables at December 31, 1994 included $1,684 related to earthquake related insurance claims. F-155 351 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................ $ 53,122 $ 48,396 Marketable securities............................................ 31,852 36,568 Receivables: Trade......................................................... 11,466 20,576 Other......................................................... 2,429 1,624 Inventories...................................................... 74,836 77,904 Prepaid expenses and other current assets........................ 5,612 7,101 ------------- ------------ Total current assets..................................... 179,317 192,169 Timber and timberlands, net of depletion of $217,507 and $204,856 at September 30, 1996 and December 31, 1995, respectively........ 326,486 337,390 Property, plant and equipment, net of accumulated depreciation of $74,321 and $67,732 at September 30, 1996 and December 31, 1995, respectively..................................................... 100,422 100,142 Deferred financing costs, net...................................... 24,996 27,288 Deferred income taxes.............................................. 56,747 58,485 Restricted cash.................................................... 30,453 31,367 Other assets....................................................... 5,843 5,542 ------------- ------------ $ 724,264 $ 752,383 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Accounts payable................................................. $ 5,436 $ 4,166 Accrued compensation and related benefits........................ 9,791 9,611 Accrued interest................................................. 9,217 25,354 Deferred income taxes............................................ 10,244 10,244 Other accrued liabilities........................................ 3,828 4,435 Long-term debt, current maturities............................... 16,258 14,195 ------------- ------------ Total current liabilities................................ 54,774 68,005 Long-term debt, less current maturities............................ 756,619 764,310 Other noncurrent liabilities....................................... 26,518 33,813 ------------- ------------ Total liabilities........................................ 837,911 866,128 ------------- ------------ Contingencies Stockholder's deficit: Common stock, $.08 1/3 par value; 1,000 shares authorized; 100 shares issued................................................. -- -- Additional capital............................................... 81,287 81,287 Accumulated deficit.............................................. (194,934) (195,032) ------------- ------------ Total stockholder's deficit.............................. (113,647) (113,745) ------------- ------------ $ 724,264 $ 752,383 ========== ==========
The accompanying notes are an integral part of these financial statements. F-156 352 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- Net sales: Lumber and logs...................................................... $183,913 $161,151 Other................................................................ 15,667 19,761 -------- -------- 199,580 180,912 -------- -------- Operating expenses: Costs of goods sold (exclusive of depletion and depreciation)........ 114,617 95,997 Selling, general and administrative expenses......................... 11,344 12,243 Depletion and depreciation........................................... 21,008 19,785 -------- -------- 146,969 128,025 -------- -------- Operating income....................................................... 52,611 52,887 Other income (expense): Investment, interest and other income................................ 8,377 6,835 Interest expense..................................................... (58,388) (58,228) -------- -------- Income (loss) before income taxes...................................... 2,600 1,494 Credit (provision) in lieu of income taxes............................. 1,398 (466) -------- -------- Net income (loss)...................................................... $ 3,998 $ 1,028 ======== ========
The accompanying notes are an integral part of these financial statements. F-157 353 MAXXAM GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 3,998 $ 1,028 Adjustments to reconcile net income to net cash provided by operating activities: Depletion and depreciation......................................... 21,008 19,785 Amortization of deferred financing costs and discounts on long-term debt.............................................................. 10,815 9,772 Decrease in receivables............................................ 11,478 12,683 Net sales (purchases) of marketable securities..................... 8,351 (10,542) Decrease (increase) in inventories, net of depletion............... 1,588 (6,067) Increase in accounts payable....................................... 1,270 853 Decrease (increase) in prepaid expenses and other current assets... 1,188 (1,132) Decrease in accrued interest....................................... (16,137) (16,330) Increase (decrease) in other liabilities........................... (8,729) 9,618 Net gains on marketable securities................................. (3,635) (2,362) Decrease (increase) in accrued and deferred income taxes........... (428) 256 Other.............................................................. (28) 465 -------- -------- Net cash provided by operating activities..................... 30,739 18,027 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment of note receivable from affiliate............................. -- 2,500 Net proceeds from sale of assets...................................... 110 9 Capital expenditures.................................................. (8,986) (6,624) -------- -------- Net cash used for investing activities........................ (8,876) (4,115) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Restricted cash withdrawals, net...................................... 914 563 Repurchase of and principal payments on long-term debt................ (14,151) (14,256) Dividends paid........................................................ (3,900) (4,800) -------- -------- Net cash used for financing activities........................ (17,137) (18,493) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 4,726 (4,581) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 48,396 48,575 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 53,122 $ 43,994 ======== ======== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net repayments of margin borrowings for marketable securities......... $ - $ 6,648 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest............................ $ 63,710 $ 64,786 Tax allocation payments to (receipts from) MAXXAM Inc., net........... 167 -- Income taxes paid (refunded).......................................... (1,549) (5,461)
The accompanying notes are an integral part of these financial statements. F-158 354 MAXXAM GROUP INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. GENERAL The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the Audited Consolidated Financial Statements of MAXXAM Group Inc. and the Notes thereto contained elsewhere herein. Any capitalized terms used but not defined in the following Condensed Notes to Consolidated Financial Statements have the same meaning given to them in the Audited Consolidated Financial Statement of MAXXAM Group Inc. All references to the "Company" include MAXXAM Group Inc. and its subsidiary companies unless otherwise noted or the context indicates otherwise. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 1996, the consolidated results of operations for the nine months ended September 30, 1996 and 1995 and consolidated cash flows for the nine months ended September 30, 1996 and 1995. Certain reclassifications of prior period information have been made to conform to the current presentation. The Company is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). 2. RESTRICTED CASH Restricted cash represents the amount deposited into an account held by the Trustee under the indenture governing the Timber Notes of the Company's indirect wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"). At September 30, 1996 and December 31, 1995, cash and cash equivalents also includes $5,676 and $19,742, respectively, which is restricted for debt service payments on the succeeding note payment date for the Timber Notes. 3. INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Lumber...................................................... $52,824 $ 59,563 Logs........................................................ 22,012 18,341 ------- ------- $74,836 $ 77,904 ======= =======
F-159 355 MAXXAM GROUP INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015............................................. $ 336,130 $350,233 10 1/2% Pacific Lumber Senior Notes due March 1, 2003....... 235,000 235,000 11 1/4% MGI Senior Secured Notes due August 1, 2003......... 100,000 100,000 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount..................................... 101,021 92,498 Other....................................................... 726 774 -------- -------- 772,877 778,505 Less: current maturities.................................... (16,258) (14,195) -------- -------- $ 756,619 $764,310 ======== ========
5. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The credit in lieu of income taxes for the nine months ended September 30, 1996 includes a benefit of $2,620 relating to the refund of taxes previously paid in connection with a settlement of certain federal income tax matters in June 1996. The Company received the cash refund in August 1996. 6. CONTINGENCIES The Company's forest products operations are primarily conducted by The Pacific Lumber Company ("Pacific Lumber") and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. While the Company does not expect that Pacific Lumber's compliance with such existing laws and regulations will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity, Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Moreover, the laws and regulations relating to the Company's forest products operations are modified from time to time and are subject to judicial and administrative interpretation. There can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions would not materially and adversely affect Pacific Lumber or its ability to harvest timber. In May 1996, the U.S. Fish and Wildlife Service (the "USFWS") published its final designation of critical habitat for the marbled murrelet ("Final Designation"), designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of the Company's timberlands are included in the Final Designation, the substantial portion of such 33,000 acres being young growth timber. Pacific Lumber's wildlife surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,600 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the area covered by the Final Designation. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") F-160 356 MAXXAM GROUP INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) alleging that certain portions of its timberlands have been "taken" and seeking just compensation. Pursuant to the Headwaters Agreement described in Note 7 below (the "Headwaters Agreement"), the Takings Litigation has been stayed by the court at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on the Company's consolidated financial position, results of operations or liquidity until such time as all of the material regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be material. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the federal Endangered Species Act ("ESA") and/or the California Endangered Species Act and to designate critical habitat for such species. For example, the National Marine Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the Company's consolidated financial position, results of operations or liquidity. See Note 7 below for a description of certain terms of the Headwaters Agreement relating to processing and approval of a multi-species habitat conservation plan (the "Multi-Species HCP") covering Pacific Lumber's timberlands. In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require the projected harvest by timber companies, over time, be capable of sustaining the average annual yield achieved during the last decade of the planning horizon, which is currently a 100-year planning period ("Projected Annual Growth"). During any rolling ten-year period, the average annual harvest over such ten-year period may not exceed Projected Annual Growth. The regulatory deadline for Pacific Lumber to submit a proposed sustained yield plan ("SYP") setting forth, among other things, its Projected Annual Growth is November 15, 1996. However, the BOF has adopted and sent to the Office of Administrative Law for its consideration a regulation to extend the deadline to November 15, 1997. This review is expected to be completed in the near future. Pacific Lumber has not completed its analysis of the projected productivity of its timberlands (including enhancements to productivity which could be achieved by a variety of methods). Until an SYP is submitted, reviewed and fully approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices; however, it is possible that the final results of this analysis could require Pacific Lumber to reduce its timber harvest in future years from the average annual harvest that it has experienced in recent years. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands, although there can be no assurance that it would be able to do so. The Company is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. See Note 7 below for a description of certain terms of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs") and other timber harvesting operations, and the Company expects that such groups and individuals will continue to file such objections to certain of the Company's THPs and other timber harvesting operations. In addition, lawsuits are pending and/or threatened which seek to prevent the Company from implementing certain of its approved THPs and/or which challenge other operations by the Company. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to the Company's THPs relating to young growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the F-161 357 MAXXAM GROUP INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) future. The Company believes that environmentally focused challenges to its timber harvesting operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, they have not had a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the Company's consolidated financial position, results of operations or liquidity. The Company is also involved in various claims, lawsuits and proceedings relating to a wide variety of other matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to determine the ultimate costs that may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 7. HEADWATERS AGREEMENT On September 28, 1996, MAXXAM and Pacific Lumber (the "Pacific Lumber Parties") entered into an agreement (the "Headwaters Agreement") which provides the framework for the acquisition by the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest (the "Headwaters Timberlands"). The Headwaters Timberlands would be transferred in exchange for (a) property and consideration (including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California (the "Elk River Timberlands"). The Pacific Lumber Parties have agreed not to conduct logging operations (including salvage logging) on the Headwaters Timberlands while the Headwaters Agreement is in effect. The continuing effectiveness of the Headwaters Agreement is predicated on the satisfaction of various conditions, including completion within ten months of specified closing items. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP which is to cover all of Pacific Lumber's existing timber properties and any timber properties acquired as a result of the Headwaters Agreement. The agreement also requires expedited processing by California of an SYP. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP, and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. F-162 358 MAXXAM GROUP INC. AND SUBSIDIARIES UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED ----------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN MILLIONS OF DOLLARS) 1996 QUARTERLY INFORMATION: Net sales.................................... $ 59.8 $ 71.3 $ 68.5 Gross profit................................. 26.7 29.9 28.4 Operating income............................. 16.4 19.0 17.2 Net income................................... .1 3.9 0 1995 QUARTERLY INFORMATION: Net sales.................................... $ 52.0 $ 65.6 $ 63.3 $61.7 Gross profit................................. 22.5 32.6 29.8 30.6 Operating income............................. 12.4 21.8 18.7 20.3 Net income (loss)............................ (3.3) 3.2 1.1 2.5 1994 QUARTERLY INFORMATION: Net sales.................................... $ 56.7 $ 63.0 $ 60.7 $69.2 Gross profit................................. 23.6 31.9 29.1 35.4 Operating income............................. 13.2 22.6 19.4 22.6 Income before extraordinary item............. 1.0 3.1 8.3 6.0 Extraordinary item -- net.................... -- (14.9) -- -- Net income (loss)............................ 1.0 (11.7) 8.3 6.0
F-163 359 =============================================================================== ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS: By Mail: FIRST BANK NATIONAL ASSOCIATION 180 E. 5TH STREET ST. PAUL, MINNESOTA 55101 ATTENTION: RICHARD PROKOSCH, TRUST OFFICER By Hand/Overnight Express: FIRST BANK NATIONAL ASSOCIATION 180 E. 5TH STREET ST. PAUL, MINNESOTA 55101 ATTENTION: RICHARD PROKOSCH, TRUST OFFICER Facsimile Transmission: (612) 244-0711 To confirm receipt: (612) 244-0721 (ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL) NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. =============================================================================== =============================================================================== OFFER TO EXCHANGE ALL OUTSTANDING 12% SENIOR SECURED NOTES DUE 2003 ($130,000,000 PRINCIPAL AMOUNT) FOR 12% SERIES B SENIOR SECURED NOTES DUE 2003. MAXXAM GROUP HOLDINGS INC. ------------------------ PROSPECTUS ------------------------ , 1997 =============================================================================== 360 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS MAXXAM Group Holdings Inc. (the "Company"), and MAXXAM Inc. (collectively, with the Company, the "Registrants") are Delaware corporations. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. The certificates of incorporation of each of the Registrants contain provisions permitted by Section 102(b)(7) of the DGCL. Reference also is made to Section 145 of the DGCL which provides that a corporation may indemnify any person, including officers and directors, who was or is, or is threatened to be made, a party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. A Delaware corporation may indemnify its officers, directors, employees and agents in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer, director, employee or agent actually and reasonably incurred in connection therewith. The certificates of incorporation and by-laws of each of the Registrants provide for indemnification of their respective directors, officers and employees to the fullest extent authorized by law. Subject to certain limitations and exceptions, each of the Registrants has insurance coverage for losses by any person who is or hereafter may be a director or officer of such Registrant arising from claims against that person for any wrongful act in his capacity as a director or officer of such Registrant or any of its subsidiaries. The policy also provides for reimbursement to the Registrants for indemnification given by the Registrants pursuant to common or statutory law or certificates of incorporation or by-laws to any such person arising from any such claims. The foregoing discussion is qualified in its entirety by reference to the DGCL, and the referenced certificates of incorporation and by-laws. II-1 361 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits.
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ *3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the Company" or "MGHI"), dated November 4, 1996. *3.2 -- By-laws of MGHI, dated November 4, 1996. 3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"), dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1989; the "MAXXAM 1989 Form 10-K"). 3.4 -- Certificate of Powers, Designations, Preferences and Relative, Participating, Optional and Other Rights of MAXXAM's Class B Junior Participating Preference Stock (incorporated herein by reference to Exhibit 3.2 to the MAXXAM 1989 Form 10-K). 3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative Participating Convertible Preferred Stock of MAXXAM, dated July 6, 1994 (incorporated herein by reference to Exhibit 4(c) to the Registration Statement of MAXXAM on Form S-8, Registration No. 33-54479). 3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1988). 3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI") (incorporated herein by reference to Exhibit 3.1E to MGI's definitive proxy statement dated October 24, 1984). 3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI, dated as of September 28, 1988 (incorporated herein by reference to Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "MGI 1988 Form 10-K")). 3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI, dated as of June 1, 1989 (incorporated herein by reference to Exhibit 3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to MGI's Current Report on Form 8-K dated July 10, 1986). *4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the Company, as Issuer, MAXXAM, as Guarantor, and First Bank National Association, as Trustee, regarding the Notes. *4.2 -- Purchase Agreement, dated December 17, 1996, among the Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, regarding the Notes. *4.3 -- Registration Rights Agreement, dated December 23, 1996, among the Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, regarding the Notes. 4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000 (incorporated herein by reference to Exhibit 4.1 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096).
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EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1980). 4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996, between Custodial Trust Company and MAXXAM (incorporated herein by reference to Exhibit 4 to MAXXAM's Quarterly Report on Form 10-Q for the year ended June 30, 1996). 4.7 -- Indenture, dated as of August 4, 1993, between Shawmut Bank, N.A. and MGI regarding MGI's 11 1/4% Senior Secured Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to MGI's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form 10-K"). 4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum & Chemical Corporation ("KACC"), certain related corporations and State Street Bank and Trust Company (as successor trustee to The First National Bank of Boston; "State Street"), regarding KACC's 12 3/4% Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Note Indenture") (incorporated herein by reference to Exhibit 4.1 to KACC's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-3605; the "KACC 1993 Form 10-K"). 4.9 -- First Supplemental Indenture, dated as of May 1, 1993, to the KACC Senior Subordinated Note Indenture (incorporated herein by reference to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and State Street, Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes due 2003 (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-3605; the "KACC 1995 Form 10-K"). 4.11 -- Indenture, dated as of February 17, 1994, among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002 (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on the KACC 1993 Form 10-K). 4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002 (incorporated hereby by reference to Exhibit 4.5 to the KACC 1995 Form 10-K). 4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC Credit Agreement"), among Kaiser Aluminum Corporation ("Kaiser"), KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to the KACC 1993 Form 10-K). 4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Kaiser for the quarter ended June 30, 1994, File No. 1-9447). 4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.6 to the Annual Report on Form 10-K of Kaiser for the year ended December 31, 1994, File No. 1-9447).
II-3 363
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9447). 4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-9447). 4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.11 to the 1995 KACC Form 10-K). 4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-3605). **4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit Agreement. 4.21 -- Certificate of Designation of Series A Mandatory Conversion Premium Dividend Preferred Stock of Kaiser, dated June 28, 1993 (incorporated herein by reference to Exhibit 4.3 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-9447; the "Kaiser 1993 Third Quarter Form 10-Q"). 4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and filed in the state of Delaware Office of the Secretary of State on October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447). 4.23 -- Deposit Agreement between Kaiser and The First National Bank of Boston, dated as of June 30, 1993 (incorporated herein by reference to Exhibit 4.4 to the Kaiser 1993 Third Quarter Form 10-Q). 4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased Dividend Equity Securities of Kaiser, dated February 17, 1994 (incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9447; the "Kaiser 1993 Form 10-K). 4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber Company ("Pacific Lumber") and State Street (as successor trustee to The First National Bank of Boston) regarding Pacific Lumber's 10 1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9204). 4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding Company ("Scotia Pacific") and State Street, as Trustee, regarding Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 33-55538; the "Scotia Pacific 1993 Form 10-K"). 4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment, dated as of March 23, 1993, among Scotia Pacific, State Street, as Trustee, and State Street, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K). 4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995, between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1-9204).
II-4 364
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and Fixture Filing (incorporated herein by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1-9204). 4.30 -- Second Amended and Restated Credit and Security Agreement, dated July 15, 1995, among the First National Bank of Boston, MCO Properties, Inc., Westcliff Development Corporation, Horizon Corporation, Horizon Properties Corporation and MCO Properties L.P. (incorporated by reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-3924). 4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the "SHRP 1995 Second Quarter Form 10-Q"). 4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer, Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary guarantors (the "Subsidiary Guarantors"), and First Trust National Association, as Trustee regarding KACC's 10 7/8% Senior Notes due 2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-9447). Note: Pursuant to Regulation sec. 229.601, Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of the total consolidated assets of the Company. **5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the Notes and the Guaranty. *10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between MAXXAM and the Company. 10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the Amendment No. 3 to the Registration Statement on Form S-2 of the Company, Registration No. 33-64042; the "MGI Registration Statement"). 10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the Company, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204). 10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December 21, 1989 (incorporated herein by reference to Exhibit 10.21 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645).
II-5 365
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated herein by reference to Exhibit 10.23 to Amendment No. 1 to the Registration Statement of Kaiser on Form S-1, Registration No. 33-37895). 10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon Creek Corporation and MAXXAM, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of Scotia Pacific, Registration No. 33-55538). 10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc., dated as of July 3, 1990 (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). *10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by MAXXAM in favor of the Company. 10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated herein by reference to Exhibit HHH to the Final Agreement to the Schedule 13D of MGI and others in respect of the common stock of MAXXAM). 10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM (incorporated herein by reference to Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 10.11 -- Power Purchase Agreement, dated January 17, 1986, between Pacific Lumber and Pacific Gas and Electric Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549). 10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K). 10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.2 to the Scotia Pacific 1993 Form 10-K). 10.14 -- Additional Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K). 10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the Scotia Pacific 1993 Form 10-K). 10.16 -- Environmental Indemnification Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to the Scotia Pacific 1993 Form 10-K). 10.17 -- Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber; Registration Statement No. 33-56332). 10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO Properties Inc. ("MCOP") and Federated Development Company (incorporated herein by reference from Exhibit 10(ff) to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300; the "MGI 1991 Registration Statement").
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EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.19 -- Revolving Credit and Term Loan Agreement, dated as of August 27, 1987, as amended, between MCOP and Federated Development Company (incorporated herein by reference to Exhibit 10.82 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.20 -- Term Loan Agreement, dated as of November 17, 1987, between MCOP and Federated Development Company (incorporated herein by reference to Exhibit 10.83 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E. Hurwitz and MPI (incorporated herein by reference to Exhibit C to Schedule 13-D, dated November 14, 1987, filed by the Company with respect to MAXXAM's common stock; the "Put and Call Agreement"). 10.22 -- Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated herein by reference to Exhibit D to the Final Amendment to Schedule 13D, dated May 20, 1988, filed by the Company relating to MAXXAM's common stock). 10.23 -- Amendment to Put and Call Agreement, dated as of February 17, 1989 (incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-3924). 10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and among the Company, MAXXAM and certain related corporations (incorporated herein by reference to Exhibit 10.23 to Amendment No. 5 to the MGI Registration). 10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific Lumber Company (on behalf of itself, its subsidiaries and its affiliates), the United States of America and the State of California (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated September 28, 1996). 10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM's Zero Coupon Senior Subordinated Notes due 2007 (incorporated herein by reference to Exhibit B to Schedule 13D dated November 24, 1987, filed by MGI relating to MAXXAM's common stock). 10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter 10-Q). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29, 1994; "MAXXAM's 1994 Proxy Statement"). 10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 10.30 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement). 10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.32 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994).
II-7 367
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.1 to MAXXAM's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement). 10.34 -- Revised Capital Accumulation Plan effective January 1, 1988 (incorporated herein by reference to Exhibit 10.27 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom Share Plan") (incorporated herein by reference to Exhibit 10.6 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1990; MAXXAM's 1990 Form 10-K"). 10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom Share Plan (incorporated herein by reference to Exhibit 10.7 to MAXXAM's 1990 Form 10-K). 10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1988). 10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(ii) to the 1991 MGI Registration Statement). 10.39 -- Form of Company Deferred Compensation Agreement (incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1995). 10.40 -- Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.41 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.42 -- KACC's Bonus Plan (incorporated herein by reference to Exhibit 10.25 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645). 10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995 First Quarter Form 10-Q"). 10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated herein by reference to Exhibit 99 to the Proxy Statement, dated April 26, 1995, filed by Kaiser, File No. 1-9447). 10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K). 10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note (incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM (the "1990 Pierno Note") (incorporated herein by reference to Exhibit 10.31 to MAXXAM's 1990 Form 10-K).
II-8 368
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note (incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.49 -- Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54 to MAXXAM's 1990 Form 10-K). 10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert E. Cole (incorporated herein by reference to Exhibit 10.63 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1993). *12.1 -- Computation of consolidated ratio of earnings to fixed charges of the Company. *12.2 -- Computation of consolidated ratio of earnings to fixed charges of MAXXAM. *21.1 -- Subsidiaries of the Company. *21.2 -- Subsidiaries of MAXXAM. *23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in Exhibit 5). *23.3 -- Consent of Thelen, Marrin, Johnson & Bridges. *23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash. *25 -- Form T-1 Statement of Eligibility of First Trust National Association, as trustee. *27 -- Financial Data Schedule *99.1 -- Form of Letter of Transmittal. *99.2 -- Form of Notice of Guaranteed Delivery.
- --------------- * Filed herewith ** To be filed by amendment All other schedules are omitted because the required information is included in the Consolidated Financial Statements or the Notes thereto or is otherwise inapplicable. ITEM 22. UNDERTAKINGS (a) (i) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (ii) "The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the II-9 369 securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof." (b) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (c) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-10 370 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT, MAXXAM GROUP HOLDINGS INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 24TH DAY OF DECEMBER, 1996. MAXXAM GROUP HOLDINGS INC. By: /s/ CHARLES E. HURWITZ ------------------------------------------ Charles E. Hurwitz, Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Anthony R. Pierno, Byron L. Wade, Bernard L. Birkel and Karen Bryant, and each of them, his true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including any post-effective amendments, to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the above premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE - --------------------------------------------- ---------------------------- ------------------ /s/ CHARLES E. HURWITZ Chairman of the Board, Chief December 24, 1996 - --------------------------------------------- Executive Officer and Charles E. Hurwitz President (Principal Executive Officer) /s/ PAUL N. SCHWARTZ Vice President, Chief December 24, 1996 - --------------------------------------------- Financial Officer and Paul N. Schwartz Director (Principal Financial Officer) /s/ GARY L. CLARK Vice President (Principal December 24, 1996 - --------------------------------------------- Accounting Officer) Gary L. Clark /s/ JOHN A. CAMPBELL Vice President and Director December 24, 1996 - --------------------------------------------- John A. Campbell /s/ JOHN T. LA DUC Vice President and Director December 24, 1996 - --------------------------------------------- John T. La Duc /s/ ANTHONY R. PIERNO Vice President, General December 24, 1996 - --------------------------------------------- Counsel and Director Anthony R. Pierno /s/ WILLIAM S. RIEGEL Vice President and Director December 24, 1996 - --------------------------------------------- William S. Riegel
II-11 371 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT, MAXXAM INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 24TH DAY OF DECEMBER, 1996. MAXXAM INC. By: /s/ CHARLES E. HURWITZ ------------------------------------------ Charles E. Hurwitz, Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Anthony R. Pierno, Byron L. Wade, Bernard L. Birkel and Karen Bryant, and each of them, his true and lawful attorneys-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including any post-effective amendments, to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the above premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE - --------------------------------------------- ---------------------------- ------------------ /s/ CHARLES E. HURWITZ Chairman of the Board, Chief December 24, 1996 - --------------------------------------------- Executive Officer and Charles E. Hurwitz President (Principal Executive Officer) /s/ PAUL N. SCHWARTZ Executive Vice President and December 24, 1996 - --------------------------------------------- Chief Financial Officer Paul N. Schwartz (Principal Financial Officer) /s/ TERRY L. FREEMAN Assistant Controller December 24, 1996 - --------------------------------------------- (Principal Accounting Terry L. Freeman Officer) /s/ ROBERT J. CRUIKSHANK Director December 24, 1996 - --------------------------------------------- Robert J. Cruikshank /s/ EZRA G. LEVIN Director December 24, 1996 - --------------------------------------------- Ezra G. Levin /s/ STANLEY D. ROSENBERG Director December 24, 1996 - --------------------------------------------- Stanley D. Rosenberg
II-12 372 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ *3.1 -- Certificate of Incorporation of MAXXAM Group Holdings Inc. ("the Company" or "MGHI"), dated November 4, 1996. *3.2 -- By-laws of MGHI, dated November 4, 1996. 3.3 -- Restated Certificate of Incorporation of MAXXAM Inc. ("MAXXAM"), dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1989; the "MAXXAM 1989 Form 10-K"). 3.4 -- Certificate of Powers, Designations, Preferences and Relative, Participating, Optional and Other Rights of MAXXAM's Class B Junior Participating Preference Stock (incorporated herein by reference to Exhibit 3.2 to the MAXXAM 1989 Form 10-K). 3.5 -- Certificate of Designations of Class A $.05 Non-Cumulative Participating Convertible Preferred Stock of MAXXAM, dated July 6, 1994 (incorporated herein by reference to Exhibit 4(c) to the Registration Statement of MAXXAM on Form S-8, Registration No. 33-54479). 3.6 -- By-laws of MAXXAM, as amended on October 6, 1988 (incorporated herein by reference to Exhibit 3.3 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1988). 3.7 -- Certificate of Incorporation of MAXXAM Group Inc. ("MGI") (incorporated herein by reference to Exhibit 3.1E to MGI's definitive proxy statement dated October 24, 1984). 3.8 -- Certificate of Amendment of Certificate of Incorporation of MGI, dated as of September 28, 1988 (incorporated herein by reference to Exhibit 3(b) to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "MGI 1988 Form 10-K")). 3.9 -- Certificate of Amendment of Certificate of Incorporation of MGI, dated as of June 1, 1989 (incorporated herein by reference to Exhibit 3(c) to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3.10 -- By-laws of MGI (incorporated herein by reference to Exhibit 3.2 to MGI's Current Report on Form 8-K dated July 10, 1986). *4.1 -- Indenture, dated as of December 23, 1996 (the "Indenture"), among the Company, as Issuer, MAXXAM, as Guarantor, and First Bank National Association, as Trustee, regarding the Notes. *4.2 -- Purchase Agreement, dated December 17, 1996, among the Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, regarding the Notes. *4.3 -- Registration Rights Agreement, dated December 23, 1996, among the Company, MAXXAM, as Guarantor, and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, regarding the Notes. 4.4 -- Indenture between MAXXAM and The Bank of New York, Trustee, regarding MAXXAM's 14% Senior Subordinated Reset Notes due May 20, 2000 (incorporated herein by reference to Exhibit 4.1 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096).
373
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.5 -- Indenture dated as of November 15, 1979 between MAXXAM and Chemical Bank, Trustee, regarding MAXXAM's 12 1/2% Subordinated Debentures due December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1980). 4.6 -- Loan and Pledge Agreement, dated as of June 28, 1996, between Custodial Trust Company and MAXXAM (incorporated herein by reference to Exhibit 4 to MAXXAM's Quarterly Report on Form 10-Q for the year ended June 30, 1996). 4.7 -- Indenture, dated as of August 4, 1993, between Shawmut Bank, N.A. and MGI regarding MGI's 11 1/4% Senior Secured Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to MGI's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form 10-K"). 4.8 -- Indenture, dated as of February 1, 1993, among Kaiser Aluminum & Chemical Corporation ("KACC"), certain related corporations and State Street Bank and Trust Company (as successor trustee to The First National Bank of Boston; "State Street"), regarding KACC's 12 3/4% Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Note Indenture") (incorporated herein by reference to Exhibit 4.1 to KACC's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-3605; the "KACC 1993 Form 10-K"). 4.9 -- First Supplemental Indenture, dated as of May 1, 1993, to the KACC Senior Subordinated Note Indenture (incorporated herein by reference to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 4.10 -- Second Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and State Street, Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes due 2003 (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-3605; the "KACC 1995 Form 10-K"). 4.11 -- Indenture, dated as of February 17, 1994, among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002 (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on the KACC 1993 Form 10-K). 4.12 -- First Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002 (incorporated hereby by reference to Exhibit 4.5 to the KACC 1995 Form 10-K). 4.13 -- Credit Agreement, dated as of February 17, 1994 (the "1994 KACC Credit Agreement"), among Kaiser Aluminum Corporation ("Kaiser"), KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to the KACC 1993 Form 10-K). 4.14 -- First Amendment, dated as of July 21, 1994, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Kaiser for the quarter ended June 30, 1994, File No. 1-9447). 4.15 -- Second Amendment, dated March 10, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.6 to the Annual Report on Form 10-K of Kaiser for the year ended December 31, 1994, File No. 1-9447).
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EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.16 -- Third Amendment, dated as of July 20, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9447). 4.17 -- Fourth Amendment, dated as of October 17, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-9447). 4.18 -- Fifth Amendment, dated December 11, 1995, to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.11 to the 1995 KACC Form 10-K). 4.19 -- Sixth Amendment dated as of October 1, 1996 to the 1994 KACC Credit Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-3605). **4.20 -- Seventh Amendment dated December 17, 1996 to the 1994 KACC Credit Agreement. 4.21 -- Certificate of Designation of Series A Mandatory Conversion Premium Dividend Preferred Stock of Kaiser, dated June 28, 1993 (incorporated herein by reference to Exhibit 4.3 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-9447; the "Kaiser 1993 Third Quarter Form 10-Q"). 4.22 -- Certificate of Retirement of Kaiser, dated October 24, 1995, and filed in the state of Delaware Office of the Secretary of State on October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447). 4.23 -- Deposit Agreement between Kaiser and The First National Bank of Boston, dated as of June 30, 1993 (incorporated herein by reference to Exhibit 4.4 to the Kaiser 1993 Third Quarter Form 10-Q). 4.24 -- Certificate of Designation of 8.255% Preferred Redeemable Increased Dividend Equity Securities of Kaiser, dated February 17, 1994 (incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9447; the "Kaiser 1993 Form 10-K). 4.25 -- Indenture, dated as of March 23, 1993, between The Pacific Lumber Company ("Pacific Lumber") and State Street (as successor trustee to The First National Bank of Boston) regarding Pacific Lumber's 10 1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9204). 4.26 -- Indenture, dated as of March 23, 1993, between Scotia Pacific Holding Company ("Scotia Pacific") and State Street, as Trustee, regarding Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 33-55538; the "Scotia Pacific 1993 Form 10-K"). 4.27 -- Form of Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment, dated as of March 23, 1993, among Scotia Pacific, State Street, as Trustee, and State Street, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K). 4.28 -- Amended and Restated Credit Agreement, dated as of November 10, 1995, between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1-9204).
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EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 4.29 -- Form of Deed of Trust, Assignment of Rents, Grant of Easement and Fixture Filing (incorporated herein by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of Pacific Lumber for the quarter ended September 30, 1995; File No. 1-9204). 4.30 -- Second Amended and Restated Credit and Security Agreement, dated July 15, 1995, among the First National Bank of Boston, MCO Properties, Inc., Westcliff Development Corporation, Horizon Corporation, Horizon Properties Corporation and MCO Properties L.P. (incorporated by reference to Exhibit 4.25 to MAXXAM's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-3924). 4.31 -- Amended and Restated Indenture dated October 6, 1995 by and among Sam Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the "SHRP 1995 Second Quarter Form 10-Q"). 4.32 -- Indenture, dated as of October 23, 1996, among KACC, as issuer, Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary guarantors (the "Subsidiary Guarantors"), and First Trust National Association, as Trustee regarding KACC's 10 7/8% Senior Notes due 2006 (incorporated by reference to Exhibit 4.2 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-9447). Note: Pursuant to Regulation sec. 229.601, Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of the total consolidated assets of the Company. **5 -- Opinion of Kramer, Levin, Naftalis & Frankel with respect to the Notes and the Guaranty. *10.1 -- Tax Allocation Agreement dated December 23, 1996 by and between MAXXAM and the Company. 10.2 -- Tax Allocation Agreement between MGI and MAXXAM, dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the Amendment No. 3 to the Registration Statement on Form S-2 of the Company, Registration No. 33-64042; the "MGI Registration Statement"). 10.3 -- Tax Allocation Agreement, dated as of May 21, 1988, among MAXXAM, the Company, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204). 10.4 -- Tax Allocation Agreement among MAXXAM and KACC dated as of December 21, 1989 (incorporated herein by reference to Exhibit 10.21 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645).
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EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.5 -- Tax Allocation Agreement between Kaiser and MAXXAM (incorporated herein by reference to Exhibit 10.23 to Amendment No. 1 to the Registration Statement of Kaiser on Form S-1, Registration No. 33-37895). 10.6 -- Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon Creek Corporation and MAXXAM, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of Scotia Pacific, Registration No. 33-55538). 10.7 -- Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc., dated as of July 3, 1990 (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). *10.8 -- Non-Negotiable Intercompany Note dated December 23, 1996 executed by MAXXAM in favor of the Company. 10.9 -- Assumption Agreement, dated as of October 28, 1988 (incorporated herein by reference to Exhibit HHH to the Final Agreement to the Schedule 13D of MGI and others in respect of the common stock of MAXXAM). 10.10 -- Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM (incorporated herein by reference to Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 10.11 -- Power Purchase Agreement, dated January 17, 1986, between Pacific Lumber and Pacific Gas and Electric Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549). 10.12 -- Master Purchase Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K). 10.13 -- Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.2 to the Scotia Pacific 1993 Form 10-K). 10.14 -- Additional Services Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K). 10.15 -- Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the Scotia Pacific 1993 Form 10-K). 10.16 -- Environmental Indemnification Agreement between Pacific Lumber and Scotia Pacific (incorporated herein by reference to Exhibit 10.5 to the Scotia Pacific 1993 Form 10-K). 10.17 -- Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber; Registration Statement No. 33-56332). 10.18 -- Exchange Agreement dated as of May 20, 1991 by and among MAXXAM, MCO Properties Inc. ("MCOP") and Federated Development Company (incorporated herein by reference from Exhibit 10(ff) to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300; the "MGI 1991 Registration Statement").
377
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.19 -- Revolving Credit and Term Loan Agreement, dated as of August 27, 1987, as amended, between MCOP and Federated Development Company (incorporated herein by reference to Exhibit 10.82 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.20 -- Term Loan Agreement, dated as of November 17, 1987, between MCOP and Federated Development Company (incorporated herein by reference to Exhibit 10.83 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.21 -- Put and Call Agreement, dated November 16, 1987, between Charles E. Hurwitz and MPI (incorporated herein by reference to Exhibit C to Schedule 13-D, dated November 14, 1987, filed by the Company with respect to MAXXAM's common stock; the "Put and Call Agreement"). 10.22 -- Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated herein by reference to Exhibit D to the Final Amendment to Schedule 13D, dated May 20, 1988, filed by the Company relating to MAXXAM's common stock). 10.23 -- Amendment to Put and Call Agreement, dated as of February 17, 1989 (incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-3924). 10.24 -- Investment Management Agreement, dated as of December 1, 1991, by and among the Company, MAXXAM and certain related corporations (incorporated herein by reference to Exhibit 10.23 to Amendment No. 5 to the MGI Registration). 10.25 -- Agreement, dated September 28, 1996, between MAXXAM, The Pacific Lumber Company (on behalf of itself, its subsidiaries and its affiliates), the United States of America and the State of California (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated September 28, 1996). 10.26 -- Note Purchase Agreement dated July 26, 1982, as amended, between MAXXAM and Drexel Burnham Lambert Incorporated, relating to MAXXAM's Zero Coupon Senior Subordinated Notes due 2007 (incorporated herein by reference to Exhibit B to Schedule 13D dated November 24, 1987, filed by MGI relating to MAXXAM's common stock). 10.27 -- Third Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter 10-Q). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.28 -- MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's Proxy Statement dated April 29, 1994; "MAXXAM's 1994 Proxy Statement"). 10.29 -- Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 10.30 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.30 -- MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement). 10.31 -- Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.32 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994).
378
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.32 -- Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.1 to MAXXAM's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.33 -- MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to Exhibit 99 to MAXXAM's 1994 Proxy Statement). 10.34 -- Revised Capital Accumulation Plan effective January 1, 1988 (incorporated herein by reference to Exhibit 10.27 to MAXXAM's Registration Statement on Form S-4, Registration No. 33-20096). 10.35 -- MAXXAM's 1984 Phantom Share Plan, as amended (the "Company Phantom Share Plan") (incorporated herein by reference to Exhibit 10.6 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1990; MAXXAM's 1990 Form 10-K"). 10.36 -- Amendment, dated as of March 8, 1990, relating to MAXXAM's Phantom Share Plan (incorporated herein by reference to Exhibit 10.7 to MAXXAM's 1990 Form 10-K). 10.37 -- Form of Phantom Share Agreement relating to the MAXXAM Phantom Share Plan (incorporated herein by reference to Exhibit 10.20 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1988). 10.38 -- MAXXAM Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(ii) to the 1991 MGI Registration Statement). 10.39 -- Form of Company Deferred Compensation Agreement (incorporated herein by reference to Exhibit 10.35 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1995). 10.40 -- Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605). 10.41 -- Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.41 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.42 -- KACC's Bonus Plan (incorporated herein by reference to Exhibit 10.25 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645). 10.43 -- Kaiser 1995 Employee Incentive Compensation Program (incorporated herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995 First Quarter Form 10-Q"). 10.44 -- Kaiser 1995 Executive Incentive Compensation Program (incorporated herein by reference to Exhibit 99 to the Proxy Statement, dated April 26, 1995, filed by Kaiser, File No. 1-9447). 10.45 -- Promissory Note dated February 1, 1989 by Anthony R. Pierno and Beverly J. Pierno to MAXXAM (the "1989 Pierno Note") (incorporated herein by reference to Exhibit 10.30 to MAXXAM's 1990 Form 10-K). 10.46 -- Letter amendment, dated February 28, 1995, to the 1989 Pierno Note (incorporated herein by reference to Exhibit 10.44 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.47 -- Promissory Note dated July 19, 1990 by Anthony R. Pierno to MAXXAM (the "1990 Pierno Note") (incorporated herein by reference to Exhibit 10.31 to MAXXAM's 1990 Form 10-K).
379
EXHIBIT NUMBER EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.48 -- Letter amendment, dated February 28, 1995, to the 1990 Pierno Note (incorporated herein by reference to Exhibit 10.46 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1994). 10.49 -- Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54 to MAXXAM's 1990 Form 10-K). 10.50 -- Employment Agreement, dated August 20, 1993 between KACC and Robert E. Cole (incorporated herein by reference to Exhibit 10.63 to MAXXAM's Annual Report on Form 10-K for the year ended December 31, 1993). *12.1 -- Computation of consolidated ratio of earnings to fixed charges of the Company. *12.2 -- Computation of consolidated ratio of earnings to fixed charges of MAXXAM. *21.1 -- Subsidiaries of the Company. *21.2 -- Subsidiaries of MAXXAM. *23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (to be contained in Exhibit 5). *23.3 -- Consent of Thelen, Marrin, Johnson & Bridges. *23.4 -- Consent of Wharton, Levin, Ehrmantraut, Klein & Nash. *25 -- Form T-1 Statement of Eligibility of First Trust National Association, as trustee. *27 -- Financial Data Schedule *99.1 -- Form of Letter of Transmittal. *99.2 -- Form of Notice of Guaranteed Delivery.
- --------------- * Filed herewith ** To be filed by amendment EX-3.1 2 CERTIFICATE OF INC. OF MGHI 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF MAXXAM GROUP HOLDINGS INC. --------------------- FIRST. The name of this corporation shall be: MAXXAM GROUP HOLDINGS INC. SECOND. Its registered office in the State of Delaware is to be located at 1013 Centre Road, in the City of Wilmington, County of New Castle and its registered agent at such address is CORPORATION SERVICE COMPANY. THIRD. The purpose or purposes of the corporation shall be: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of stock which this corporation is authorized to issue is: Three Thousand (3,000) Shares With A Par Value Of One Dollar ($1.00) Per Share amounting to Three Thousand Dollars ($3000). FIFTH. The name and address of the incorporator is as follows: Robert Matera Corporation Service Company 1013 Centre Road Wilmington, DE 19805 SIXTH. The Board of Directors shall have the power to adopt, amend or repeal the by-laws. 2 SEVENTH. No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Seventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore named, has executed, signed and acknowledged this certificate of incorporation this fourth day of November, A.D., 1996. /s/ ROBERT MATERA ---------------------- Robert Matera Incorporator EX-3.2 3 BYLAWS OF MGHI 1 EXHIBIT 3.2 BY-LAWS OF MAXXAM GROUP HOLDINGS INC. (a Delaware corporation) __________________ ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law of the State of Delaware (the "General Corporation Law"). Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Board of Directors may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer of any -1- 2 uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the -2- 3 date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior to action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. -3- 4 7. STOCKHOLDER MEETINGS TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting. NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten (10) days nor more than sixty (60) days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States Mail. If a meeting is adjourned to another time, not more than thirty (30) days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. -4- 5 STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting--the Chairman of the Board, if any, the Vice Chairman of the Board, if any, the President, a Vice President, or if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but is neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three (3) years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the -5- 6 voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. Except as otherwise required by subsection (e) of Section 231 of the General Corporation Law, the provisions of that Section shall not apply to the corporation. QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. VOTING. Each share of stock shall entitle the holders thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these By-Laws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the -6- 7 members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of three (3) persons. Thereafter the number of directors constituting the whole board shall be at least one (1). Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if the number is not fixed, the number shall be at least one (1). The number of directors may be increased or decreased by action of the stockholders or of the directors. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, of the Vice Chairman of the Board, if any, of the President, or of a majority of the directors in office. -7- 8 NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these By-Laws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any -8- 9 meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III OFFICERS The officers of the corporation shall consist of such officers as may be appointed by the Board of Directors from time to time, including but not limited to a President, a Secretary, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, an Executive Vice President, one or more other Vice Presidents, a Treasurer, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer, other than the Chairman or Vice Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may -9- 10 be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI CONTROL OVER BY-LAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Law, the power to amend, alter, or repeal these By-laws and to adopt new By-Laws may be exercised by the Board of Directors or by the stockholders. I HEREBY CERTIFY that the foregoing is a full, true, and correct copy of the By-Laws of MAXXAM Group Holdings Inc., a Delaware corporation, as in effect on the date hereof. DATED: As of November 4, 1996 /s/ BYRON L. WADE ________________________________________ Byron L. Wade, Secretary of (Seal) MAXXAM Group Holdings Inc. -10- EX-4.1 4 INDENTURE DATED 12/23/96 1 EXHIBIT 4.1 DRAFT 12/19/96 MAXXAM GROUP HOLDINGS INC., as Issuer, MAXXAM INC., as Guarantor, AND First Bank National Association, as Trustee, __________________________________ INDENTURE Dated as of December 23, 1996 __________________________________ $130,000,000 12% Senior Secured Notes due 2003 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Definitions . . . . . . . . . . . . . 26 SECTION 1.03. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . 28 SECTION 1.04. Rules of Construction . . . . . . . . . . . 29 ARTICLE 2 The Securities -------------- SECTION 2.01. Form and Dating . . . . . . . . . . . . . . 30 SECTION 2.02. Execution and Authentication . . . . . . . 31 SECTION 2.03. Registrar and Paying Agent . . . . . . . . 31 SECTION 2.04. Paying Agent to Hold Money in Trust . . . . 32 SECTION 2.05. Holder Lists . . . . . . . . . . . . . . . 32 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . 32 SECTION 2.07. Replacement Securities . . . . . . . . . . 41 SECTION 2.08. Outstanding Securities . . . . . . . . . . 41 SECTION 2.09. Treasury Securities . . . . . . . . . . . . 41 SECTION 2.10. Temporary Securities . . . . . . . . . . . 42 SECTION 2.11. Cancellation . . . . . . . . . . . . . . . 42 SECTION 2.12. Defaulted Interest . . . . . . . . . . . . 42 SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . 43 ARTICLE 3 Redemption ---------- SECTION 3.01. Notices to Trustee . . . . . . . . . . . . 43 SECTION 3.02. Selection of Securities to be Redeemed . . . . . . . . . . . . . . . . . 43 SECTION 3.03. Notice of Redemption . . . . . . . . . . . 44 SECTION 3.04. Effect of Notice of Redemption . . . . . . 45 SECTION 3.05. Deposit of Redemption Price . . . . . . . . 45 SECTION 3.06. Securities Redeemed in Part . . . . . . . . 45 SECTION 3.07. Cancellation of Redeemed Securities . . . . 45 SECTION 3.08. No Repurchase Restrictions . . . . . . . . 45
i 3 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities . . . . . . . . . . . 46 SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . 46 SECTION 4.03. Limitation on Indebtedness . . . . . . . . 46 SECTION 4.04. Limitation on Restricted Payments . . . . . 49 SECTION 4.05. Ownership of Capital Stock of Subsidiaries and Kaiser Shares . . . . . . 53 SECTION 4.06. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries . . . . 54 SECTION 4.07. Limitation on Asset Sales . . . . . . . . . 56 SECTION 4.08. Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . 62 SECTION 4.09. Change of Control . . . . . . . . . . . . . 64 SECTION 4.10. Limitation on Liens . . . . . . . . . . . . 67 SECTION 4.11. Amendment of Scotia Pacific Agreements or Intercompany Note . . . . . . 69 SECTION 4.12. Compliance Certificate . . . . . . . . . . 70 SECTION 4.13. Use of Proceeds . . . . . . . . . . . . . . 70 SECTION 4.14. Corporate Existence . . . . . . . . . . . . 70 SECTION 4.15. Limitation on Status as Investment Company . . . . . . . . . . . . . . . . . . 70 SECTION 4.16. Limitation on Liens on Pledged Shares and Intercompany Note . . . . . . . 70 SECTION 4.17. Declaration and Payment of Dividends by MGI . . . . . . . . . . . . . . . . . . . . 71 SECTION 4.18. Releases from Lien of MGI Indenture . . . . 71 ARTICLE 5 Successor Company ----------------- SECTION 5.01. When Company May Merge or Transfer Assets . . . . . . . . . . . . . . . . . . 71 ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default . . . . . . . . . . . . . 73 SECTION 6.02. Acceleration . . . . . . . . . . . . . . . 75 SECTION 6.03. Other Remedies . . . . . . . . . . . . . . 75 SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . 75 SECTION 6.05. Control by Majority . . . . . . . . . . . . 76 SECTION 6.06. Limitation on Suits . . . . . . . . . . . . 76 SECTION 6.07. Rights of Holders to Receive Payment . . . 77 SECTION 6.08. Collection Suit by Trustee . . . . . . . . 77
ii 4 SECTION 6.09. Trustee May File Proofs of Claim . . . . . 77 SECTION 6.10. Priorities . . . . . . . . . . . . . . . . 77 SECTION 6.11. Undertaking for Costs . . . . . . . . . . . 78 SECTION 6.12. Waiver of Stay or Extension Laws . . . . . 78 SECTION 6.13. Restoration of Rights and Remedies . . . . 78 ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . 79 SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . 80 SECTION 7.03. Individual Rights of Trustee . . . . . . . 81 SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . 82 SECTION 7.05. Notice of Defaults . . . . . . . . . . . . 82 SECTION 7.06. Reports by Trustee to Holders . . . . . . . 82 SECTION 7.07. Compensation and Indemnity . . . . . . . . 82 SECTION 7.08. Replacement of Trustee . . . . . . . . . . 83 SECTION 7.09. Successor Trustee by Merger . . . . . . . . 84 SECTION 7.10. Eligibility; Disqualification . . . . . . . 85 SECTION 7.11. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . 85 ARTICLE 8 Discharge of Indenture ---------------------- SECTION 8.01. Discharge of Liability on Securities; Defeasance . . . . . . . . . . . . . . . . 85 SECTION 8.02. Conditions to Defeasance . . . . . . . . . 86 SECTION 8.03. Application of Trust Money . . . . . . . . 87 SECTION 8.04. Repayment to Company . . . . . . . . . . . 87 SECTION 8.05. Indemnity for Government Obligations . . . 87 SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . 88 ARTICLE 9 Amendments ---------- SECTION 9.01. Without Consent of Holders . . . . . . . . 88 SECTION 9.02. With Consent of Holders . . . . . . . . . . 89 SECTION 9.03. Compliance with Trust Indenture Act . . . . 90 SECTION 9.04. Revocation and Effect of Consents and Waivers . . . . . . . . . . . . . . . . . . 90 SECTION 9.05. Notation on or Exchange of Securities . . . . . . . . . . . . . . . . 91 SECTION 9.06. Trustee to Sign Amendments . . . . . . . . 91
iii 5 ARTICLE 10 Security -------- SECTION 10.01. Grants of Security Interests . . . . . . . 91 SECTION 10.02. Pledged Shares and Intercompany Notes . . . 94 SECTION 10.03. Collateral Accounts . . . . . . . . . . . . 97 SECTION 10.04. Further Assurances; Revisions of Exhibit D . . . . . . . . . . . . . . . . . 103 SECTION 10.05. Release and Substitution of Collateral . . . . . . . . . . . . . . . . 103 SECTION 10.06. Trustee Appointed Attorney-in-Fact . . . . 114 SECTION 10.07. Trustee May Perform . . . . . . . . . . . . 114 SECTION 10.08. Remedies Upon Event of Default . . . . . . 115 SECTION 10.09. Application of Proceeds . . . . . . . . . . 116 SECTION 10.10. Continuing Liens . . . . . . . . . . . . . 116 SECTION 10.11. Certificates and Opinions . . . . . . . . . 116 SECTION 10.12. Representations and Warranties . . . . . . 116 SECTION 10.13. Certain Mergers, Consolidations, etc. Among the Company, MGI and Restricted Subsidiaries . . . . . . . . . . 117 ARTICLE 11 Miscellaneous ------------- SECTION 11.01. Trust Indenture Act Controls . . . . . . . 118 SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . 118 SECTION 11.03. Communication by Holders with Other Holders . . . . . . . . . . . . . . . . . . 119 SECTION 11.04. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . 119 SECTION 11.05. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . 120 SECTION 11.06. When Treasury Securities Disregarded . . . . . . . . . . . . . . . . 120 SECTION 11.07. Rules by Trustee, Paying Agent and Registrar . . . . . . . . . . . . . . . . . 121 SECTION 11.08. Legal Holidays . . . . . . . . . . . . . . 121 SECTION 11.09. Governing Law . . . . . . . . . . . . . . . 121 SECTION 11.10. No Recourse Against Others . . . . . . . . 121 SECTION 11.11. Successors . . . . . . . . . . . . . . . . 122 SECTION 11.12. Severability . . . . . . . . . . . . . . . 122 SECTION 11.13. Multiple Originals . . . . . . . . . . . . 122 SECTION 11.14. Table of Contents; Headings . . . . . . . . 122 SECTION 11.15. Benefits of Indenture . . . . . . . . . . . 122 SECTION 11.16. No Challenge . . . . . . . . . . . . . . . 122
iv 6 ARTICLE 12 MAXXAM Guarantee ---------------- SECTION 12.01 Senior Guarantee . . . . . . . . . . . . . . . 123 SECTION 12.02 When Guarantor May Merge, Etc. . . . . . . . . 125 Exhibit A - Form of Security . . . . . . . . . . . . . A-1 Exhibit B - Certificate of Transferor . . . . . . . . . B-1 Exhibit C - Salmon Creek Property Legal Description . . . . . . . . . . . . . . . . C-1 Exhibit D - Description of Pledged Shares . . . . . . . D-1
v 7 CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- --------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . N A (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . 7 10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; .10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 1.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . 4.02; 4.12; 11.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . 10.11 (e) . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; . . . . . . 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a) (last sentence) . . . . . . . . . . . . . . . . . 11.06 (a)(l)(A) . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(l)(B) . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
N.A. means Not Applicable. Note: This Cross-Reference Table shall not, for any purpose, be deemed part of the Indenture. vi 8 INDENTURE dated as of December 23, 1996, among MAXXAM Group Holdings Inc., a Delaware corporation (the "Company"), MAXXAM Inc., a Delaware corporation (the "Guarantor"), and First Bank National Association, a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Company's 12% Series A Senior Secured Notes due 2003 (the "Series A Securities") and the 12% Series B Senior Secured Notes due 2003 (the "Series B Securities" and, together with the Series A Securities, the "Securities"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "AFFILIATE" of any person means (i) any person who, directly or indirectly, is in control of, is controlled by or is under common control with such person and (ii) any person who is a director or officer (A) of such person, (B) of any subsidiary of such person or (C) of any person described in clause (i) above, and shall be deemed to include any joint venture, partnership or other person (other than a Subsidiary of the Company) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and in which one or more Affiliates of the Company has a direct or an indirect equity ownership interest in excess of 5% therein other than by virtue of the direct or indirect equity ownership in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries; provided, however, that the term "Affiliate" shall not include (i) the Company or (ii) any Subsidiary of the Company so long as no Affiliate of the Company has a direct or indirect equity ownership interest equal to or greater than 5% in such Subsidiary other than by virtue of the direct or indirect equity ownership in such Subsidiary held (in the aggregate) by the Company and/or one or more of its Subsidiaries. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. The fact that an Affiliate of a person is a partner of a law firm that renders services to such person or its Affiliates does not mean that the law firm is an Affiliate of such person. "AGENT" means any Registrar, Paying Agent or transfer agent. 9 "ASSET SALE" means any sale, transfer or other disposition (including, without limitation, dispositions pursuant to any Taking, merger, consolidation or sale and lease back transactions), after the Issue Date, by the Company or any of its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) to any person other than to the Company or any of its Restricted Subsidiaries of (i) any Capital Stock or other ownership interest of any of the Company's Restricted Subsidiaries (including sales, transfers or other dispositions by such Restricted Subsidiary of its Capital Stock or other ownership interest) or (ii) any other assets (other than any Capital Stock or ownership interests in any Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries, other than sales, transfers or other dispositions of assets in the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; provided, however, that the term Asset Sale shall not include (A) the sale, transfer or other disposition of any assets or Capital Stock or other ownership interest by the Company or its Restricted Subsidiaries if such transaction would have been an Asset Sale in the absence of this clause (A) to the extent the gross proceeds thereof (exclusive of indemnities) do not exceed, in aggregate amount with all other such sales, transfers or other dispositions after the Issue Date, $25,000,000 from and after the Issue Date (such proceeds, to the extent non-cash, to be determined in good faith by the Board of Directors), (B) the creation, incurrence, assumption or existence of any Lien to the extent not prohibited by Section 4.10, (C) any of the transactions governed by Section 5.01, (D) an exchange of assets, provided, the assets received are to be used in the lines of business of the Company or any of its Restricted Subsidiaries on the Issue Date or reasonably related extensions of such lines and only to the extent such exchange qualifies for non-recognition treatment under the Code, (E) any transaction to the extent governed by Section 4.04 or Section 4.05, (F) the sale, transfer or other disposition of Collateral under this Indenture, collateral under the MGI Indenture or any assets referred to in clause (vi) of Section 4.04(c) or the proceeds of such assets or (G) any Primary Share Sale by MGI to the extent the Net Proceeds of such Primary Share Sale are distributed on the Pledged MGI Shares. "AVERAGE LIFE" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "BANK DEBT" means any and all amounts payable under or in respect of the Credit Agreement, including principal, premium (if any), interest, fees, charges, expenses, reimbursement obligations, 2 10 guaranties, indemnities and all other amounts payable thereunder or in respect thereof. "BERING AGREEMENT" means the investment management agreement, effective as of December 1, 1991, between Bering Holdings Inc. and each of MAXXAM, the Company, MGI, MPI and Pacific Lumber, as the same has been or may be amended, supplemented or otherwise modified from time to time in a manner that is not materially adverse to the Holders. "BOARD OF DIRECTORS" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "BRITT" means Britt Lumber Co., Inc., a California corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "BUSINESS DAY" means each day that is not a Legal Holiday. "CALL PRICE" means, expressed as a percentage of principal amount, 110%. "CAPITAL LEASE OBLIGATIONS" of any person means, as of any date of determination, any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such person prepared in accordance with GAAP as of such determination date (it being understood that the Capital Lease Obligations of the Company shall not include any such obligations attributable to any Unrestricted Subsidiary as of any determination date); the amount of such obligation shall be the capitalized amount thereof, determined in accordance with GAAP; and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CAPITAL STOCK" of any person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock of such person, including any Preferred Stock of such person but excluding any Redeemable Stock of such person. "CASH EQUIVALENTS" means (1) when used in respect of any Trust Moneys (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company 3 11 organized under the laws of the United States of America or any State thereof (including the Trustee) whose unsecured, unguaranteed, long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in subclauses (i), (ii) or (iv) of this clause (1); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii) taxable or non-taxable auction rate securities which have interest rates reset on periodic short term intervals (typically each 7, 14, 21, 28 or 49 days via a Dutch auction process) and which at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (viii) any investments hereafter developed which are substantially comparable to those described above in this clause (1); and (2) otherwise (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company organized under the laws of the United States of America or any state thereof (including the Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to 4 12 any obligation described in subclauses (i), (ii) or (iv) of this clause (2); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable auction rate securities commonly known as "money market notes" that at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (vii) any investments hereafter developed which are substantially comparable to those described above in this clause (2). "CHANGE OF CONTROL" means the occurrence of any of the following events: (i) MAXXAM, directly or indirectly, not having (other than by reason of the existence of a Lien, but including by reason of the foreclosure of or other realization upon a Lien) direct or indirect sole beneficial ownership (as defined under Regulation 13d-3 of the Exchange Act as in effect on the date of this Indenture) of at least 40% of the total common equity, on a fully diluted basis, of the Company; provided, however, that such ownership by MAXXAM, directly or indirectly, of 30% or greater, but less than 40% of the total common equity, on a fully diluted basis, of the Company shall not be a Change of Control if MAXXAM, through direct representation or through persons nominated by it, controls a majority of the Board of Directors necessary to effectuate any actions by the Board of Directors; and provided, further, that the foregoing minimum percentages shall be deemed not satisfied if any person or group shall, directly or indirectly, own more of the total voting power entitled to vote generally in the election of directors of the Company than MAXXAM; (ii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than to a person that is a Subsidiary of MAXXAM both immediately before and immediately after giving effect to such transaction or to any of the Principals (as defined below) or to a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock 5 13 beneficially owned by such group); (iii) the approval by the stockholders of the Company of a plan for the liquidation or dissolution of the Company other than into MAXXAM or a Subsidiary of MAXXAM; (iv) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than any of the Principals or a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock beneficially owned by such group), becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of Voting Stock representing more than 35% of the voting power in the election of a majority of the directors of MAXXAM represented by all outstanding Voting Stock of MAXXAM; (v) the consummation of the first transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) other than a group of which one or more of the Principals is a member (provided that one or more of the Principals beneficially owns Voting Stock representing at least 80% of the voting power in the election of a majority of the directors of MAXXAM of the Voting Stock beneficially owned by such group) becomes the "beneficial owner" (as defined above), directly or indirectly, of Voting Stock representing more of the voting power in the election of a majority of the directors of MAXXAM represented by all outstanding Voting Stock of MAXXAM than is at the time represented by Voting Stock "beneficially owned" (as defined above) by the Principals; or (vi) the first day on which a majority of the members of the Board of Directors of MAXXAM are not Continuing Directors. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring Voting Stock of MAXXAM will be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of MAXXAM who (i) was a member of such Board of Directors on the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Principals" means Charles Hurwitz, his wife and lineal descendants, any trust for the benefit thereof, and/or any entity in which any one or more of such persons hold an 80% or more controlling interest. "CODE" means the Internal Revenue Code of 1986, as amended (or any successor statute thereto), and the regulations promulgated thereunder, all as in effect from time to time. "COLLATERAL" means, at any time of determination, all property upon which a Lien exists at such time in favor of the Trustee for 6 14 the benefit of Holders pursuant to Articles 5 and 10, including pursuant to instruments executed and delivered in compliance with Sections 5.01(i), 10.01(b) or 10.13. "COLLATERAL DEFAULT" means a Default consisting of the Company's failure to comply with any provision contained in Article 10 of this Indenture which (i) either (A) results in an impairment of the validity, perfection, or priority of the Lien of this Indenture with respect to any portion of the Collateral having a fair market value in excess of $1 million in the aggregate or (B) would be materially adverse in any way to the Holders (any Default consisting of the failure to make any offer required to be made pursuant to Article 10 being deemed, without limitation, material for this purpose) and (ii) would constitute an Event of Default unless cured within the applicable cure or grace period set forth in Section 6.01(3). "COMPANY" means MAXXAM Group Holdings Inc., a Delaware corporation, and, subject to the provisions of Article 5 hereof, shall mean its successors and assigns; provided, however, that, for purposes of any provision contained herein which is required by the TIA, "Company" shall also mean each other obligor (if any) on the indenture securities. "CONSOLIDATED CASH FLOW COVERAGE RATIO" of the Company means, as of the date of the transaction giving rise to the need to calculate the Consolidated Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount of EBITDA for the immediately preceding four fiscal quarters for which financial information in respect thereof is available immediately prior to the Transaction Date to (ii) the aggregate Consolidated Interest Expense for the fiscal quarter in which the Transaction Date occurs and to be accrued during the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount of Indebtedness of the Company and its Restricted Subsidiaries reasonably expected by the Company to be outstanding on the Transaction Date and thereafter other than the Timber Notes), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Transaction Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date; provided that if the Company or any of its Restricted Subsidiaries is a party to any Interest Rate Protection Agreements which would have the effect of changing the interest rate on any Indebtedness of the Company or any of its Restricted Subsidiaries for such four quarter period (or a portion thereof), the resulting rate shall be used for such four quarter period or portion thereof; and provided, further, that any Consolidated Interest Expense with respect to Indebtedness Incurred or retired by the Company or any of its Restricted Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be 7 15 calculated as if such Indebtedness was so Incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs; and provided, further, that if, during the four fiscal quarters referred to in clause (i) of this definition, (A) the Company or any of its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (B) the Company or any of its Restricted Subsidiaries shall have acquired any material assets out of the ordinary course of business, EBITDA shall be calculated on a pro forma basis as if such asset acquisition and any related financing had occurred on the first day of such period. "CONSOLIDATED INCOME TAX EXPENSE" of the Company means (without duplication), for any period, the aggregate of the income tax expense (net of applicable credits) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP other than income taxes (including credits) with respect to items of net income excluded from the definition of Consolidated Net Income. "CONSOLIDATED INTEREST EXPENSE" of the Company means, for any period (without duplication), (i) the sum of (A) the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, (B) all fees, commissions, discounts and other charges of the Company and its Subsidiaries with respect to letters of credit and bankers' acceptances and the costs (net of benefits) associated with Interest Rate Protection Agreements for such period, determined on a consolidated basis in accordance with GAAP, and (C) dividends declared on Redeemable Stock of the Company or any Restricted Subsidiary held by persons other than the Company or a Wholly Owned Restricted Subsidiary (other than dividends payable in Capital Stock of the Company or pro rata dividends payable to all stockholders of such class or series of Stock payable in Capital Stock of any such Restricted Subsidiary), less (ii) the amortization or write-off of deferred financing costs by the Company and its Subsidiaries during such period, determined on a consolidated basis in accordance with GAAP (including, without limitation, the amortization of any unamortized deferred financing costs in connection with any refinancing of the Credit Agreement); in the case of clauses (i) and (ii) of this definition, without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as any Timber Notes are outstanding, during such period. 8 16 "CONSOLIDATED NET INCOME" of the Company means, for any period, the aggregate net income (or net loss, as the case may be) of the Company and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP ("GAAP Net Income"); provided that (without duplication) there shall be excluded from GAAP Net Income (to the extent otherwise included therein) (i) gains and losses (net of applicable taxes) from (A) Asset Sales or reserves relating thereto, (B) any sale, transfer or other disposition of any Capital Stock or ownership interests in (x) Salmon Creek or (y) any Unrestricted Subsidiary to which non-cash proceeds received by the Company in respect of a Salmon Creek Distribution have been contributed by the Company as contemplated by Section 4.04(d), (C) the sale, transfer or other disposition by the Company of any assets received by the Company in respect of a Salmon Creek Distribution or (D) any sale, transfer or other disposition of Kaiser Shares; (ii) items classified as extraordinary and gains and losses from discontinued operations; (iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any person that is not a Subsidiary of the Company or that is accounted for on the equity method of accounting, provided that in each case the amount of dividends or other distributions actually paid to the Company (other than Salmon Creek Distributions) during such period shall be added to Consolidated Net Income (to the extent, in the case of clause (A), that the Company elects to include such distributions in the computation of Consolidated Net Income at the time of the computation thereof) and the amount of dividends or other distributions actually paid to a Restricted Subsidiary of the Company (other than Salmon Creek Distributions) during such period shall be included in computing the net income (or net loss, as the case may be) of such Restricted Subsidiary, subject to clause (v) below (to the extent, in the case of clause (A), that the Company elects to include such distributions in the computation of Consolidated Net Income at the time of the computation thereof); (iv) except to the extent includable pursuant to clause (iii) of this definition, the net income (or loss) of any other person accrued or attributable to any period prior to the date it becomes a Subsidiary of the Company or is merged into or consolidated with the Company or any of its Subsidiaries or such other person's property (or a portion thereof) is acquired by the Company or any of its Subsidiaries; (v) the net income (or loss) of any Restricted Subsidiary during such period if and to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary to the Company or any Restricted Subsidiary of any such net income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or government regulation applicable to such Restricted Subsidiary, provided that the amount of dividends or other distributions actually paid to the Company by such Restricted Subsidiary (other than Salmon Creek Distributions) shall be added to Consolidated Net Income during such period and the amount of dividends or other 9 17 distributions actually paid to a Restricted Subsidiary of the Company (the "Recipient Restricted Subsidiary") by such Restricted Subsidiary (other than Salmon Creek Distributions) shall be included in computing the net income (or net loss, as the case may be) of such Recipient Restricted Subsidiary during such period; and (vi) the transfer of the Kaiser Shares to the Company by MAXXAM; provided that there shall be excluded from Consolidated Net Income, to the extent otherwise included therein, the amount of dividends and distributions made with the net proceeds of any Equity Offering by any Subsidiary of the Company. "CREDIT AGREEMENT" means the agreement dated November 10, 1995, between Bank of America, National Trust and Savings Association and Pacific Lumber, together with all related notes, letters of credit, collateral documents and guarantees and any other related agreements and instruments executed and delivered in connection therewith, in each case, as amended, supplemented, restated, restructured, renewed, extended, refinanced or otherwise modified, in whole or in part, from time to time. "DEED OF TRUST" means the Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993, from Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit of the Collateral Agent named therein, as the same has been or may be amended, supplemented or otherwise modified from time to time. "DEFAULT" means any event which is, or after notice or passage of time or both would be, an Event of Default as specified in Section 6.01. "DEFINITIVE SECURITIES" means Securities that are in the form of the Securities attached hereto as Exhibit A that do not include the paragraph or schedule called for by footnotes 1 and 5 thereof. "DEPOSITORY" means, with respect to the Global Securities, the person specified in Section 2.03 as the Depository with respect to the Global Securities, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture and, thereafter, "Depository" shall mean or include such successor. "EBITDA" of the Company means, for any period, the sum for such period of Consolidated Net Income (excluding, to the extent included in Consolidated Net Income for such period, any gains (net of applicable taxes) from any sale, transfer or other disposition of any Capital Stock or ownership interests in any Unrestricted Subsidiary to which non-cash proceeds received by a Restricted Subsidiary in respect of a Salmon Creek Distribution have been contributed by a Restricted Subsidiary as contemplated by Section 4.04(d)) plus, to the extent reflected in the income statement for 10 18 such period from which Consolidated Net Income is determined, without duplication, (i) Consolidated Interest Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and depletion expense, (iv) amortization expense (including amortization of deferred financing costs), and (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Indebtedness prior to its stated maturity; (A) in the case of clauses (iii), (iv) and (v) of this definition, of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP for such period, but without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary during such period or to Scotia Pacific so long as any Timber Notes are outstanding, and (B) in the case of clauses (iv) and (v) of this definition, excluding the amounts thereof excluded from the definition of "Consolidated Interest Expense" pursuant to clause (ii) of such definition. "EQUITY OFFERING" means any sale, public or private, of equity securities of any person. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "EXCHANGE OFFER" means the offer that may be made by the Company pursuant to the Registration Rights Agreement to exchange Series A Securities for Series B Securities. "EXEMPT DISTRIBUTIONS" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any of the Pledged Shares other than: (i) any liquidating dividend or other liquidating distribution or other similar extraordinary dividend or distribution; (ii) any dividend or other distribution on Pledged MGI Shares (or on Stock of MGI's permitted successor pursuant to Section 10.13) if the amount of all dividends and other distributions on the Stock of MGI made on or after the Issue Date to and including the date of such dividend or other distribution on such Pledged MGI Shares (other than dividends and distributions to the extent that such dividends or distributions were previously paid or delivered to the Trustee for inclusion in the Collateral, whether by deposit into an Account or otherwise, and other than amounts referred to in clauses (iv), (v) and (vi) below) exceeds 100% of the consolidated net income of MGI plus 100% of the consolidated depletion expense of MGI, each determined in accordance with GAAP, accrued on a cumulative basis subsequent to September 30, 1996; (iii) any dividend or other distribution on any Pledged Kaiser Shares to the extent of the amount, if any, by which all dividends and other distributions on such Pledged Kaiser Shares during the 12-month period ending on and including the date on which such dividend or distribution is paid (other than dividends and distributions to the extent that such 11 19 dividends or distributions were previously paid or delivered to the Trustee for inclusion in the Collateral, whether by deposit into an Account or otherwise, and other than amounts referred to in clauses (iv), (v) and (vi) below) exceeds, on a per share basis, 7.5% of the average of the daily closing prices (or average bid and asked prices if closing prices are not available) of such Kaiser Shares over such consecutive 12-month period; (iv) any Salmon Creek Distribution; (v) any dividend or other distribution consisting of proceeds of any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale; and (vi) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with Sections 10.05(c)(2) or 10.13. Notwithstanding the foregoing, any dividend or other distribution made on any Pledged MGI Shares and received by the Company during any fiscal year shall be an Exempt Distribution if such dividend or distribution, together with all other dividends and other distributions previously so made during such fiscal year (exclusive of amounts referred to in clauses (iv), (v) and (vi) above), does not exceed 120% of the interest that has become payable or is to become payable on the Securities during such year. "EXTRAORDINARY DISTRIBUTION" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any Pledged Shares other than: (i) an Exempt Distribution; (ii) any Salmon Creek Distribution; (iii) any dividend or other distribution consisting of proceeds of any Primary Share Sale by MGI or Kaiser or proceeds of any Pledged Share Sale; and (iv) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with Section 10.05(c)(2) or 10.13. "GAAP" means, at any date, generally accepted accounting principles as in effect on December 31, 1995, and used in the preparation of the Company's consolidated balance sheet at such date and the Company's statements of consolidated income and cash flows for the year then ended. "GLOBAL SECURITY" means a Security that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 5 to the form of the Security attached hereto as Exhibit A. "GUARANTEE" means the guarantee of the Guarantor set forth in Article 12 hereof. "GUARANTOR" See the definition of "MAXXAM". "GUARANTOR'S OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the Guarantor. 12 20 "HOLDER" OR "SECURITYHOLDER" means the person in whose name a Security is registered on the Registrar's books. "INDEBTEDNESS" of any person means, at any date, any of the following (without duplication): (i) the principal amount of all obligations (unconditional or contingent) of such person for borrowed money (whether or not there is recourse to the whole of the assets of such person or only to a portion thereof) and the principal amount of all obligations (unconditional or contingent) of such person evidenced by debentures, notes or other similar instruments (including, without limitation, reimbursement obligations with respect to letters of credit (except to the extent collateralized by cash or Cash Equivalents), performance bonds (except to the extent collateralized by cash or Cash Equivalents) and bankers' acceptances (except to the extent collateralized by cash or Cash Equivalents)); (ii) all obligations of such person to pay the deferred purchase price of property or services, except (A) accounts payable and other current liabilities arising in the ordinary course of business and (B) compensation, pension obligations and other obligations arising from employee benefits and employee arrangements; (iii) Capital Lease Obligations of such person; (iv) all Indebtedness of others secured by a Lien on any asset of such person (other than assets referred to in clause (vi) of Section 4.04(c) and the proceeds of such assets) whether or not such Indebtedness is assumed or guaranteed by such person; (v) all Indebtedness of others guaranteed by such person; and (vi) all Redeemable Stock, valued at the greater of its voluntary or involuntary maximum fixed repurchase price (or its stated liquidation value in the case of Preferred Stock that is not by its terms redeemable) exclusive of accrued and unpaid dividends; and the amounts thereof shall be the outstanding balance of any such unconditional obligations as described in clauses (i) through (v) (other than clause (iv)), and the maximum liability of any such contingent obligations at such date as described in clauses (i) through (v) (other than with respect to clause (iv)) and, in the case of clause (iv), the lesser of the fair value (as determined by the Board of Directors) at such date of any asset subject to any Lien securing the Indebtedness of others and the principal amount of the Indebtedness secured; provided that the Indebtedness of any person shall not include (x) obligations of such person arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business, provided that such obligations are extinguished within two Business Days after their Incurrence and (y) obligations of such person resulting from the endorsement of negotiable instruments in the ordinary course of business. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were 13 21 purchased on any date on which Indebtedness is required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Redeemable Stock, such fair market value shall be determined in good faith by the board of directors of the issuer of such Redeemable Stock. "INDENTURE" means this Indenture as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. "INTERCOMPANY NOTE" means that certain intercompany note in an initial principal amount of $125,000,000, dated as of the Issue Date, payable by MAXXAM to the Company. "INTEREST PAYMENT DEFAULT" means a default in the payment of interest when due and payable on any of the Securities which would constitute an Event of Default if such payment were not made within the applicable cure or grace period pursuant to Section 6.01(1). "INTEREST RATE PROTECTION AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, currency swap agreement or other financial agreement or arrangement designed to protect the Company or any Subsidiary of the Company against fluctuations in interest rates or currency exchange rates, as in effect from time to time. "INVESTMENT" means with respect to any person (such person being referred to in this definition as the "Investor") (without duplication), (i) any amount paid or any property transferred, in each case, directly or indirectly, by the Investor for Capital Stock or Redeemable Stock, partnership interests or other securities of, or as a contribution to the capital of any other person, (ii) any direct or indirect loan or advance by the Investor to any other person other than accounts receivable of the Investor relating to the purchase and sale of property or services arising in the ordinary course of business, and (iii) any direct or indirect guarantee by the Investor of any Indebtedness of any other person. "ISSUE DATE" means December 23, 1996. "KAISER" means Kaiser Aluminum Corporation, a Delaware corporation, and any successor pursuant to a transaction governed by and in accordance with Section 10.05(c)(2) of this Indenture or Section 10.05(c)(2) of the MGI Indenture, as in effect on the date hereof. "KAISER SHARE CASH EQUIVALENTS" means (i) the amount of any Trust Moneys constituting proceeds of any Primary Share Sale by Kaiser or a Pledged Share Sale of Pledged Kaiser Shares or any Extraordinary Distribution on Pledged Kaiser Shares (or the 14 22 proceeds of any non-cash consideration received in any such transaction) that are released from the Lien of the MGI Indenture and thereupon pledged under the Indenture as a result of such Trust Moneys not having been utilized to purchase MGI Notes pursuant to an offer by MGI to purchase MGI Notes at a price at least equal to the respective Call Prices of the MGI Notes or as a result of payment in full of the MGI Notes or defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, divided by (ii) the greater of (A) the Net Proceeds per share received by the Company with respect to Pledged Kaiser Shares released from the Lien of the MGI Indenture in the transaction that resulted in the deposit of such Trust Moneys thereunder and (B) $9.00 (as adjusted to reflect any subdivision, combination or reclassification of Kaiser Shares). To the extent that any of the Net Proceeds referred to in clause (ii)(A) of the preceding sentence are other than cash, the amount of such non-cash Net Proceeds attributable to each Pledged Kaiser Share released from the Lien of the MGI Indenture for purposes of such clause (ii)(A) shall be determined by a nationally recognized investment banking firm selected by the Company based on the fair market value per share of such non-cash Net Proceeds received by the Company in such transaction. As used in this definition, each of the terms Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary Distribution, Trust Moneys, Call Prices and Net Proceeds has the meaning ascribed to such term in the MGI Indenture (as in effect on the date hereof). "KAISER SHARES" means, at any time, the 27,938,250 shares of common stock, par value $.01 per share, of Kaiser owned by the Company, and, as of the Issue Date, pledged under the MGI Indenture, as such shares are (and any number thereof as utilized in this Indenture is) adjusted to reflect any subdivision, combination or reclassification (in a merger or otherwise) of such Kaiser Shares on or after the Issue Date, and any securities or property substituted for such Kaiser Shares pursuant to any Kaiser Transaction (as such term is defined in Section 10.05(c)(2) of the MGI Indenture as in effect on the date hereof) under the MGI Indenture. "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions are not required by applicable law to be open in the States of New York, California, Minnesota and Texas. "LIEN" means, with respect to any asset, any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof) in respect of such asset. "MAKE-WHOLE AMOUNT" with respect to any Security means an amount equal to the excess, if any, of (i) the present value of the remaining interest, premium and principal payments due on such Security if such Security were redeemed on August 1, 2000, computed 15 23 using a discount rate equal to the Treasury Rate plus 75 basis points, over (ii) the outstanding principal amount of such Security. "Treasury Rate" is defined as the yield to maturity at the time of the computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15 (519), which has become publicly available at least two Business Days prior to the date of the redemption notice or, if such Statistical Release is no longer published, any publicly available source of similar market data) most nearly equal to the then remaining maturity of the Security assuming redemption of the Security on August 1, 2000; provided, however, that if the Make-Whole Average Life of such Security is not equal to the constant maturity of the United States Treasury securities for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Make- Whole Average Life of such Security is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "MAKE-WHOLE AVERAGE LIFE" means the number of years (calculated to the nearest one-twelfth) between the date of redemption and August 1, 2000. "MAKE-WHOLE PRICE" with respect to any Security means the greater of (i) the sum of the outstanding principal amount and the Make-Whole Amount of such Security, and (ii) 110% of the outstanding principal amount of such Security. "MAXXAM" OR THE "GUARANTOR" means MAXXAM Inc., a Delaware corporation, and, subject to the provisions of Article 12 hereof, any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "MONEY" or "U.S. LEGAL TENDER" means such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. "MGI" means MAXXAM Group Inc., a Delaware corporation, and any successor Restricted Subsidiary pursuant to a transaction governed by and in accordance with Section 10.13. "MGI INDENTURE" means the Indenture dated as of August 4, 1993, between MGI and Fleet National Bank, as successor to Shawmut Bank, N.A., as trustee, pursuant to which the MGI Notes were issued, as the same has been or may be amended, supplemented or otherwise modified from time to time. A true and correct copy of the MGI Indenture, as amended through the date hereof, has been delivered to the Trustee. 16 24 "MGI NOTES" means the debt securities outstanding pursuant to, and whose terms are governed by, the MGI Indenture. "MPI" means MAXXAM Properties Inc., a Delaware corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "MXM GUARANTY" means the Unconditional Guarantee of Payment and Performance, dated June 17, 1991, to General Electric Capital Corp. by MAXXAM and MGI, as amended by agreements dated as of June 17, 1992 and December 30, 1992, as amended, supplemented or otherwise modified from time to time in a manner that is not materially adverse to Holders. "NET CASH PROCEEDS" means cash payments received (but if received in a currency other than United States dollars, such payments shall not be deemed received until the earliest time at which such currency is converted into United States dollars) by the Company and/or any of its Restricted Subsidiaries (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, or the cash realization of any non-cash proceeds of any Asset Sale, but, in each case, only as and when, and to the extent, received by the Company or any of its Restricted Subsidiaries) from an Asset Sale, in each case and without duplication, net of (i) fees, expenses and other expenditures in connection with such Asset Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness retained, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Asset Sale or (B) associated with such assets and due in connection with such Asset Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Asset Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such assets which are the subject of such Asset Sale, (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in connection with or as a result of such Asset Sale, (v) with respect to any Asset Sale by a Restricted Subsidiary of the Company or any Primary Share Sale, the portion of such cash payments required to be paid to persons holding a minority interest in such Restricted Subsidiary and (vi) if such Asset Sale is a Primary Share Sale by MGI, any of the proceeds of such Primary Share Sale that are distributed by the issuer in such Primary Share Sale to its stockholders; provided, in each such case, such fees, expenses, 17 25 expenditures and other amounts are not payable to an Affiliate of the Company. "NET PROCEEDS" means any property, assets or other consideration of any kind, whether tangible or intangible, received by the Company as a dividend or distribution on any Pledged Shares of proceeds of any Primary Share Sale by, or from any Pledged Share Sale of any of the Pledged Shares of, MGI or Kaiser, in each case and without duplication, net of (i) fees, expenses and other expenditures in connection with such Pledged Share Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness assumed, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Pledged Share Sale or (B) associated with such assets and due in connection with such Pledged Share Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Pledged Share Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such shares which are the subject of such Pledged Share Sale and (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in connection with or as a result of such dividend or distribution or Pledged Share Sale; provided, in each such case, such fees, expenses, expenditures and other amounts are not payable to an Affiliate of the Company; and provided, further, that, if other than cash, Net Proceeds shall have as their value for purposes of this Indenture their fair value as reasonably- determined by the Board of Directors. "NOTICE OF ACCELERATION" means a written notice delivered during the continuance of an Event of Default to the Company by the Trustee or by the Holders of at least 25% in aggregate principal amount of the Securities then outstanding, stating that an Event of Default has occurred and is continuing and that the principal amount of and accrued and unpaid interest, if any, on all of the Securities are due and payable; provided that a Notice of Acceleration shall be deemed to have been delivered and to be effective for all purposes under Article 10 of this Indenture upon the occurrence and during the continuance of an event with respect to the Company specified in Section 6.01(5) or (6). "OBLIGATIONS" means, with respect to the Company, any principal, premium, interest, expenses, fees, indemnifications, reimbursements, damages and other liabilities payable by the Company under the Securities or this Indenture. 18 26 "OFFERING MEMORANDUM" means the final offering memorandum, dated December 17, 1996, relating to the offer and sale of the Securities. "OFFICER" means the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary, an Assistant Secretary, the Controller or an Assistant Controller of the Company or the Guarantor, as the case may be. "OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the Company. "OPINION OF COUNSEL" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, the Guarantor or the Trustee, as the case may be. "PACIFIC LUMBER" means The Pacific Lumber Company, a Delaware corporation, and any successor corporation by way of merger, consolidation or purchase of all or substantially all of its assets. "PACIFIC LUMBER INDENTURE" means the indenture, dated March 23, 1993, between Pacific Lumber and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, pursuant to which the Pacific Lumber Senior Notes were issued, as amended, supplemented or otherwise modified, or, in accordance with and subject to the provisions of Section 4.03(c), restated, restructured, renewed or refinanced in whole or in part from time to time. "PACIFIC LUMBER SENIOR NOTES" means the debt securities outstanding pursuant to, and whose terms are governed by, the Pacific Lumber Indenture. "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "PLEDGED KAISER SHARES" means, at any time, any Kaiser Shares which are included in the Collateral at such time, and any securities or other property substituted for Pledged Kaiser Shares pursuant to Section 10.05(c) included in the Collateral at such time. "PLEDGED MGI SHARES" means, at any time, any shares of Stock of MGI included in the Collateral at such time, and any securities or other property substituted for Pledged MGI Shares pursuant to Section 10.13 included in the Collateral at such time. 19 27 "PLEDGED SHARE SALE" means a sale to any person of Pledged Shares other than (i) a sale in connection with a transaction pursuant to and in accordance with Section 10.13, (ii) a sale in connection with a transaction pursuant to and in accordance with Section 10.05(c)(2) or (iii) a sale of Pledged MGI Shares by the Company or one of its Subsidiaries to any of the Company's Subsidiaries, in which the purchaser becomes a pledgor with respect to such Pledged Shares pursuant to Article 10 hereof. "PLEDGED SHARES" means the Pledged MGI Shares and the Pledged Kaiser Shares. "PREFERRED STOCK" as applied to the Capital Stock or Redeemable Stock of any corporation, means Capital Stock or Redeemable Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock or Redeemable Stock, as the case may be, of any other class of such corporation. "PRIMARY SHARE SALE" means (i) any issuance and sale of Stock by MGI other than to the Company or any of its Subsidiaries (provided, that no issuance of Stock in connection with a transaction pursuant to and in accordance with Section 10.13 shall constitute a Primary Share Sale) and (ii) any issuance and sale of common stock by Kaiser (provided, that no issuance of Stock in connection with a transaction pursuant to and in accordance with Section 10.05(c)(2), or pursuant to or in accordance with Section 10.05(c)(2) of the MGI Indenture as in effect on the date hereof, shall constitute a Primary Share Sale). "PUBLIC EQUITY OFFERING" means an underwritten public offering of common stock of the Company or MGI (or the successor in a transaction with MGI pursuant to Section 10.13) pursuant to an effective registration statement filed pursuant to the Securities Act. "REDEEMABLE STOCK" of any person means any equity security of such person that by its terms is required to be redeemed prior to the final Stated Maturity of all principal of the Securities, or is redeemable at the option of the holder thereof at any time prior to the final Stated Maturity of all principal of the Securities and shall also include, in the case of the Company, all Preferred Stock of the Company's Restricted Subsidiaries. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, dated as of the date hereof, by and among the Company and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time. 20 28 "RELEASED KAISER SHARES" means (i) all or any portion of the Kaiser Shares transferred to the Company by MAXXAM as of the Issue Date (as such shares are (and any number thereof as utilized in this indenture is) adjusted to reflect any subdivision, combination or reclassification (in a merger or otherwise) of such Kaiser Shares on or after the Issue Date) that are released after the Issue Date from the Lien of the MGI Indenture as a result of (a) payment in full of the MGI Notes, (b) defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, or (c) early retirement of a portion of the MGI Notes resulting in a release of some of the Kaiser Shares from the Lien of the MGI Indenture pursuant to Section 10.05(c)(1) thereof (as in effect on the date hereof); and (ii) all or any portion of any securities or other property substituted for Kaiser Shares under the MGI Indenture pursuant to Section 10.05(c)(2) thereof (as in effect on the date hereof) that are released from the Lien of the MGI Indenture as the result of an occurrence referred to in clause (a), (b) or (c) of the preceding clause (i); provided, however, that Kaiser Shares and other collateral released from the Lien of the MGI Indenture pledged to secure Indebtedness that refinances the MGI Notes (as permitted by Section 4.05(b)) shall not be deemed to be Released Kaiser Shares. "RESTRICTED INVESTMENT" means any Investment in an Affiliate (other than any Unrestricted Subsidiary referred to in Section 4.04(d)) of the Company, except for (i) the Intercompany Note and (ii) the Company's ownership of Kaiser Shares or any other asset that is included in the Collateral under the Indenture or the collateral under the MGI Indenture. "RESTRICTED SUBSIDIARY" means, as of any determination date, each of the Subsidiaries of the Company which is not as of such determination date an Unrestricted Subsidiary of the Company. "SALMON CREEK" means Salmon Creek Corporation, a Delaware corporation, or any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise, which holds the Salmon Creek Property on the date of this Indenture but which may not acquire any other assets (other than assets incidental to the operation, disposition, management and maintenance of the Salmon Creek Property or assets received (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property), except in exchange for or out of the proceeds of the sale or disposition of the Salmon Creek Property. "SALMON CREEK DISTRIBUTION" means a dividend or other distribution identified as a "Salmon Creek Distribution" by the 21 29 Company in writing to the Trustee at the time of such dividend or other distribution. "SALMON CREEK PROPERTY" means any of the property described on Exhibit C to this Indenture or any assets or Stock, in each case, held by Salmon Creek. "SCOTIA PACIFIC" means Scotia Pacific Holding Company, a Delaware corporation, and any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise. "SCOTIA PACIFIC AGREEMENTS" means any agreements between Scotia Pacific and Pacific Lumber or any Subsidiary of Pacific Lumber as the same may be amended after the date hereof in accordance with the terms thereof, including, without limitation, the Master Purchase Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Additional Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Environmental Indemnification Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, and the Reciprocal Rights Agreement, dated as of March 18, 1993, among Scotia Pacific, Pacific Lumber and Salmon Creek. "SEC" means the Securities and Exchange Commission or any successor regulatory agency thereto. "SECURITIES" means the Series A Securities and the Series B Securities, issued, authenticated and delivered pursuant to this Indenture, as amended, restated, restructured, renewed, extended, or otherwise modified, in whole or in part, from time to time. "SECURITIES ACT" means the Securities Act of 1933, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "SECURITIES CUSTODIAN" means the Trustee, as custodian with respect to the Global Securities, or any successor entity thereto. "SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the Company which at the time of determination had, or any group of Restricted Subsidiaries which, if merged into each other at the time of determination, would at the time of determination have had, (i) assets which, as of the date of the Company's most recent quarterly consolidated balance sheet, constituted at least 10% of the Company's total assets on a consolidated basis as of such date, (ii) revenues for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total revenues on 22 30 a consolidated basis for such period, or (iii) EBITDA for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total EBITDA on a consolidated basis for such period (it being understood that for the purposes of clause (iii) of this definition, EBITDA of any Restricted Subsidiary or group of Restricted Subsidiaries of the Company for any period shall be that portion of the Company's total EBITDA attributable to such Restricted Subsidiary or group of Restricted Subsidiaries during such period). "STATED MATURITY", when used with respect to the payment of any principal of, or accrued interest on, any Security, means the date specified in such Security as the fixed date on which such principal of or accrued interest on such Security is due and payable, as the case may be. "STOCK" of any person means, collectively, the Capital Stock and the Redeemable Stock of such person. "SUBSIDIARY" means, with respect to any person, (i) any corporation of which more than 50% of the outstanding Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of the corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries of such person, or by such person and one or more other Subsidiaries of such person, or (ii) any other entity of which more than 50% of the outstanding equity ownership interests are at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries of such person, or by such person and one or more other Subsidiaries of such person. Notwithstanding the foregoing, neither Kaiser nor any Subsidiary of Kaiser shall be deemed a Subsidiary of the Company for any purpose under this Indenture unless ownership by the Company of more than 50% of the outstanding Capital Stock of Kaiser resulted from the acquisition (other than in connection with a Kaiser Transaction, a dividend or distribution on Capital Stock of Kaiser, a reclassification of shares of Capital Stock of Kaiser or any other transaction in which the Company or any Restricted Subsidiary of the Company receives Capital Stock or other securities of Kaiser in exchange for or in respect of other shares of Capital Stock or securities of Kaiser) by the Company of Kaiser Capital Stock after the Issue Date. "TAKING" means any sale, transfer or other disposition of all or any part of the assets of the Company and its Restricted Subsidiaries that occurs by reason of condemnation or eminent domain or other similar proceedings exercised by, or by consensual transfer by the Company or its Restricted Subsidiaries of assets 23 31 to, the United States of America or any State, municipality, agency or other governmental authority thereof. "TAX SHARING AGREEMENTS" means (i) the tax allocation agreement, dated May 21, 1988, by and among MAXXAM, Pacific Lumber and certain other subsidiaries of MAXXAM and MGI, as amended by the tax allocation agreement, dated as of March 23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek, and as further amended by the tax allocation agreement, dated as of August 4, 1993, by and between MAXXAM and MGI, (ii) the tax allocation agreement, dated as of July 3, 1990, by and between MAXXAM and Britt and (iii) the tax allocation agreement, dated as of the Issue Date, by and between MAXXAM and the Company; each as amended, supplemented or otherwise modified from time to time. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa through 77bbbb) as in effect on the date of this Indenture, except as otherwise expressly provided herein. "TIMBER NOTE INDENTURE" means the indenture, dated as of March 23, 1993, between Scotia Pacific and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, pursuant to which the Timber Notes were issued, as amended, supplemented or otherwise modified from time to time. "TIMBER NOTES" means the 7.95% Timber Collateralized Notes due 2015, issued by Scotia Pacific, as amended, supplemented or otherwise modified, in whole or in part, from time to time in accordance with the terms of the Timber Note Indenture. "TRANSFER RESTRICTED SECURITIES" means securities that bear or are required to bear the legend set forth in Section 2.06. "TRUST OFFICER" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "TRUSTEE" means the party named as such in this Indenture until a successor replaces it in accordance with the terms of this Indenture and, thereafter, means the successor. "UNIFORM COMMERCIAL CODE" means the New York Uniform Commercial Code as in effect from time to time, except with respect to matters concerning the validity and perfection of security interests of the Trustee in favor of the Holders in the Accounts, in which case such term shall mean the Minnesota Uniform Commercial Code as in effect from time to time. "UNRESTRICTED INVESTMENTS OUTSTANDING" means, at any time of determination, in respect of any Unrestricted Subsidiary, the difference between (i) the sum of all Unrestricted Investments theretofore made by the Company or any Restricted Subsidiary in 24 32 such Unrestricted Subsidiary after the date of this Indenture, minus (ii) the amount of all dividends and distributions paid to the Company or a Restricted Subsidiary (to the extent that the Company does not elect to include the amount of such dividends and distributions in the computation of Consolidated Net Income pursuant to the parenthetical of clause (iii) of the definition thereof at the time of determination) and all repayments of the principal amount of loans or advances by such Unrestricted Subsidiary to the Company or any of its Restricted Subsidiaries during the period that such person was an Unrestricted Subsidiary and any other reduction of Unrestricted Investments in such Unrestricted Subsidiary during the period that such person was an Unrestricted Subsidiary (the amount of any Unrestricted Investment returned or reduced, if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee); provided that the amount of Unrestricted Investments Outstanding in respect of any Unrestricted Subsidiary shall at no time be a negative amount. "UNRESTRICTED SUBSIDIARY" means (i) each of the Subsidiaries of the Company so designated by a resolution adopted by the Company's Board of Directors and whose creditors have no direct or indirect recourse (including, but not limited to, recourse with respect to the payment of principal or interest on Indebtedness of such Subsidiary) to the Company or a Restricted Subsidiary (except to the extent such recourse arises (A) solely by operation of law and not pursuant to a contractual or other consensual arrangement or (B) pursuant to an Investment or a Restricted Investment permitted by this Indenture), (ii) any joint venture, partnership or other person (other than a Subsidiary of the Company, Kaiser or a Subsidiary of Kaiser) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and (except for any Unrestricted Subsidiary referred to in Section 4.04(d)) in which no Affiliate of the Company has a direct or an indirect equity ownership interest in excess of 5% therein other than by virtue of the direct or indirect equity ownership interest in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries and (iii) Salmon Creek. The Board of Directors may designate an Unrestricted Subsidiary to be a Restricted Subsidiary, provided, that any such redesignation shall be deemed to be an Incurrence by the Company and its Restricted Subsidiaries of the Indebtedness (if any) of such redesignated Restricted Subsidiary for purposes of Section 4.03 as of the date of such redesignation to the extent that such Indebtedness does not already constitute Indebtedness of the Company or one or more of its Restricted Subsidiaries. Subject to the foregoing, the Board of Directors of the Company also may designate any Restricted Subsidiary (other than Scotia Pacific so long as there are any Timber Notes outstand- 25 33 ing) to be an Unrestricted Subsidiary, provided, that (x) the amount of any outstanding Investments by the Company and its Restricted Subsidiaries in such Restricted Subsidiary shall be deemed to be Unrestricted Investments Outstanding at the time of such designation and (y) immediately after giving effect to such designation and to the characterization of the Investments by the Company and its Restricted Subsidiaries in such newly designated Unrestricted Subsidiary, the Company and its remaining Restricted Subsidiaries could make at least $1.00 of additional Restricted Payments or Unrestricted Investments pursuant to Section 4.04. "U.S. GOVERNMENTAL OBLIGATIONS" means any evidence of obligations issued directly or fully guaranteed or insured by the United States of America or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "U.S. LEGAL TENDER" See the definition of "money." "VOTING STOCK" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled to vote in the election of directors. "WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary (i) which is a corporation of which all of the outstanding shares of Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the Company (except for director's qualifying shares), or (ii) which is any other entity of which all of the outstanding equity ownership interests are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the Company. SECTION 1.02. OTHER DEFINITIONS. "Accounts" . . . . . . . . . . . . . . . . . . . . . . . 10.03(a) "Adjustment Period" . . . . . . . . . . . . . . . . . . . 4.08(b) "Aggregate Redemption Price" . . . . . . . . . . . . . . 10.05(g) "Asset Sale Offer" . . . . . . . . . . . . . . . . . . . 4.07(c) "Asset Sale Offer Amount" . . . . . . . . . . . . . . . . 4.07(b) "Asset Sale Offer Notice" . . . . . . . . . . . . . . . . 4.07(d) "Asset Sale Purchase Date" . . . . . . . . . . . . . . . 4.07(d) "Asset Sale Purchase Notice" . . . . . . . . . . . . . . 4.07(e) "Asset Sale Purchase Price" . . . . . . . . . . . . . . . 4.07(c) "Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . 6.01
26 34 "Cash Collateral Account" . . . . . . . . . . . . . . . . 10.03(a) "Cash Collateral Default Account" . . . . . . . . . . . . 10.03(a) "Cash Collateral Offer Account" . . . . . . . . . . . . . 10.03(a) "Cash Collateral Public Equity Offering Account" . . . . 10.03(a) "Change of Control Offer Notice" . . . . . . . . . . . . 4.09(b) "Change of Control Purchase Date" . . . . . . . . . . . . 4.09(a) "Change of Control Purchase Notice" . . . . . . . . . . . 4.09(c) "Change of Control Purchase Price" . . . . . . . . . . . 4.09(a) "Collateralized Cash Proceeds Offer" . . . . . . . . . . 10.05(f) "Collateralized Cash Proceeds Offer Amount" . . . . . . . 10.05(f) "Collateralized Cash Proceeds Offer Notice" . . . . . . . 10.05(f) "Collateralized Cash Proceeds Purchase Date" . . . . . . 10.05(f) "Collateralized Cash Proceeds Purchase Notice" . . . . . 10.05(f) "Collateralized Cash Proceeds Purchase Price" . . . . . . 10.05(f) "Company Party" . . . . . . . . . . . . . . . . . . . . . 4.08(a) "Continuing Directors" . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Change of Control") "covenant defeasance option" . . . . . . . . . . . . . . 8.01(b) "Custodian" . . . . . . . . . . . . . . . . . . . . . . . 6.01 "Dividend Encumbrances" . . . . . . . . . . . . . . . . . 4.17 "DTC" . . . . . . . . . . . . . . . . . . . . . . . . 2.03 "Event of Default" . . . . . . . . . . . . . . . . . . . 6.01 "GAAP Net Income" . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Consolidated Net Income") "Headwaters Joint Venture . . . . . . . . . . . . . . . . 4.08(b) "Incur" (and the terms "Incurred" and "Incurrence" have correlative meanings) . . . . . . . . . . . 4.03(a) "Initial Salmon Creek Agreement . . . . . . . . . . . . . 4.08(b) "Investor" . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Investment") "Kaiser Transaction" . . . . . . . . . . . . . . . . . . 10.05(c) "legal defeasance option" . . . . . . . . . . . . . . . . 8.01(b) "maximum fixed repurchase price" . . . . . . . . . . . . 1.01 (within the definition of "Indebtedness") "MGI Asset Sale" . . . . . . . . . . . . . . . . . . . . 4.07(b) "MGI Refinancing Indebtedness" . . . . . . . . . . . . . 4.05(b) "Monetization" . . . . . . . . . . . . . . . . . . . . . 10.05(b)
27 35 "Moody's" . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Cash Equivalents") "Non-Cash Amount . . . . . . . . . . . . . . . . . . . . "10.05(f) "Paying Agent" . . . . . . . . . . . . . . . . . . . . . 2.03 "PL Asset Sale" . . . . . . . . . . . . . . . . . . . . . 4.07(b) "PPI Index" . . . . . . . . . . . . . . . . . . . . . . . 4.08(b) "Principals" . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Change of Control") "Recipient Restricted Subsidiary" . . . . . . . . . . . . 1.01 (within the definition of "Consolidated Net Income") "refinance" (and the terms "refinancing" and "refinanced" have correlative meanings) . . . . 4.03(c) "Refinancing Indebtedness" . . . . . . . . . . . . . . . 4.03(c) "Registrar" . . . . . . . . . . . . . . . . . . . . . . . 2.03 "Repurchase" . . . . . . . . . . . . . . . . . . . . . . 4.04(a) "Restricted Payment" . . . . . . . . . . . . . . . . . . 4.04(a) "S&P" . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Cash Equivalents") "Series A Securities" . . . . . . . . . . . . . . . . . . Introduction "Series B Securities" . . . . . . . . . . . . . . . . . . Introduction "Transaction Date" . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Consolidated Cash Flow Coverage Ratio") "Treasury Rate" . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Make-Whole Amount") "Trust Moneys" . . . . . . . . . . . . . . . . . . . . . 10.03(a) "Unrestricted Investment" . . . . . . . . . . . . . . . . 4.04(a)
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this 28 36 Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. Except as expressly provided herein, all other terms used in this Indenture that are defined by the TIA, or that are, by reference in the TIA, defined in the Securities Act, shall have the meaning assigned to such terms in the TIA and in the Securities Act, as the case may be, as they were in effect as of the date of this Indenture. SECTION 1.04. RULES OF CONSTRUCTION. For purposes of the Securities and this Indenture (except as otherwise expressly provided herein or unless the context otherwise requires): a term has the meaning assigned to it; (1) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (2) "or" is not exclusive; (3) "including" means including, without limitation; (4) words in the singular include the plural and words in the plural include the singular; (5) unsecured indebtedness shall not be deemed to rank subordinate or junior in right or priority of payment to secured indebtedness merely because it is unsecured indebtedness; and (6) the principal amount of any noninterest bearing security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP and accretion of principal on such security shall not be deemed to be the Incurrence of Indebtedness. 29 37 ARTICLE 2 THE SECURITIES SECTION 2.01. FORM AND DATING. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Securities shall be issued in registered form and may have notations, legends or endorsements as the Company may deem appropriate and as not inconsistent with the provisions of this Indenture, or as may be required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. The Securities shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Securities issued in global form shall be substantially in the form of Exhibit A attached hereto (including the text referred to in footnotes 1 and 3 thereto). Securities issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without including the text referred to in footnotes 1 and 3 thereto). Each Global Security shall represent such of the outstanding Securities as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee or the Securities Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. 30 38 SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the Securities for the Company by manual or facsimile signature. Two Officers of MAXXAM shall sign the Securities for the Guarantor by manual or facsimile signature. If an Officer of the Company or MAXXAM whose signature is on a Security no longer holds that office at the time a Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers, authenticate Securities for original issue up to the aggregate principal amount stated in paragraph 4 of the Securities. The aggregate principal amount of Securities outstanding at any time may not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate or Subsidiary of the Company. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Securities may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depository with respect to the Global Securities. 31 39 The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Securities Custodian with respect to the Global Securities. The Trustee is authorized to enter into a letter of representations with DTC in the form provided to the Trustee by the Company and to act in accordance with such letter. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or interest on the Securities, and will notify the Trustee of any default by the Company in making any such payment; provided, however, that any money earned on funds invested by the Trustee or any Paying Agent shall be remitted to the Company. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Securities. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee, at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Securities and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented by a Holder to the Registrar with a request: (x) to register the transfer of the Definitive Securities; or 32 40 (y) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Securities presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing; and (ii) in the case of a Definitive Security that is a Transfer Restricted Security, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); or (B) if such Transfer Restricted Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); or (C) if such Transfer Restricted Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from such Holder (in 33 41 substantially the form of Exhibit B hereto) and an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. (b) Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Registrar of a Definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (i) if such Definitive Security is a Transfer Restricted Security, a certification from the Holder thereof (in substantially the form of Exhibit B hereto) to the effect that such Definitive Security is being transferred by such Holder to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act; and (ii) whether or not such Definitive Security is a Transfer Restricted Security, written instructions from the Holder thereof directing the Registrar to make, or to direct the Securities Custodian to make, an endorsement on the Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, in which case the Registrar shall cancel such Definitive Security in accordance with Section 2.11 hereof and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian, the aggregate principal amount of Securities represented by the Global Security to be increased accordingly. If no Global Securities are then outstanding, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate a new Global Security in the appropriate principal amount. (c) Transfer and Exchange of Global Securities. The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture and the procedures of the Depository therefor, 34 42 which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (d) Transfer of a Beneficial Interest in a Global Security for a Definitive Security. (i) Any Person having a beneficial interest in a Global Security may upon request exchange such beneficial interest for a Definitive Security. Upon receipt by the Registrar of written instructions or such other form of instructions as is customary for the Depository, from the Depository or its nominee on behalf of any person having a beneficial interest in a Global Security, and, in the case of a Transfer Restricted Security, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depository as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B hereto); or (B) if such beneficial interest is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B hereto); or (C) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B hereto) and an Opinion of Counsel from the transferee or transferor reasonably 35 43 acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the Securities Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian, cause the aggregate principal amount of Global Securities to be reduced accordingly and, following such reduction, the Company shall execute and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver to the transferee a Definitive Security in the appropriate principal amount. (ii) Definitive Securities issued in exchange for a beneficial interest in a Global Security pursuant to this Section 2.06(d) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the Persons in whose names such Securities are so registered. (e) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Security may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (f) Authentication of Definitive Securities in Absence of Depository. If at any time: (i) the Depository for the Securities notifies the Company that the Depository is unwilling or unable to continue as Depository for the Global Securities and a successor Depository for the Global Securities is not appointed by the Company within 90 days after delivery of such notice; or 36 44 (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Securities under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02 hereof, authenticate and deliver, Definitive Securities in an aggregate principal amount equal to the principal amount of the Global Securities in exchange for such Global Securities. (g) Legends. (i) Except as permitted by the following paragraphs (ii) and (iii), each Security certificate evidencing Global Securities or Definitive Securities (and all Securities issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUER SO REQUESTS), 37 45 (ii) TO THE COMPANY OR (iii) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) in the case of any Transfer Restricted Security represented by a Global Security, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(c) hereof; provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Security for a Definitive Security that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B hereto). (iii) Notwithstanding the foregoing, upon consummation of the Exchange Offer, the 38 46 Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate Series B Securities in exchange for Series A Securities accepted for exchange in the Exchange Offer, which Series B Securities shall not bear the legend set forth in (i) above, and the Registrar shall rescind any restriction on the transfer of such Securities, in each case unless the Holder of such Series A Securities is either (A) a broker-dealer, (B) a Person participating in the distribution of the Series A Securities or (C) a Person who is an affiliate (as defined in Rule 144A) of the Company. (h) Cancellation and/or Adjustment of Global Securities. At such time as all beneficial interests in Global Securities have been exchanged for Definitive Securities, redeemed, repurchased or cancelled, all Global Securities shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, redeemed, repurchased or cancelled, the principal amount of Securities represented by such Global Security shall be reduced accordingly and an endorsement shall be made on such Global Security, by the Trustee or the Securities Custodian, at the direction of the Trustee, to reflect such reduction. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Definitive Securities and Global Securities at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Paragraph 7 of the Securities or Section 4.07, 4.09, 10.05(f) and 9.05 hereof). 39 47 (iii) All Definitive Securities and Global Securities issued upon any registration of transfer or exchange of Definitive Securities or Global Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Definitive Securities or Global Securities surrendered upon such registration of transfer or exchange. (iv) Neither the Company nor the Registrar shall be required: (A) to issue, to register the transfer of or to exchange Securities for a period of 15 days before the mailing of a notice of redemption of Securities selected for redemption; or (B) to register the transfer of or to exchange any Security selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part; or (C) to register the transfer of or to exchange a Security between a record date and the next succeeding interest payment date. (v) Prior to due presentment for the registration of a transfer of any Security, the Trustee, any Agent, the Company and MAXXAM may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Securities, and neither the Trustee, any Agent, the Company nor MAXXAM shall be affected by notice to the contrary. (vi) The Trustee shall authenticate Definitive Securities and Global Securities in accordance with the provisions of Section 2.02 hereof. 40 48 SECTION 2.07. REPLACEMENT SECURITIES. If any mutilated Security is surrendered to the Trustee, or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Security is replaced. The Company may charge for its expenses in replacing a Security. Every replacement Security is an additional obligation of the Company (guaranteed by MAXXAM) and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. SECTION 2.08. OUTSTANDING SECURITIES. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the interest in a Global Security effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Securities payable on that date, then on and after that date such Securities shall be deemed to be no longer outstanding and shall cease to accrue interest. SECTION 2.09. TREASURY SECURITIES. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, or by any 41 49 person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that a Trustee knows are so owned shall be so disregarded. SECTION 2.10. TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities upon a written order of the Company signed by two Officers of the Company. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Holders of temporary Securities shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Securities (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all cancelled Securities shall be delivered to the Company. The Company may not issue new Securities to replace Securities that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Securities and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Security and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date, provided that no such special record date shall be less than 10 days prior to the related payment date for 42 50 such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13. CUSIP NUMBERS. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and the Trustee shall use CUSIP numbers in notices of redemption or exchange as a convenience to Holders upon written order of the Company signed by two Officers; provided, that any such notice shall state that neither the Trustee nor the Company makes any representation as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption or exchange shall not be affected by any defect in or omission of such numbers. ARTICLE 3 REDEMPTION SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date and the aggregate principal amount of Securities to be redeemed. The Company shall give each notice to the Trustee provided for in this Section 3.01 at least 45 days before the redemption date (unless a shorter notice period shall be satisfactory to the Trustee). If less than all the Securities are to be redeemed, the record date relating to such redemption shall be selected by the Company and given to the Trustee. SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed such that the redemption is effected on a pro rata basis. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal amount of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects for redemption shall be in denominations of $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee in redeeming Securities may use any method it considers fair and equitable to round up or down so that the amount of any Securities redeemed shall be in denominations of $1,000 or integral multiples thereof. If at the time of any such 43 51 selection, the Trustee is not then the Registrar, the Trustee may direct the Registrar to make the selection in accordance with this Section 3.02. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days (or 30 days if legally required by DTC) but not more than 60 days before a date fixed for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's last address as it shall appear upon the register of the Securities maintained by the Company, but any defect therein or failure of the addressee to receive such notice shall not affect the validity of the proceedings for the redemption of any of the Securities. Any failure to give such notice to the Holder of any Securities shall not affect the validity of the proceedings for the redemption of any other Security. The notice shall identify the Securities to be redeemed (including CUSIP numbers if used) and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment, interest on Securities called for redemption ceases to accrue on and after the redemption date and the only remaining right of the Holders is to receive payment of the redemption price and accrued and unpaid interest thereon to (but not including) the redemption date, if applicable, upon surrender to the Paying Agent of such Securities; and (7) the paragraph of the Securities and the section of this Indenture pursuant to which the Securities are to be redeemed. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the 44 52 information required by clauses (1) through (3) at least 60 days prior to any such redemption date (unless a shorter notice period shall be satisfactory to the Trustee). SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price thereof stated in the notice. Upon surrender to the Paying Agent, each such Security shall be paid at the applicable redemption price thereof stated in the notice, plus accrued and unpaid interest thereon, if any, to (but not including) the redemption date. Unless the Company defaults in making the redemption payment, interest on the Securities called for redemption ceases to accrue on and after the redemption date (regardless of whether the Securities have been timely surrendered), and the only remaining right of the Holders thereof shall be to receive payment of the redemption price thereof, plus accrued and unpaid interest thereon to (but not including) such redemption date, if applicable, upon surrender to the Paying Agent of such Securities. If the date fixed for redemption is an interest payment date, the redemption payment shall not include accrued interest which shall be paid in the usual manner otherwise provided for herein. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 11:00 A.M., New York City time, on the redemption date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust as provided in Section 2.04) money sufficient to pay the redemption price of, and accrued interest, if any, on, all Securities to be redeemed on that date other than Securities or portions thereof called for redemption on that date which have been delivered by the Company to the Trustee for cancellation. All money earned on funds held in trust by the Trustee or any Paying Agent shall be remitted to the Company. SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof (at the Company's expense) a new Security equal in principal amount at maturity in authorized denominations to the unredeemed portion of the Security surrendered. SECTION 3.07. CANCELLATION OF REDEEMED SECURITIES. All Securities surrendered to the Trustee, upon redemption pursuant to the provisions of this Article 3, shall be forthwith cancelled by it. SECTION 3.08. NO REPURCHASE RESTRICTIONS. Except as expressly provided in Article 10, nothing contained in this Indenture or in the Securities shall be deemed to prohibit or in any way restrict the Company, any Subsidiary or any Affiliate from 45 53 purchasing or otherwise acquiring any Security or interest therein at any price or for any consideration whether higher or lower than the redemption price, in a transaction not effected pursuant to this Article 3. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly pay the principal of and accrued interest, if any, on the Securities on the dates and in the manner provided in the Securities and in this Indenture. The principal of Securities and accrued interest, if any, shall be considered paid on the date due to the extent that on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay the principal of the Securities and accrued interest, if any, then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal of the Securities at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest to the extent permitted by applicable law calculated at the same rate as the rate at which the interest that is in default was calculated. SECTION 4.02. SEC REPORTS. Whether or not the Company and MAXXAM are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, each of the Company and MAXXAM shall file with the SEC (unless the SEC will not accept the same for filing) and the Trustee within fifteen days after it is or would have been required to file the same with the SEC, copies of such annual reports and such information, documents and other reports as it is required to file pursuant to, or would be required to file if it were subject to the requirements of, Section 13 or 15(d) of the Exchange Act. In addition, the Company and MAXXAM shall, for so long as any Securities are outstanding, furnish to the Holders and to securities analysts and prospective investors, upon request, the information required to be delivered pursuant to Rule 144 A(d)(4) under the Securities Act. The Company also shall comply with the provisions of TIA Section 314(a). SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or become liable with respect to, contingently or otherwise (collectively, "INCUR"), any Indebtedness (including, without duplication, guarantees of Indebtedness by the 46 54 Company and/or its Restricted Subsidiaries), except that the Company and/or its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur Indebtedness (including, without duplication, guarantees of Indebtedness by the Company and/or its Restricted Subsidiaries) if, immediately after giving effect thereto and the receipt and application of the proceeds thereof, the Consolidated Cash Flow Coverage Ratio of the Company would exceed 2.0 to 1. (b) Notwithstanding the provisions of Section 4.03(a), the Company and/or its Restricted Subsidiaries (other than, except in the case of clauses (xi) and (xii) of Section 4.03(b), Scotia Pacific so long as there are any Timber Notes outstanding) may Incur (without duplication) the following: (i) Indebtedness in respect of the Securities; (ii) aggregate Indebtedness under the Credit Agreement in an amount not to exceed at any time outstanding $40,000,000; (iii) Indebtedness outstanding on the Issue Date, including the indebtedness outstanding pursuant to the MGI Indenture or the Pacific Lumber Indenture (other than the Timber Notes which are governed by clause (xi) of this Section 4.03(b)); (iv) Indebtedness in connection with one or more letters of credit issued pursuant to (A) self-insurance obligations (other than workmen's compensation obligations), the aggregate face or stated amount of which, together with the aggregate amount of any related reimbursement obligations (without duplication) does not exceed $1,000,000 at any time outstanding, and (B) workmen's compensation obligations; (v) Indebtedness owed by the Company to a Restricted Subsidiary or owed by a Restricted Subsidiary to the Company or to any other Restricted Subsidiary of the Company; (vi) Capital Lease Obligations (other than Capital Lease Obligations permitted by clause (xii) of this Section 4.03(b)) not exceeding in the aggregate $10,000,000 at any time outstanding; (vii) Indebtedness under any Interest Rate Protection Agreement to the extent that such Interest Rate Protection Agreement is related to payment obligations on Indebtedness otherwise permitted under this Section 4.03; 47 55 (viii) Indebtedness Incurred in connection with Indebtedness the interest on which is exempt from Federal income tax under the Code in an aggregate amount not exceeding $10,000,000 at any time outstanding; (ix) Indebtedness owed to or guaranteed by any governmental agency, instrumentality or other authority Incurred to provide relief from natural disasters or other similar assistance; (x) Indebtedness Incurred after August 4, 1993 (in addition to (and without duplication of) Indebtedness otherwise permitted by this Section 4.03), in an aggregate principal amount not exceeding $25,000,000 at any one time outstanding in the case of Indebtedness Incurred by Pacific Lumber and its Subsidiaries that are Restricted Subsidiaries, $15,000,000 at any one time outstanding in the case of Indebtedness Incurred by MGI and its Restricted Subsidiaries other than Pacific Lumber and its Subsidiaries that are Restricted Subsidiaries, and $7,500,000 at any one time outstanding in the case of Indebtedness Incurred by the Company; (xi) Indebtedness of Scotia Pacific under the Timber Notes or the Timber Note Indenture or in respect of the Scotia Pacific Agreements or any other agreement entered into in connection with the Timber Notes, as the same may be amended from time to time in accordance with Section 4.11; and (xii) Capital Lease Obligations of Scotia Pacific. (c) Notwithstanding anything to the contrary in Section 4.03(a) or (b), the Company and its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur Indebtedness all of the net proceeds of which (after premiums, reasonable fees, expenses and costs related to the Incurrence of such Indebtedness) are applied to renew, extend, restructure, restate, refund or otherwise refinance, in whole or in part (collectively, "REFINANCE") the Indebtedness permitted by paragraphs (a) or (b)(i) and (b)(iii) of this Section 4.03 or any one or more successive refinancings thereof (collectively, "REFINANCING INDEBTEDNESS"), provided that: (i) such Refinancing Indebtedness is in an aggregate amount not exceeding the aggregate amount outstanding of the Indebtedness being so refinanced plus an amount equal to the premiums, reasonable fees and expenses incurred in connection with such refinancing; (ii) with respect to Refinancing Indebtedness which refinances Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities, (A) the final stated maturity date of such Refinancing Indebtedness shall not be earlier than the final stated maturity date of the 48 56 Indebtedness being so refinanced, (B) in the case of such Refinancing Indebtedness Incurred by the Company, such Refinancing Indebtedness is ranked (pursuant to its terms) subordinate in right and priority of payment to the Securities to the same extent as the Indebtedness being so refinanced, and (C) such Refinancing Indebtedness has an Average Life at the time it is Incurred which is not less than the remaining Average Life of the Indebtedness being so refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing Indebtedness to refinance Indebtedness of the Company pursuant to this paragraph (c) of Section 4.03 except to the extent that such Refinancing Indebtedness constitutes a guarantee by such Restricted Subsidiary of Indebtedness of the Company (it being understood that such Restricted Subsidiary may incur Indebtedness to refinance Indebtedness of the Company to the extent that the Incurrence of such Indebtedness is otherwise permitted by paragraph (a) or (b) of this Section 4.03). (d) Any revocation of the designation of an Unrestricted Subsidiary shall be deemed for purposes of this Section 4.03 to be an Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of the Indebtedness of such Unrestricted Subsidiary as of the time of such revocation to the extent such Indebtedness does not already constitute Indebtedness of the Company or one of its Restricted Subsidiaries. (e) Notwithstanding anything to the contrary in Section 4.03(a), (b) or (c), so long as Britt remains a Restricted Subsidiary, Britt may not Incur after the Issue Date Indebtedness (other than Indebtedness in respect of the Securities, the MGI Notes and Indebtedness owed to the Company or MGI and Refinancing Indebtedness in respect of the foregoing) in an aggregate principal amount exceeding $5,000,000 at any time outstanding. SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to: (i)(x) declare or pay any dividend or make any distribution on the Company's Capital Stock or the Company's Redeemable Stock (other than (A) in either case, dividends or distributions payable in Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness of the Company and (B) in the case of the Company's Redeemable Stock, dividends and distributions in an amount not exceeding (in addition to any dividends or distributions declared or paid in accordance with clause (A) above) the amount stated to be payable on such Redeemable Stock pursuant to the provisions thereof) or (y) purchase, redeem or otherwise acquire or retire for value any Capital Stock or Redeemable Stock of the Company (each of the foregoing in clauses (x) and (y), a "RESTRICTED PAYMENT"), 49 57 (ii) make any Restricted Investment, (iii) make any Investment in an Unrestricted Subsidiary (an "UNRESTRICTED INVESTMENT"), or (iv) redeem, repurchase, defease or otherwise acquire or retire for value (a "REPURCHASE"), prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities and which was scheduled to mature subsequent to the final Stated Maturity of all principal of the Securities (other than acquisitions of such Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such acquisition), if, at the time of such Restricted Payment, Restricted Investment, Unrestricted Investment, or Repurchase: (A) a Default shall have occurred and be continuing; or (B) after giving effect to such Restricted Payment, Unrestricted Investment, Repurchase or Restricted Investment by the Company or any Restricted Subsidiary, the aggregate amount (i) expended for all such Restricted Payments and Repurchases subsequent to the Issue Date, (ii) of all Restricted Investments then outstanding (the amount expended for such Restricted Payments, Repurchases and Restricted Investments subsequent to the Issue Date, the amount of any Restricted Investments outstanding at any time, and the amount of any Restricted Investments returned or reduced, in each case, if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee), and (iii) of all Unrestricted Investments Outstanding, shall exceed the sum of: (1) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis subsequent to September 30, 1996 (or, in case such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss), and (2) the aggregate net cash proceeds, received by the Company as capital contributions to the Company subsequent to September 30, 1996, or from the issue or sale (other than to a Subsidiary of the Company) subsequent to September 30, 1996, of Capital Stock (including Capital Stock issued upon the conversion of, 50 58 or in exchange for, Indebtedness or Redeemable Stock (other than that issued pursuant to clause (ii) of Section 4.04(c) below) and including upon exercise of warrants or options or other rights to purchase such Capital Stock, issued subsequent to September 30, 1996), or from the issue or sale, subsequent to September 30, 1996, of any Indebtedness (other than that issued pursuant to clause (ii) of Section 4.04(c) below) or, without duplication, other security of the Company convertible or exercisable into such Capital Stock that has been so converted or exercised. (b) Transactions and payments which are permitted by Section 4.08(b) hereof shall not be considered Restricted Payments or Restricted Investments. (c) The foregoing provisions of Section 4.04(a) shall not be violated by reason of: (i) the payment of any dividend or distribution or the redemption of any securities within 60 days after the date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, if at said date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, such dividend, distribution or redemption would have complied with Section 4.04(a) and so long as no Event of Default exists as of the payment date; (ii) redemptions, repurchases, defeasances, acquisitions or retirements for value, of indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities from the proceeds of Refinancing Indebtedness permitted by Section 4.03(c); (iii) the acquisition, redemption or retirement of any shares of the Company's Capital Stock or any Indebtedness of the Company in exchange for, or in connection with a substantially concurrent issuance of, Capital Stock of the Company (provided such Capital Stock is not exchangeable for or convertible into Redeemable Stock or Indebtedness of the Company or any of its Subsidiaries); (iv) the repurchase of the Company's Capital Stock or Redeemable Stock with the proceeds of a substantially concurrent issuance of the Company's Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness of the Company; (v) the making by Pacific Lumber or its Restricted Subsidiaries of an Unrestricted Investment to the extent the amount of Unrestricted Investments Outstanding made pursuant to this clause (v) does not exceed $25 million, provided that none of the funds used by Pacific Lumber or its Restricted Subsidiaries to make any such Unrestricted Investment is obtained from the Company or any Restricted Subsidiary (other than Pacific Lumber or a Restricted Subsidiary of Pacific Lumber); (vi) dividends or distributions of (A) any Kaiser Shares that are either (x) released from the Lien of this Indenture pursuant to the provisions of Section 10.05(c)(1) or (y) Released Kaiser Shares that are not required to be subjected to the Lien of 51 59 this Indenture upon release from the Lien of the MGI Indenture or (B) cash, securities or other property received by the Company upon the sale of any such Kaiser Shares or (C) any proceeds of Kaiser Shares that are (x) released from the Lien of this Indenture or (y) released from the Lien of the MGI Indenture and not required to be subjected to the Lien of this Indenture upon such release; or (vii) the payment of any dividends or distributions by the Company with fifty percent (50%) of the fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee) of Salmon Creek Distributions received by the Company (less 50% of any income taxes payable by the Company in respect of the receipt by the Company of such Salmon Creek Distributions, or in respect of the sale or other disposition by the Company of any non-cash proceeds of such Salmon Creek Distributions (to the extent that Salmon Creek Distributions dividended or distributed by the Company are the proceeds of such sales or other dispositions)) provided that: (x) such dividends or distributions (to the extent made in cash) shall not exceed 50% of the amount of cash so received by the Company (including any cash realization of any non-cash proceeds of any Salmon Creek Distribution, but, in each case, only as, when, and to the extent, received by the Company) in respect of Salmon Creek Distributions, and (y) such dividends or distributions (to the extent made in kind with property received by the Company in a Salmon Creek Distribution) shall be valued at fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee, except to the extent the fair market value exceeds $10 million, in which case such determination shall be made by an investment banking firm with capital of at least $250 million or a nationally recognized appraiser or other expert selected by the Company whose opinion shall be delivered, and shall be acceptable, to the Trustee). No payment or other transfer made pursuant to clauses (ii) through (vii) of this Section 4.04(c) shall reduce the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments or Repurchases pursuant to Section 4.04(a) and the application of proceeds from the issuance of Capital Stock applied pursuant to clause (iii) or (iv) of this Section 4.04(c) shall not reduce the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments or Repurchases pursuant to Section 4.04(a); provided, however, that the proceeds from the issuance of Capital Stock pursuant to clauses (iii) and (iv) of this Section 4.04(c) shall not increase the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments and Repurchases under Section 4.04(a). (d) Notwithstanding anything to the contrary contained in this Indenture (but subject to the provisions of Section 4.08), the Company or any of its Restricted Subsidiaries shall be permitted to contribute any non-cash proceeds received in 52 60 respect of a Salmon Creek Distribution to one or more Unrestricted Subsidiaries and such contribution(s) shall not constitute an Unrestricted Investment under this Indenture. SECTION 4.05. OWNERSHIP OF CAPITAL STOCK OF SUBSIDIARIES AND KAISER SHARES. (a) The Company will not, and will not permit any Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia Pacific (it being understood that no issue, sale, assignment, transfer or other disposition of any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific) shall be deemed to violate this clause (i) provided that Pacific Lumber shall thereafter continue to own directly all outstanding Stock of Scotia Pacific), (ii) any Capital Stock or Redeemable Stock of MGI, Pacific Lumber, Britt or MPI if immediately thereafter, or as a consequence thereof, the Company shall beneficially own, directly or indirectly, less than a majority of the Voting Stock and outstanding equity interests (on a fully diluted basis) of any such company (other than in a transaction governed by and in compliance with Section 10.13 of this Indenture or Section 10.13 of the MGI Indenture (as in effect on the date hereof)), (iii) any assets of Scotia Pacific for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary, (iv) any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) (except to the Company or to one or more Restricted Subsidiaries) or any assets of any Restricted Subsidiary (other than Scotia Pacific, MGI, Pacific Lumber, Britt or MPI) for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary unless, in the case of this clause (iv), immediately after giving effect thereto and the receipt and application of the proceeds therefrom, the Consolidated Cash Flow Coverage Ratio of the Company would be greater than 1.5 to 1; provided, however, that this Section 4.05(a) shall permit, assuming the Company complies with the provisions of Article 5 and Sections 10.05 and 10.13, in each case to the extent applicable, the disposition in a single transaction or in a series of related transactions of all of the Capital Stock of any Restricted Subsidiary then owned by the Company or its Restricted Subsidiaries for a consideration consisting of cash or other property (other than Capital Stock or Redeemable Stock of another person) which is at least equal to the fair value (as reasonably determined by the Board of Directors of the Company) of such Capital Stock; and provided, further, that any entity resulting from any transaction or disposition permitted by clause (iv) of this Section 4.05(a) shall be or become a Restricted Subsidiary. (b) Until such time as the maximum number of Kaiser Shares required to be pledged as Collateral pursuant to this 53 61 Indenture are included in the Collateral, the Company shall not sell, transfer, assign, pledge or otherwise dispose of any Kaiser Shares (i) to a Subsidiary of the Company or to MAXXAM or (ii) in violation of any of the provisions of the MGI Indenture. In addition, the Company shall not sell, transfer, assign, pledge or otherwise dispose of any Pledged Shares except pursuant to Section 10.05(b)(1), 10.05(c), 10.13 or 5.01 and except for Liens permitted by Section 4.16. Anything in this Indenture to the contrary notwithstanding, the MGI Notes may, at any time or from time to time, be refinanced pursuant to Section 4.03(c), in whole or in part, with the proceeds of Indebtedness and such Indebtedness ("MGI Refinancing Indebtedness") may be secured by Liens on (i) all or any part of the Kaiser Shares or other collateral subject to the Lien of the MGI Indenture immediately prior to such refinancing and (ii) the proceeds of such Kaiser Shares or other collateral; provided, however, that, in the event that any MGI Refinancing Indebtedness is secured by any such Liens, such Refinancing Indebtedness shall contain provisions for release of collateral from the Lien thereunder that (except for the maturity date of such MGI Refinancing Indebtedness) are no less favorable in any material respect (taken as a whole) to the Holders than the release provisions of the MGI Indenture. SECTION 4.06. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual restriction or encumbrance on the ability of any such Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or Redeemable Stock or any other interest or participation in, or measured by, its profits, in each case, owned by the Company, or pay any Indebtedness owed to the Company or any Restricted Subsidiary of the Company, (ii) make loans or advances to the Company or any Restricted Subsidiary of the Company, or (iii) make any transfer of any of its assets to the Company or a Restricted Subsidiary. (b) The foregoing shall not prohibit encumbrances or restrictions existing as of the date hereof or hereafter under or by reason of: (i) this Indenture, the MGI Indenture or the Pacific Lumber Indenture; (ii) the Credit Agreement; (iii) (A) customary provisions restricting subletting or assignment of any lease of the Company or any Restricted Subsidiary of the Company, or (B) customary restrictions imposed on the transfer of copyrighted or 54 62 patented materials or provisions in agreements that restrict the assignment of such agreement or any rights thereunder; (iv) any instrument governing Indebtedness or other obligations of a person acquired (whether pursuant to a purchase of stock or assets) by the Company or any Restricted Subsidiary or applicable to any assets so acquired at the time such person became a Subsidiary of the Company or such assets were acquired by the Company or a Restricted Subsidiary (excluding instruments entered into by such person in connection with, or in contemplation of, its becoming a Subsidiary of the Company or its assets being acquired by the Company or any Restricted Subsidiary, as the case may be), which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person or the property or assets of the person so acquired (including the Capital Stock or Redeemable Stock thereof) or any entity formed to effect such acquisition, and, in each case, the monetary proceeds thereof; (v) Indebtedness or other obligations existing on the Issue Date; (vi) the subordination (pursuant to its terms) in right and priority of payment to Indebtedness of the Company or any of its Restricted Subsidiaries of any Indebtedness owed by the Company or any Restricted Subsidiary of the Company to the Company or any of its other Restricted Subsidiaries, provided, (A) the Indebtedness is permitted under this Indenture and (B) the Board of Directors has determined in good faith at the time of the creation of such encumbrance or restriction that such encumbrance or restriction would not singly or in the aggregate have a material adverse effect on the Holders of the Securities; (vii) restrictions imposed by covenants contained in any refinancing of Indebtedness or other obligations described in clauses (i), (ii), (iv), (v) and (ix) of this Section 4.06(b), provided, that such restrictions are, in the good faith determination of the Board of Directors, on the whole, not materially more restrictive than such restrictions contained in such refinanced Indebtedness; (viii) restrictions imposed by applicable laws or regulations or pursuant to condemnation or eminent domain proceedings; (ix) restrictions on Scotia Pacific and/or any of its Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of Trust, the Timber Note Indenture or any other agreements entered into in connection with the Timber Notes, 55 63 as the same may be amended in accordance with Section 4.11 of this Indenture; (x) an agreement which has been entered into for the sale or disposition of all or substantially all of the Stock or assets of a Restricted Subsidiary of the Company, provided, however, that such encumbrances or restrictions are limited to the Stock or assets being sold or disposed of; (xi) applicable law and agreements with foreign governments with respect to assets located in their respective jurisdictions; or (xii) customary provisions placing limitations on the payment of dividends on shares of stock contained in the terms of Preferred Stock instruments issued in compliance with this Indenture. (c) The provisions of Section 4.06(a) shall not prohibit (i) Liens not prohibited by Section 4.10 or (ii) restrictions on the sale or other disposition of any property securing Indebtedness, provided, that such Indebtedness is otherwise permitted by this Indenture. SECTION 4.07. LIMITATION ON ASSET SALES. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (except in the case of an Asset Sale which is a Taking) (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair value of the assets subject to such Asset Sale (as reasonably determined by the Board of Directors), including the value of all non-cash consideration, and (ii) at least 75% of the aggregate consideration (excluding indemnities) received therefor by the Company or such Restricted Subsidiary is in the form of money or Cash Equivalents. The amount of any liabilities of the Company or any Restricted Subsidiary of the Company that is actually assumed by the transferee in such Asset Sale shall be deemed to be money for purposes of determining the percentage of money and Cash Equivalent consideration received by the Company and its Restricted Subsidiaries. (b) For the purposes of this Section 4.07, "ASSET SALE OFFER AMOUNT" means the sum of the amount of Net Cash Proceeds from each Asset Sale by the Company and its Restricted Subsidiaries (excluding the amount of Net Cash Proceeds from such Asset Sales which have been subjected to a prior Asset Sale Offer) which, on the 360th day following the consummation of such Asset Sale (or the 540th day following the consummation of an Asset Sale to the extent that such Asset Sale is by MGI and/or any Subsidiary of MGI that is a Restricted Subsidiary (other than Pacific Lumber or any Subsidiary of Pacific Lumber that is a Restricted Subsidiary) and 56 64 is governed by the terms of the MGI Indenture (an "MGI Asset Sale") or the 590th day following the consummation of an Asset Sale to the extent that such Asset Sale is by Pacific Lumber and/or any Subsidiary of Pacific Lumber that is a Restricted Subsidiary, other than Scotia Pacific so long as any Timber Notes are outstanding, and is governed by the terms of the Pacific Lumber Indenture (a "PL Asset Sale")), the Company and/or its Restricted Subsidiaries have not either (i) reinvested, or entered into binding obligations (subject to customary closing and termination provisions) to reinvest, in additional assets to be used in one or more lines of business (including capital expenditures) in which the Company and its Restricted Subsidiaries are engaged as of the Issue Date (or reasonably related extensions of such lines), or (ii) applied to make repayments or purchases of the Securities, the MGI Notes or the Pacific Lumber Senior Notes (or Indebtedness ranking pari passu in right and priority of payment with the Securities, the MGI Notes or the Pacific Senior Lumber Notes), provided, that (x) Net Cash Proceeds of any MGI Asset Sale, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture as in effect on the date hereof and applicable law on the earlier of (A) the 450th day following the consummation of such MGI Asset Sale and (B) the consummation of any offer to purchase MGI Notes which MGI is required to make with such Net Cash Proceeds pursuant to the MGI Indenture, (y) Net Cash Proceeds of any PL Asset Sale, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent (A) permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the Pacific Lumber Indenture and applicable law on the earlier of (1) the 450th day following the consummation of such PL Asset Sale and (2) the consummation of any offer to purchase Pacific Lumber Senior Notes which Pacific Lumber is required to make with such Net Cash Proceeds pursuant to the Pacific Lumber Indenture and (B) permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on the date hereof) and applicable law on the earlier of (1) the 590th day following the consummation of such PL Asset Sale and (2) the consummation of any offer to purchase MGI Notes which MGI is required to make with such Net Cash Proceeds pursuant to the MGI Indenture, and (z) Net Cash Proceeds of any Primary Share Sale by MGI, to the extent not applied pursuant to the provisions described in clauses (i) and (ii) above, shall be included in the Asset Sale Offer Amount only to the extent permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the MGI Indenture (as in effect on the date hereof) on the 270th day following the consummation of such Primary Share Sale. 57 65 (c) Each Holder shall have the right, at the Holder's option, to require the Company to apply the Asset Sale Offer Amount to purchase Securities tendered pursuant to an offer by the Company to purchase Securities at a purchase price (the "ASSET SALE PURCHASE PRICE") equal to 100% of the principal amount of the Securities purchased, plus accrued and unpaid interest, if any, to (but not including) the date of purchase in accordance with the procedures (including proration in the event of an oversubscription) set forth in this Section 4.07 (an "ASSET SALE OFFER"); provided, that the Company shall not be required to (but may in its discretion) make an Asset Sale Offer, unless the Asset Sale Offer Amount exceeds $25,000,000. No Asset Sale Offer Amount shall be required to be applied to purchase Securities pursuant to more than one Asset Sale Offer. Pending application of any Net Cash Proceeds in accordance with this Section 4.07, the Company or a Restricted Subsidiary, as the case may be, may invest such Net Cash Proceeds in Cash Equivalents. (d) Within 30 days following the date on which the Asset Sale Offer Amount exceeds $25,000,000, the Company shall mail a written notice of an Asset Sale Offer to the Trustee, the Paying Agent and each Holder (and to beneficial owners as required by applicable law including, without limitation, the Exchange Act and the rules and regulations promulgated pursuant thereto) (the "ASSET SALE OFFER NOTICE"). The Asset Sale Offer Notice shall include a form of Asset Sale Purchase Notice (as described below) to be completed by the Holder and shall contain or state: (1) the Asset Sale Offer Amount, a brief description of the Asset Sale(s) which have generated Net Cash Proceeds and the calculation of the Asset Sale Offer Amount; (2) the date by which the Asset Sale Purchase Notice pursuant to this Section 4.07 must be delivered to the Paying Agent; (3) the scheduled date of purchase (the "Asset Sale Purchase Date") (which shall be no earlier than 30 days and not later than 60 days following the date on which such Asset Sale Offer Notice is mailed, subject to compliance with applicable law); (4) the Asset Sale Purchase Price; (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; 58 66 (7) that the Asset Sale Purchase Price for any Security as to which an Asset Sale Purchase Notice has been duly given and not withdrawn will be paid promptly (subject to proration as described in clause (d)(8) of this Section 4.07) following the later of the Asset Sale Purchase Date and the time of surrender of such Security as described in clause (d)(6) of this Section 4.07; (8) that if Asset Sale Purchase Notices are given with respect to Securities having an aggregate Asset Sale Purchase Price in excess of the Asset Sale Offer Amount pursuant to the Asset Sale Offer, the Company shall purchase Securities on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples thereof shall be acquired); (9) the procedures that the Holder must follow to exercise rights under this Section 4.07 and a brief description of those rights; and (10) the procedures for withdrawing an Asset Sale Purchase Notice. The Trustee and the Paying Agent shall be under no obligation to ascertain the occurrence of an Asset Sale. The Trustee and the Paying Agent may conclusively assume, absent contrary notice from the Company, that no Asset Sale has occurred. (e) To accept the offer to purchase Securities described in Section 4.07(c), a Holder must deliver a written notice of purchase (an "ASSET SALE PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Asset Sale Purchase Date, stating: (1) the name of the Holder, the principal amount and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the Asset Sale Offer is being accepted with respect to such Securities; (2) the portion of the principal amount of any Security which the Holder will deliver to be purchased, which portion must be $1,000 principal amount or an integral multiple thereof; and (3) that such Security or Securities shall be purchased on the Asset Sale Purchase Date pursuant to the terms and conditions specified in the Securities and this Indenture. 59 67 The delivery of a Security, by hand or by registered mail prior to, on or after the Asset Sale Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a condition to the receipt by the Holder of the Asset Sale Purchase Price therefor; provided, however, that such Asset Sale Purchase Price shall be so paid pursuant to this Section 4.07 only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Asset Sale Purchase Notice; and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which an Asset Sale Purchase Notice has not been received by the Paying Agent prior to the close of business on the third Business Day immediately preceding the Asset Sale Purchase Date. In the event that the Asset Sale Offer described in this Section 4.07 shall be accepted in accordance with the terms hereof with respect to any portion of a Security, the Company shall purchase from the Holder thereof (subject to proration pursuant to Section 4.07(f)), pursuant to this Section 4.07, such portion of such Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount to that of the unpurchased portion of the Security surrendered. (f) Upon receipt by the Paying Agent of the Asset Sale Purchase Notice as specified in Section 4.07(e), the Holder of the Security (or portion thereof) in respect of which such Asset Sale Purchase Notice was given shall (subject to proration pursuant to this Section 4.07(f) and unless such Asset Sale Purchase Notice is withdrawn as specified in the following paragraph) thereafter be entitled to receive the Asset Sale Purchase Price with respect to such Security (or portion thereof). Such Asset Sale Purchase Price shall be due and payable as of the Asset Sale Purchase Date and shall be paid to such Holder promptly following the later of (i) the Asset Sale Purchase Date (provided the conditions in Section 4.07(e), as applicable, have been satisfied) and (ii) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 4.07(e). An Asset Sale Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the second Business Day preceding the Asset Sale Purchase Date, specifying: (1) the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; 60 68 (2) the principal amount of the Security or Securities with respect to which such notice of withdrawal is being submitted; and (3) the principal amount, if any, of such Security or Securities which remains subject to the original Asset Sale Purchase Notice, and which has been or will be delivered for purchase by the Company. If, at the close of business on the second Business Day preceding the Asset Sale Purchase Date, the Asset Sale Purchase Price of all Securities for which Asset Sale Purchase Notices have been given and not withdrawn exceeds the Asset Sale Offer Amount, the Paying Agent shall select the Securities to be purchased such that each properly tendering Holder shall receive a portion of the Asset Sale Offer Amount on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 principal amount or integral multiples thereof shall be purchased). The Paying Agent shall promptly return to the Holder thereof any Securities surrendered which the Company shall not be required to purchase pursuant to this Section 4.07. (g) On or prior to the Asset Sale Purchase Date, the Company shall deposit with the Paying Agent (which, for purposes of this Section 4.07, may not be the Company or a Subsidiary or an Affiliate of either) an amount of money (not exceeding the Asset Sale Offer Amount) in immediately available funds sufficient to pay the aggregate Asset Sale Purchase Price of the Securities (or portions thereof) which are to be purchased on the Asset Sale Purchase Date. If money sufficient to pay the Asset Sale Purchase Price of all Securities (or portions thereof) to be purchased on the Asset Sale Purchase Date is deposited with the Paying Agent as of the Asset Sale Purchase Date, interest shall cease to accrue, whether or not any such Security is delivered to the Paying Agent, on such Securities (or portions thereof) on and after the Asset Sale Purchase Date, and the Holders thereof shall have no other rights as such, other than the right to receive the Asset Sale Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (h) In connection with any offer to purchase, or any purchase of, Securities under this Section 4.07, the Company shall (i) comply with the Exchange Act, if applicable, (ii) file any required Schedules of the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (i) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by 61 69 it for the payment of the Asset Sale Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 4.07(g) exceeds the aggregate Asset Sale Purchase Price of the Securities or portions thereof to be purchased on the Asset Sale Purchase Date, then promptly after the Asset Sale Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. (j) Notwithstanding anything to the contrary contained in this Section 4.07, this Section 4.07 shall not prohibit or otherwise apply to (i) a consolidation or merger of the Company or a transfer, conveyance, sale or lease of all or substantially all of the Company's assets, provided that any such transaction complies with the provisions and the terms set forth in Section 5.01 or (ii) any transaction permitted by Section 4.04. SECTION 4.08. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries or Salmon Creek (or any successor to Salmon Creek or any transferee of substantially all of the assets of Salmon Creek so long as such successor or transferee is a Subsidiary of the Company) or any Unrestricted Subsidiary to which the Company or any of its Restricted Subsidiaries makes a contribution of non-cash proceeds received in respect of a Salmon Creek Distribution pursuant to Section 4.04(d) (each, a "Company Party") to, enter into any transaction or transactions with any Affiliate of the Company, unless: (i) the terms thereof are not less favorable to the Company Party than those that could reasonably be obtained in a comparable transaction at such time with a person who is not an Affiliate of the Company; (ii) such transaction shall have been approved as meeting such standard, in good faith, by a majority of the members of the Board of Directors; and (iii) with respect to any transaction or series of related transactions involving payments and consideration in excess of $10,000,000, the Company shall have obtained and made available to the Trustee an opinion of a nationally recognized investment banking firm stating that the terms of such transaction or series of transactions are fair from a financial point of view to the Company Party. The Company shall deliver to the Trustee, within 60 days after the end of each fiscal quarter of the Company, an Officers' Certificate which shall briefly describe and specify the aggregate dollar amount of transactions (other than the transactions set forth in Section 4.08(b), except clause (vii) thereof)) with Affiliates of the Company occurring during such fiscal quarter. (b) The provisions contained in Section 4.08(a) shall not apply to: (i) any transaction permitted by Section 4.04(a) or Section 4.04(c)(i), (v), (vi) and (vii) of this Indenture; (ii) the 62 70 execution and delivery of, the performance of, and the making of any payments required by, the Tax Sharing Agreements; (iii) the execution and delivery of, the performance of, and the making of any payments required by, the Bering Agreement; (iv) the making of payments to MAXXAM for reimbursement for actual services provided thereby to the Company and its Subsidiaries based on actual costs and an allocable share of overhead expenses consistent with prior practices; (v) compensation, indemnification and other benefits paid or made available to officers, directors and employees of any Company Party for services rendered in such person's capacity as an officer, director, or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and directors' and officers' liability insurance); (vi) the execution and delivery of, the performance of, and the making of any payments required by, the MXM Guaranty; (vii) the execution, delivery and performance of, and the making of any payments or the taking of any action required or contemplated by, any agreements initially entered into by a Company Party with one or more Affiliates, in which MAXXAM (and no other Affiliate) has an equity interest of 30% or less (each, a "Headwaters Joint Venture") relating to the ownership, holding, development or disposition of any non-cash or non-Cash Equivalent property (whether an individual property or a group of properties) received by Pacific Lumber or any of its Subsidiaries as a Salmon Creek Distribution in connection with or relating to the transactions referred to in or contemplated by the information set forth in the Offering Memorandum under the caption "Business of the Company--Headwaters Agreement" (each, an "Initial Salmon Creek Agreement") provided that each Initial Salmon Creek Agreement satisfies the provisions of Section 4.08(a) and that each subsequent agreement entered into by a Company Party and any transaction between any Headwaters Joint Venture and any Affiliate subsequent to the execution of an Initial Salmon Creek Agreement that relate to the subject matter of such Initial Salmon Creek Agreement satisfies the provisions of clauses (i) and (ii) of Section 4.08(a); provided, further, that (a) each such subsequent agreement involving payments and other consideration paid to or received by any Company Party, or involving payments and other consideration paid to or received from any Headwaters Joint Venture by any Affiliate, in excess of $10.0 million shall satisfy the requirements of Section 4.08(a), and (b) any material amendment of any Initial Salmon Creek Agreement or any such subsequent agreement shall be on terms (considered as a whole) no less favorable to any Company Party, relative to MAXXAM, than the terms of such Initial Salmon Creek Agreement; (viii) the execution, delivery and performance of any agreements granting any Lien permitted by clause (xv) of Section 4.10 or any amendment to any such agreement, to the extent that such agreement or amendment thereto does not create or evidence Indebtedness of the Company or any Restricted Subsidiary of the Company; and (ix) the making of the loan evidenced by the Intercompany Note and any amendment to the Intercompany Note to the extent such amendment does not materially adversely affect the 63 71 Company's ability to pay its obligations on the Securities; in the case of clauses (iii) and (iv) of this Section 4.08(b), to the extent the aggregate amount of payments pursuant to such clauses does not exceed $5.0 million in any calendar year, which amount shall be adjusted for each calendar year, commencing with the calendar year beginning January 1, 1996 (each, an "Adjustment Period"), by multiplying such amount by a fraction, the numerator of which shall be the then most recent Producer Price Index (Lumber and Wood Products Commodity Groups) (Standard Industrial Classification No. 2400), as published by the United States Department of Labor, Bureau of Labor Statistics (the "PPI Index"), in effect on the first day of such Adjustment Period, and the denominator of which shall be the most recent PPI Index published as of January 1, 1993. SECTION 4.09. CHANGE OF CONTROL. (a) Upon the first Change of Control to occur after the date of this Indenture (but not upon any subsequent Change of Control), each Holder shall have the right, at the Holder's option, to require that the Company purchase any or all of such Holder's Securities at a purchase price (the "CHANGE OF CONTROL PURCHASE PRICE") in cash equal to 101% of the principal amount of the Securities, plus accrued and unpaid interest, if any, to (but not including) the scheduled date of purchase (the "CHANGE OF CONTROL PURCHASE DATE"), in accordance with the procedures set forth in this Section 4.09. (b) Within 30 days following the first occurrence of a Change of Control following the date of this Indenture, the Company shall mail a written notice of Change of Control to the Trustee, the Paying Agent and each Holder (and to beneficial owners as required by applicable law, including without limitation, the rules and regulations promulgated under the Exchange Act) (the "CHANGE OF CONTROL OFFER NOTICE"). The Change of Control Offer Notice shall include a form of Change of Control Purchase Notice (as described below) to be completed by the Holder and shall contain or state: (1) a brief description of the Change of Control and the date of such Change of Control; (2) the date by which the Change of Control Purchase Notice pursuant to this Section 4.09 must be delivered to the Paying Agent; (3) the Change of Control Purchase Date (which shall be no earlier than 30 days and not later than 60 days following the date on which such Change of Control Offer Notice is mailed, subject to compliance with applicable law); (4) the Change of Control Purchase Price; 64 72 (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; (7) that the Change of Control Purchase Price for any Security as to which such Change of Control Purchase Notice has been duly given and not withdrawn will be paid promptly following the later of the Change of Control Purchase Date and the time of surrender of such Security as described in clause (b)(6) of this Section 4.09; (8) the procedures that the Holder must follow to exercise rights under this Section 4.09 and a brief description of those rights; and (9) the procedures for withdrawing such Change of Control Purchase Notice. The Trustee and the Paying Agent shall be under no obligation to ascertain the occurrence of a Change of Control. The Trustee and the Paying Agent may conclusively assume, absent contrary notice from the Company, that no Change of Control has occurred. (c) To accept the offer to purchase Securities described in Section 4.09(a), a Holder must deliver a written notice of purchase (a "CHANGE OF CONTROL PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Change of Control Purchase Date, stating: (1) the name of the Holder, the principal amount and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the offer to purchase is being accepted with respect to such Securities; (2) the portion of the principal amount of any Security which the Holder will deliver to be purchased, which portion must be $1,000 principal amount or an integral multiple thereof; and (3) that such Security or Securities shall be purchased on the Change of Control Purchase Date pursuant to the terms and conditions specified in the Securities and this Indenture. The delivery of a Security, by hand or by registered mail prior to, on or after the Change of Control Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a 65 73 condition to the receipt by the Holder of the Change of Control Purchase Price therefor; provided, however, that such Change of Control Purchase Price shall be so paid pursuant to this Section 4.09 only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Purchase Notice; and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which a Change of Control Purchase Notice has not been received by the Paying Agent prior to the close of business on the third Business Day immediately preceding the Change of Control Purchase Date. In the event that the offer to purchase described in Section 4.09(a) shall be accepted in accordance with the terms hereof with respect to any portion of a Security, the Company shall purchase from the Holder thereof, pursuant to this Section 4.09, such portion of such Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount to the unpurchased portion of the Security surrendered. (d) Upon receipt by the Paying Agent of the Change of Control Purchase Notice as specified in Section 4.09(c), the Holder of the Security (or portion thereof) in respect of which such Change of Control Purchase Notice was given shall (unless such Change of Control Purchase Notice is withdrawn as specified in the following paragraph) thereafter be entitled to receive the Change of Control Purchase Price with respect to such Security (or portion thereof). Such Change of Control Purchase Price shall be due and payable as of the Change of Control Purchase Date and shall be paid to such Holder promptly following the later of (i) the Change of Control Purchase Date (provided the conditions in Section 4.09(c), as applicable, have been satisfied) and (ii) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 4.09(c). A Change of Control Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the Business Day next preceding the Change of Control Purchase Date, specifying: (1) the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (2) the principal amount of the Security or Securities with respect to which such notice of withdrawal is being submitted; and 66 74 (3) the principal amount, if any, of such Security or Securities which remains subject to the original Change of Control Purchase Notice, and which has been or will be delivered for purchase by the Company. (e) On or prior to the Change of Control Purchase Date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as Paying Agent, shall segregate and hold in trust) an amount of cash in immediately available funds sufficient to pay the aggregate Change of Control Purchase Price of all the Securities (or portions thereof) which are to be purchased on the Change of Control Purchase Date. If money sufficient to pay the Change of Control Purchase Price of all Securities (or portions thereof) to be purchased on the Change of Control Purchase Date is deposited with the Paying Agent as of the Change of Control Purchase Date, interest shall cease to accrue, whether or not such Security is delivered to the Paying Agent, on such securities (or portions thereof) on and after the Change of Control Purchase Date, and the Holders thereof shall have no other rights as such, other than the right to receive the Change of Control Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (f) In connection with any offer to purchase, or any purchase of, Securities pursuant to this Section 4.09, the Company shall (i) comply with the Exchange Act and the applicable rules and regulations of the Exchange Act (or any successor provision thereof), if applicable, (ii) file the Schedules required by the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (g) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by it for the payment of the Change of Control Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 4.09(e) exceeds the aggregate Change of Control Purchase Prices of the Securities (or portions thereof) to be purchased on the Change of Control Purchase Date, then promptly after the Change of Control Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. SECTION 4.10. LIMITATION ON LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, incur, assume, suffer to exist, create or otherwise cause to be effective Liens upon any of their respective assets to secure Indebtedness, except for: 67 75 (i) Liens in existence on the Issue Date; (ii) Liens securing all or any Indebtedness outstanding under the Credit Agreement; (iii) Liens incurred or pledges and deposits in connection with workers' compensation, unemployment insurance and other social security benefits, leases, appeal bonds and other obligations of like nature incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (iv) Liens imposed by law, including, without limitation, mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (v) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property or minor irregularities of title incident thereto, which do not in the aggregate have a material adverse effect on the operation of the business of the Company or its Restricted Subsidiaries taken as a whole; (vi) Liens for ad valorem, income or property taxes or assessments and similar charges either (A) not delinquent or (B) contested in good faith by appropriate proceedings and as to which the Company has set aside on its books reserves to the extent required by GAAP; (vii) Liens in respect of purchase money Indebtedness incurred to acquire assets or Stock provided that such Liens are limited to the assets or Stock acquired with the proceeds of such Indebtedness (and the proceeds of such assets or Stock); (viii) Liens securing Indebtedness permitted by Section 4.03(c) which refinances secured Indebtedness, so long as such Liens are limited to the collateral which secures the Indebtedness being refinanced and the proceeds of such collateral; (ix) Liens on any assets or the Stock of any Subsidiary of the Company which assets or Stock are acquired by the Company or a Restricted Subsidiary subsequent to the date of this Indenture and which Liens were in existence on or prior to the acquisition of such assets or the Stock of such Subsidiary (to the extent that such Liens were not created in contemplation of such acquisition); provided that such Liens are limited to the assets so acquired or the Stock of such acquired Subsidiary (or the entity organized to effect such acquisition) and the proceeds thereof; 68 76 (x) Liens securing Indebtedness permitted by clauses (vi), (viii), (ix), or (xii) of Section 4.03(b), provided, in each such case, that such Liens are limited to the assets financed with the proceeds of the Indebtedness incurred pursuant to such provisions (and the proceeds of such assets); (xi) Liens securing Indebtedness under any Interest Rate Protection Agreement permitted by Section 4.03(b)(vii), provided, that such Liens are limited to the collateral which secures the Indebtedness to which such Interest Rate Protection Agreement relates; (xii) Liens imposed pursuant to condemnation or eminent domain or substantially similar proceedings or in connection with compliance with environmental laws or regulations; (xiii) Liens granted pursuant to the Timber Notes, the Timber Note Indenture or the Deed of Trust, in connection with the Timber Notes or in connection with any of the Scotia Pacific Agreements, or in connection with any other agreement entered into in connection with the Timber Notes; (xiv) other Liens securing Indebtedness not exceeding $25,000,000 in aggregate principal amount; (xv) Liens on assets referred to in clause (vi) of Section 4.04(c) and on the proceeds of such assets; and (xvi) Liens in favor of the Trustee pursuant to this Indenture, Liens in favor of the trustee under and pursuant to the MGI Indenture and Liens in favor of the trustee under and pursuant to the Pacific Lumber Indenture. SECTION 4.11. AMENDMENT OF SCOTIA PACIFIC AGREEMENTS OR INTERCOMPANY NOTE. The Company shall not permit Scotia Pacific to agree to amend the Timber Note Indenture, the Deed of Trust, or any of the Scotia Pacific Agreements, unless such amendment (i) is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of Scotia Pacific for the benefit of the Company or the Holders or to surrender any right or power conferred in the Master Purchase Agreement on Scotia Pacific, or (ii) does not materially adversely affect the ability of the Company to pay principal or interest on the Securities when due. The Company shall not agree to any amendment or modification of the Intercompany Note unless such amendment (i) is to cure an ambiguity, omission, defect or inconsistency, or to add to the covenants of MAXXAM for the benefit of the Company or the Holders or (ii) does not materially adversely affect the ability of the Company to pay principal or interest on the Securities when due. 69 77 SECTION 4.12. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers know of any Default that occurred during such period. If they do, the Officers' Certificate shall describe the Default and its status. Such Officers' Certificates shall comply with TIA Section 314(a)(4). SECTION 4.13. USE OF PROCEEDS. The Company shall use the net proceeds from the offering and sale of the Securities as set forth in the Offering Memorandum under the caption "Use of Proceeds." In addition, while any Series A Securities remain outstanding that have not been transferred in a transaction registered under the Securities Act, the Company shall not use any proceeds from the sale of such Series A Securities for the purpose of buying or carrying (within the meaning of the margin regulations (Regulations G and U) issued by the Board of Governors of the Federal Reserve System) any margin stock (within the meaning of such regulations). SECTION 4.14. CORPORATE EXISTENCE. Subject to Article 5, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company. SECTION 4.15. LIMITATION ON STATUS AS INVESTMENT COMPANY. Neither the Company nor any of its Restricted Subsidiaries shall become an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended). SECTION 4.16. LIMITATION ON LIENS ON PLEDGED SHARES AND INTERCOMPANY NOTE. The Company covenants that it will not, and will not permit any Subsidiary of the Company to, directly or indirectly, create, incur, assume or permit to exist, will defend such Pledged Shares and Intercompany Note against, and will take such action as is necessary to remove, any Lien or claim on or in respect of any Pledged Shares or the Intercompany Note, except (i) the Liens created by this Indenture, (ii) Liens for taxes or assessments or other governmental charges or levies not yet due or payable under law or being contested in good faith by appropriate proceedings, (iii) Liens arising by operation of law in the ordinary course of business and with respect to amounts not overdue for a period of more than 90 days or being contested in good faith by appropriate proceedings and (iv) judgment Liens and other similar Liens arising in connection with court proceedings (provided, that the execution or other enforcement thereof is effectively stayed within 60 days following entry of judgment and 70 78 the claims secured thereby are being actively contested in good faith and by appropriate proceedings). SECTION 4.17. DECLARATION AND PAYMENT OF DIVIDENDS BY MGI. The Company shall cause MGI, to the extent that there exists any consensual restriction or encumbrance on MGI's ability to pay dividends or make any other distributions on its Capital Stock ("Dividend Encumbrances"), to declare and pay dividends to its stockholders to the maximum extent permitted by the instruments or other agreements containing such Dividend Encumbrances, unless the Board of Directors of MGI determines in good faith (whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee) that the declaration or payment of such dividend would be detrimental to the capital and other operating needs of MGI. SECTION 4.18. RELEASES FROM LIEN OF MGI INDENTURE. To the extent that collateral released from the Lien of the MGI Indenture is required to be pledged as Collateral pursuant to this Indenture, the Company shall seek the release of such collateral from the Lien of the MGI Indenture promptly after it becomes eligible for such release pursuant to the terms of the MGI Indenture. Anything in this Indenture to the contrary notwithstanding, it is understood and agreed that this Indenture does not create any Lien or claim on or in respect of any collateral subject to the Lien of the MGI Indenture. ARTICLE 5 SUCCESSOR COMPANY SECTION 5.01. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS. Except as permitted by Section 10.13, the Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to, any person or group of related persons in a single transaction or series of related transactions, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions if such transaction or transactions in the aggregate would result in a transfer of all or substantially all of the assets of the Company and its Restricted Subsidiaries on a consolidated basis to any person other than the Company, unless (except as permitted by Article 10): (i) the resulting, surviving or transferee person (if not the Company) shall be organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and such entity shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, 71 79 all the obligations of the Company under the Securities and this Indenture, and such entity and/or each other person that, upon consummation of such transaction or transactions, obtains ownership of any portion of the Collateral (to the extent such Collateral is not released from the Lien of this Indenture in accordance with the terms of this Indenture) shall grant a security interest (of like tenor to the security interest granted on the Issue Date with respect to such Collateral pursuant to Section 10.01(a) or to the security interest granted subsequent to the Issue Date with respect to such Collateral pursuant to any other provision of this Indenture, as applicable) in such Collateral, and shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company with respect to such Collateral set forth in Article 10; (ii) immediately after giving effect to such transaction, no Default shall have happened and be continuing; (iii) except in the case of a merger, or transfer of all or substantially all assets, of a Restricted Subsidiary into or to the Company or into or to another Restricted Subsidiary, immediately after giving effect to such transaction, the Consolidated Cash Flow Coverage Ratio of the Company or the surviving entity shall exceed 2.0 to 1; (iv) the Company shall have delivered to the Trustee an Officers' Certificate to the foregoing effect and an Opinion of Counsel, stating that such consolidation, merger or transfer, conveyance or lease (other than the calculation of the Consolidated Cash Flow Coverage Ratio as to which counsel need not opine) and such supplemental indenture comply with this Indenture; and (v) the Lien of this Indenture on the Collateral in favor of the Trustee for the benefit of Holders of the Securities has not been materially impaired in contravention of the provisions of this Indenture as a result of such transaction or transactions; provided, that MGI may merge or consolidate with or transfer substantially all of its assets to a Restricted Subsidiary of the Company pursuant to a transaction in compliance with the provisions of Section 10.13. The resulting, surviving or transferee person (if other than the Company which executed this Indenture) shall succeed to, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Company had been named as the Company herein and the Company (except in the event of a lease of all or substantially all of the Company's 72 80 assets) shall be relieved of its obligations under this Indenture and the Securities. Each person that becomes a pledgor with respect to any Collateral upon consummation of such transaction or transactions shall succeed to, and may exercise every right and power of, the Company with respect to such Collateral prior to such consummation with the same effect as if such person had originally been a pledgor with respect to such Collateral, and each person who ceases to be such a pledgor upon such consummation shall be relieved of its obligations as a pledgor in respect of such Collateral. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if: (1) the Company defaults in any payment of interest on any Security when the same becomes due and payable and such default continues for a period of 30 days; (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at its Stated Maturity, upon optional or special redemption, upon declaration or otherwise, including any failure by the Company to redeem or repurchase any of the Securities when required pursuant to Sections 4.07, 4.09 and 10.05(f) of this Indenture or paragraphs 5 or 7 of the Securities; (3) the Company defaults in the performance of, or breaches, any covenant or agreement on the part of the Company contained in this Indenture (other than a covenant or agreement on the part of the Company a default in whose performance or breach is specifically addressed elsewhere in this Section 6.01), and continuance of such default or breach for a period of 60 days after written notice thereof, which must specify the default or breach, demand it be remedied and state that the notice is a "Notice of Default," has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Securities then outstanding; (4) there is a default under any bond, debenture, note or other evidence of Indebtedness of the Company or any Restricted Subsidiary, or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or any Restricted Subsidiary, whether such Indebtedness now exists or is hereafter created, which default involves the 73 81 failure to pay principal on Indebtedness at the final maturity thereof or which has resulted in such Indebtedness becoming or being declared due and payable prior to its scheduled maturity in an aggregate amount in excess of $10,000,000; (5) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case, (B) appoints a Custodian of the Company or any Significant Subsidiary or for all or substantially all of its property, or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for a period of 60 consecutive days; or (7) the entry by a court having jurisdiction in the premises of one or more judgments or orders against the Company or any Restricted Subsidiary for the payment of money in an aggregate amount in excess of $10,000,000 (to the extent not covered by insurance) which remain undischarged or unsatisfied for a period of 60 consecutive days after the judgments or orders become final and the right to appeal them has expired. The term "Bankruptcy Law" means Title 11 of the United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. 74 82 The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice, in the form of an Officers' Certificate, of any event which with the giving of notice and the lapse of time would become an Event of Default under clauses (4) or (7). Such notice shall specify the status of such event and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 6.01(5) or (6)) occurs and is continuing, either the Trustee by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding by written notice to the Company and the Trustee, may declare the principal amount of and accrued interest, if any, on all the Securities to be due and payable. If an Event of Default specified in Section 6.01(5) or (6) with respect to the Company occurs and is continuing, the principal of and interest on all the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in aggregate principal amount of the Securities then outstanding by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections 6.07 and 9.02, the Holders of a majority in aggregate principal amount of outstanding Securities by notice to the Trustee may waive an existing Default and its consequences except (1) a Default or Event of Default in the payment of the principal of or interest on a Security as specified in clauses (1) and (2) of Section 6.01 or 75 83 (2) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default or Event of Default is waived, it is deemed cured and ceases, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in aggregate principal amount of outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification reasonably satisfactory to it against all losses and expenses caused by taking or not taking such action. SECTION 6.06. LIMITATION ON SUITS. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities, unless: (1) the Holders of at least 25% of the aggregate principal amount of Securities then outstanding give to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% of the aggregate principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense to be incurred in complying with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity and such Event of Default has not been cured or waived; and (5) the Holders of a majority of the aggregate principal amount of the Securities then outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. 76 84 A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder; provided, that no Holder shall have the right to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral created by this Indenture. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment of interest or principal specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid (together with interest on such unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other person performing similar functions, and be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article 6 or, if a Notice of Acceleration has been delivered to the Company and is in effect and Trust Monies are held 77 85 in the Accounts, it shall pay out the money (or Trust Monies, as applicable) in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and THIRD: to the Company its successors and assigns. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Securityholder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% of the aggregate principal amount of the then outstanding Securities. SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such 78 86 case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Company, the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) The Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. At all times, the Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. (b) Except during the continuance of an Event of Default: (1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture which are adverse to the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, that the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; 79 87 (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall agree in writing with the Company to invest moneys deposited hereunder and the Company shall be entitled to the income thereon. (f) Funds held in trust by the Trustee need not be segregated from other funds except to the extent required by this Indenture and applicable law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any written resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, Security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate or an Opinion of Counsel; (c) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture; provided, however, that the Trustee's conduct does not constitute willful misconduct, negligence or bad faith. 80 88 (d) The Trustee may consult with counsel, and the advice or Opinion of Counsel with respect to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or Opinion of Counsel. (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Securityholders pursuant to this Indenture, unless such Securityholder shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such requests or direction; (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, Security or other paper or document but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the relevant books, records and premises of the Company, personally or by agent or attorney; (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) The Trustee shall have no duty to review documents delivered to the Trustee pursuant to Section 4.02 for purposes of determining compliance with any provisions of this Indenture; (i) Except with respect to Sections 4.01 and 4.12, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article 4. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Default or Event of Default occurring pursuant to Sections 6.01(1), 6.01(2), 4.01 or 4.12, or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent or Registrar may do the same with like 81 89 rights. Notwithstanding the foregoing, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in this Indenture or the Securities other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder, in the manner and to the extent provided in TIA Section 315(b), notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interest of Securityholders. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. As promptly as practicable after each May 15, beginning with the May 15 following the date of this Indenture, and in any event prior to July 15 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 15 of such year that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b)(1) and (2) and (c). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed. The Company agrees to notify the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation relating to the trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it, including reasonable expenses incurred in connection with exercise of any remedy with respect to the Collateral, except any such expense as may arise from the Trustee's negligence, bad faith or wilful misconduct. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any loss, liability or expense (including reasonable attorneys' fees) incurred by it without negligence or bad faith on its part in connection with the administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Company promptly of any 82 90 claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The failure of the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent the Company is prejudiced thereby. The Company need not pay for any settlement made without its written consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through wilful misconduct, negligence or bad faith. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee in its capacity as Trustee, except that held in trust to pay principal of or interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of an Event of Default specified in Section 6.01(5) or (6) with respect to the Company, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and the appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying the Company and the Holders in writing. The Holders of a majority in aggregate principal amount of the Securities then outstanding may remove the Trustee by so notifying the Trustee and the Company in writing and may appoint a successor Trustee with the Company's consent. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian, receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. 83 91 A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate principal amount of the Securities then outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates or merges with or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee; provided, that in the case of a transfer of all or substantially all of its corporate trust business to another corporation, the transferee corporation expressly assumes all the Trustee's liabilities under the Indenture and the Securities. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Securities in the name of any predecessor trustee shall only apply to its successors by merger, conversion or consolidation. 84 92 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times satisfy the requirements of TIA Section 310(a)(1) and (2). In addition, without limiting the foregoing, the Trustee shall at all times be authorized to conduct a corporate trust business in good standing, and be either (a) a bank or trust company having, or (b) a wholly owned subsidiary of a bank or trust company having, a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE (a) When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancellation or (ii) all outstanding Securities not delivered to the Trustee for cancellation have become due and payable, will become due and payable at their stated maturity within one year or may be called for redemption on a redemption date that is within one year under arrangements satisfactory to the Trustee and the Company irrevocably (i.e., without condition or right of withdrawal deposits with the Trustee money or U.S. Governmental Obligations sufficient to pay at maturity all outstanding Securities, including interest thereon (other than Securities replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c) and 8.06, cease to be of further effect. Upon satisfaction of the conditions set forth in this Section 8.01(a) and upon request of the Company, accompanied by an Officers' Certificate and an Opinion of Counsel, and at the expense of the Company, the Trustee shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified herein. (b) Subject to Sections 8.01(c), 8.02 and 8.06, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.16, 4.17, 4.18 and 5.01(ii) (other than with respect to an Event of Default specified in Sections 6.01(1) or 6.01(2)) and 5.01(iii) and the operation of Sections 85 93 6.01(3), 6.01(4) and 6.01(7) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(3), 6.01(4) and 6.01(7). Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.02. CONDITIONS TO DEFEASANCE. The Company may exercise its legal defeasance option or its covenant defeasance option only if: (i) the Company irrevocably deposits in trust with the Trustee money or U.S. Governmental Obligations sufficient for the payment of principal and interest on the Securities to maturity or redemption, as the case may be; (ii) the Company delivers to the Trustee an Officers' Certificate to the effect that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts (but, in the case of the legal defeasance option only, not more than such amounts) as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (iii) 90 days pass after the deposit is made and during the 90-day period no Default specified in Section 6.01(5) or (6) with respect to the Company occurs which is continuing at the end of the period; (iv) the deposit does not constitute a default under any other agreement binding on the Company other than a default (a) with respect to Indebtedness of the Company which is defeased, redeemed or otherwise satisfied prior to or contemporaneously with such deposit, or (b) which is consented 86 94 to or waived by the relevant other party or parties to the agreement; (v) the Company delivers to the Trustee an Opinion of Counsel or a ruling received from the Internal Revenue Service to the effect that holders will not recognize income, gain or loss for Federal income tax purposes as a result of the exercise of such rights and will be subject to Federal income tax in the same amount and in the same manner and at the same time as would have been the case otherwise; provided, that the Company is not required to deliver to the Trustee such Opinion of Counsel upon the exercise of the Company's legal defeasance option or covenant defeasance option within one year of Stated Maturity or a date fixed for redemption pursuant to Article 3; and (vi) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.04. REPAYMENT TO COMPANY. Subject to Section 8.01, the Trustee and the Paying Agent shall promptly turn over to the Company any excess money or securities held by them at any time, upon the written request of the Company and upon the receipt by the Trustee of an Officers' Certificate in form reasonably satisfactory to the Trustee, addressing the status of such money or securities. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall promptly pay to the Company any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors, unless applicable law designates another person. SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. 87 95 Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENTS SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may amend, supplement or otherwise modify this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsis- tency; (2) to comply with Article 5, Article 12, Section 10.01(b), Section 10.02(a), Section 10.04 or Section 10.13; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (4) to make any change that does not adversely affect the rights of any Securityholder; (5) to add to the covenants of the Company for the benefit of the Securityholders or to surrender any right or power herein conferred upon the Company; or (6) to comply with the TIA. 88 96 After an amendment, supplement or other modification under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment, supplement or other modification. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement or other modification under this Section 9.01. SECTION 9.02. WITH CONSENT OF HOLDERS. (a) Subject to Section 6.07, the Company and the Trustee may amend, supplement or otherwise modify this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority of the aggregate principal amount of the Securities then outstanding; provided, that (except for changes permitted pursuant to Section 9.01) any change to Article 10 (or the definitions relating thereto) shall require the written consent of the Holders of at least 66 2/3% of the aggregate principal amount of Securities then outstanding. Subject to Sections 6.04 and 6.07, the Holders of a majority in aggregate principal amount of the Securities then outstanding may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. (b) Notwithstanding anything to the contrary contained in Sections 9.01 or 9.02(a), without the consent of each Securityholder affected, an amendment, supplement, other modification or waiver may not: (1) reduce the amount of Securities whose Holders must consent to an amendment, supplement, other modification or waiver; (2) reduce the rate of or extend the Stated Maturity of any payment of interest on any Security; (3) reduce the principal amount (at maturity or any other time) of or extend the Stated Maturity of any payment of principal of any Security, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; (4) reduce the premium payable upon the redemption of any Security, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; or (5) make any Security payable in money other than that stated in the Security. (c) It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form 89 97 of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (d) After an amendment, supplement, waiver or other modification under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment, supplement, waiver or other modification. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement, waiver or other modification under this Section. (e) Notwithstanding the foregoing, the provisions of Section 11.16 hereof and this subsection (e) may not be amended without the consent of the parties to the Credit Agreement. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment, supplement or other modification to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to an amendment, supplement or other modification or a waiver under or in connection with this Indenture or the Securities by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, if such consent or waiver may be revoked, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment, supplement, waiver or other modification becomes effective. After an amendment, supplement, waiver or other modification becomes effective, it shall bind every Securityholder, unless it makes a change described in any of clauses (1) through (5) of Section 9.02(b). In that case, the amendment, supplement, waiver or other modification shall bind each Holder of a Security who has consented to it and every subsequent Holder of a Security or a portion of a Security that evidences the same debt as the consenting Holder's Security. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those persons who were Securityholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such persons continue to be Holders after such record date. 90 98 SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment, supplement, waiver or other modification changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment, supplement, waiver or other modification. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any amendment, supplement, waiver or other modification authorized pursuant to this Article 9 if the amendment, supplement, waiver or other modification does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not sign it. In signing such amendment, supplement, waiver or other modification the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment, supplement, waiver or other modification is authorized or permitted by this Indenture. ARTICLE 10 SECURITY SECTION 10.01. GRANTS OF SECURITY INTERESTS. (a) To secure the full and punctual payment of principal and premium of and interest on the Securities and all other amounts payable pursuant to this Indenture, the Company hereby grants to the Trustee, for the benefit of the Holders and the Trustee, a first priority and (except for Liens permitted under Section 4.16) exclusive security interest in all its right, title and interest in and to the following, subject to the exclusion specified in the last sentence of this Section 10.01(a): (i) all of the outstanding shares of Stock of MGI, whether now or hereafter owned or acquired by the Company; (ii) all certificates whether now owned or hereafter acquired representing any of the shares referred to in clause (i) of this Section 10.01(a); (iii) all dividends, cash, instruments and other property and proceeds from time to time received, receivable or otherwise distributed on or in exchange for any of the foregoing after the Issue Date, including, without limitation, 91 99 any stocks, bonds or other securities, options, warrants, or other such rights, cash or other property payable or distributable on any of the shares referred to in clause (i) of this Section 10.01(a) at any time, including, without limitation, any distribution on any such shares upon the dissolution or liquidation, in whole or in part, of the issuer of such shares or the consolidation or merger of such issuer with any other person or persons, or the reorganization of such issuer, or any distribution on any such shares of the capital or paid-in capital surplus or any part thereof of the issuer of such shares, in any form, or any subdivision, combination, reclassification or redemption of any such shares; (iv) the Intercompany Note; (v) all payments of interest on and principal of the Intercompany Note; and (vi) to the extent not included in clauses (i), (ii), (iii), (iv) and (v) of this Section 10.01(a), all proceeds (as defined in the Uniform Commercial Code as in effect on the date hereof) of any and all of the foregoing (arising after the Issue Date). Notwithstanding any other provision contained in this Indenture or in the Securities, no security interest has been granted pursuant to this Indenture, and the Trustee has not taken pursuant to this Indenture a security interest, in (x) any Salmon Creek Distribution or (y) any proceeds of any Salmon Creek Distribution. The Company shall not identify any dividend or distribution as a "Salmon Creek Distribution" except for any dividends and other distributions on Pledged MGI Shares or on shares of Stock of any other Restricted Subsidiary of the Company of amounts or other consideration received by the Company or any of its Subsidiaries from any person or entity (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property. (b) Within ten (10) days after the release of any Released Kaiser Shares from the Lien of the MGI Indenture, to secure the full and punctual payment of principal and premium of and interest on the Securities and all other amounts payable pursuant to this Indenture, the Company shall, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, grant to the Trustee, for the benefit of the Holders and the Trustee, a first priority and (except for 92 100 Liens permitted under Section 4.16) exclusive security interest in all its right, title and interest in and to the following: (i) such Released Kaiser Shares; (ii) all certificates whether then owned or thereafter acquired representing any of such Released Kaiser Shares; (iii) all dividends, cash, instruments and other property and proceeds from time to time received, receivable or otherwise distributed on or in exchange for any of the foregoing after the date of such supplemental indenture hereto, including, without limitation, any stocks, bonds or other securities, options, warrants, or other such rights, cash or other property payable or distributable on any of such Released Kaiser Shares at any time after the date of such supplemental indenture hereto, including, without limitation, any distribution on any such shares upon the dissolution or liquidation, in whole or in part, of the issuer of such shares or the consolidation or merger of such issuer with any other person or persons, or the reorganization of such issuer, or any distribution on any such shares of the capital or paid-in capital surplus or any part thereof of the issuer of such shares, in any form, or any subdivision, combination, reclassification or redemption of any such shares; and (iv) to the extent not included in clauses (i), (ii) and (iii) of this Section 10.01(b), all proceeds (as defined in the Uniform Commercial Code as in effect on the date hereof) of any and all of the foregoing (arising after the date of such supplemental indenture hereto. Notwithstanding the foregoing provisions of this Section 10.01(b), the aggregate number of Released Kaiser Shares required to be pledged pursuant to this Section 10.01(b) through any date shall not exceed the sum of (1) 8,027,500 and (2) an amount equal to (x) 8,027,500 times (y) a fraction, the numerator of which is the aggregate principal amount of the Securities outstanding on such date, and the denominator of which is the aggregate principal amount of Securities outstanding on the Issue Date. To the extent that Released Kaiser Shares are comprised of securities or other property substituted or adjusted for Kaiser Shares (as contemplated by clause (i) or (ii) of the definition of Released Kaiser Shares), the kind and amount of Released Kaiser Shares to be pledged shall be appropriately adjusted to take account of the kind and amount of such securities or other property so substituted for each Kaiser Share. Moreover, in no event shall the aggregate of the number of Released Kaiser Shares required to be pledged pursuant to this Section 10.01(b) through any date and the number of Kaiser Share Cash Equivalents resulting from the pledge of released funds pursuant to Section 10.03(d)(6) through such date exceed the number 93 101 of Released Kaiser Shares that would be required to be pledged through such date if no such released funds were pledged through such date. SECTION 10.02. PLEDGED SHARES AND INTERCOMPANY NOTE. (a) Delivery of Certificates and Instruments. Subject to the terms hereof, the Company agrees that the Intercompany Note and all certificates or instruments representing or evidencing Pledged Shares or any other Collateral shall be delivered to the Trustee, at such office in New York City, New York as is designated by the Trustee from time to time in a notice addressed to the Company, and shall be in suitable form for transfer by delivery, and shall be accompanied by duly executed and undated instruments of transfer or assignment or endorsement, as applicable, in blank (with signatures appropriately guaranteed if requested by the Trustee), all in form and substance satisfactory to the Trustee. If an issuer of Pledged Shares is incorporated in a jurisdiction which does not permit the use of certificates to evidence equity ownership or which permits or requires pledges of Capital Stock to be perfected other than by delivery, then the Company shall, upon delivery to the Company of the Trustee's written request, take such action as may be necessary in such jurisdiction and reasonably requested by the Trustee to perfect the Trustee's first priority and (except for Liens permitted under Section 4.16) exclusive security interest in such Stock and other Collateral and give the Trustee the other rights in the Pledged Shares granted under the terms hereof; and the Company agrees to provide to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to it, confirming such pledge. The Trustee shall have the right at any time at which a Notice of Acceleration has been delivered and is in effect to exchange certificates or instruments representing or evidencing the Pledged Shares for certificates or instruments of smaller or larger denominations. (b) Preservation of Corporate Existence of Issuers of Pledged Shares. Subject to Article 5 and Sections 10.05 and 10.13, the Trustee may do whatever in its reasonable judgment may be necessary, and the Company shall take such action in connection therewith as may reasonably be requested in writing by the Trustee, for the purpose of preserving or extending the corporate existence of MGI and (except as permitted by Section 10.05 of the MGI Indenture, as in effect on the date hereof) Kaiser. (c) Change of Registration Upon Notice of Acceleration. Any or all Pledged Shares held by the Trustee for the benefit of the Holders of Securities may, if a Notice of Acceleration has been delivered and is at the time in effect, without notice to the Company, be registered in the name of the Trustee or its nominee. 94 102 (d) Voting Rights; Dividends; etc. (1) Unless a Notice of Acceleration has been delivered and is at the time in effect, the Company shall be entitled to exercise any and all voting and other corporate rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Indenture and the Securities; provided, however, that no vote shall be cast or consent, waiver or ratification given or action taken that would be inconsistent with or violate any provision of this Indenture or the Securities. After a Notice of Acceleration has been delivered and so long as it remains in effect, upon written notice from the Trustee to the Company that it has determined that it will exercise such rights, all rights of the Company to exercise the voting and other consensual corporate rights which it would otherwise be entitled to exercise pursuant to this Section 10.02(d)(1) shall cease and all such rights shall become vested in the Trustee, which shall thereupon have the sole right to exercise such voting and other consensual corporate rights during the continued effectiveness of such Notice of Acceleration (such rights to include the exercise of any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Shares, including, without limitation, the right to exchange, at the Trustee's discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other readjustment of any issuer of any of such Pledged Shares or upon the exercise by any such issuer or the Trustee of any right, privilege or option pertaining to any of the Pledged Shares and, in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depositary, transfer agent, registrar or other designated agency on such terms and conditions as the Trustee may determine, all without liability except to account for property actually received by it). The Trustee shall have no duty to the Company to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. Upon rescission of such Notice of Acceleration, such voting and consensual corporate rights shall revert to the Company. (2) So long as no Event of Default, Collateral Default or Interest Payment Default shall have occurred and be continuing, the Company shall be entitled to receive and retain any and all Exempt Distributions made on any Pledged Shares. (3) Upon the occurrence and during the continuance of an Event of Default, Collateral Default or Interest Payment Default, all rights of the Company to receive and retain 95 103 Exempt Distributions on Pledged Shares pursuant to Section 10.02(d)(2) shall cease, and the Trustee shall thereupon have the sole right to receive any Exempt Distributions on any Pledged Shares made during the continuance of such Event of Default, Collateral Default or Interest Payment Default; provided, that the Company shall be entitled to receive and retain any Salmon Creek Distributions. All such Exempt Distributions shall be deposited in the Cash Collateral Default Account in accordance with Section 10.03(f). All Exempt Distributions on Pledged Shares received by the Company contrary to the provisions of this Section 10.02(d)(3) shall be received in trust for the benefit of the Trustee and the Holders, shall be segregated from other funds of the Company, and shall be forthwith paid over to the Trustee in the same form as received by the Company (duly endorsed to the Trustee, if required), and the Trustee shall deposit such amounts in the Cash Collateral Default Account in accordance with Section 10.03(f). If any such Event of Default, Collateral Default or Interest Payment Default shall have been cured or waived and no other Event of Default, Collateral Default or Interest Payment Default shall be continuing, the right of the Company to receive and retain any and all Exempt Distributions on Pledged Shares shall be reinstated. (4) In order to permit the Company and the Trustee to exercise their respective voting and other corporate rights which they are entitled to exercise pursuant to Section 10.02(d)(1) and Section 10.02(d)(5) and to receive the dividends, distributions and other amounts which they are authorized to receive and retain pursuant to Sections 10.02(d)(2) and 10.02(d)(3), (A) the Trustee shall, upon written notice from the Company, from time to time execute and deliver (or cause to be executed and delivered) to the Company, and (B) the Company shall, upon written notice from the Trustee, from time to time execute and deliver (or cause to be executed and delivered) to the Trustee, all such proxies, dividend payment orders and other instruments as the Company or the Trustee, as the case may be, may reasonably request for such purposes as shall be specified in such request. (5) At any time with the consent of the Company, or without the consent of the Company upon the delivery to the Company of a Notice of Acceleration that is at the time in effect, the Trustee may join in any plan of voluntary or involuntary reorganization or readjustment or rearrangement in respect of any Pledged Shares and may accept or authorize the acceptance of new securities issued in exchange therefor under any such plan. Any new securities so issued shall be delivered to the Trustee and pledged hereunder. If the Trustee does not join in such plan of reorganization or 96 104 readjustment or rearrangement, any money or Cash Equivalents accruing on or apportioned to such Pledged Shares shall be delivered to the Trustee for deposit into the Cash Collateral Account in accordance with Section 10.03(g). (e) Pledged Shares to Constitute Majority of Voting Stock and Equity Interests; Delivery of After-Acquired Shares. The Company shall cause the Pledged Shares that are subject to the Lien of this Indenture at all times to include: (i) at least a majority of the Voting Stock and the outstanding equity interests (on a fully diluted basis) of MGI until such time as MGI merges or consolidates into, or transfers all of its assets to, either (A) a Restricted Subsidiary or (B) the Company, in either case pursuant to and in accordance with Section 10.13; and (ii) after any transaction described in clause (i)(A) above, at least a majority of the Voting Stock and the outstanding equity interests (on a fully diluted basis) of the Restricted Subsidiary into which MGI merges or consolidates or to which it transfers all or substantially all of its assets. The Company shall pledge and deposit with the Trustee all outstanding shares of Stock of MGI that the Company acquires at any time after the Issue Date, and to cause all such shares of Stock to be subject to the Lien of this Indenture. (f) Payments on Intercompany Note. The Company shall deliver (or cause to be delivered) to the Trustee all payments of interest received on the Intercompany Note. All such payments of interest shall be deposited in the Cash Collateral Account in accordance with Section 10.03(g). The Company shall deliver or cause to be delivered to the Trustee all payments of principal received on the Intercompany Note, except that the Company shall be entitled to receive and retain all payments of principal of the Intercompany Note that do not result in the outstanding principal amount of the Intercompany Note being reduced below the outstanding principal amount of the Securities. All payments of principal on the Intercompany Note delivered to the Trustee pursuant to the preceding sentence shall be deposited in the Cash Collateral Offer Account in accordance with Section 10.03(d). SECTION 10.03. COLLATERAL ACCOUNTS. (a) Establishment of Accounts; Deposit of Trust Moneys. (1) The Trustee shall establish from time to time as required by this Section 10.03, and at all times thereafter until the trust created by this Indenture has terminated shall maintain, at its corporate offices in Minnesota, four (4) accounts: the Cash Collateral Offer Account, the Cash Collateral Public Equity Offering Account, the Cash Collateral 97 105 Default Account and the Cash Collateral Account (collectively, the "Accounts"). The Accounts shall be entitled the "MAXXAM GROUP HOLDINGS INC. Cash Collateral Offer Account, [name of Trustee], as trustee, secured party," "MAXXAM GROUP HOLDINGS INC. Cash Collateral Public Equity Offering Account, [name of Trustee], as trustee, secured party," "MAXXAM GROUP HOLDINGS INC. Cash Collateral Default Account, [name of Trustee], as trustee, secured party" and "MAXXAM GROUP HOLDINGS INC. Cash Collateral Account, [name of Trustee], as trustee, secured party," respectively. (2) All money and Cash Equivalents required to constitute Collateral and to be delivered to the Trustee or received by the Trustee or any agent or nominee of the Trustee in respect thereof, whether pursuant to the terms of this Indenture, the Uniform Commercial Code, other applicable law or otherwise ("Trust Moneys"), shall be deposited in the appropriate Account, as specified in this Section 10.03, and the Trustee shall thereafter invest, apply, deposit into another Account or release, as the case may be, Trust Moneys in accordance with the terms of this Indenture. All right, title and interest in and to the Accounts shall vest in the Trustee, who shall have sole dominion and control over the Accounts and only the Trustee shall have any right of withdrawal therefrom. (b) Accounts as Collateral. All Trust Moneys deposited in any of the Accounts shall be held segregated in the Cash Collateral Offer Account, the Cash Collateral Public Equity Offering Account, the Cash Collateral Default Account or the Cash Collateral Account, as the case may be, as provided in this Section 10.03, and shall be held by the Trustee, in trust under this Indenture, as part of the Collateral. (c) Investment of Trust Moneys. The Company shall have the right to direct the Trustee in writing to, and the Trustee shall, except as otherwise required herein, invest any Trust Moneys held in the Accounts in Cash Equivalents and liquidate Cash Equivalents held in Accounts into money. The Trustee shall not be liable or responsible for any loss resulting from such investments and reinvestments or from any dispositions; provided, however, that the Trustee shall be liable for its own negligent action, its own negligent failure to act and its own willful misconduct in complying with this Article 10. The Accounts and all credits thereto and investments therein shall be maintained in such a manner in accordance with applicable law and all items shall be delivered to the Trustee and credited to the Accounts in accordance with applicable law so that the Trustee shall at all times have (except for Liens permitted under Section 4.16) an exclusive and a first priority perfected security interest therein. The Company shall deliver to the Trustee and any bank where any Accounts are 98 106 maintained all such notices and other documents, and shall otherwise make such filings and take such other actions as may be reasonably requested by the Trustee, to create and maintain (except for Liens permitted under Section 4.16) an exclusive and first priority perfected security interest in the Accounts and all credits thereto and investments therein. Interest and other amounts earned on an Account shall be held as part of the Collateral, shall be credited to the Account in which the principal on which they are earned is deposited and shall be transferred between Accounts together with and in the same manner as the principal on which they are earned. (d) Deposits into Cash Collateral Offer Account. (1) Except as otherwise provided in Section 10.03(e)(1), upon the receipt of any Net Proceeds of a Primary Share Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be, the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all such Net Proceeds so received that are money or Cash Equivalents. (2) Except as otherwise provided in Section 10.03(e)(2), upon the release of any Pledged Shares pursuant to Section 10.05(b)(1) and the receipt of any Net Proceeds of a Pledged Share Sale in respect of such Pledged Shares, the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all such Net Proceeds so received that are money or Cash Equivalents. (3) Upon receipt by the Company of an Extraordinary Distribution on any Pledged Shares, the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all amounts so received that are money or Cash Equivalents. (4) Except as otherwise provided in Section 10.03(e)(3), if, following receipt by the Company of (A) Net Proceeds, other than money or Cash Equivalents, of either (x) a Primary Share Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be, or (y) a Pledged Share Sale in respect of any Pledged Shares or of (B) an Extraordinary Distribution on any Pledged Shares in a form other than money or Cash Equivalents, all or any portion of such Net Proceeds or Extraordinary Distributions at the time subject to the Lien of this Indenture are disposed of for money or Cash Equivalents pursuant to Section 10.05(b)(2), the Company shall deliver or 99 107 cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account, all money or Cash Equivalents received in consideration of such disposition. (5) Upon the receipt of any payments of principal on the Intercompany Note (other than any payments of principal that do no result in the outstanding principal amount of the Intercompany Note being reduced below the outstanding principal amount of the Securities), the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account, such payments. (6) If any Trust Moneys constituting proceeds of any Primary Share Sale by Kaiser or a Pledged Share Sale of Pledged Kaiser Shares or any Extraordinary Distribution on Pledged Kaiser Shares (or the proceeds of any non-cash consideration received in any such transaction) are released from the Lien of the MGI Indenture as a result of such Trust Moneys not having been utilized to purchase MGI Notes pursuant to an offer to purchase MGI Notes at a price at least equal to the respective Call Prices of the MGI Notes or as a result of payment in full of the MGI Notes or defeasance of the MGI Notes pursuant to Article 8 of the MGI Indenture, the Company shall, upon receipt of such released funds (but subject to the limitation set forth in the last sentence of Section 10.01(b)), deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account, such released funds. As used in this Section 10.03(d)(6), each of the terms Trust Moneys, Primary Share Sale, Pledged Share Sale, Pledged Kaiser Shares, Extraordinary Distribution and Call Prices has the meaning ascribed to such term in the MGI Indenture (as in effect on the date hereof). (e) Deposits into and Transfers from Cash Collateral Public Equity Offering Account. (1) Upon receipt of any Net Proceeds of a Primary Share Sale by MGI or by Kaiser, that were dividended or distributed on Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be, if such Primary Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 2000, the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, all such Net Proceeds so received that are money or Cash Equivalents. (2) Upon the release of any Pledged Shares pursuant to Section 10.05(b)(1) and the receipt of any Net Proceeds of a Pledged Share Sale in respect of such Pledged Shares, if such Pledged Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 2000, the Company shall 100 108 deliver or cause to be delivered to the Trustee for deposit into the Cash Collateral Public Equity Offering Account all such Net Proceeds so received that are money or Cash Equivalents. (3) If, following receipt by the Company of Net Proceeds, other than money or Cash Equivalents, of (A) a Primary Share Sale that is a Public Equity Offering that were distributed on Pledged Shares or (B) a Pledged Share Sale that is a Public Equity Offering in respect of any Pledged Shares, all or any portion of such Net Proceeds at the time subject to the Lien of this Indenture are disposed of for money or Cash Equivalents pursuant to Section 10.05(b)(2), the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, all money or Cash Equivalents received (if such receipt occurs prior to August 1, 2000) in consideration of such disposition. (4) In the event the Company elects, pursuant to Section 10.05(g), optionally to redeem Securities with all or any portion of any Net Proceeds described in Sections 10.03(e)(1), (2) or (3), such Net Proceeds (or such portion thereof) shall remain in the Cash Collateral Public Equity Offering Account for application pursuant to Article 3 and Section 10.05(g) hereof and paragraph 5 of the Securities. If no such election is made within the time period specified in Section 10.05(g), all amounts in such Account shall, upon expiration of the time period for such election (or upon earlier written notice from the Company that no such election will be made), be deposited in the Cash Collateral Offer Account. (f) Deposits into Cash Collateral Default Account. (1) Upon and during the continuance of an Event of Default, Collateral Default or an Interest Payment Default, the Company shall deliver or cause to be delivered to the Trustee for deposit into the Cash Collateral Default Account all Exempt Distributions made on any Pledged Shares during such continuance; provided, that the Company shall be entitled to receive and retain any Salmon Creek Distributions. Any Trust Moneys held in the Cash Collateral Default Account shall be released from the Lien of this Indenture and, as the Company directs in writing, applied by the Trustee to cure any outstanding Interest Payment Defaults in respect of the Securities and to pay the principal due on the Securities at the final maturity thereof. (2) If at any time following the deposit of Trust Moneys into the Cash Collateral Default Account, no Event of Default, Collateral Default or Interest Payment Default is continuing, any amounts in the Cash Collateral Default Account shall be 101 109 deposited into the Cash Collateral Offer Account for application pursuant to Section 10.05(f). (g) Deposits into Cash Collateral Account. The Trustee shall deposit into the Cash Collateral Account any money or Cash Equivalents (i) eligible for transfer out of the Cash Collateral Offer Account pursuant to Section 10.05(f) upon their eligibility for such transfer, (ii) delivered to the Trustee pursuant to Section 10.02(d)(5) or 10.02(f) or (iii) constituting Trust Moneys whose disposition by the Trustee upon receipt thereof is not otherwise provided for in this Section 10.03. (h) Application of Trust Moneys to Pay Trustee's Fees or upon a Notice of Acceleration. (1) Notwithstanding any other provision contained in this Article 10, but subject to the Company's continuing primary obligation contained in Section 7.07, the Trustee may at any time apply Trust Moneys in the Cash Collateral Account or in the Cash Collateral Default Account to the payment of due and unpaid fees under Section 7.07 of this Indenture; provided, that funds are drawn, first, from the Cash Collateral Account and, second, and only if there exist no Trust Moneys in the Cash Collateral Account, from the Cash Collateral Default Account. (2) Notwithstanding any other provision contained in this Article 10, if a Notice of Acceleration has been delivered to the Company and is at the time in effect, the Trustee shall apply all Trust Moneys held in the Accounts in accordance with Section 6.10; provided, that, so long as a Notice of Acceleration is not in effect, Trust Moneys shall be invested, applied, deposited in other Accounts or released as otherwise provided in this Article 10. (i) Grant of Security Interest in Accounts. As security for the Company's obligations to pay the principal and premium of and interest on the Securities and all other amounts and obligations under this Indenture and the Securities when due, the Company hereby grants a security interest to the Trustee, for the benefit of the Holders and the Trustee, in all of its right, title and interest, whether now owned or hereafter acquired, in the Accounts and all sums of money, funds, securities, investments or other property held in or credited to the Accounts, from any source whatsoever, now or hereafter transferred or credited to and comprising the Accounts, including, without limitation, all proceeds derived from the Collateral credited to the Accounts, and any and all interest and dividends or other distribution from any such amounts, and all statements, certificates and instruments in or representing the Accounts. 102 110 (j) Release and Application of Trust Moneys in Cash Collateral Account. The Company shall be entitled to a release, at any time and from time to time, of any Trust Moneys held in the Cash Collateral Account to be applied, as the Company directs the Trustee in writing, to pay interest on the Securities (but only to the extent that the Trust Moneys so applied were derived from payments of interest on the Intercompany Note), to redeem Securities or to purchase Securities, in the open market or otherwise. SECTION 10.04. FURTHER ASSURANCES; REVISIONS OF EXHIBIT D. The Company shall, at any reasonable time and reasonably from time to time, at its expense, execute and deliver all further instruments and documents and take all reasonable further action that the Trustee may reasonably request in order to perfect and protect any Lien granted or purported to be granted with respect to any Collateral or to enable the Trustee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the foregoing, the Company shall provide to the Trustee a revised Exhibit D to reflect any changes in the composition of the Pledged Shares pledged by it hereunder, and at such time the Company shall be deemed to make the representations and warranties set forth in clauses (i) through (iv) of Section 10.12 with respect to Exhibit D as so revised. SECTION 10.05. RELEASE AND SUBSTITUTION OF COLLATERAL. (a) General. The Company shall be entitled from time to time to the release by the Trustee of Pledged Shares and other Collateral from the Lien of this Indenture, and to substitute other property for Collateral, upon satisfaction of the requirements of this Section 10.05 and, to the extent applicable, Sections 5.01 and 10.13. (b) Release of Pledged Shares and of Non-Cash Net Proceeds and Extraordinary Distributions in Connection with a Collateralized Cash Proceeds Offer or Optional Redemption. (1) The Company shall be entitled to a release of Pledged Shares from the Lien of this Indenture in order to effect a Pledged Share Sale; provided, that (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is otherwise permitted under this Section 10.05 and (iii) the Company agrees to subject money in an amount equal to the amount of Net Proceeds of such Pledged Share Sale received by the Company, including all Trust Moneys in the Accounts to the extent required in this Article 10, to an offer to purchase Securities in accordance with the provisions of Section 103 111 10.05(f) or, if such Pledged Share Sale is a Public Equity Offering and the Company shall so elect pursuant to Section 10.05(g) with respect to all or any portion of such Net Proceeds, to effect an optional redemption of Securities pursuant to Article 3 of this Indenture and paragraph 5 of the Securities. (2) The Company shall be entitled to a release of (A) Net Proceeds, other than money or Cash Equivalents, of either (x) a Primary Share Sale by MGI or by Kaiser, that were distributed on Pledged MGI Shares, or on Pledged Kaiser Shares, as the case may be, or (y) a Pledged Share Sale in respect of any Pledged Shares or of (B) Extraordinary Distributions on any Pledged Shares in a form other than money or Cash Equivalents: (i) if all or any portion of such Net Proceeds or Extraordinary Distributions are disposed of in one or more transactions (a "Monetization") for consideration consisting of money or Cash Equivalents (but which may also include customary indemnities) and the Company delivers or causes to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account or the Cash Collateral Public Equity Offering Account, as applicable, all of the money or Cash Equivalents received in such Monetization, in which case all or such portion of such Net Proceeds or Extraordinary Distributions shall, simultaneously with such Monetization, be released from the Lien of this Indenture; (ii) if, in connection with a Collateralized Cash Proceeds Offer, the Company delivers to the Trustee for deposit into the Cash Collateral Offer Account, pursuant to Section 10.05(f)(ix), money in the amount specified in such section, in which case (a) all of such Net Proceeds or Extraordinary Distributions shall be released from the Lien of this Indenture, simultaneously with such deposit, if the Cash Collateralized Proceeds Purchase Price for the Securities equals or exceeds the Call Price therefor plus accrued and unpaid interest, if any, thereon to (but not including) the Collateralized Cash Proceeds Purchase Date and (b) if the preceding clause (a) is not applicable, a portion of such Net Proceeds or Extraordinary Distributions, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company shall, simultaneously with such deposit, be released from the Lien of this Indenture; and (iii) if, in connection with an optional redemption using Net Proceeds of a Public Equity Offering that are subject to the Lien of this Indenture, the Company delivers to the Trustee for deposit into the Cash Collateral Public Equity 104 112 Offering Account, pursuant to Section 10.05(g), money in the amount specified in such section, in which case there shall be released from the Lien of this Indenture, simultaneously with such deposit, a portion of such Net Proceeds, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company. (iv) If, in connection with an optional redemption referred to in Section 10.05(f)(xiv), the Company delivers to the Trustee for deposit into the Cash Collateral Offer Account, pursuant to Section 10.05(f)(xiv), money in the amount specified in such section, in which case a portion of such Net Proceeds or Extraordinary Distributions, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company shall, simultaneously with such deposit, be released from the Lien of this Indenture. (c) Pledged Kaiser Share Release and Substitution. (1) The Company shall be entitled to a release of any Pledged Kaiser Shares from the Lien of this Indenture at any time and from time to time if (i) no Event of Default, no Collateral Default and no Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is permitted under this Section 10.05(c) and (iii) there shall remain as Collateral, immediately subsequent to any such release, a number of Pledged Kaiser Shares equal to 16,055,000 multiplied by a fraction, the numerator of which is equal to the sum of (x) the aggregate principal amount of Securities outstanding on the date of such release, plus (y) one-half of the difference obtained by subtracting the aggregate principal amount of Securities outstanding on the date of such release from the aggregate principal amount of Securities outstanding on the Issue Date, and the denominator of which is the aggregate principal amount of Securities outstanding on the Issue Date. To the extent that Pledged Kaiser Shares are comprised of securities or other property substituted for Kaiser Shares (as contemplated by the definition of Pledged Kaiser Shares), the kind and amount of Pledged Kaiser Shares to be released shall be appropriately adjusted to take account of the kind and amount of such securities or other property so substituted for each Kaiser Share. (2) The Company shall be entitled to a release of Pledged Kaiser Shares from the Lien of this Indenture at any time and from time to time in connection with, and MAXXAM and 105 113 the Company may permit Kaiser to effect, a merger or consolidation of Kaiser (or a successor thereto pursuant to this Section 10.05(c)(2)) into, or a sale or transfer of all or substantially all of the assets of Kaiser in any transaction or series of related transactions to, another person, or in connection with any other corporate reorganization of Kaiser (other than a spin-off or other similar distribution of Kaiser Shares to stockholders of MAXXAM or the Company) (a "Kaiser Transaction") if (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, (ii) the Trustee receives, as Collateral subject to the Lien of this Indenture, in substitution for such Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction, (iii) all holders of the common stock of Kaiser (or such successor) shall (subject to proration, customary treatment of fractional amounts and other similar adjustments) be entitled to receive substantially the same consideration in respect of their shares of Kaiser common stock pursuant to the terms of such Kaiser Transaction and (iv) any non-money or non-Cash Equivalent consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction shall have been registered under the Securities Act to the extent required under the Federal securities laws. (3) The Company shall be entitled to a release of any Trust Moneys from the Lien of the Indenture at any time or from time to time if (i) no Event of Default, no Collateral Default and no Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is permitted under this Section 10.05(c) and (iii) there remains as Collateral immediately subsequent to any such release, an amount of Trust Moneys equal to the greater of (x) the Make-Whole Price with respect to the then outstanding principal amount of the Securities (if such release occurs prior to August 1, 2000) and (y) 110% of the then outstanding principal amount of the Securities. Any Trust Moneys to be released pursuant to the provisions of this Section 10.05(c)(3) at any time shall be released from the Accounts in the following order of priority until an amount of Trust Moneys equal to the total amount to be released at such time has been released: first, from the Cash Collateral Account; second, from the Cash Collateral Default Account; third, from the Cash Collateral Offer Account; and, fourth, from the Cash Collateral Public Equity Offering Account. 106 114 (d) Release Upon Defeasance. Notwithstanding anything to the contrary in this Indenture, upon satisfaction by the Company of the conditions set forth in Article 8 to its legal defeasance option, its covenant defeasance option or to the discharge of this Indenture, the Lien of this Indenture on all the Collateral shall terminate and all the Collateral shall be released without any further action on the part of the Trustee or any other Person. (e) Further Assurances by Trustee Upon Release of Collateral. Upon the release of any Collateral pursuant to this Article 10, the Trustee shall execute and deliver an instrument or instruments acknowledging the release of such Collateral from the Lien of this Indenture and the discharge of the Lien on such Collateral created by this Article 10, and shall duly assign, transfer and deliver to the Company or such other person as may be entitled thereto (without recourse and without any representation or warranty) such Collateral. (f) Collateralized Cash Proceeds Offer Procedures. (i) Each holder shall have the right, at such Holder's option, to require the Company to apply Trust Moneys in the Cash Collateral Offer Account, together with other money, if required, in an aggregate amount equal to the Collateralized Cash Proceeds Offer Amount, to purchase Securities tendered pursuant to an offer by the Company to purchase, for U.S. Legal Tender pursuant to an unconditional, irrevocable offer, subject to applicable law, Securities at a purchase price (the "COLLATERALIZED CASH PROCEEDS PURCHASE PRICE") equal to not less than the sum of (1) 101% of the principal amount thereof plus (2) accrued and unpaid interest to but not including the date of purchase, in accordance with the procedures (including proration in the event of an oversubscription) set forth in this Section 10.05(f) (a "COLLATERALIZED CASH PROCEEDS OFFER"); provided, that the Company shall not be required to (but may in its discretion) make a Collateralized Cash Proceeds Offer if the sum of (x) the amount of Trust Moneys deposited in the Cash Collateral Offer Account, together with (y) the value, when it became Collateral, of non-money and non-Cash Equivalent Net Proceeds, Extraordinary Distributions and Exempt Distributions then required to constitute Collateral, in each case that have not previously been (and are not being) subjected to an offer pursuant to this Section 10.05(f) or (in the case of Net Proceeds of a Public Equity Offering) applied to an optional redemption pursuant to Section 10.05(g) (the amounts specified in clause (y), above, to the extent not subjected or applied (or being subjected or applied) as aforesaid, being hereafter referred to collectively as the "NON-CASH AMOUNT"), do not in the aggregate exceed $10,000,000. No Net Proceeds, Exempt 107 115 Distributions, Extraordinary Distributions or other Trust Moneys shall be required to be subjected to more than one Collateralized Cash Proceeds Offer (or be subjected to any such offer to the extent they have been applied to an optional redemption (or are being so applied) in accordance with Section 10.05(f)(xiv)), and no Net Proceeds of a Public Equity Offering that have been applied to an optional redemption (or that are being so applied or that may be so applied pursuant to an election by the Company pursuant to Section 10.05(g) the time for which has not expired) in accordance with Section 10.05(g) shall be required to be subjected to a Collateralized Cash Proceeds Offer. Pending application of any Trust Moneys in the Cash Collateral Offer Account in accordance with this Section 10.05(f), such moneys may be invested in accordance with Section 10.03(c). (ii) Within 30 days following the date on which the Trust Moneys in the Cash Collateral Offer Account, together with the Non-Cash Amount, exceed $10,000,000 (the amount of such Trust Moneys together with the Non-Cash Amount, as of the close of business on the second Business Day prior to the mailing of the Collateralized Cash Proceeds Offer Notice, described below, being hereinafter referred to as the "COLLATERALIZED CASH PROCEEDS OFFER AMOUNT"), or earlier if it shall so elect, the Company shall mail a written notice of a Collateralized Cash Proceeds Offer to the Trustee, the Paying Agent (which for purposes of this Article 10 shall not be the Company or any of its Affiliates or Subsidiaries) and each Holder (and to beneficial owners as required by applicable law including, without limitation, the Exchange Act and the rules and regulations promulgated pursuant thereto) (the "COLLATERALIZED CASH PROCEEDS OFFER NOTICE"). The Collateralized Cash Proceeds Offer Notice shall include a form of Collateralized Cash Proceeds Purchase Notice (as described below) to be completed by the Holder, and shall contain or state: (1) the Collateralized Cash Proceeds Offer Amount, a brief description of the transactions which have generated such amount, and the calculation of the Collateralized Cash Proceeds Offer Amount; (2) the date by which the Collateralized Cash Proceeds Purchase Notice pursuant to this Section 10.05(f) must be delivered to the Paying Agent; (3) the scheduled date of purchase (the "Collateralized Cash Proceeds Purchase Date"), which shall be no earlier than 30 days and not later than 60 days following the date on which such Collateralized Cash Proceeds Offer Notice is mailed, subject to compliance with applicable law; 108 116 (4) the applicable Collateralized Cash Proceeds Purchase Price; (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; (7) that the Collateralized Cash Proceeds Price for any Security as to which a Collateralized Cash Proceeds Purchase Notice has been duly given and not withdrawn shall be paid promptly (subject to proration) following the later of the Collateralized Cash Proceeds Purchase Date and the time of surrender of such Security as described in this Section 10.05(f); (8) that if Collateralized Cash Proceeds Purchase Notices are given with respect to Securities having an aggregate Collateralized Cash Proceeds Purchase Price in excess of the Collateralized Cash Proceeds Offer Amount pursuant to the Collateralized Cash Proceeds Offer, the Company shall purchase Securities on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 or integral multiples thereof shall be acquired) (9) the procedures that the Holder must follow to exercise rights under this Section 10.05(f) and a brief description of those rights; and (10) the procedures for withdrawing a Collateralized Cash Proceeds Purchase Notice. (iii) To accept the offer to purchase Securities described in this Section 10.05(f), a Holder must deliver a written notice of purchase (a "COLLATERALIZED CASH PROCEEDS PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Collateralized Cash Proceeds Purchase Date, stating: (1) the name of the Holder, the principal amount and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the Collateralized Cash Proceeds Offer is being accepted with respect to such Securities; (2) the portion of the principal amount of any Security which the Holder will deliver to be purchased, which portion must be $1,000 or an integral multiple thereof; and 109 117 (3) that such Security or Securities shall be purchased on the Collateralized Cash Proceeds Purchase Date pursuant to the terms and conditions specified in the Securities and this Indenture. (iv) The delivery of a Security, by hand or by registered mail prior to, on or after the Collateralized Cash Proceeds Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a condition to the receipt by the Holder of the Collateralized Cash Proceeds Purchase Price therefor; provided, however, that such Collateralized Cash Proceeds Purchase Price shall be so paid pursuant to this Section 10.05(f) only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Collateralized Cash Proceeds Purchase Notice and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which a Collateralized Cash Proceeds Purchase Notice has not been received by the Paying Agent prior to the close of business on the third Business Day immediately preceding the Collateralized Cash Proceeds Purchase Date. (v) In the event that the Collateralized Cash Proceeds Offer described in this Section 10.05(f) shall be accepted in accordance with the terms thereof with respect to any portion of a Security, the Company shall purchase from the holder thereof (subject to proration pursuant to clause (viii) of this Section 10.05(f)), pursuant to this Section 10.05(f), such portion of such Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount to that of the unpurchased portion of the Security so surrendered. (vi) Upon receipt by the Paying Agent of the Collateralized Cash Proceeds Purchase Notice as specified in this Section 10.05(f), the Holder of the Security (or portion thereof) in respect of which such Collateralized Cash Proceeds Purchase Notice was given shall (subject to proration pursuant to clause (viii) of this Section 10.05(f)) and unless such Collateralized Cash Proceeds Purchase Notice is withdrawn as specified in clause (vii) of this Section 10.05(f)) thereafter be entitled to receive the applicable Collateralized Cash Proceeds Purchase Price with respect to such Security (or portion thereof). Such Collateralized Cash Proceeds Purchase Price shall be due and payable as of the Collateralized Cash Proceeds Purchase Date and shall be paid to such Holder promptly following the later of (A) the Collateralized Cash 110 118 Proceeds Purchase Date (provided, the conditions in clauses (iii) and (iv) of this Section 10.05(f), as applicable, have been satisfied) and (B) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by such clauses (iii) and (iv). (vii) A Collateralized Cash Proceeds Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the second Business Day preceding the Collateralized Cash Proceeds Purchase Date specifying: (1) the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (2) the principal amount of the Security or Securities with respect to which such notice of withdrawal is being submitted; and (3) the principal amount, if any, of such Security or Securities which remains subject to the original Collateralized Cash Proceeds Purchase Notice, and which has been or will be delivered for purchase by the Company. (viii) If at the close of business on the second Business Day preceding the Collateralized Cash Proceeds Purchase Date, the Collateralized Cash Proceeds Purchase Price of all Securities for which Collateralized Cash Proceeds Purchase Notices have been given and not withdrawn exceeds the Collateralized Cash Proceeds Offer Amount, the Paying Agent shall select the Securities to be purchased such that each properly tendering Holder shall receive a portion of the Collateralized Cash Proceeds Offer Amount on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 or integral multiples thereof shall be purchased). The Paying Agent shall promptly return to the Holder thereof any Securities surrendered which the Company shall not be required to purchase pursuant to this Section 10.05(f). (ix) Prior to noon, New York time, on the Collateralized Cash Proceeds Purchase Date, the Company shall deliver to the Trustee, for deposit into the Cash Collateral Offer Account, an amount of money equal to the amount, if any, by which (A) the lesser of (x) the aggregate Collateralized Cash Proceeds Purchase Price of all Securities for which Collateralized Cash Proceeds Purchase Notices have been given and not withdrawn and (y) the Collateralized Cash Proceeds Offer Amount exceeds (B) the amount of money on deposit in the Cash Collateral Offer Account. Following such delivery, if any, but in any 111 119 event on or prior to noon, New York time, on the Collateralized Cash Proceeds Purchase Date, the Trustee shall release from the Lien of this Indenture and deliver to the Paying Agent an amount of money from the Cash Collateral Offer Account equal to the amount specified in clause (A) above. (x) Any Trust Moneys remaining in the Cash Collateral Offer Account following release and delivery by the Trustee pursuant to Section 10.05(f)(ix) shall be (A) deposited in the Cash Collateral Account if the Collateralized Cash Proceeds Purchase Price for the Securities does not equal or exceed the Call Price therefor plus accrued and unpaid interest, if any, thereon to (but not including) the Collateralized Cash Proceeds Purchase Date, in which case such Trust Moneys shall remain subject to the Lien of this Indenture, or (B) delivered to the Company, if the preceding clause (A) is not applicable, in which case such moneys shall be released from the Lien of this Indenture without the need for any further action from the Trustee. (xi) If money sufficient to pay the Collateralized Cash Proceeds Purchase Price of all Securities (or portions thereof) to be purchased on the Collateralized Cash Proceeds Purchase Date is deposited with the Paying Agent as of the Collateralized Cash Proceeds Purchase Date, interest shall cease to accrue on all such Securities (or portions thereof) on and after the Collateralized Cash Proceeds Purchase Date, whether or not any such Security is delivered to the Paying Agent, and the holders thereof shall have no other rights as such, other than the right to receive the Collateralized Cash Proceeds Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (xii) In connection with any offer to purchase, or any purchase of, Securities under this Section 10.05(f), the Company shall (i) comply with the Exchange Act, if applicable, (ii) file any required Schedules of the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (xiii) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by it for the payment of the Collateralized Cash Proceeds Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 10.05(f)(ix) (together with Trust Moneys at the time in the Cash Collateral Offer Account) 112 120 exceeds the aggregate Collateralized Cash Proceeds Purchase Price of the Securities or portions thereof to be purchased on the Collateralized Cash Proceeds Purchase Date, then promptly after the Collateralized Cash Proceeds Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. (xiv) Notwithstanding the foregoing provisions of this Section 10.05(f), the Company shall not be required to make a Collateralized Cash Proceeds Offer if and to the extent that, prior to the time when the Company would have been required to make such Collateralized Cash Proceeds Offer, the Company shall have, by written notice to the Trustee, (1) elected to apply all or any portion of the Collateral Cash Proceeds Offer Amount (such Collateralized Cash Proceeds Offer Amount to be computed as if the date of delivery of such written notice to the Trustee were the date of mailing of a Collateralized Cash Proceeds Offer Notice) to a then permitted optional redemption of the Securities, in whole or in part, at a redemption price equal to not less than 101% of the principal amount thereof plus accrued and unpaid interest, if any, to (but not including) the redemption date and (2) notified the Trustee of the redemption date and the aggregate principal amount of Securities to be redeemed. Following the giving of such written notice, the Company shall, prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, deliver to the Trustee, for deposit into the Cash Collateral Offer Account, an amount of money equal to the amount, if any, by which the aggregate redemption price of all Securities called for redemption, including accrued and unpaid interest, if any, thereon to (but not including) the date of redemption exceeds the amount of money on deposit in the Cash Collateral Offer Account. Following such delivery, if any, but in any event on or prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, the Trustee shall release from the Lien of this Indenture and deliver to the Paying Agent an amount of money from the Cash Collateral Offer Account equal to the aggregate redemption price of all Securities called for redemption, including accrued and unpaid interest, if any, thereon to (but not including) the date of redemption. (g) Release Upon Election Optionally to Redeem. If the Company receives Net Proceeds from a sale of Pledged Shares or from a Primary Share Sale that becomes subject to the Lien of this Indenture, and if such sale constitutes a Public Equity Offering and the Company is entitled at such time to effect an optional redemption in part of Securities pursuant to Article 3 of this Indenture and paragraph 5 of the Securities with 113 121 such Net Proceeds, then the Company may elect, by written notice to the Trustee delivered within 30 days after it receives such Net Proceeds, to apply all or any portion of such Net Proceeds to such an optional redemption. Following the giving of such written notice, the Company shall, prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, deliver to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, an amount of money equal to the amount, if any, by which the aggregate redemption price of all Securities called for redemption, including accrued and unpaid interest, if any, to (but not including) the date of redemption (the "AGGREGATE REDEMPTION PRICE"), exceeds the amount of money on deposit in the Cash Collateral Public Equity Offering Account. Following such delivery, if any, but in any event on or prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, the Trustee shall release from the Lien of this Indenture and deliver to the Paying Agent an amount of money from the Cash Collateral Public Equity Offering Account equal to the Aggregate Redemption Price. Pending application of any Trust Moneys in the Cash Collateral Public Equity Offering Account in accordance with this Section 10.05(g), such moneys may be invested in accordance with Section 10.03(c). SECTION 10.06. TRUSTEE APPOINTED ATTORNEY-IN-FACT. The Company hereby appoints the Trustee as its attorney-in-fact, with power of substitution and with full authority in its place and stead and in its name or the Trustee's own name, from time to time, in the Trustee's discretion subject to the provisions of this Article 10, to take any action and to execute any instrument which the Trustee may deem necessary or advisable in order to accomplish the purposes of this Article 10, including to receive, endorse and collect all instruments made payable to it representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. This power, being coupled with an interest, is irrevocable. SECTION 10.07. TRUSTEE MAY PERFORM. If the Company fails in any material respect to perform any agreement contained in this Article 10, or fails to take any action required to be taken by it, to perfect or maintain the perfection and priority of the Trustee's Lien on any applicable Collateral, the Trustee may itself perform, or cause performance of, such agreement, and the expenses of the Trustee incurred in connection therewith shall be payable by the Company under Section 7.07. Without limiting the foregoing, the Trustee is authorized to file financing statements without the signature of the grantor of a security interest in any Collateral in order to perfect any Lien on such Collateral. 114 122 SECTION 10.08. REMEDIES UPON EVENT OF DEFAULT. If any Notice of Acceleration shall have been delivered and is at the time in effect, the Trustee may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies provided a secured party upon the default of a debtor under the Uniform Commercial Code at that time. Without limiting the foregoing, the Trustee may, without notice, except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Trustee's offices or elsewhere, for cash, on credit or for future delivery, upon such terms as the Trustee may determine to be commercially reasonable, and the Trustee or any securityholder may be the purchaser of any or all of the Collateral so sold and thereafter hold the same, absolutely, free from any right or claim of whatsoever kind. The Company agrees that, to the extent notice of sale shall be required by law, at least 10 days' notice to the Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Trustee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed there for, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Trustee shall incur no liability to the Company as a result of the sale of the Collateral, or any part thereof, at any private sale conducted in a commercially reasonable manner. The Company hereby waives any claim against the Trustee arising by reason of the fact that the price at which any Collateral pledged by it hereunder may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Trustee accepts the first offer received and does not offer such Collateral to more than one offeree. The Company recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, the Trustee may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. The Company acknowledges and agrees that any such sale may result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions and, notwithstanding such circumstances, agrees that any such sale of any Collateral pledged by it hereunder shall be deemed to have been made in a commercially reasonable manner. The Trustee shall be under no obligation to delay the sale of any of the Pledged Shares for the period of time necessary to permit the Company to register such securities for public sale 115 123 under the Securities Act or under applicable state securities laws, even if the Company would agree to do so. If a Notice of Acceleration has been delivered and is at the time in effect, the Trustee may, upon written notice, require the Company to use its best efforts to cause to be registered as soon as possible pursuant to the Securities Act and relevant state securities laws the Pledged Shares and to keep such registration effective for at least 360 consecutive days, and to enter into customary arrangements with the Trustee and the holders concerning indemnification and reimbursement of expenses. SECTION 10.09. APPLICATION OF PROCEEDS. If a Notice of Acceleration has been delivered and is at the time in effect, any Trust Moneys held by the Trustee as Collateral, and all proceeds received by the Trustee in respect of any sale of, collection from or other realization upon, all or any part of the Collateral, shall be applied by the Trustee in the manner specified in Section 6.10. SECTION 10.10. CONTINUING LIENS. Except as provided in Article 5 and this Article 10, the Company represents that this Indenture shall create a continuing Lien on the Collateral with respect to which a security interest is granted pursuant to Section 10.01(a), and on any Released Kaiser Shares in which a security interest may hereafter be granted by the Company pursuant to Section 10.01(b), that shall (i) remain in full force and effect until payment in full of the Securities, (ii) be binding upon the Company and its successors and assigns and (iii) enure to the benefit of the Trustee and its successors, transferees and assigns. SECTION 10.11. CERTIFICATES AND OPINIONS. The Company shall comply with (a) TIA Section 314(b) relating to Opinions of Counsel regarding the Lien of this Indenture and (b) TIA Section 314(d) relating to the release and substitution of Collateral from the Lien of this Indenture and Officers' Certificates or other documents regarding fair value of the Collateral, to the extent such provisions are applicable. The release of any collateral, in whole or in part, from the Lien of this Indenture shall be deemed not to impair in contravention of this Indenture, any of the Liens relating to the Collateral, or otherwise contravene the provisions of this Indenture, if and to the extent such Collateral is released pursuant to and in compliance with the terms of this Indenture. Any certificate or opinion required by TIA Section 314(d) may be executed and delivered by an Officer of the Company to the extent permitted by TIA Section 314(d). SECTION 10.12. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants as follows: 116 124 (i) The Company is the record and beneficial owner of the Pledged Shares described on Exhibit D, free and clear of any Lien, except for the Lien created by this Indenture. (ii) The Company has full corporate power, authority and legal right to pledge all the Pledged Shares described on Exhibit D and all other Collateral pledged by the Company. (iii) The Pledged Shares described on Exhibit D have been duly authorized and are validly issued, fully paid and non-assessable. (iv) The pledge in accordance with the terms of this Indenture of the Pledged Shares described on Exhibit D (assuming no failure by the Trustee to perform acts customarily required of a secured party in such circumstances) creates an (except for Liens permitted under Section 4.16) exclusive and a valid and perfected first priority Lien on such Collateral, securing payment of principal and premium of and interest on the Securities by the Company. (v) Exhibit D hereto sets forth a description of all the Pledged Shares owned by the Company as of the Issue Date. (vi) There are no existing options, warrants, calls or similar commitments relating to any authorized and unissued Stock of MGI. SECTION 10.13. CERTAIN MERGERS, CONSOLIDATIONS, ETC. AMONG THE COMPANY, MGI AND RESTRICTED SUBSIDIARIES. Notwithstanding any other provision of this Indenture, the Company may at any time and from time to time permit MGI to merge or consolidate into, or sell or transfer all or substantially all its assets in any transaction or series of transactions to, any Restricted Subsidiary if: (i) the Trustee receives, as Collateral subject to the Lien of this Indenture, the consideration distributed to the Company on the Pledged MGI Shares in such transaction or transactions; (ii) after giving effect to such transaction or transactions, the Collateral includes at least a majority of the Voting Stock and outstanding equity interests (on a fully diluted basis) of the person surviving such merger or consolidation or to whom such transfer is made, in a proportion at least equal to that in which the Voting Stock and outstanding equity interests of MGI were included in the Collateral immediately prior to such transaction or transactions; 117 125 (iii) no Default exists or would exist immediately following such transaction or transactions after giving effect thereto on a pro forma basis; and (iv) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that clause (iii) above is satisfied and stating that such transaction or transactions are otherwise permitted by this Section 10.13. Upon satisfaction of the requirements of this Section 10.13, the Trustee shall, if requested, release the Pledged MGI Shares from the Lien of this Indenture to the extent necessary to effect any transaction or transactions permitted under this Section 10.13; provided, that any person surviving such merger or consolidation, or to whom such sale or transfer is made, pursuant to the foregoing provisions of this Section 10.13 shall be deemed to be, for all purposes of this Indenture, MGI, such person shall be a Restricted Subsidiary and any owner of shares of Stock of such person that is either the Company or a Subsidiary of the Company shall grant a security interest (of like tenor to the security interest granted on the Issue Date pursuant to Section 10.01(a)) in such shares of Stock and shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations with respect to such shares applicable to the Company with respect thereto under this Article 10. Notwithstanding any other provision of this Indenture, MGI may, at any time and from time to time, merge or consolidate into, or transfer all or substantially all its assets in any transaction or series of transactions to, the Company. ARTICLE 11 MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 11.02. NOTICES. Any notice or communication shall be in writing and delivered in person, transmitted by facsimile (confirmed in writing by mail) or mailed by first-class mail addressed as follows: 118 126 If to the Company: MAXXAM Group Holdings, Inc. 5847 San Felipe, Suite 2600 Houston, Texas 77057 Attention: General Counsel Telecopy Number: (713) 267-3702 with copies to: Howard A. Sobel, Esq. c/o Kramer, Levin, Naftalis & Frankel 919 Third Avenue New York, New York 10022 Telecopy Number: (212) 715-8000 and if to the Trustee: First Bank National Association Corporate Trust Department 180 East 5th Street Second Floor St. Paul, Minnesota 55101 Attention: Rick Prokosch Telecopy Number: (612) 244-0711 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Notwithstanding anything to the contrary in this Section 11.02, notices to the Company or the Trustee shall only be deemed given when received by the Company or the Trustee, as the case may be. SECTION 11.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Security holders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities and the Trustee shall comply with TIA 119 127 Section 312(b). The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee upon the Trustee's request: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with (or will have been complied with upon the execution and delivery of designated instruments); and (ii) an Opinion of Counsel stating that, in the opinion of such counsel, as to legal matters, all such conditions precedent have been complied with (or will have been complied with upon the execution and delivery of designated instruments); except that in the case of any application or request as to which the furnishing of such documents is specifically required by any provisions of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the person making such certificate or rendering such opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such covenant or condition has been complied with. SECTION 11.06. WHEN TREASURY SECURITIES DISREGARDED. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any person directly or 120 128 indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 11.07. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 11.08. LEGAL HOLIDAYS. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.09. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY, EXCEPT THAT THE LAWS OF THE STATE OF MINNESOTA SHALL GOVERN MATTERS CONCERNING THE VALIDITY AND PERFECTION OF SECURITY INTERESTS OF THE TRUSTEE IN FAVOR OF THE HOLDERS IN THE ACCOUNTS, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE COMPANY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. SECTION 11.10. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the Company, the Guarantor or the Trustee shall not have any liability for any 121 129 obligations of the Company, the Guarantor or the Trustee under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. SUCCESSORS. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions thereof shall not in any way be affected or impaired thereby. SECTION 11.13. MULTIPLE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. This Indenture may be executed in two or more counterparts, each of which shall be an original, but all of them together constitute the same agreement. SECTION 11.14. TABLE OF CONTENTS; HEADINGS. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify, restrict or otherwise affect the meaning or interpretation of any of the terms or provisions hereof. SECTION 11.15. BENEFITS OF INDENTURE. Nothing in this Indenture or the Securities, express or implied shall give to any person, other than the parties hereto and their successors hereunder, and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 11.16. NO CHALLENGE. (a) The Trustee agrees, and each Holder of a Security by its acceptance thereof agrees, that neither the Trustee nor any such Holder shall take any action to challenge or to contest, in any bankruptcy or insolvency proceeding or otherwise, or vote in any way so as to authorize or participate, directly or indirectly, in any such challenge or contest of, or file any claim in any bankruptcy or insolvency proceeding or otherwise inconsistent with: (i) the validity, priority or enforceability of the Liens and security interests granted to secure payment of the Bank Debt, whether outstanding at the date hereof or hereafter, (ii) the rights of the holders of the Bank Debt, or any agent for such holders, set forth in any security 122 130 agreement, mortgage or other collateral document with respect to such Liens and security interests, or (iii) the validity or enforceability of any provision of this Section 11.16. For purposes of this Indenture, the Liens and security interests granted in connection with the Bank Debt shall be deemed to have been given in exchange for reasonably equivalent or fair value received by the Company. (b) Except as expressly stated in this Section 11.16, the Trustee and the Holders of the Securities retain their rights to vote their claims and otherwise to act on their own behalf in any proceeding under the Bankruptcy Law. (c) The Trustee acknowledges, on behalf of itself and the Holders of the Securities, that the holders of the Bank Debt have entered or will enter into the Credit Agreement and have extended or will extend credit pursuant thereto in reliance upon this Section 11.16. This Section 11.16 shall inure to the benefit of and be enforceable by the holders of the Bank Debt and any agent for such holders. ARTICLE 12 MAXXAM GUARANTEE SECTION 12.01 SENIOR GUARANTEE. Subject to the provisions of this Article 12, the Guarantor hereby unconditionally guarantees to each Securityholder of Securities authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities or the Obligations of the Company to the Securityholders or the Trustee hereunder or under the Securities, that: (a) the principal of, and premium, if any, and interest on the Securities will be duly and punctually paid in full when due, whether at maturity, by acceleration or otherwise, and interest on overdue principal, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Securities and all other amounts and Obligations of the Company to the Securityholders or the Trustee hereunder or under the Securities will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or failing performance of any other Obligation of the Company to the Securityholders, for whatever reason, the Guarantor 123 131 will be obligated to pay, or to perform or to cause the performance of, the same immediately. The Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Securityholder with respect to any provision hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, protest, notice and all demands whatsoever and covenants that its Guarantee will not be discharged except by payment in full of the principal of, premium, if any, and interest on the Securities or as provided in Section 12.02 or Section 8.01 (subject, in the case of Section 8.01, to reinstatement pursuant to Section 8.06). If any Securityholder or the Trustee is required by any court or otherwise to return to the Company or any Custodian, trustee, liquidator or other similar official acting in relation to the Company any amount paid by any such entity to the Trustee or such Securityholder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Securityholders in respect of any Obligations guaranteed hereby until payment in full of the principal of, premium, if any, and interest on the Securities or satisfaction of the conditions set forth in Section 8.01(a) or 8.02; provided, however, that, anything in this Indenture or in the Intercompany Note to the contrary notwithstanding, any payment made by the Guarantor pursuant to this Article 12 shall automatically reduce the outstanding principal amount of the Intercompany Note by an amount equal to the amount of such payment, provided that such obligation under the Intercompany Note shall be reinstated to the extent that any Securityholder or the Trustee is required by any court or otherwise to return to the Guarantor or any Custodian, trustee, liquidator or other similar official acting in relation to the Guarantor any amount paid by any such entity to the Trustee or such Securityholder. The Guarantor agrees that, as between it, on the one hand, and the Securityholders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith 124 132 become due and payable by the Guarantor for the purpose of this Guarantee. SECTION 12.02 WHEN GUARANTOR MAY MERGE, ETC. The Guarantor shall not consolidate or merge with or into (whether or not the Guarantor is the surviving person), or sell or transfer all or substantially all of its assets to, another corporation, person or entity whether or not affiliated with the Guarantor unless: (i) the person formed by or surviving any such consolidation or merger (if other than the Guarantor) or that acquires such assets assumes all obligations of the Guarantor under this Indenture and the Securities pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exist. The resulting, surviving or transferee person (if other than the Guarantor which executed this Indenture) shall succeed to, and may exercise every right and power of, the Guarantor under this Indenture with the same effect as if such successor Guarantor had been named as the Guarantor herein and the Guarantor (except in the event of a lease of all or substantially all of the Guarantor's assets) shall be relieved of its obligations under this Indenture and the Securities. The Guarantor shall deliver to the Trustee prior to the consummation of the proposed transaction a Guarantor's Officers' Certificate and an Opinion of Counsel (to such counsel's knowledge) to the effect set forth in clause (ii) and stating that the proposed transaction and such supplemental indenture (if required) comply with this Indenture. 125 133 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. MAXXAM GROUP HOLDINGS INC. Attest: By: /s/ BERNARD L. BIRKEL By: /s/ BYRON L. WADE ------------------------ ---------------------------- Assistant Secretary Name: Byron L. Wade Title: Vice President MAXXAM INC. hereby confirms its agreements set forth in Article 12 of this Indenture. Attest: By: /s/ BERNARD L. BIRKEL By: /s/ RONALD L. REMAN ------------------------ ---------------------------- Assistant Secretary Name: Ronald L. Reman Title: Vice President - Taxes FIRST BANK NATIONAL ASSOCIATION Attest: By: /s/ BERNARD L. BIRKEL By: /s/ RICHARD PROKASCH ------------------------ ----------------------------- Assistant Secretary Name: Richard Prokasch Title: Trust Officer 126 134 EXHIBIT A (FORM OF FACE OF SECURITY) No. $ 12% [Series A] [Series B] Senior Secured Notes due 2003 MAXXAM Group Holdings Inc., a Delaware corporation, promises to pay to _____________________, or registered assigns, the principal sum of _____________ ______ DOLLARS on August 1, 2003. Interest Payment Dates: February 1 and August 1, commencing February 1, 1997. Record Dates: January 15 and July 15. Additional provisions of this Security are set forth on the other side of this Security. Dated: MAXXAM GROUP HOLDINGS INC. By_________________________ By_________________________ MAXXAM INC., as Guarantor in accordance with the Indenture By_________________________ By_________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION FIRST BANK NATIONAL ASSOCIATION as Trustee [Seal] certifies that this is one of the Series [A][B] Securities referred to in the Indenture. By__________________________________ Authorized Signatory A-1 135 [Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]* - --------------- * This paragraph should be included only if the Security is issued in global form. A-2 136 [THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUER SO REQUESTS), (ii) TO THE ISSUER OR (iii) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.]* - --------------- * This paragraph should be included only if the Security is a Transfer Restricted Security. A-3 137 [FORM OF REVERSE SIDE OF SECURITY] 12% [Series A] [Series B] Senior Secured Notes due 2003 1. Interest MAXXAM Group Holdings Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture (as hereinafter defined), being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above from December 23, 1996, until payment of such principal amount has been made or duly provided for [and shall pay any Additional Interest payable pursuant to Section 2(e) of the Registration Rights Agreement referred to below]. The Company shall pay interest [and Additional Interest, if any,] semiannually on February 1 and August 1 of each year, commencing on February 1, 1997. Interest on this Security will accrue from the most recent interest payment date next preceding the date hereof to which interest has been paid, unless the date hereof is an interest payment date to which such interest has been paid, in which case from the date hereof, or unless the date hereof is prior to February 1, 1997, in which case from December 23, 1996; except that if the date hereof is prior to an interest payment date and after the next preceding interest payment record date and if there be no default in payment of interest on the Securities on such interest payment date, then this Security shall bear interest from such interest payment date, and if there be such a default then this Security shall bear interest from the next preceding interest payment date to which interest has been paid or duly provided for or, in the case of a default in the first payment of interest, from December 23, 1996. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate per annum shown above, and it shall pay interest on overdue installments of interest [and Additional Interest, if any,] at the same rate at which interest was paid prior to default, to the extent lawful.* 2. Method of Payment The Company will pay interest [and Additional Interest, if any,] on the Securities to the persons who are registered holders of Securities at the close of business on the January 15 or July 15 next preceding an interest payment date even if Securities are canceled after the record date and on or before - --------------- * Bracketed language should be included in this paragraph only if the Security is a Transfer Restricted Security. A-4 138 such interest payment date (except defaulted interest, which will be paid to the persons who are registered holders of Securities at the close of business on a special record date established for payment of such defaulted interest, which date shall be at least ten days prior to the interest payment date). Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest [and Additional Interest, if any,] in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by check payable in such money. It may mail an interest check to a Holder's registered address.* 3. Paying Agent and Registrar Initially, First Bank National Association (the "Trustee") will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent or Registrar without notice, except as provided in the Indenture. The Company or any of its Subsidiaries may act as Paying Agent or Registrar except as provided in the Indenture. 4. Indenture This Security is one of a duly authorized issue of Securities of the Company, designated as its 12% Senior Secured Notes due 2003 (herein called the " Securities"), all issued under an Indenture, dated as of December 23, 1996 (the "Indenture"), among the Company, MAXXAM Inc., a Delaware corporation (such corporation and its successors and assigns under the Indenture being herein called "MAXXAM"), and the Trustee. The terms of the Securities include those of the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Securities issued pursuant to the Indenture. Capitalized terms used and not otherwise defined herein have the meanings given to such terms in the Indenture. The Securities are general secured obligations of the Company limited to $130,000,000 aggregate principal amount, subject to Section 2.07 of the Indenture. The Indenture imposes certain limitations on the Company and its Restricted - --------------- * Bracketed language should be included in this paragraph only if the Security is a Transfer Restricted Security. A-5 139 Subsidiaries with respect to the issuance of Indebtedness, the payment of dividends and certain other distributions by the Company, the sale or transfer of assets, transactions with Affiliates and the creation of certain Liens. in addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict dividends from Restricted Subsidiaries and certain other payments to the Company. 5. Optional Redemption At any time prior to August 1, 2000, the Company may, at its option, on not less than 15 days (or 30 days if legally required by The Depository Trust Company) nor more than 60 days notice to each Holder of the Securities to be redeemed, redeem all or any portion of the Securities at the Make-Whole Price (as defined in the Indenture) plus accrued and unpaid interest to (but not including) the date of redemption. In addition, at any time prior to August 1, 2000, the Securities may be redeemed at the option of the Company, in part, on not less than 15 days (or 30 days if legally required by The Depository Trust Company) nor more than 60 days notice to each Holder of the Securities to be redeemed, with the net proceeds of a Public Equity Offering (as defined in the Indenture), at 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to (but not including) the date of redemption; provided, however, that at least 65% of the aggregate principal amount of the Securities outstanding on the Issue Date (as defined in the Indenture) shall remain outstanding after any such redemption pursuant to this sentence. On and after August 1, 2000, the Securities may be redeemed at the option of the Company, in whole or in part, on not less than 15 days (or 30 days if legally required by The Depository Trust Company) nor more than 60 days notice to each Holder of the Securities to be redeemed, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest, if any, to (but not including) the date of redemption: If redeemed during the 12-month period commencing August 1 of the following years:
Year Price - --------------------------------------------------------------------- 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.00% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.00% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00%
A-6 140 6. Notice of Redemption Notice of redemption will be mailed at least 15 days (or 30 days if legally required by The Depository Trust Company) but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his or her registered address. Securities in denominations larger than $1,000 may be redeemed in part, but only in multiples of $1,000. If money sufficient to pay the redemption price, including accrued and unpaid interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after the redemption date interest shall cease to accrue on Securities or portions of them called for redemption (whether or not the Securities have been timely surrendered) and the only remaining right of the Holders thereof shall be to receive payment of the redemption price thereof, including accrued and unpaid interest, if any, to (but not including) the redemption date, if applicable, upon surrender to the Paying Agent of such Securities. 7. Change of Control, Certain Collateral Dispositions and Asset Sales Upon the first Change of Control (as defined in the Indenture) after the date of the Indenture, a Holder of Securities will have the right to cause the Company to purchase all or any part of the Securities of such Holder at a purchase price equal to 101% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest, if any, to (but not including) the date of purchase, subject to the terms of the Indenture. Upon certain Asset Sales (as defined in the Indenture), a Holder of Securities will have the right to cause the Company to purchase Securities of such Holder at a purchase price equal to 100% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest, if any, to (but not including) the date of purchase, subject to the terms of the Indenture. If less than all Securities are so purchased, such purchase shall be made on a pro rata basis. Upon receipt by the Company of certain proceeds of the Collateral (as defined in the Indenture), a Holder of Securities will have the right to cause the Company to purchase Securities of such Holder at a purchase price equal to not less than 101% of the principal amount of the Securities to be purchased, plus accrued and unpaid interest, if any, to (but not including) the purchase date, subject to the terms of the Indenture. If less than all Securities are so purchased, such purchase shall be made on a pro rata basis. A-7 141 8. Security To secure the full and punctual payment of the principal amount and premium of and interest on the Securities and all other amounts payable under the Indenture and the Securities when and as the same shall be due and payable, the Company has granted a security interest in all of the outstanding shares of Stock of MAXXAM Group Inc. ("MGI"), a wholly owned Subsidiary of the Company. Subject to the terms of the Indenture, if and only if any Released Kaiser Shares are released from the Lien of the MGI Indenture by reason of early retirement of the MGI Notes (other than by reason of a refinancing of the MGI Notes), the Company will pledge up to 16,055,000 of such shares as security for the Securities. The Collateral (as defined in the Indenture) is subject to substitution and release from the Lien of the Indenture to the extent provided therein. 9. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed), any Securities for a period of 15 days before the mailing of a notice of redemption of Securities selected for redemption or any Securities after an interest payment record date and before the next succeeding interest payment date. 10. Persons Deemed Owners The registered Holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to any portion of such money must look only to the Company, and not to the Trustee or Paying Agent, for payment as general creditors, or, as applicable law designates, another person. A-8 142 12. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the written consent of the Holders of at least a majority in aggregate principal amount outstanding of the Securities and (ii) any nonpayment default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in aggregate principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder of any Security, the Company and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, to comply with Articles 5 or 12 and Sections 10.01(b), 10.02(a), 10.04 or 10.13 of the Indenture (relating to successor corporations and subsequent pledges of Collateral), to provide for uncertificated Securities in addition to or in place of certificated Securities, to add to the covenants of the Company for the benefit of the Holders, to surrender any right or power conferred upon the Company, to comply with the Trust Indenture Act of 1939 or to make any change that does not adversely affect the rights of any Holder of any Security. Without the consent of each Holder of an outstanding Security affected thereby, no amendment may (i) reduce the aggregate amount of Securities whose holders must consent to an amendment to the Indenture, (ii) reduce the rate of or extend the stated maturity of any payment of interest on the Securities, (iii) reduce the principal (at maturity or any other time) of or extend the Stated Maturity of any payment of principal of any Security, including upon redemption or payment of the Asset Sale Purchase Price or Change of Control Purchase Price, (iv) reduce the premium payable upon the redemption of any Security or (v) make any Security payable in money other than that stated in the Security. Notwithstanding any other provision of the Indenture, the right of any Holder of Securities to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed therein, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder; provided, that no Holder shall have the right to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral created by the Indenture. Changes to Article 10 of the Indenture or the definitions relating thereto (except for changes permitted without the consent of Holders of Securities) may be made only with the consent of Holders of 66-2/3% of the aggregate principal amount of outstanding Securities. A-9 143 13. Defaults and Remedies Under the Indenture, Events of Default include (i) default for 30 days in payment of interest on the Securities; (ii) default in payment of the principal amount of the Securities at maturity, upon redemption or required repurchase pursuant to paragraph 5 or 7 of the Securities, upon declaration or otherwise; (iii) failure by the Company to comply with other agreements in the Indenture or the Securities, in certain cases subject to notice and lapse of time; (iv) certain defaults with respect to other Indebtedness of the Company or its Subsidiaries if the amount of such Indebtedness exceeds $10,000,000; (v) certain events of bankruptcy or insolvency; and (vi) certain judgments or decrees for the payment of money in excess of $10,000,000 that are not discharged, waived or stayed within 60 days after notice. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities may declare the principal amount of all the Securities to be due and payable in the manner and with the effect provided in the Indenture. Certain events of bankruptcy or insolvency with respect to the Company are Events of Default that will result in the principal amount of the Securities being due and payable immediately upon the occurrence and during the continuance of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. 14. Trustee Dealings with the Company Subject to certain limitations imposed by the Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities, and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 15. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Company, MAXXAM or the Trustee shall not have any A-10 144 liability for any obligations of the Company, MAXXAM or the Trustee under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 16. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 17. Discharge Subject to certain conditions, the Company may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Governmental obligations for the payment of principal and interest, if any, on the Securities, to redemption or maturity, as the case may be. 18. Abbreviations Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/m/A (= Uniform Gift to Minors Act). 19. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture which has in it the text of this Security in large type. Requests may be made to: MAXXAM Group Holdings Inc. 5847 San Felipe, Suite 2600 A-11 145 Houston, Texas 77057 Attention: Investor Relations Coordinator 20. Guarantee This Security is initially entitled to the benefits of the Guarantee of MAXXAM. Upon the terms and subject to the conditions set forth in the Indenture, MAXXAM has unconditionally guaranteed that the principal of, and premium, if any, and interest on the Securities will be duly and punctually paid in full when due, whether at maturity, by acceleration or otherwise, and interest on overdue principal, and premium, if any, and (to the extent permitted by law) interest on any interest, if any, on the Securities and all other amounts and Obligations of the Company to the Securityholders or the Trustee under the Indenture or the Securities will be promptly paid in full or performed. A-12 146 ________________________________________________________________________________ ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: Your Signature: ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Security. A-13 147 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.07 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.07 of the Indenture, state the amount and check the box: [ ] If you want to elect to have this Security purchased by the Company pursuant to Section 4.09 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.09 of the Indenture, state the amount and check the box: $__________ [ ] If you want to elect to have this Security purchased by the Company pursuant to Section 10.05(f) of the Indenture, check the box: [ ] A-14 148 If you want to elect to have only part of this Security purchased by the Company pursuant to Section 10.05(f) of the indenture, state the amount and check the box: [ ] Date:________________________ Your Signature:________________________ (sign exactly as your name appears on the other side of this Security) Signature Guarantee:_____________________ A-15 149 SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(1) The following exchanges of a part of this Global Security for Definitive Securities have been made:
Amount of Amount of Principal Signature of decrease in increase in Amount of this authorized Principal Principal Global Security officer of Amount of Amount of following such Trustee or Date of this Global this Global decrease Securities Exchange Security Security (or increase) Custodian -------- -------- -------- ----------------- ---------
- --------------- (1) This schedule should be included only if the Security is issued in global form. A-16 150 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF SECURITIES Re: 12% Senior Secured Notes due 2003 of MAXXAM Group Holdings Inc. This Certificate relates to $_____ principal amount of Securities held in * ________ book-entry or *_______ definitive form by ________________ (the "Transferor"). The Transferor*: [ ] has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Security held by the Depository a Security or Securities in definitive, registered form of authorized denominations in an aggregate principal amount equal to its beneficial interest in such Global Security (or the portion thereof indicated above); or [ ] has requested the Trustee by written order to exchange or register the transfer of a Security or Securities. In connection with such request and in respect of each such Security, the Transferor does hereby certify that Transferor is familiar with the Indenture relating to the above captioned Securities and as provided in Section 2.06 of such Indenture, the transfer of this Security does not require registration under the Securities Act (as defined below) because:* [ ] Such Security is being acquired for the Transferor's own account, without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section 2.06(d)(i)(A) of the Indenture). [ ] Such Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")) in reliance on Rule 144A (in accordance with and in satisfaction of Section 2.06(a)(ii)(B), Section 2.06(b)(i) or Section 2.06(d)(i) (B) of the Indenture) or pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (in satisfaction of Section 2.06(a)(ii)(B) or Section 2.06(d)(i)(B) of the Indenture.) - --------------- *Check applicable box. B-1 151 [ ] Such Security is being transferred pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act, or pursuant to an effective registration statement under the Securities Act (in satisfaction of Section 2.06(a)(ii)(B) or Section 2.06(d)(i)(B) of the Indenture). [ ] Such Security is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Securities Act, other than Rule 144A, Rule 144 or Rule 904 under the Securities Act. An Opinion of Counsel to the effect that such transfer does not require registration under the Securities Act accompanies this Certificate (in satisfaction of Section 2.06(a)(ii)(C) or Section 2.06(d)(i)(C) of the Indenture). --------------------------------------- [INSERT NAME OF TRANSFEROR] By:------------------------------------ Date:-------------------------------- - --------------- *Check applicable box. B-2 152 EXHIBIT C SALMON CREEK DESCRIPTION: All that certain real property situated in the State of California, County of Humboldt, and is described as follows: TOWNSHIP 3 NORTH, RANGE 1 EAST, HUMBOLDT MERIDIAN: Section 8: The West Half of the Southwest Quarter, the Southeast Quarter of the Southwest Quarter, and the Southwest Quarter of the Southeast Quarter. Section 15: The Southwest Quarter. EXCEPTING THEREFROM all oil, gas and minerals, with appurtenant rights, as excepted in deed from the Regents of the University of California recorded March 25, 1950 in Book 125 of Official Records, page 24. Section 16: Entire Section. EXCEPTING THEREFROM all oil, gas and minerals, with appurtenant rights, as excepted in deed from the Regents of the University of California recorded March 25, 1950 in Book 125 of Official Records, page 24. Section 17: The Northeast Quarter. Section 17: The West Half and the Southeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. C-1 153 Section 18: The Southeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. Section 19: The Northeast Quarter, and the North Half of the Southeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. Section 20: The North Half, the North Half of the Southeast Quarter and the North Half of the Southwest Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. The South Half of the Southeast Quarter. Section 21: Entire Section. Section 22: The South Half, and the South Half of the Northwest Quarter. Section 23: The East Half of the Southeast Quarter, the Northwest Quarter of the Southeast Quarter and the Northeast Quarter of the Southwest Quarter. EXCEPTING FROM the lands in Section 21, 22 and 23 above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. C-2 154 Section 22: The Northeast Quarter, and the North Half of the Northwest Quarter. Section 23: The South Half of the Northwest Quarter, the West Half of the Southwest Quarter, the Southeast Quarter of the Southwest Quarter, and the Southwest Quarter of the Southeast Quarter. EXCEPTING FROM the lands in Section 22 and 23 last above described all oil, gas and minerals, with appurtenant rights as excepted in the deed from the Regents of the University of California recorded March 22, 1950 in Book 125 of Official Records, page 24. Section 26: The Northwest Quarter, the North Half of the Southwest Quarter, the Southwest Quarter of the Southwest Quarter and the Southwest Quarter of the Northeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. Section 27: The West Half, the Northeast Quarter, the North Half of the Southeast Quarter and the Southeast Quarter of the Southeast Quarter. Section 28: The East Half of the Southeast Quarter, the Northeast Quarter of the Northwest Quarter, and the Northeast Quarter. EXCEPTING THEREFROM and from the land in Section 27 last above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. The West Half of the Northwest Quarter, the Southeast Quarter of the Northwest Quarter, the West Half of the Southeast Quarter, the North Half of the Southwest C-3 155 Quarter and the Southeast Quarter of the Southwest Quarter. Section 29: The North Half of the Northeast Quarter. Section 33: The Northeast Quarter. Section 35: The Northwest Quarter of the Northwest Quarter. EXCEPTING THEREFROM, one-half of all oil, gas and minerals, with appurtenant rights as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. C-4 156 EXHIBIT D TO INDENTURE
Company Type of Stock Certificate No. No. of Shares - ------------ ----------------- ----------------- --------------- MAXXAM Group Common 2 100 Inc.
D-1 EX-4.2 5 PURCHASE AGREEMENT 12/17/96 1 EXHIBIT 4.2 ================================================================================ MAXXAM GROUP HOLDINGS INC. MAXXAM INC. $130,000,000 12% Senior Secured Notes due 2003 Purchase Agreement December 17, 1996 BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ================================================================================ 2 MAXXAM GROUP HOLDINGS INC., A DELAWARE CORPORATION $130,000,000 12% Senior Secured Notes due 2003 PURCHASE AGREEMENT December 17, 1996 New York, New York BEAR, STEARNS & CO. INC. 245 Park Avenue New York, New York 10167 Ladies & Gentlemen: MAXXAM Group Holdings Inc., a Delaware corporation (the "Issuer"), confirms its agreement with Bear, Stearns & Co. Inc. ("Bear Stearns") and Donaldson, Lufkin & Jenrette Securities Corporation (together with Bear Stearns, the "Initial Purchasers") with respect to the sale by the Issuer and the purchase by the Initial Purchasers of $130,000,000 aggregate principal amount of 12% Series A Senior Secured Notes due 2003 (the "Series A Notes"), subject to the terms and conditions set forth herein. Payment of principal and interest on the Series A Notes will be guaranteed (the "Guarantee") on a senior unsecured basis by MAXXAM Inc., a Delaware corporation (the "Guarantor"). The Issuer is a newly formed, wholly owned subsidiary of the Guarantor. The Series A Notes will be issued pursuant to an indenture (the "Indenture"), to be dated as of the Closing Date (as defined), among the Issuer, the Guarantor and First Bank National Association, as trustee (the "Trustee"), and will be secured by, among other things, a first priority pledge of (i) all outstanding shares (the "Pledged MGI Shares") of MAXXAM Group Inc. ("MGI") and (ii) that certain intercompany note payable by the Guarantor to the Issuer, maturing August 1, 2003 (the "Intercompany Note"). In addition, subject to the release of such shares as security for public indebtedness of MGI, the Series A Notes may be secured by up to 16,055,000 of the 27,938,250 shares (the "Kaiser Shares") of Kaiser Aluminum Corporation, which Kaiser Shares are to be transferred by the Guarantor to the Issuer as of the Closing Date. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Indenture or the Offering Memorandum, as applicable. 1. Issuance of Securities. The Issuer proposes, upon the terms and subject to the conditions set forth herein, to issue and sell to the Initial Purchasers an aggregate of $130,000,000 principal amount of Series A Notes. The Series A Notes and the Series B Notes (as defined below) issuable in exchange therefor are collectively referred to herein as the "Notes." Upon original issuance of the Series A Notes, and until such time as the same is no longer required under the applicable requirements of the Securities Act of 1933, as amended (the "Act"), the Series A Notes (and all securities issued in exchange therefor) shall bear the following legend: 3 "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUER SO REQUEST), (ii) TO THE ISSUER OR (iii) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." 2. Offering. The Series A Notes are being offered and sold to the Initial Purchasers pursuant to an exemption from the registration requirements under the Act. The Issuer has prepared a preliminary offering memorandum, dated November 27, 1996 (the "Preliminary Offering Memorandum"), and will prepare a final offering memorandum (the "Offering Memorandum"), relating to the Issuer, the Guarantor, their respective subsidiaries, the Series A Notes and the Guarantee. The Initial Purchasers have advised the Issuer that the Initial Purchasers will make offers (the "Exempt Resales") of the Series A Notes on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to persons whom the Initial Purchasers reasonably believe to be qualified institutional buyers (as defined in Rule 144A under the Act) ("Qualified Institutional Buyers") in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A, and to a limited number of institutional accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the Act) ("Accredited Investors") that, prior to their purchase of Series A Notes, deliver to the Initial Purchasers an Accredited Investor Letter (as defined in the Offering Memorandum). The Qualified Institutional Buyers and the Accredited Investors are referred to herein as the "Eligible Purchasers." The Initial Purchasers will offer the Series A Notes to such Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. 4 Holders (including subsequent transferees) of the Series A Notes will have the registration rights set forth in the registration rights agreement relating thereto (the "Registration Rights Agreement"), to be dated the Closing Date, for so long as such Series A Notes constitute "Registrable Securities" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Issuer and the Guarantor will agree to file with the Securities and Exchange Commission (the "Commission"), under the circumstances set forth therein, (i) a registration statement under the Act (the "Exchange Offer Registration Statement") relating to the 12% Senior Secured Notes due 2003, Series B (the "Series B Notes") to be offered in exchange for the Series A Notes (the "Exchange Offer") and (ii) under certain circumstances, a shelf registration statement under the Act (the "Shelf Registration Statement") relating to the resale by certain holders of the Series A Notes, and to use their best efforts to cause such registration statement to be declared effective and to consummate the Exchange Offer. This Agreement, the Series A Notes, the Series B Notes, the Registration Rights Agreement, the Indenture and the Intercompany Note are hereinafter sometimes referred to collectively as the "Operative Documents." 3. Purchase, Sale and Delivery. (a) On the basis of the representations, warranties and covenants contained in this Agreement, and subject to the terms and conditions set forth herein, the Issuer agree to issue and sell to the Initial Purchasers, and the Initial Purchasers agree, severally and not jointly, to purchase from the Issuer, in the proportions specified in Schedule A hereto, $130,000,000 aggregate principal amount of Series A Notes, at an aggregate purchase price equal to 97.25% of the principal amount thereof. (b) Payment of the purchase price and delivery of the certificate representing the Series A Notes shall be made at the offices of Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022, or such other location as may be agreed upon by the Initial Purchasers and the Issuer. Such delivery and payment shall be made at 9:00 A.M. New York time, on December 23, 1996 or at such other time as shall be agreed upon by the Initial Purchasers and the Issuer. The time and date of such delivery and payment are herein called the "Closing Date." (c) One or more Series A Notes in definitive form, registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), having an aggregate amount corresponding to the aggregate amount of the Series A Notes sold pursuant to Exempt Resales to Qualified Institutional Buyers (the "Global Note") shall be delivered by the Issuer to the Initial Purchasers (or as the Initial Purchasers direct), against payment by the Initial Purchasers of the purchase price therefor, by wire transfer of same day funds, to an account designated by the Issuer, provided that the Issuer shall give at least two business days' prior written notice to the Initial Purchasers of the information required to effect such wire transfer. The Global Note shall be made available to the Initial Purchasers for inspection not later than 9:30 A.M. on the business day immediately preceding the Closing Date. (d) One or more Series A Notes in definitive certificated form, registered in the name of the respective Accredited Investors, having an aggregate amount corresponding to the aggregate amount of the Series A Notes sold pursuant to Exempt Resales to such Accredited Investors (the "Certificated Notes") shall be delivered by the Issuer to the Initial Purchasers (or as the Initial Purchasers direct), against payment by the Initial Purchasers of the purchase price therefor, by wire transfer of same day funds, to an account designated by the Issuer, provided that the Issuer shall give at least two business days' prior written notice to the Initial Purchasers of the information required to effect such wire transfer. The Certificated Notes shall be made available to the Initial Purchasers for inspection not later than 9:30 A.M. on the business day immediately preceding the Closing Date. 5 4. Covenants of the Issuer and the Guarantor. The Issuer and the Guarantor hereby covenant and agree with the Initial Purchasers as follows: (a) To advise the Initial Purchasers promptly and, if requested by the Initial Purchasers, confirm such advice in writing, (i) of the issuance against the Issuer or the Guarantor by any state securities commission of any stop order suspending the qualification or exemption from qualification of any Notes for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority and (ii) of the happening of any event that makes any statement of a material fact made in the Preliminary Offering Memorandum or the Offering Memorandum untrue or that requires the making of any additions to or changes in the Preliminary Offering Memorandum or the Offering Memorandum in order to make the statements of material fact therein, in the light of the circumstances under which they are made, not misleading. The Issuer and the Guarantor shall make every reasonable effort to prevent the issuance of any stop order or order suspending the qualification or exemption of any Notes under any state securities or Blue Sky laws and, if at any time any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of any Notes under any state securities or Blue Sky laws, the Issuer and the Guarantor shall make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish the Initial Purchasers and those persons identified by the Initial Purchasers to the Issuer, without charge, as many copies of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments or supplements thereto, as the Initial Purchasers may reasonably request. The Issuer and the Guarantor consent to the use of the Preliminary Offering Memorandum and the Offering Memorandum, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. (c) Not to amend or supplement the Preliminary Offering Memorandum or the Offering Memorandum prior to the Closing Date unless the Initial Purchasers shall previously have been advised thereof and shall not have objected thereto within a reasonable time after being furnished a copy thereof. The Issuer shall promptly prepare, upon the Initial Purchasers' reasonable request, any amendment or supplement to the Preliminary Offering Memorandum or the Offering Memorandum that may be necessary or advisable in connection with Exempt Resales. (d) If, after the date hereof and prior to consummation of any Exempt Resale, any event shall occur as a result of which, in the reasonable judgment of the Issuer or in the reasonable opinion of counsel for the Issuer or counsel for the Initial Purchasers, it becomes necessary or advisable to amend or supplement the Preliminary Offering Memorandum or Offering Memorandum in order to make such statements therein, in the light of the circumstances when such Offering Memorandum is delivered to an Eligible Purchaser which is a prospective purchaser, not misleading, or if it is necessary or advisable to amend or supplement the Preliminary Offering Memorandum or Offering Memorandum to comply with applicable law, (i) to notify the Initial Purchasers and (ii) promptly to prepare an appropriate amendment or supplement to such Preliminary Offering Memorandum or Offering Memorandum so that the statements therein as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that such Preliminary Offering Memorandum or Offering Memorandum will comply with applicable law. (e) To cooperate with the Initial Purchasers and counsel for the Initial Purchasers in connection with the qualification or registration of the Series A Notes under the securities or Blue 6 Sky laws of such jurisdictions of the United States as the Initial Purchasers may reasonably request and to continue such qualification in effect so long as required for the Exempt Resales; provided, however, that neither the Issuer nor the Guarantor shall be required in connection therewith to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to service of process in suits or taxation, in each case, in any jurisdiction where it is not now so subject. (f) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement becomes effective or is terminated, to pay all costs, expenses, fees and taxes incident to the performance of the obligations of the Issuer and the Guarantor hereunder, including (i) the printing, filing and distribution of the Preliminary Offering Memorandum and the Offering Memorandum (including, without limitation, financial statements) and all amendments and supplements thereto required pursuant hereto (other than legal fees and expenses of counsel to the Initial Purchasers in connection with any of the foregoing), (ii) the preparation (including, without limitation, duplication costs) and delivery of all preliminary and final Blue Sky Memoranda and all other agreements, memoranda, correspondence and all other documents prepared and delivered in connection herewith and with the Exempt Resales (including Blue Sky filing fees, but excluding legal fees and expenses of counsel to the Initial Purchasers in connection with any of the foregoing), (iii) the issuance, transfer and delivery by the Issuer of the Series A Notes to the Initial Purchasers, (iv) the qualification or registration of the Series A Notes for offer and sale under the securities or Blue Sky laws of the several states (including, without limitation, the cost of duplicating and mailing a preliminary and final Blue Sky Memorandum and the reasonable fees and disbursements of counsel for the Initial Purchasers relating thereto), (v) furnishing such copies of the Preliminary Offering Memorandum and the Offering Memorandum, and all amendments and supplements thereto, as may be reasonably requested for use in connection with Exempt Resales, (vi) the preparation of certificates for the Series A Notes (including, without limitation, printing and engraving thereof), (vii) the fees, disbursements and expenses of the Issuer's counsel and accountants, (viii) all expenses and listing fees in connection with the application for quotation of the Series A Notes in the National Association of Securities Dealers, Inc. ("NASD") Private Offering, Resales and Trading through Automated Linkages ("PORTAL") market, (ix) all fees and expenses (including fees and expenses of counsel) of the Issuer in connection with the approval of the Series A Notes by DTC for "book-entry" transfer, (x) rating the Series A Notes by rating agencies, (xi) the reasonable fees and expenses of the Trustee and its counsel in connection with the Indenture and the Series A Notes, (xii) the performance by the Issuer and the Guarantor of their other obligations under this Agreement and the other Operative Documents and (xiii) "roadshow" travel and other expenses incurred by the Issuer and the Guarantor (including one half of the expense of chartered aircraft) in connection with the marketing and sale of the Series A Notes. (g) To use the net proceeds from the sale of the Series A Notes in the manner described in the Offering Memorandum under the caption "Use of Proceeds." (h) Not to voluntarily claim, and to resist actively any attempts to claim, the benefit of any usury laws against the holders of any Notes. (i) To do and perform in all material respects all things required to be done and performed under this Agreement by it prior to or after the Closing Date, and to satisfy all conditions precedent on its part to the delivery of the Series A Notes. 7 (j) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Series A Notes in a manner that would require the registration under the Act of the sale to the Initial Purchasers or the Eligible Purchasers of the Series A Notes or to take any other action that would result in the Exempt Resales not being exempt from registration under the Act. (k) For so long as any of the Series A Notes remain outstanding and during any period in which the Issuer is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make available to any holder or beneficial owner of Series A Notes in connection with any sale thereof and any prospective purchaser of such Notes from such holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act. (l) To cause the Exchange Offer to be made in the appropriate form to permit registered Series B Notes to be offered in exchange for the Series A Notes and to comply in all material respects with all applicable federal and state securities laws in connection with the Exchange Offer. (m) To comply in all material respects with all of its agreements set forth in the Operative Documents to which it is a party and all agreements set forth in the representation letters of the Issuer to DTC relating to the approval of the Series A Notes by DTC for "book-entry" transfer. (n) To use best reasonable efforts to effect the inclusion of the Series A Notes in PORTAL and to obtain approval of the Series A Notes by DTC for "book-entry" transfer. (o) During a period of five years following the Closing Date, to deliver without charge to the Initial Purchasers, as they may reasonably request, promptly upon their becoming available, copies of all reports or other publicly available information that either the Issuer or the Guarantor shall mail or otherwise make available to its stockholders. (p) Prior to the Closing Date, to furnish to the Initial Purchasers, as soon as they have been prepared in the ordinary course by the Issuer, the Guarantor or any of their respective subsidiaries, copies of any unaudited interim financial statements for any period subsequent to the periods covered by the financial statements appearing in the Offering Memorandum. (q) On or prior to the Closing Date, the Guarantor will transfer to the Issuer the Kaiser Shares. On the Closing Date, the Issuer will represent and warrant to the Initial Purchasers that the Kaiser Shares (a) have been duly authorized, validly issued, and are fully paid and nonassessable, (b) were not issued in violation of any preemptive or similar rights and (c) except as disclosed in the Offering Memorandum, are owned by the Issuer free and clear of any security interest, claim, mortgage, lien, limitation on voting rights or encumbrance. (r) Not to take, directly or indirectly, through any of their respective subsidiaries or otherwise, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of either of the Issuer or the Guarantor to facilitate the sale or resale of the Series A Notes, and not to distribute, except as permitted by the Act, any (i) preliminary offering memorandum, including, without limitation, the Preliminary Offering Memorandum, (ii) offering memorandum, including, without limitation, the Offering Memorandum or (iii) other offering material in connection with the offering and sale of the Series A Notes. 8 (s) On the Closing Date, to furnish to the Initial Purchasers Federal Reserve Form G-3 pursuant to Regulation G of the Federal Reserve Board; on and after the Closing Date, to comply with the provisions of the Indenture described in the Offering Memorandum under the caption "Description of Notes--Certain Covenants--Use of Proceeds." 5. Representations and Warranties. (a) The Issuer and the Guarantor, jointly and severally, represent and warrant to the Initial Purchasers that: (i) The Preliminary Offering Memorandum and the Offering Memorandum do not, and any supplement or amendment to them will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph shall not apply to statements in or omissions from the Preliminary Offering Memorandum and the Offering Memorandum (or any supplement or amendment thereto) made in reliance upon and in conformity with information relating to the Initial Purchasers furnished to the Issuer in writing by the Initial Purchasers expressly for use therein. No stop order preventing the use of the Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, has been issued. (ii) Except as disclosed in the Offering Memorandum, since the date of the most recent audited financial statements included therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings or business affairs of the Issuer and its subsidiaries or the Guarantor and its subsidiaries, in each case taken as a whole (a "Material Adverse Change"), whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Issuer, the Guarantor or any of their respective subsidiaries, other than those in the ordinary course of business, which are material with respect to the Issuer, the Guarantor and their respective subsidiaries taken as a whole and (C) there has been no dividend or distribution of any kind declared, paid or made by the Issuer or the Guarantor on any class of its capital stock. (iii) Each of the Issuer and the Guarantor (A) has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of its jurisdiction of incorporation, (B) has all requisite corporate power and authority to carry on its business as it is currently being conducted and as described in the Offering Memorandum and to own, lease and operate its properties, and (C) is duly qualified and in good standing as a foreign corporation, authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified could not reasonably be expected to (x) result, individually or in the aggregate, in a material adverse effect on the properties, business, results of operations, condition (financial or otherwise), or affairs of the Issuer and its subsidiaries or the Guarantor and its subsidiaries, in each case taken as a whole, (y) materially interfere with or materially adversely affect the issuance of the Series A Notes pursuant hereto or (z) in any manner draw into question the validity of this Agreement or any other Operative Document or the transactions described in the Offering Memorandum under the caption "Use of Proceeds" (any of the events set forth in clauses (x), (y) or (z), a "Material Adverse Effect"). (iv) All of the outstanding capital stock of the Issuer (a) has been duly authorized, validly issued, and is fully paid and nonassessable, (b) was not issued in violation of any preemptive or 9 similar rights and (c) is owned by the Guarantor free and clear of any security interest, claim, mortgage, lien, limitation on voting rights or encumbrance. On September 30, 1996, after giving pro forma effect to the issuance and sale of the Series A Notes pursuant hereto (A) the Issuer would have had an authorized and outstanding capitalization as set forth in the Offering Memorandum under the caption "Capitalization of the Company," subject to the notes and assumptions included therein and (B) the Guarantor would have had an authorized and outstanding capitalization as set forth in the Offering Memorandum under the caption "Capitalization of the MAXXAM," subject to the notes and assumptions included therein. (v) Each subsidiary of either of the Issuer or the Guarantor listed on Exhibit A hereto (each a "Significant Subsidiary"), Sam Houston Race Park, Ltd. ("SHRP") and Palmas del Mar Properties, Inc. ("Palmas") (A) has been duly formed or incorporated and is validly existing as a partnership or corporation, as applicable, and is in good standing under the laws of its jurisdiction of formation or incorporation, as applicable, (B) has all requisite power (corporate or otherwise) and authority to carry on its business as it is currently being conducted and as described in the Offering Memorandum and to own, lease and operate its properties, and (C) is duly qualified and in good standing as a foreign corporation or partnership, as applicable, authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. (vi) All of the outstanding capital stock of each Significant Subsidiary, SHRP and Palmas (a) has been duly authorized, validly issued, and are fully paid and nonassessable, (b) was not issued in violation of any preemptive or similar rights and (c) except as disclosed in the Offering Memorandum, is owned by the Issuer or the Guarantor, directly or through subsidiaries, free and clear of any security interest, claim, mortgage, lien, limitation on voting rights or encumbrance, except any such security interest, claim, mortgage, lien, limitation or encumbrance as would not have a material effect on the value of such capital stock or the ability of the Issuer, any Significant Subsidiary, SHRP or Palmas to control the transfer or other disposition thereof. (vii) There are not currently any outstanding subscriptions, rights, warrants, calls, commitments of sale or options to acquire, or instruments convertible into or exchangeable for capital stock or other equity interest of the Issuer, MGI or Kaiser, except for Kaiser's PRIDES and the Guarantor's Class A Non-Cumulative Participating Convertible Preferred Stock, and except as disclosed or referred to in the Offering Memorandum or pursuant to existing option or employee or director benefit plans. (viii) When the Series A Notes are issued and delivered pursuant to this Agreement, no Series A Note will be of the same class (within the meaning of Rule 144A under the Act) as securities of either of the Issuer or the Guarantor that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in a United States automated inter-dealer quotation system. (ix) Each of the Issuer and the Guarantor has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Operative Documents to which it is a party and to consummate the transactions contemplated hereby and thereby, including (in the case of the Issuer), without limitation, the corporate power and authority to issue, sell and deliver the Series A Notes as provided herein and therein. 10 (x) This Agreement has been duly and validly authorized, executed and delivered by each of the Issuer and the Guarantor and (assuming the due authorization, execution and delivery of this Agreement by the Initial Purchasers) is the legal, valid and binding agreement of each of the Issuer and the Guarantor, enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity. (xi) The Indenture has been duly and validly authorized by each of the Issuer and the Guarantor and, when duly executed and delivered by each of the Issuer and the Guarantor, will be the legal, valid and binding obligation of each of the Issuer and the Guarantor, enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws affecting the rights of creditors generally and subject to general principles of equity. The description of the terms of the Indenture contained in the Offering Memorandum conforms in all material respects to the terms of the Indenture. (xii) The Registration Rights Agreement has been duly and validly authorized by each of the Issuer and the Guarantor and, when duly executed and delivered by each of the Issuer and the Guarantor, will be the legal, valid and binding obligation of each of the Issuer and the Guarantor, enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws affecting the rights of creditors generally and subject to general principles of equity. The description of the terms of the Registration Rights Agreement contained in the Offering Memorandum conforms in all material respects to the terms of the Registration Rights Agreement. (xiii) The Series A Notes have been duly and validly authorized by the Issuer for issuance and sale to the Initial Purchasers pursuant to this Agreement and, when issued and authenticated in accordance with the terms of the Indenture and delivered against payment therefor in accordance with the terms hereof and thereof, will be the legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms and entitled to the benefits of the Indenture, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws affecting the rights of creditors generally and subject to general principles of equity. The description of the terms of the Series A Notes contained in the Offering Memorandum conforms in all material respects to the terms of the Series A Notes. (xiv) The Series B Notes have been duly and validly authorized for issuance by the Issuer and, when issued and authenticated in accordance with the terms of the Exchange Offer and the Indenture, will be the legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms and entitled to the benefits of the Indenture, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws affecting the rights of creditors generally and subject to general principles of equity. The description of the terms of the Series B Notes contained in the Offering Memorandum conforms in all material respects to the terms of the Series B Notes. (xv) The Intercompany Note has been duly and validly authorized by the Guarantor and, when issued and delivered against payment therefor in accordance with the terms thereof, will be the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other laws affecting the rights of creditors generally and subject to general principles of equity. The description of the terms of the Intercompany Note contained in the Offering Memorandum conforms in all material respects to the terms of the Intercompany Note. 11 (xvi) Reserved. (xvii) Upon (1) authentication and execution of the Series A Notes in accordance with the terms of the Indenture, (2) delivery of the Series A Notes against payment therefor in accordance with the terms of the Purchase Agreement and (3) delivery to the Trustee in New York of the certificates representing the Pledged MGI Shares listed on Exhibit D to the Indenture, certificates representing the Pledged MGI Shares listed on Exhibit D to the Indenture, registered in the name of the Issuer, accompanied by stock powers duly endorsed in blank, the Indenture will create a valid security interest, free of any adverse claim (within the meaning of Section 8-302 of the UCC), in all of the Issuer's right, title and interest in and to such Pledged MGI Shares in favor of the Trustee under the Uniform Commercial Code as in effect on the date of the Indenture in the State of New York (the "UCC"). Such security interest will be a perfected security interest in all of the Issuer's right, title and interest in and to such Pledged MGI Shares that have been delivered to the Trustee (accompanied by stock powers duly endorsed in blank) and are in the physical possession of the Trustee in the State of New York for the benefit of the holders of the Series A Notes under the Indenture. The representation and warranty in this paragraph (xvii) is based on the assumption, without independent investigation, (a) that the Trustee will have received such Pledged MGI Shares and that the purchasers of Series A Notes on the date of execution of the Indenture are purchasing the Series A Notes in good faith and without notice (as such term is used in subsections (1), (3) and (4) of Section 8-304 of the UCC) of an adverse claim within the meaning of Section 8- 302 of the UCC with respect to such Pledged MGI Shares, (b) that such Pledged MGI Shares will at all relevant times be in the actual physical possession of the Trustee in the State of New York and (c) that the issuer is the record and beneficial owner of, and has all rights in and title to, such Pledged MGI Shares. (xviii) Upon (1) authentication and execution of the Series A Notes in accordance with the terms of the Indenture, (2) delivery of the Series A Notes against payment therefor in accordance with the terms of the Purchase Agreement and (3) delivery to the Trustee in New York of the Intercompany Note duly endorsed in blank, the Indenture will create a valid security interest in all of the Issuer's right, title and interest in and to the Intercompany Note in favor of the Trustee under the UCC. Such security interest will be a perfected security interest in the Intercompany Note that has been delivered to the Trustee (duly endorsed in blank) and is in the physical possession of the Trustee in the State of New York for the benefit of the holders of the Series A Notes under the Indenture. The representation and warranty in this paragraph (xviii) is based on the assumption, without independent investigation, (a) that the Trustee will have received the Intercompany Note and that the purchasers of Series A Notes on the date of execution of the Indenture are purchasing the Series A Notes in good faith and without notice (as such term is used in subsections (1), (3) and (4) of the Section 8-304 of the UCC) of an adverse claim within the meaning of Section 8-302 of the UCC with respect to such Intercompany Note, (b) that such Intercompany Note will at all relevant times be in the actual physical possession of the Trustee in the State of New York and (c) that the Issuer is the record and beneficial owner of, and has all rights in and title to, such Intercompany Note. (xix) The Issuer is not and, after giving effect to the Offering, will not be, (A) in violation of its charter or bylaws, (B) in default in the performance of any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties is subject that could reasonably be expected to have a Material Adverse Effect, or (C) in violation of any local, state, federal or foreign law, statute, ordinance, rule, regulation, requirement, judgment or court decree (including, without limitation, environmental laws, statutes, ordinances, rules, regulations, judgments or court 12 decrees) applicable to it or any of its subsidiaries or any of its or their assets or properties (whether owned or leased) that could reasonably be expected to have a Material Adverse Effect. (xx) The Guarantor is not and, after giving effect to the Offering, will not be, (A) in violation of its charter or bylaws, (B) in default in the performance of any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties is subject that could reasonably be expected to have a Material Adverse Effect, or (C) in violation of any local, state, federal or foreign law, statute, ordinance, rule, regulation, requirement, judgment or court decree (including, without limitation, environmental laws, statutes, ordinances, rules, regulations, judgments or court decrees) applicable to it or any of its subsidiaries or any of its or their assets or properties (whether owned or leased) that could reasonably be expected to have a Material Adverse Effect. (xxi) Neither any Significant Subsidiary, nor SHRP nor Palmas is and, after giving effect to the Offering, will be, (A) in violation of its charter, bylaws or partnership agreement, as applicable, (B) in default in the performance of any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties is subject that could reasonably be expected to have a Material Adverse Effect, or (C) in violation of any local, state, federal or foreign law, statute, ordinance, rule, regulation, requirement, judgment or court decree (including, without limitation, environmental laws, statutes, ordinances, rules, regulations, judgments or court decrees) applicable to it or any of its subsidiaries or any of its or their assets or properties (whether owned or leased) that could reasonably be expected to have a Material Adverse Effect. (xxii) None of (A) the execution, delivery or performance by either of the Issuer or the Guarantor of this Agreement or any of the other Operative Documents to which it is a party, (B) the issuance and sale of the Series A Notes or (C) except to the extent waived or consented to on or prior to the Closing Date, neither the issuance of the Intercompany Note by the Guarantor nor the transfer of the Kaiser Shares to the Issuer violates, conflicts with or constitutes a breach of any of the terms or provisions of, requires consent under, or results in the imposition of a lien or encumbrance on, any properties of the Issuer, the Guarantor or any of their respective subsidiaries, or an acceleration of any indebtedness of the Issuer, the Guarantor or any of their respective subsidiaries pursuant to (1) the respective charter or bylaws of the Issuer, the Guarantor and their respective subsidiaries, (2) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which the Issuer, the Guarantor or any of their respective subsidiaries is a party or by which any of them or their property is or may be bound, (3) any statute, rule or regulation applicable to the Issuer, the Guarantor or any of their respective subsidiaries or any of their assets or properties or (4) any judgment, order or decree of any court or governmental agency or authority having jurisdiction over the Issuer, the Guarantor or any of their respective subsidiaries or any of their assets or properties, except, in the case of clauses (2), (3) and (4) above, as could not reasonably be expected to have a Material Adverse Effect. No consent, approval, authorization or order of, or filing, registration, qualification, license or permit of or with, (A) any court or governmental agency, body or administrative agency or (B) any other person is required for (1) the execution, delivery and performance by the Issuer or the Guarantor of this Agreement or any of the other Operative Documents to which it is a party or (2) the issuance and sale by the Issuer and Guarantor of the Series A Notes and the transactions contemplated hereby and thereby, except such as have been obtained and made (or, in the case of the Registration Rights Agreement, will be obtained and made) under the Act, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and state securities or Blue Sky 13 laws and regulations or such as may be required by the NASD, and except those the failure of which to obtain would not have a Material Adverse Effect. (xxiii) There is (A) no action, suit, investigation or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the best knowledge of the Issuer, threatened or contemplated to which either of the Issuer, the Guarantor or any of their respective subsidiaries is or may be a party or to which the business or property of the Issuer, the Guarantor or any of their respective subsidiaries, (B) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or that has been proposed by any governmental body and (C) no injunction, restraining order or order of any nature by a federal or state court or foreign court of competent jurisdiction to which the Issuer, the Guarantor or any of their respective subsidiaries is or may be subject or to which the business, assets, or property of the Issuer, the Guarantor or any of their respective subsidiaries is or may be subject, that, in the case of clauses (A), (B) and (C) above, (1) is required to be disclosed in the Preliminary Offering Memorandum and the Offering Memorandum and that is not so disclosed, or (2) could reasonably be expected to have a Material Adverse Effect. (xxiv) No action has been taken and no statute, rule, regulation or order has been enacted, adopted or issued by any governmental agency that prevents the issuance of the Series A Notes or prevents or suspends the use of the Offering Memorandum; no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction has been issued that prevents the issuance of the Series A Notes or prevents or suspends the sale of the Series A Notes in any jurisdiction referred to in Section 4(e) hereof; and every request of any securities authority or agency of any jurisdiction for additional information has been complied with in all material respects. (xxv) Except to the extent disclosed in the Offering Memorandum, none of the Issuer, the Guarantor or any of their respective subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws") which could reasonably be expected to have a Material Adverse Effect. (xxvi) There is no alleged liability, or to the best knowledge of the Issuer, potential liability (including, without limitation, alleged or potential liability or investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries or penalties) of the Issuer, the Guarantor or any of their respective subsidiaries arising out of, based on or resulting from (a) the presence or release into the environment of any Hazardous Material (as defined below) at any location, whether or not owned by the Issuer, the Guarantor or such subsidiary, as the case may be, or (b) any violation or alleged violation of any Environmental Law, which alleged or potential liability is required to be disclosed in the Offering Memorandum, other than as disclosed therein, or that could reasonably be expected to have a Material Adverse Effect. The term "Hazardous Material" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl, and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other law relating to protection of human health or the environment or imposing liability or standards of conduct concerning any such chemical material, waste or substance. 14 (xxvii) Each of the Issuer, the Guarantor and their respective subsidiaries has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease and operate their respective properties and to conduct their businesses, except as could not reasonably be expected to have a Material Adverse Effect; each of the Issuer, the Guarantor and their respective subsidiaries has fulfilled and performed all of its obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as described in the Offering Memorandum, such permits contain no restrictions that are materially burdensome to the Issuer, the Guarantor or such subsidiary, as the case may be. (xxviii) Each of the Issuer, the Guarantor and their respective subsidiaries has (A) all licenses, certificates, permits, authorizations, approvals, franchises and other rights from, and has made all declarations and filings with, all federal, state and local authorities, all self-regulatory authorities and all courts and other tribunals (each, an "Authorization") necessary to engage in the business conducted by any of them in the manner described in the Offering Memorandum, except as could not reasonably be expected to have a Material Adverse Effect and (B) no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Authorization. All such Authorizations are valid and in full force and effect and each of the Issuer, the Guarantor and their respective subsidiaries is in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities having jurisdiction with respect thereto, except as could not reasonably be expected to have a Material Adverse Effect. (xxix) Each of the Issuer, the Guarantor and their respective subsidiaries owns, possesses or has the right to employ all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, software, systems or procedures), trademarks, service marks and trade names, inventions, computer programs, technical data and information (collectively, the "Intellectual Property") presently employed by it in connection with the businesses now operated by it or that are proposed to be operated by it free and clear of and without violating any right, claimed right, charge, encumbrance, pledge, security interest, restriction or lien of any kind of any other person and, except as disclosed in the Offering Memorandum, none of the Issuer, the Guarantor or any of their respective subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing, except as could not reasonably be expected to have a Material Adverse Effect. To the best knowledge of the Issuer, the use of the Intellectual Property in connection with the business and operations of either of the Issuer, the Guarantor or any of their respective subsidiaries does not infringe on the rights of any person, except as could not reasonably be expected to have a Material Adverse Effect. (xxx) All material tax returns required to be filed by either of the Issuer, the Guarantor or any of their respective subsidiaries in all jurisdictions have been so filed. All taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities or that are due and payable have been paid, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest. To the knowledge of the Issuer, there are no material proposed additional tax assessments against the Issuer, the Guarantor or any of their respective subsidiaries, or the assets or property of the Issuer, the Guarantor or any of their respective subsidiaries. 15 (xxxi) Neither the Issuer nor the Guarantor is required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (xxxii) The Indenture is in form eligible for qualification under the Trust Indenture Act. (xxxiii) None of the Issuer, the Guarantor or any of their respective subsidiaries has (A) taken, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Issuer, the Guarantor or any of their respective subsidiaries to facilitate the sale or resale of the Series A Notes or (B) since the date of the Preliminary Offering Memorandum (1) sold, bid for, purchased or paid any person any compensation for soliciting purchases of the Series A Notes or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Issuer, the Guarantor or any of their respective subsidiaries. (xxxiv) No registration under the Act of the Series A Notes is required for the sale of the Series A Notes to the Initial Purchasers as contemplated hereby or for the Exempt Resales assuming (A) that the purchasers who buy the Series A Notes in the Exempt Resales are Eligible Purchasers and (B) the accuracy of the Initial Purchasers' representations regarding the absence of general solicitation in connection with the sale of Series A Notes to the Initial Purchasers and the Exempt Resales contained herein. No form of general solicitation or general advertising was used by the Issuer, the Guarantor or any of their respective representatives (other than the Initial Purchasers, as to which the Issuer and the Guarantor make no representation or warranty) in connection with the offer and sale of any of the Series A Notes in connection with Exempt Resales, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Series A Notes have been issued and sold by the Issuer, the Guarantor or any of their respective subsidiaries within the six-month period immediately prior to the date hereof. (xxxv) The execution and delivery of this Agreement, the other Operative Documents and the sale of the Series A Notes to be purchased by the Qualified Institutional Buyers and the Accredited Investors will not involve any prohibited transaction within the meaning of Section 406 of the Employee Retirement Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986, as amended. The representation made by the Issuer and the Guarantor in the preceding sentence is made in reliance upon and subject to the accuracy of, and compliance with, the representations and covenants made or deemed made by the Qualified Institutional Buyers and the Accredited Investors as set forth in the Offering Memorandum under the caption "Notice to Investors." (xxxvi) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its date, and each amendment or supplement thereto, as of its date, contains the information specified in, and meets the requirements of, Rule 144A(d)(4) under the Act. (xxxvii) Subsequent to September 30, 1996 and up to the Closing Date, (A) there has not been, singly or in the aggregate, any change or development of which the Issuer or Guarantor is aware which could reasonably be expected to result in a Material Adverse Effect of the type described in clause (x) of such definition and (B) there has been no dividend or distribution of any kind declared, paid or made by the Issuer or the Guarantor on any class of their capital stock. 16 (xxxviii) The accountants who have certified or will certify the financial statements included or to be included as part of the Offering Memorandum are independent accountants. The historical financial statements of the Issuer, the Guarantor and their respective subsidiaries comply as to form in all material respects with the requirements applicable to registration statements on Form S-1 under the Act and present fairly in all material respects the financial position and results of operations of the Issuer, the Guarantor and their respective subsidiaries, as the case may be, at the dates and for the periods indicated. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods presented. The pro forma financial statements included in the Offering Memorandum have been prepared on a basis consistent with such historical statements, except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis and present fairly in all material respects the historical and proposed transactions contemplated by this Agreement and the other Operative Documents. The other financial and statistical information and data included in the Offering Memorandum, historical and pro forma, are accurately presented on a basis consistent with the financial statements, historical and pro forma, included in the Offering Memorandum and the books and records of the Issuer, the Guarantor and their respective subsidiaries, as applicable. (xxxix) Upon the issuance of the Series A Notes, the present fair saleable value of the assets of the Issuer, the Guarantor and their respective subsidiaries, taken as a whole, will exceed the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Issuer, the Guarantor and their respective subsidiaries, taken as a whole, as they become absolute and matured. Upon the issuance of the Series A Notes, the assets of the Issuer, the Guarantor and their respective subsidiaries, taken as a whole, will not constitute unreasonably small capital to carry out their businesses as now conducted, including the capital needs of the Issuer, the Guarantor and their respective subsidiaries, taking into account the projected capital requirements and capital availability. (xl) There exist no conditions that constitute a Default or Event of Default by the Issuer or the Guarantor (or an event which with notice or the lapse of time, or both, would constitute a default) under the Indenture. (xli) Each of the Issuer, the Guarantor and their respective subsidiaries has complied with all of the provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to doing business with the Government of Cuba or with any person or any affiliate located in Cuba. (xlii) Each certificate signed by any officer of the Issuer or the Guarantor and delivered to the Initial Purchasers or counsel for the Initial Purchasers shall be deemed to be a representation and warranty by the Issuer and the Guarantor, as applicable, to the Initial Purchasers as to the matters covered thereby. The Issuer and the Guarantor acknowledge that the Initial Purchasers and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 8 hereof, counsel for the Issuer and the Guarantor and counsel for the Initial Purchasers, will rely upon the accuracy and truth of the foregoing representations and hereby consent to such reliance. (b) The Initial Purchasers represent, warrant and covenant to the Issuer and the Guarantor and agree that: 17 (i) The Initial Purchasers are Qualified Institutional Buyers, with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Series A Notes. (ii) The Initial Purchasers (A) are not acquiring the Series A Notes with a view to any distribution thereof that would violate the Act or the securities laws of any state of the United States or any other applicable jurisdiction and (B) will be reoffering and reselling the Series A Notes only to Qualified Institutional Buyers in reliance on the exemption from the registration requirements of the Act provided by Rule 144A and to Accredited Investors in a private placement exempt from the registration requirements of the Act. (iii) No form of general solicitation or general advertising has been or will be used by the Initial Purchasers or any of their representatives in connection with the offer and sale of any of the Series A Notes, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. (iv) The Initial Purchasers agree that, in connection with the Exempt Resales, they will solicit offers to buy the Series A Notes only from, and will offer to sell the Series A Notes only to, Eligible Purchasers. The Initial Purchasers further agree (A) that they will offer to sell the Series A Notes only to, and will solicit offers to buy the Series A Notes only from (1) Qualified Institutional Buyers who in purchasing such Series A Notes will be deemed to have represented and agreed that they are purchasing the Series A Notes for their own accounts or accounts with respect to which they exercise sole investment discretion and that they or such accounts are Qualified Institutional Buyers and (2) Accredited Investors who make the representations contained in, and execute and return to the Initial Purchasers, a letter in the form of Annex A attached to the Offering Memorandum and (B) that, in the case of such Qualified Institutional Buyers and Accredited Investors, acknowledges and agrees that such Series A Notes will not have been registered under the Act and may be resold, pledged or otherwise transferred only (x)(I) to a person who the seller reasonably believes is a Qualified Institutional Buyer in a transaction meeting the requirements of Rule 144A, (II) in a transaction meeting the requirements of Rule 144, (III) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Act or (IV) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion of counsel if the Issuer so requests), (y) to the Issuer or (z) pursuant to an effective registration statement under the Act and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and (C) that the holder will, and each subsequent holder is required to, notify any purchaser of the security evidenced thereby of the resale restrictions set forth in (B) above. The Initial Purchasers understand that the Issuer and the Guarantor and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 8 hereof, counsel for the Issuer and the Guarantor and counsel for the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and the Initial Purchasers hereby consent to such reliance. 6. Indemnification. (a) The Issuer and the Guarantor, jointly and severally, agree to indemnify and hold harmless (i) the Initial Purchasers, (ii) each person, if any, who controls the Initial Purchasers 18 within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and (iii) the respective officers, directors, partners, employees, representatives and agents of the Initial Purchasers or any controlling person to the fullest extent lawful, from and against any and all losses, liabilities, claims, damages and expenses whatsoever (including but not limited to reasonable attorneys' fees and any and all reasonable expenses whatsoever incurred in investigating, preparing or defending against any investigation or litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Issuer and the Guarantor will not be liable in any such case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense (i) arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Issuer and the Guarantor by or on behalf of the Initial Purchasers expressly for use therein or (ii) is caused by an untrue statement or omission or alleged untrue statement or omission that was contained or made in the Preliminary Offering Memorandum and corrected in the Offering Memorandum and (1) any such loss, liability, claim, damage or expense suffered or insured by any indemnified party resulted from an action, claim, or suit by any person who purchased Series A Notes from the Initial Purchasers in the offering, (2) the Initial Purchasers failed to deliver or provide a copy of the Offering Memorandum to such person at or prior to the confirmation of the sale of such Series A Notes in any case where such delivery is required by the Act and (3) the Offering Memorandum (as so amended and supplemented) would have cured the defect giving rise to such loss, liability, claim, damage or expense. This indemnity agreement will be in addition to any liability which the Issuer and the Guarantor may otherwise have, including under this Agreement. (b) The Initial Purchasers agree to indemnify and hold harmless (i) the Issuer and the Guarantor, (ii) each person, if any, who controls the Issuer or the Guarantor within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any investigation or litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Issuer and the Guarantor by or on behalf of the Initial Purchasers expressly for use therein; provided, however, that in no case shall the Initial Purchasers be liable or responsible for any 19 amount in excess of the discounts and commissions received by the Initial Purchasers, as set forth on the cover page of the Offering Memorandum. This indemnity will be in addition to any liability which the Initial Purchasers may otherwise have, including under this Agreement. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, proceeding or investigation, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify, as promptly as practicable, each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 6 or otherwise except to the extent that it has been prejudiced in any material respect by such failure). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to take charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have been advised by counsel that there may be legal defenses available to it or them which are different from or additional to those available to the indemnifying parties (in which case the indemnifying party or parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of counsel shall be borne by the indemnifying parties; provided, however, that the indemnifying party under subsection (a) or (b) above shall only be liable for the legal expenses of one counsel (in addition to any local counsel and to their own counsel) for all indemnified parties in connection with any one action or separate but similar actions in the same jurisdiction arising out of the same general allegations or claims. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its prior written consent; provided, however, that such consent was not unreasonably withheld. 7. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 6 is for any reason held to be unavailable from the indemnifying party or parties or is insufficient to hold harmless a party indemnified thereunder, the Issuer and the Guarantor, on the one hand, and the Initial Purchasers, on the other hand, shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Issuer and the Guarantor, any contribution received by the Issuer and the Guarantor from persons, other than the Initial Purchaser, who may also be liable for contribution, including persons who control the Issuer and the Guarantor within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act) to which the Issuer, the Guarantor and the Initial Purchaser) may be subject, in such proportion as is appropriate to reflect the relative benefits received by the Issuer and the Guarantor, on one hand, and the Initial Purchasers, on the other hand, from the offering of the Series A Notes or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the 20 indemnifying party not having received notice as provided in Section 6, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Issuer and the Guarantor, on one hand, and the Initial Purchasers, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Issuer and the Guarantor, on one hand, and the Initial Purchasers, on the other hand, shall be deemed to be in the same proportion as (i) the total proceeds from the offering of Series A Notes (net of discounts but before deducting expenses) received by the Issuer and the Guarantor and (ii) the discounts and commissions received by the Initial Purchasers, respectively, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Issuer and the Guarantor, on one hand, and of the Initial Purchasers, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer, the Guarantor or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer, the Guarantor and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to above. Notwithstanding the provisions of this Section 7, (i) in no case shall the Initial Purchasers be required to contribute any amount in excess of the amount by which the discounts and commissions applicable to the Series A Notes purchased by the Initial Purchasers pursuant to this Agreement exceeds the amount of any damages which the Initial Purchasers has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, (A) each person, if any, who controls the Initial Purchasers within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and (B) the respective officers, directors, partners, employees, representatives and agents of the Initial Purchasers or any controlling person shall have the same rights to contribution as the Initial Purchasers, and each person, if any, who controls either of the Issuer or the Guarantor within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as the Issuer and the Guarantor, subject in each case to clauses (i) and (ii) of this Section 7. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 7, notify such party or parties from whom contribution may be sought, but the failure to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 7 or otherwise, except to the extent that the party entitled to contribution has been prejudiced in any material respect by such failure. No party shall be liable for contribution with respect to any action or claim settled without its prior written consent; provided, however, that such written consent was not unreasonably withheld. 8. Conditions of Initial Purchasers' Obligations. The obligations of the Initial Purchasers to purchase and pay for the Series A Notes, as provided herein, shall be subject to the satisfaction of the following conditions: (a) All of the representations and warranties of the Issuer and the Guarantor contained in this Agreement shall be true and correct in all material respects on the date hereof and on the Closing Date with the same force and effect as if made on and as of the date hereof and the Closing Date, respectively. Each of the Issuer and the Guarantor shall have performed or complied in all material respects with all of the agreements herein contained and required to be performed or complied with by it at or prior to the Closing Date. 21 (b) The Offering Memorandum shall have been printed and copies distributed to the Initial Purchasers on the day following the date of this Agreement or at such later date and time as to which the Initial Purchasers may agree, and no stop order suspending the qualification or exemption from qualification of the Series A Notes in any jurisdiction referred to in Section 4(e) shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (c) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency which would, as of the Closing Date, prevent the issuance of the Series A Notes; no action, suit or proceeding shall have been commenced and be pending against or affecting or, to the best knowledge of each of the Issuer and the Guarantor, threatened against, the Issuer, the Guarantor or any of their respective subsidiaries before any court or arbitrator or any governmental body, agency or official that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; and no stop order shall have been issued preventing the use of the Offering Memorandum, or any amendment or supplement thereto, or which could reasonably be expected to have a Material Adverse Effect. (d) Except as disclosed in the Offering Memorandum, from the date hereof and the dates as of which information is given in the Offering Memorandum until the Closing Date there shall not have been any material adverse change, or any development that is reasonably likely to result in a material adverse change, in the capital stock or the long-term debt, or material increase in the short-term debt, of the Issuer, the Guarantor or any of their respective subsidiaries from that set forth in the Offering Memorandum, (ii) no dividend or distribution of any kind shall have been declared, paid or made by the Issuer, the Guarantor or any of their respective subsidiaries on any class of its capital stock and (iii) other than pursuant to this Agreement, none of the Issuer, the Guarantor or any of their respective subsidiaries shall have incurred any liabilities or obligations, direct or contingent, that are material, individually or in the aggregate, to the Issuer, the Guarantor and their respective subsidiaries, taken as a whole, and that are required to be disclosed on a balance sheet or notes thereto in accordance with generally accepted accounting principles and are not disclosed on the latest balance sheet or notes thereto included in the Offering Memorandum. Since the date hereof and since the dates as of which information is given in the Offering Memorandum, there shall not have occurred any material adverse change in the business, prospects, financial condition or results of operation of the Issuer, the Guarantor and their subsidiaries, taken as a whole. (e) The Initial Purchasers shall have received a certificate, dated the Closing Date, signed on behalf of the Issuer and the Guarantor, in form and substance satisfactory to the Initial Purchasers, confirming, as of the Closing Date, the matters set forth in paragraphs (a), (b), (c) and (d) of this Section 8 and that, as of the Closing Date, the obligations of the Issuer and the Guarantor to be performed hereunder on or prior thereto have been duly performed in all material respects. (f) The Initial Purchasers shall have received on the Closing Date an opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers and counsel for the Initial Purchasers, of Kramer, Levin, Naftalis & Frankel, counsel for the Issuer and the Guarantor, to the effect set forth in Exhibit B hereto. (g) The Initial Purchasers shall have received on the Closing Date an opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers and counsel for the 22 Initial Purchasers, of Anthony R. Pierno, Esq., General Counsel of the Issuer and the Guarantor, to the effect set forth in Exhibit C hereto. (h) The Initial Purchasers shall have received on the Closing Date an opinion with respect to compliance by the Issuer and the Guarantor with Regulation G of the Federal Reserve Board, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers and counsel for the Initial Purchasers, of Shearman & Sterling, special counsel for the Issuer and the Guarantor, to the effect set forth in Exhibit D hereto. (i) At the time this Agreement is executed and at the Closing Date, the Initial Purchasers shall have received from Arthur Andersen & Co., LLP, independent public accountants, dated as of the date of this Agreement and as of the Closing Date, customary comfort letters addressed to the Initial Purchasers and in form and substance satisfactory to the Initial Purchasers and counsel for the Initial Purchasers with respect to the financial statements and certain financial information of the Issuer, the Guarantor and their respective subsidiaries contained in the Offering Memorandum. The comfort letter delivered on the Closing Date shall recite that such accountants have reviewed the financial statements for the Issuer, the Guarantor, MGI and Kaiser for November 1996. On or prior to the Closing Date, Arthur Andersen & Co., LLP shall have delivered to the Initial Purchasers a signed audit opinion in the form set forth in the Offering Memorandum pertaining to the Issuer and its consolidated subsidiaries, without the legend appearing at the top of page F-3 of the Preliminary Offering Memorandum. (j) The Initial Purchasers shall have received an opinion, dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, of Latham & Watkins, counsel for the Initial Purchasers, covering such matters as are customarily covered in such opinions. (k) Latham & Watkins shall have been furnished with such documents, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 8 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (l) Prior to the Closing Date, the Issuer and the Guarantor shall have furnished to the Initial Purchasers such further information, certificates and documents as the Initial Purchasers may reasonably request. (m) The Issuer, the Guarantor and the Trustee shall have entered into the Indenture and the Initial Purchasers shall have received counterparts, conformed as executed, thereof. (n) The Issuer and the Guarantor shall have entered into the Registration Rights Agreement and the Initial Purchasers shall have received counterparts, conformed as executed, thereof. All opinions, certificates, letters and other documents required by this Section 8 to be delivered by the Issuer and the Guarantor will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Initial Purchasers. The Issuer and the Guarantor will furnish the Initial Purchasers with such conformed copies of such opinions, certificates, letters and other documents as they shall reasonably request. 23 9. Initial Purchasers' Information. The Issuer and the Initial Purchasers acknowledge that the statements with respect to the offering of the Series A Notes set forth in the last paragraph of the cover page and the third paragraph of text and the fifth and sixth sentences of the fourth paragraph of text under the caption "Plan of Distribution" in such Offering Memorandum constitute the only information furnished in writing by the Initial Purchasers expressly for use in the Offering Memorandum. 10. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Initial Purchasers, the Issuer and the Guarantor contained in this Agreement, including the agreements contained in Sections 4(f) and 11(d), the indemnity agreements contained in Section 6 and the contribution agreements contained in Section 7, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Initial Purchasers any controlling person thereof or by or on behalf of the Issuer, the Guarantor or any controlling person thereof, and shall survive delivery of and payment for the Series A Notes to and by the Initial Purchasers. The representations contained in Section 5 and the agreements contained in Sections 4(f), 6, 7 and 11(d) shall survive the termination of this Agreement, including any termination pursuant to Section 11. 11. Effective Date of Agreement; Termination. (a) This Agreement shall become effective upon execution and delivery of a counterpart hereof by each of the parties hereto. (b) The Initial Purchasers shall have the right to terminate this Agreement at any time prior to the Closing Date by notice to the Issuer from the Initial Purchasers, without liability (other than with respect to Sections 6 and 7) on the Initial Purchasers' part to the Issuer or the Guarantor if, on or prior to such date (i) the Issuer or the Guarantor shall have failed, refused or been unable to perform in any material respect any agreement on their part to be performed hereunder, (ii) any other condition to the obligations of the Initial Purchasers hereunder as provided in Section 8 is not fulfilled when and as required in any material respect, (iii) in the reasonable judgment of the Initial Purchasers, any material adverse change shall have occurred since the respective dates as of which information is given in the Offering Memorandum in the condition (financial or otherwise), business, properties, assets, liabilities, prospects, net worth, results of operations or cash flows of the Issuer, the Guarantor and their respective subsidiaries, taken as a whole, other than as set forth in the Offering Memorandum, or (iv)(A) any domestic or international event or act or occurrence has materially disrupted, or in the reasonable opinion of the Initial Purchasers will in the immediate future materially disrupt, the market for the Issuer's securities or for securities in general; or (B) trading in securities generally on the New York or American Stock Exchanges shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been established, or maximum ranges for prices for securities shall have been required, on such exchange, or by such exchange or other regulatory body or governmental authority having jurisdiction; or (C) a banking moratorium shall have been declared by federal or state authorities, or a moratorium in foreign exchange trading by major international banks or persons shall have been declared; or (D) there is an outbreak or escalation of armed hostilities involving the United States on or after the date hereof, or if there has been a declaration by the United States of a national emergency or war, the effect of which shall be, in the Initial Purchasers' judgment, to make it inadvisable or impracticable to proceed with the offering or delivery of the Series A Notes on the terms and in the manner contemplated in the Offering Memorandum; or (E) there shall have been such a material adverse change in general economic, political or financial conditions or if the effect of international conditions on the financial markets in the United States shall be such as, in the Initial Purchasers' reasonable 24 judgment, makes it inadvisable or impracticable to proceed with the delivery of the Series A Notes as contemplated hereby. (c) Any notice of termination pursuant to this Section 10 shall be by telephone, telex, telephonic facsimile, or telegraph, confirmed in writing by letter. (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to clause (iv) of Section 10(b), in which case each party will be responsible for its own expenses), or if the sale of the Series A Notes provided for herein is not consummated because any condition to the obligations of the Initial Purchasers set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Issuer and the Guarantor to perform any agreement herein or comply with any provision hereof, the Issuer and the Guarantor will reimburse the Initial Purchasers for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of Initial Purchasers' counsel), incurred by the Initial Purchasers in connection herewith. 12. Notice. All notices and other communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to the Initial Purchasers shall be mailed, delivered, or telexed, telegraphed or telecopied and confirmed in writing to Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: Corporate Finance Department, telecopy number: (212) 272-3092, and to Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Corporate Finance Department, telecopy number (212) 892-7272, with a copy to Latham & Watkins, 233 S. Wacker Drive, Suite 5800, Chicago, Illinois 60606, Attention: Mark A. Stegemoeller, Esq., telecopy number (312) 993-9767; and if sent to the Issuer, shall be mailed, delivered or telexed, telegraphed or telecopied and confirmed in writing to the Issuer at 5847 San Felipe, Suite 2600, Houston, Texas 77057, attention of Anthony R. Pierno, General Counsel, telecopy number (713) 267-3702, with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022, attention of Howard A. Sobel, Esq., telecopy number (212) 715-8000. 13. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Initial Purchasers, the Issuer, the Guarantor and the controlling persons and agents referred to in Sections 6 and 7, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Notes from the Initial Purchasers. 14. Construction. This Agreement shall be construed in accordance with the internal laws of the State of New York, without giving effect to principles of conflict of laws. TIME IS OF THE ESSENCE IN THIS AGREEMENT. 15. Captions. The captions included in this Agreement are included solely for convenience of reference and are not to be considered a part of this Agreement. 16. Counterparts. This Agreement may be executed in various counterparts which together shall constitute one and the same instrument. [Signature page to follow] 25 If the foregoing correctly sets forth the understanding among the Initial Purchasers, the Issuer and the Guarantor please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, MAXXAM GROUP HOLDINGS INC. By: /s/ RONALD L. REMAN ----------------------------------- Name: Ronald L. Reman Title: Vice President - Taxes MAXXAM INC. By: /s/ RONALD L. REMAN ----------------------------------- Name: Ronald L. Reman Title: Vice President - Taxes Accepted and agreed to as of the date first above written: BEAR, STEARNS & CO. INC. By: [Signature illegible] ------------------------------------ Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ JAMES T. SINGTON ------------------------------------ Name: James T. Sington Title: Managing Director S-1 26 SCHEDULE A Initial Purchasers Principal Amount Bear, Stearns & Co. Inc. $ 78,000,000 Donaldson, Lufkin & Jenrette Securities Corporation $ 52,000,000 ------------ Total $130,000,000 27 EXHIBIT A LIST OF SIGNIFICANT SUBSIDIARIES MAXXAM Group Inc. The Pacific Lumber Company Scotia Pacific Holding Company Salmon Creek Corporation Britt Lumber Co., Inc. Kaiser Aluminum Corporation Kaiser Aluminum & Chemical Corporation MCO Properties, Inc. 28 EXHIBIT B FORM OF OPINION OF KRAMER, LEVIN, NAFTALIS & FRANKEL (i) Each of the Issuer and the Guarantor is a corporation validly organized and existing and in good standing under the laws of Delaware. (ii) Each of the Issuer and the Guarantor has the requisite corporate power and authority to (A) own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and (B) to perform its respective obligations under the Indenture, the Purchase Agreement and the Registration Rights Agreement. (iii) The Purchase Agreement has been duly authorized, executed and delivered by each of the Issuer and the Guarantor. (iv) The Indenture, the Registration Rights Agreement and the Intercompany Note have each been duly authorized, executed and delivered by the Issuer and the Guarantor, as applicable, and each constitutes a legal, valid and binding agreement of the Issuer and the Guarantor, as applicable, enforceable against the Issuer and the Guarantor in accordance with its respective terms. (v) The Series A Notes and Series B Notes have been duly authorized by all necessary corporate action on the part of the Issuer and, when executed and authenticated in accordance with the terms of the Indenture and the Registration Rights Agreement and delivered against payment pursuant to the Purchase Agreement and the Registration Rights Agreement (and the other documents relating to the Exchange Offer), as applicable, will constitute legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their respective terms and entitled to the benefits of the Indenture. (vi) The Intercompany Note has been duly and validly authorized by the Guarantor and, when issued and delivered against payment therefor in accordance with the terms thereof, will be the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms. (vii) The Indenture constitutes a valid and legally binding obligation of the Issuer and the Guarantor, enforceable against the Issuer and the Guarantor, in accordance with its terms. (viii) Upon (1) authentication and execution of the Series A Notes in accordance with the terms of the Indenture, (2) delivery of the Series A Notes against payment therefor in accordance with the terms of the Purchase Agreement and (3) delivery to the Trustee in New York of the certificates representing the Pledged MGI Shares listed on Exhibit D to the Indenture, registered in the name of the Issuer, accompanied by stock powers duly endorsed in blank, the Indenture will create a valid security interest in all of the Issuer's right, title and interest in and to such Pledged MGI Shares in favor of the Trustee under the Uniform Commercial Code as in effect on the date of the Indenture in the State of New York (the "UCC"). Such security interest will be a perfected security interest, free of any adverse claim (within the meaning of Section 8-302 of the UCC), in all of the Issuer's right, title and interest in and to such Pledged MGI Shares that have been delivered to the Trustee (accompanied by stock powers duly endorsed in blank) and are in the physical possession of the Trustee in the State of New York for the benefit of the holders of the Series A Notes under the Indenture. The opinion expressed in this paragraph (viii) is based on the assumption, with your permission and without independent investigation, (a) that 29 the Trustee will have received such Pledged MGI Shares and that the purchasers of Series A Notes on the date of execution of the Indenture are purchasing the Series A Notes in good faith and without notice (as such term is used in subsections (1), (3) and (4) of Section 8-304 of the UCC) of an adverse claim within the meaning of Section 8-302 of the UCC with respect to such Pledged MGI Shares, (b) that such Pledged MGI Shares will at all relevant times be in the actual physical possession of the Trustee in the State of New York and (c) that the Issuer is the record and beneficial owner of, and has all rights in and title to, such Pledged MGI Shares. (ix) Upon (1) authentication and execution of the Series A Notes in accordance with the terms of the Indenture, (2) delivery of the Series A Notes against payment therefor in accordance with the terms of the Purchase Agreement and (3) delivery to the Trustee in New York of the Intercompany Note duly endorsed in blank, the Indenture will create a valid security interest in all of the Issuer's right, title and interest in and to the Intercompany Note in favor of the Trustee under the UCC. Such security interest will be a perfected security interest in the Intercompany Note that has been delivered to the Trustee (duly endorsed in blank) and is in the physical possession of the Trustee in the State of New York for the benefit of the holders of the Series A Notes under the Indenture. The opinion expressed in this paragraph (ix) is based on the assumption, with your permission and without independent investigation, (a) that the Trustee will have received the Intercompany Note and that the purchasers of Series A Notes on the date of execution of the Indenture are purchasing the Series A Notes in good faith and without notice (as such term is used in subsections (1), (3) and (4) of the Section 8-304 of the UCC) of an adverse claim within the meaning of Section 8-302 of the UCC with respect to such Intercompany Note, (b) that such Intercompany Note will at all relevant times be in the actual physical possession of the Trustee in the State of New York and (c) that the Issuer is the record and beneficial owner of, and has all rights in and title to, such Intercompany Note. (x) The Series A Notes, the Registration Rights Agreement, the Indenture and the Intercompany Note conform, and the Series B Notes (when issued in accordance with the terms of the Indenture and the Registration Rights Agreement) will conform, in all material respects to the statements relating thereto contained in the Offering Memorandum under the captions "Description of Notes" and "Exchange Offer; Registration Rights." (xi) Neither the Issuer nor the Guarantor is required to be registered as an "investment company" under the Investment Company Act of 1940, as amended. (xii) To the best knowledge of such counsel, without any independent inquiry, there are no legal or governmental proceedings pending or threatened against the Issuer or the Guarantor or their respective subsidiaries, other than legal or governmental proceedings referred to in the Offering Memorandum and other claims, lawsuits and other proceedings which in the opinion of the Issuer or the Guarantor should not have a material adverse effect on the Issuer's or the Guarantor's consolidated financial position, results of operations or liquidity. (xiii) The terms of the Issuer's indebtedness described in the Offering Memorandum under the caption "Description of Principal Indebtedness -- The Company -- MGI Notes" (other than financial, numerical, statistical or accounting data included therein or omitted therefrom, as to which no opinion is expressed) conform in all material respects to the statements relating thereto under such caption. (xiv) No authorization, approval, consent or order of any court or governmental authority or agency is legally required to be obtained by the Issuer or the Guarantor in connection with the issuance and sale by the Issuer of the Series A Notes to you under the Purchase Agreement, except such as may be required in connection with (A) the registration under the Act of the Series A Notes or the Series B 30 Notes pursuant to the Registration Rights Agreement, (B) the qualification of the Indenture under the Trust Indenture Act in connection with the registration of the Series A Notes or the Series B Notes pursuant to the Registration Rights Agreement and (C) qualifications, authorizations, registrations or other actions under state securities or Blue Sky laws or regulations or foreign laws or regulations, as to which no opinion is expressed. The execution and delivery by the Issuer and the Guarantor of the Operative Documents and the consummation of the transactions contemplated therein by each of the Issuer and the Guarantor do not violate the provisions of the Certificate of Incorporation or By-laws of the Issuer or the Guarantor as in effect on the date of this opinion, or, to the best of our knowledge, any applicable law or administrative regulation (other than state securities or Blue Sky laws or regulations or foreign laws or regulations, as to which no opinion is expressed) or administrative or court decree (other than foreign administrative or court decrees, as to which no opinion is expressed) entered against the Issuer or the Guarantor, in each case as in effect on the date of this opinion. It is understood in rendering the opinion expressed in this Paragraph (xiv) with respect to any law or administrative regulation, we have assumed that none of the Purchase Agreement, the Indenture, the Registration Rights Agreement, the Preliminary Offering Memorandum (and any amendment or supplement thereto), the Offering Memorandum (and any amendment or supplement thereto) or any other information provided to the Initial Purchasers or any other person by or on behalf of the Issuer or the Guarantor pursuant thereto or in connection therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (xv) Assuming that the only purchasers to whom the Initial Purchasers initially resell the Series A Notes are (i) Qualified Institutional Buyers and (ii) a limited number of Accredited Investors, and assuming the accuracy of the representations and warranties of the Issuer and the Guarantor contained in Section 5(a)(xxxiii) of the Purchase Agreement and compliance by the Issuer and the Guarantor with the covenants in Sections 4(k) and 4(j) of the Purchase Agreement, and assuming the accuracy of the Initial Purchasers' covenants contained in Section 2 of the Purchase Agreement, and assuming that the representations and warranties of the Accredited Investors or non-U.S persons to whom the Initial Purchasers initially resell the Series A Notes as specified in the Offering Memorandum under "Notice to Investors" and as set forth in the certificates of such Accredited Investors or non-U.S. persons in the form set forth in Annex A of the Offering Memorandum are true and correct in all material respects as of the Closing Time, and assuming compliance in all material respects by such Accredited Investors or non-U.S. persons, as the case may be, with the agreements in such certificates, and assuming that the certificates representing the Series A Notes bear the legends contemplated by the Indenture and receipt by the purchasers to whom the Initial Purchasers initially resell the Series A Notes of a copy of the Offering Memorandum at or prior to the delivery of confirmation of sale, it is not necessary in connection with the offer, sale and delivery of the Series A Notes to the Initial Purchasers under, or in connection with the initial resale of such Series A Notes by the Initial Purchasers as contemplated by, the Purchase Agreement, to register the Series A Notes under the Act or to qualify the Indenture under the 1939 Act. (xvi) When the Series A Notes are issued and delivered pursuant to the Purchase Agreement, such Series A Notes will not be of the same class (within the meaning of Rule 144A of the Act) as securities of the Issuer or the Guarantor which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. (xvii) The Issuer is required to deliver the information relating to the Issuer specified in Rule 144A(d)(4) in connection with any resale of the Series A Notes. Although such counsel has not undertaken to determine independently the accuracy and completeness of the statements contained in the Offering Memorandum, such counsel have obtained information as a result of discussions and meetings with officers and other representatives of the Issuer 31 and the Guarantor, as a result of discussions with representatives of the independent public accountants for the Issuer and the Guarantor in connection with the preparation of the Offering Memorandum, responses to various questions raised by such counsel regarding the business of the Issuer and the Guarantor, and the examination of other information and documents requested by such counsel. Such counsel did not, however, undertake to determine independently, and therefore, no responsibility, explicitly or implicitly, is assumed for the accuracy and completeness or fairness of the statements contained in the Offering Memorandum, and no assurance can be given that such counsel's procedures described in the first sentence of this paragraph would necessarily reveal matters of significance with respect to the following comments. Nothing has come to the attention of such counsel during the course of the above described procedures or otherwise that has caused such counsel to believe that (A) the Offering Memorandum as of the date thereof and as of the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 32 EXHIBIT C FORM OF OPINION OF ANTHONY R. PIERNO, ESQ., GENERAL COUNSEL OF THE ISSUER AND THE GUARANTOR (i) To the knowledge of such counsel, each of the Issuer and the Guarantor is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify or be in good standing could not reasonably be expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Issuer, the Guarantor and their respective subsidiaries considered as one enterprise. (ii) The Series A Notes and the Series B Notes have been duly authorized by all necessary corporate action and, when executed and authenticated in accordance with the terms of the Indenture and the Registration Rights Agreement and delivered against payment pursuant to the Purchase Agreement and the Registration Rights Agreement (and the other documents relating to the Exchange Offer), as applicable, will constitute legal, valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms and entitled to the benefits of the Indenture, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance and similar laws and court decisions relating to or affecting creditors' rights and remedies generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or law). (iii) To the knowledge of such counsel, there are no legal or governmental proceedings pending or threatened against the Issuer or the Guarantor, other than legal or governmental proceedings referred to in the Offering Memorandum and other claims, lawsuits and other proceedings which, in the opinion of the Issuer, should not have a material adverse effect on the Issuer's consolidated financial position, results of operations, or liquidity. (iv) Each Significant Subsidiary has been duly organized and is validly existing and is in good standing under the laws of the jurisdiction of its organization, has the requisite corporate, partnership or other organizational power and authority to own, lease and operate its respective properties and to conduct its business as described in the Offering Memorandum and, to the knowledge of such counsel, is duly qualified as a foreign corporation, partnership or other entity to transact business and, if applicable, is in good standing in each jurisdiction in which such qualification is required, except where the failure to so qualify and be in good standing could not reasonably be expected to have, singly or in the aggregate, a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Issuer and its subsidiaries or the Guarantor and its subsidiaries, in each case taken as a whole. To the knowledge of such counsel, all of the issued and outstanding capital stock of each such Significant Subsidiary that is a corporation has been duly authorized and validly issued, is fully paid and non-assessable and, to the knowledge of such counsel, the shares of capital stock of each such Significant Subsidiary owned by the Issuer or the Guarantor, as the case may be, directly or through subsidiaries, are owned free and clear of any Lien, except (i) as disclosed in the Offering Memorandum and (ii) for the pledge of all or a portion of the capital stock of Kaiser Aluminum & Chemical Corporation to BankAmerica Business Credit, Inc., as Agent under a credit agreement. (v) To the knowledge of such counsel, all of the Kaiser Shares (a) have been duly authorized, validly issued, and are fully paid and nonassessable, (b) were not issued in violation of any preemptive 33 or similar rights and (c) except as disclosed in the Offering Memorandum, are owned by the Issuer free and clear of any security interest, claim, mortgage, lien, limitation on voting rights or encumbrance. (vi) To the knowledge of such counsel, (A) there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments to which the Issuer or any Significant Subsidiary is a party or by which any of them may be bound that would be required to be described in a Registration Statement on Form S-1 under the Act that is not described in the Offering Memorandum, and (B) no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, except for defaults which could not reasonably be expected to have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Issuer and its subsidiaries considered as one enterprise. (vii) To the knowledge of such counsel, no authorization, approval, consent or order of any court or governmental authority or agency is legally required to be obtained by the Issuer or the Guarantor in connection with the issuance and sale of the Series A Notes to the Initial Purchasers under the Purchase Agreement, except such as may be required in connection with (A) the registration under the Act of the Series A Notes or the Series B Notes pursuant to the Registration Rights Agreement, (B) the qualification of the Indenture under the Trust Indenture Act in connection with the registration of the Series A Notes or the Series B Notes pursuant to the Registration Rights Agreement, and (C) qualifications, authorizations, registrations or other actions under state securities or Blue Sky laws or regulations or foreign laws or regulations, as to which no opinion is expressed. The execution and delivery by the Issuer and the Guarantor, as applicable, of the Operative Documents and the consummation by the Issuer and the Guarantor, as applicable, of the transactions contemplated therein do not, to the knowledge of such counsel, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any Lien, charge or encumbrance upon any property or assets of the Issuer, the Guarantor or any of the Significant Subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument referred to in the Offering Memorandum to which the Issuer, the Guarantor or any of the Significant Subsidiaries is a party or by which any of them may be bound, nor does such action conflict with or constitute a breach of, or default under, or result in any violation of the provisions of the charter or by-laws, or partnership agreement, or other organizational documents, as the case may be, of the Issuer, the Guarantor or any of the Significant Subsidiaries, as in effect on the date of this opinion, or, to the knowledge of such counsel, any applicable law or administrative regulation (other than state securities or Blue Sky laws or regulations or foreign laws or regulations, as to which no opinion is expressed) or administrative or court decree entered against or applicable to the Issuer, the Guarantor or any of the Significant Subsidiaries as of the date of this opinion. It is understood that in rendering the opinion expressed in this paragraph with respect to any law or administrative regulation, the assumption has been made that none of the Purchase Agreement, the Registration Rights Agreement, the Preliminary Offering Memorandum (and any amendment or supplement thereto), the Offering Memorandum (and any amendment or supplement thereto) or any other information provided to the Initial Purchasers or any other person by the Issuer or the Guarantor pursuant thereto or in connection therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (viii) To the knowledge of such counsel, all of the issued and outstanding shares of capital stock of the Issuer have been duly authorized and validly issued and are fully paid and non-assessable. (ix) To the knowledge of such counsel, the descriptions of documents and legal proceedings contained in the Offering Memorandum under "Business - Pacific Lumber Operations - Regulatory and 34 Environmental Matters," "Legal Proceedings" and "Description of Principal Indebtedness" (other than financial, numerical, statistical or accounting data included therein or omitted therefrom, and other than the description under the caption "Description of Principal Indebtedness -- The Company -- MGI Notes," as to which no opinion is expressed) conform in all material respects to the terms of the applicable documents or the relevant legal proceedings, as the case may be. (x) Except for Kaiser's PRIDES and the Guarantor's Class A Non-Cumulative Participating Convertible Preferred Stock, and except as disclosed or referred to in the Offering Memorandum or pursuant to existing option or employee or director benefit plans, to the knowledge of such counsel, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or Liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in the Issuer, the Guarantor or any Significant Subsidiary. (xi) The authorized capital stock of Kaiser, a Delaware corporation, consists of 20,000,000 shares of preferred stock and 100,000,000 shares of common stock (8,673,850 shares of preferred stock (all of which are PRIDES convertible preferred stock) and 71,646,789 shares of common stock being issued and outstanding as of December 17, 1996); the authorized capital stock of the Issuer consists of 3,000 shares of common stock (1,000 shares of which being currently issued and outstanding); the Guarantor, a Delaware corporation, owns of record and beneficially 100% of the issued and outstanding shares of capital stock of the Issuer and beneficially owns 62% of the issued and outstanding shares of common stock of Kaiser (after giving pro forma effect to the conversion of each share of Kaiser's outstanding PRIDES convertible preferred stock into one share of common stock of Kaiser); Kaiser owns of record and beneficially 100% of the issued and outstanding shares of common stock of Kaiser Aluminum & Chemical Corporation, a Delaware corporation; the Guarantor owns of record and beneficially 100% of the issued and outstanding common stock of MCO Properties Inc., a Delaware corporation; the Issuer owns of record and beneficially 100% of the issued and outstanding common stock of MAXXAM Group Inc. and upon transfer thereof from the Guarantor on or before the Closing Date, will own of record 27,938,250 shares, or approximately 34.7% (after giving pro forma effect to the conversion of each share of Kaiser's outstanding PRIDES convertible preferred stock into one share of common stock of Kaiser) of common stock of Kaiser; MAXXAM Group Inc. owns of record and beneficially 100% of the issued and outstanding shares of The Pacific Lumber Company, a Delaware corporation ("Pacific Lumber"), and of Britt Lumber Co., Inc., a California corporation; Pacific Lumber owns of record and beneficially 100% of the issued and outstanding shares of each of Salmon Creek Corporation, a Delaware corporation, and Scotia Pacific Holding Company, a special purpose Delaware corporation. With respect to the foregoing, such counsel notes that on November 15, 1996, Kaiser filed a shelf registration statement on Form S-3 relating to preferred stock, depository shares, common stock and warrants. Although neither such counsel nor the attorneys under such counsel's supervision (the "Legal Staff") have undertaken to determine independently the accuracy or completeness of the statements contained in the Offering Memorandum, such counsel and the Legal Staff have obtained information as a result of discussions and meetings with officers and other representatives of the Issuer and the Guarantor, as a result of discussions with representatives of the independent public accountants for the Issuer and the Guarantor in connection with the preparation of the Offering Memorandum, responses to various questions raised by such counsel and the Legal Staff regarding the business of the Issuer and the Guarantor, and the examination of other information and documents requested by such counsel and the Legal Staff. Such counsel did not, however, undertake to determine independently, and therefore, no responsibility, explicitly or implicitly, is assumed for the accuracy and completeness or fairness of the statements contained in the Offering Memorandum, and no assurance can be given that such counsel's procedures described in the first sentence of this paragraph would necessarily reveal matters of 35 significance with respect to the following comments. Nothing has come to the attention of such counsel or the Legal Staff during the course of the above described procedures or otherwise that has caused such counsel or any member of the Legal Staff to believe that the Offering Memorandum as of the date thereof and as of the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 36 EXHIBIT D FORM OF OPINION OF SHEARMAN & STERLING (i) The Series A Notes will not constitute purpose credit under Regulations G and U. (ii) Purchasers of the Series A Notes that are not registered lenders pursuant to Regulation G at the time of purchase of the Series A Notes will not be required to register as such lenders with the Board of Governors of the Federal Reserve System. (iii) Upon the exchange of any Series A Notes for Series B Notes, the Series B Notes will not constitute an "extension of credit" under Regulations G, T, U and X (12 C.F.R. Parts 207, 220, 221, 224, respectively (1996)) (the "Margin Regulations"), and, on and after such exchange, the proceeds of the Series A Notes so exchanged may be used to buy and carry margin stock without complying with the maximum loan value requirements of the Margin Regulations. In addition, upon any transfer of the Series A Notes in a transaction registered under the Securities Act, such Series A Notes will not constitute an "extension of credit" and, from and after such transfer, the proceeds of such Series A Notes may be used to buy and carry margin stock without complying with the maximum loan value requirements of the Margin Regulations. EX-4.3 6 REGISTRATION RIGHTS AGREEMENT 12/23/96 1 EXHIBIT 4.3 ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated December 23, 1996 between MAXXAM GROUP HOLDINGS INC. MAXXAM INC. and BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ================================================================================ 2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of December 23, 1996 between MAXXAM Group Holdings Inc., a Delaware corporation (the "Company"), and MAXXAM Inc., a Delaware corporation (the "Guarantor"), on the one hand, and Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (the "Purchasers"), on the other. This Agreement is made pursuant to the Purchase Agreement dated December 17, 1996 among the Company, the Guarantor and the Purchasers (the "Purchase Agreement"), which provides for, among other things, the sale by the Company to the Purchasers of an aggregate of $130,000,000 principal amount of the Company's 12% Senior Secured Notes due 2003 (the "Securities"). In order to induce the Purchasers to enter into the Purchase Agreement, the Company and the Guarantor have agreed to provide to the Purchasers and certain of their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Interest" shall have the meaning set forth in Section 2(e) hereof. "Advice" shall have the meaning set forth in the last paragraph of Section 3 hereof. "Applicable Period" shall have the meaning set forth in Section 2(b) hereof. "Business Day" shall mean a day that is not a Saturday, a Sunday, or a day on which banking institutions in New York, New York are required to be closed. "Company" shall have the meaning set forth in the preamble to this Agreement and also includes the Company's successors and permitted assigns. "Depository" shall mean The Depository Trust Company, or any other depository appointed by the Company; provided, however, that such depository must have an address in the Borough of Manhattan, in The City of New York. "Effectiveness Period" shall have the meaning set forth in Section 2(b) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations of the SEC promulgated thereunder. "Exchange Notes" shall mean the 12% Senior Secured Notes due 2003, Series B, issued by the Company under the Indenture containing terms substantially identical to the Securities (except that (i) 1 3 interest thereon shall accrue from the last date to which interest was paid on the Securities or, if no such interest has been paid, from the Issue Date, (ii) the provisions for Additional Interest thereon shall be eliminated (except as contemplated by Section 2(e)(v) hereof with respect to Exchange Notes held by Participating Broker-Dealers) and (iii) the transfer restrictions thereon shall be eliminated) to be offered to Holders in exchange for Securities pursuant to the Exchange Offer. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Notes for Securities pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean any registration statement of the Company which covers any of the Exchange Notes or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference, or deemed to be incorporated by reference, therein. "Exchange Period" shall have the meaning set forth in Section 2(a)(B) hereof. "Guarantor" shall have the meaning set forth in the Indenture. "Holder" shall mean the Purchasers, for so long as they own any Registrable Securities, and each of their successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture. "Indenture" shall mean the Indenture relating to the Securities dated as of December 23, 1996 among the Company, as issuer, the Guarantor and First Bank National Association, as trustee, as the same may be amended or supplemented from time to time in accordance with the terms thereof. "Inspectors" shall have the meaning set forth in Section 3(n) hereof. "Issue Date" shall mean December 23, 1996. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities. "Participating Broker-Dealer" shall have the meaning set forth in Section 3(s) hereof. "Person" shall mean an individual, trustee, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof, or other legal entity. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and 2 4 supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. "Purchasers" shall have the meaning set forth in the preamble to this Agreement. "Records" shall have the meaning set forth in Section 3(n) hereof. "Registrable Securities" shall mean the Securities; provided, however, that Securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to such Securities for the resale thereof, shall have been declared effective under the Securities Act and such Securities shall have been disposed of pursuant to such Registration Statement, (ii) such Securities shall have been sold to the public in compliance with Rule 144 (or any similar provision then in force) under the Securities Act, (iii) such Securities shall have ceased to be outstanding or (iv) with respect to the Securities, such Securities have been exchanged for Exchange Notes upon consummation of the Exchange Offer and are thereafter freely tradeable by the holder thereof not an affiliate of the Company or the Guarantor. "Registration Default" shall have the meaning set forth in Section 2(e) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantor with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Registrable Securities) and compliance with the rules of the NASD, (iii) all expenses of any Persons retained with the consent of the Company in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing, printing and distributing any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) the fees and disbursements of counsel for the Company and the Guarantor and of the independent certified public accountants of the Company and the Guarantor, including the expenses of any "cold comfort" letters required by or incident to such performance and compliance, (vi) the fees and expenses of the Trustee, and any exchange agent or custodian, (vii) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities or Exchange Notes on any securities exchange or exchanges, and (viii) any fees and disbursements of any underwriter customarily required to be paid by issuers or sellers of securities and the reasonable fees and expenses of any special experts, in each case, retained by the Company or any Guarantor in connection with any Registration Statement, but excluding fees of counsel to the underwriters and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Registration Statement" shall mean each of the Exchange Offer Registration Statement and the Shelf Registration Statement, as applicable. 3 5 "SEC" shall mean the Securities and Exchange Commission. "Securities" shall have the meaning set forth in the preamble to this Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time and the rules and regulations of the SEC promulgated thereunder. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Event" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Event Date" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) hereof which covers Registrable Securities in respect of which a Shelf Registration Statement is required to be filed pursuant to this Agreement on an appropriate form pursuant to Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference therein. "TIA" shall mean the Trust Indenture Act of 1939, as amended. "Trustee" shall mean the trustee with respect to the Securities under the Indenture. 2. Registration Under the Securities Act. a. Exchange Offer. To the extent not prohibited by any law or applicable interpretations of the staff of the SEC, the Company and the Guarantor shall, for the benefit of the Holders, at the Company's expense, (i) cause to be filed with the SEC within 60 days after the Issue Date an Exchange Offer Registration Statement on an appropriate form under the Securities Act covering the offer by the Company and the Guarantor to the Holders to exchange any and all of the Registrable Securities for a like principal amount of Exchange Notes (the "Exchange Offer"), (ii) use their reasonable best efforts to have such Exchange Offer Registration Statement declared effective under the Securities Act by the SEC within 150 days after the Issue Date, (iii) use their reasonable best efforts to have such Exchange Offer Registration Statement remain effective until the closing of the Exchange Offer and (iv) use their reasonable best efforts to cause the Exchange Offer to be consummated within 180 days after the Issue Date. The Exchange Notes will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantor shall as soon as practicable commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for Exchange Notes (assuming that such Holder is not an affiliate of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act and is not a broker-dealer tendering Registrable Securities acquired directly from the Company or any Guarantor or any affiliate of the Company or any Guarantor for its own account, and has no arrangements or understandings with any Person to participate in the Exchange Offer for the 4 6 purpose of distributing (within the meaning of the Securities Act) the Exchange Notes) to transfer such Exchange Notes from and after their receipt, subject to the prospectus delivery requirements of Participating Broker-Dealers as contemplated by Section 3(s) hereof, without any limitations or restrictions under the Securities Act or under state securities or blue sky laws. In connection with the Exchange Offer, the Company and the Guarantor shall: (A) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (B) keep the Exchange Offer open for acceptance for a period of not less than 30 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (C) utilize the services of a Depository for the Exchange Offer; (D) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Securities delivered for exchange, and a statement that such Holder is withdrawing his election to have such Securities exchanged; (E) notify each Holder that any Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except as otherwise provided herein); and (F) otherwise comply in all material respects with all applicable laws relating to the Exchange Offer. As soon as practicable after the close of the Exchange Offer the Company shall (i) accept for exchange all Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Securities or portions thereof so accepted for exchange by the Company, and issue, and cause the Trustee under the Indenture to promptly authenticate and deliver to each Holder, a new Exchange Note equal in principal amount to the principal amount of the Securities surrendered by such Holder. To the extent not prohibited by any law or applicable interpretations of the staff of the SEC, the Company and the Guarantor shall use their reasonable best efforts to complete the Exchange Offer as provided above, and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate any law or applicable interpretations of the staff of the SEC. Each Holder who wishes to exchange such Registrable Securities for Exchange Notes in the Exchange Offer will be required to make certain customary representations in connection therewith, including 5 7 representations that (i) it is not an affiliate of the Company or the Guarantor, (ii) it is not a broker-dealer tendering Securities acquired directly from the Company or the Guarantor or an affiliate of the Company or the Guarantor, (iii) any Exchange Notes to be received by it will be acquired in the ordinary course of its business, (iv) it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes in violation of the Securities Act and (v) it is not acting on behalf of any person who could not truthfully make the foregoing representations. Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Registrable Securities as to which Section 2(b)(iii) or Section 2(b)(iv) hereof is applicable and to Exchange Notes held by Participating Broker-Dealers, and the Company shall have no further obligation to register Registrable Securities (other than Securities as to which Section 2(b)(iii) or Section 2(b)(iv) hereof is applicable) pursuant to Section 2(b) hereof. b. Shelf Registration. In the event that (i) the Company reasonably determines, after conferring with counsel (which may be in-house counsel), that the Exchange Offer Registration provided in Section 2(a) hereof is not available or may not be consummated as soon as practicable after the last day of the Exchange Period because it would violate any law or applicable interpretations of the staff of the SEC, (ii) the Exchange Offer is not for any reason consummated or capable of being consummated within 210 days after the Issue Date, (iii) any Holder notifies the Company in writing within 15 days after receipt of the prospectus forming part of the Exchange Offer Registration Statement required to be mailed to each Holder as set forth above that (A) in the opinion of nationally-recognized counsel for such Holder (or counsel acting for or by reference to all Holders), due to a change in law or SEC staff interpretation which change occurs subsequent to the date hereof, such Holder is not entitled to participate in the Exchange Offer or (B) in the opinion of nationally-recognized counsel for such Holder (or counsel acting for or by reference to all Holders), due to a change in law or SEC staff interpretation which change occurs subsequent to the date hereof, such Holder may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and (I) the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder and (II) such prospectus is not promptly amended or modified in order to be suitable for use in connection with resales by such Holder or (iv) upon the request of either Purchaser with respect to any Registrable Securities which it acquired directly from the Company or the Guarantor or an affiliate of the Company or the Guarantor and, with respect to other Registrable Securities held by it, if such Purchaser is not permitted, in the opinion of nationally-recognized counsel to such Purchaser, pursuant to any law or applicable interpretations of the staff of the SEC, to participate in the Exchange Offer and thereby receive securities that are freely tradeable without restriction (other than a prospectus delivery requirement) under the Securities Act and applicable blue sky or state securities laws (any of the events specified in (i)- (iv) being a "Shelf Registration Event" and the date of occurrence thereof, the "Shelf Registration Event Date"), the Company and the Guarantor shall, at the Company's expense, cause to be filed as promptly as practicable after such Shelf Registration Event Date, as the case may be, and, in any event, in the case of (i), (iii) and (iv) above, within 180 days after the Issue Date, and in the case of (ii) above, as soon as reasonably practicable after the 210 day period set forth therein (notwithstanding in the case of (ii) above, the Company shall remain liable for the increases in 6 8 interest set forth in Section 2(e) until the effectiveness of the Shelf Registration Statement), a Shelf Registration Statement providing for the sale by the Holders of any and all of the Registrable Securities, and shall use their reasonable best efforts to have such Shelf Registration Statement declared effective by the SEC as soon as reasonably practicable after its filing with the SEC. No Holder may include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder furnishes to the Company in writing such information as the Company may, after conferring with counsel with regard to information relating to Holders that would be required by the SEC to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company all information with respect to such Holder necessary to make the information previously furnished to the Company by such Holder not materially misleading. The Company and the Guarantor agree to use their reasonable best efforts to keep the Shelf Registration Statement continuously effective for a period until the earlier of 36 months following the Issue Date (or for such longer period if extended pursuant to the last sentence of Section 3 hereof (the "Applicable Period")) or for such shorter period which will terminate when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or otherwise cease to be Registrable Securities (the "Effectiveness Period"). The Company and the Guarantor shall not permit any securities other than Registrable Securities to be included in the Shelf Registration. The Company and the Guarantor further agree, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company agrees to furnish to the Holders copies of any such supplement or amendment promptly after its being used or filed with the SEC. c. Expenses. The Company and the Guarantor shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or 2(b) hereof and will pay the reasonable fees and disbursements of any one counsel designated in writing by the Majority Holders to act as counsel for the Holders in connection with a Shelf Registration Statement. Except as provided herein, each Holder shall pay all expenses of its counsel, underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. d. Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the effectiveness of a Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference. The Company and the Guarantor will be deemed not to have used their reasonable best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if they voluntarily take any action that would result 7 9 in any such Registration Statement not being declared effective or in the Holders covered thereby not being able to exchange or offer and sell such Registrable Securities during that period unless (i) such action is required by applicable law or interpretations of the staff of the SEC or (ii) such action is taken by them in good faith and for valid business reasons (not including avoidance of their obligations hereunder). e. Additional Interest. In the event that (i) the Exchange Offer Registration Statement has not been filed with the SEC on or prior to the 60th calendar day after the Issue Date, (ii) the Exchange Offer Registration Statement is not declared effective on or prior to the 150th calendar day after the Issue Date, (iii) the Exchange Offer is not consummated on or prior to the 180th calendar day after the Issue Date, (iv) a Shelf Registration Event shall have occurred and the Shelf Registration Statement is not declared effective on or prior to the 210th calendar day after the Issue Date or (v) the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective but thereafter ceases to be effective or usable during the period specified herein (each such event referred to in (i) through (v), a "Registration Default"), the interest rate borne by the Securities or Exchange Notes which are Registrable Securities shall be increased (the "Additional Interest") by one-quarter of one percent (0.25%) per annum for the first 90-day period immediately after the first such Registration Default. The interest rate borne by such Registrable Securities shall increase by an additional one-quarter of one percent (0.25%) per annum for each subsequent 90-day period, in each case, until all Registration Defaults have been cured (provided that in the event the Company has abandoned the Exchange Offer because of the circumstances described in Section 2(b)(i) or Section 2(b)(ii) hereof, then the effectiveness of the Shelf Registration Statement shall be deemed a cure of such Registration Defaults); provided, that the aggregate increase in such interest rate pursuant to this Section 2(e) will in no event exceed one percent (1.00%) per annum. Notwithstanding any of the above, it is understood that Additional Interest pursuant to a Registration Default under clause (v) above, as such clause (v) relates to an Exchange Offer Registration Statement, shall only be payable to a Participating Broker-Dealer that holds Registrable Securities subject to a prospectus delivery requirement; provided, that such a Registration Default may only be deemed to be occurring during the period following the 150th day after the Issue Date until, subject to an extension of the relevant 180-day period pursuant to the last sentence of Section 3 hereof, 180 days after the consummation of the Exchange Offer. Following the cure of all Registration Defaults, the interest rate borne by such Registrable Securities will be reduced to the original interest rate. The Company shall notify the Trustee within three Business Days after each and every date on which a Registration Default occurs. Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders on or before the applicable semiannual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Registration Default. f. Specific Enforcement. Without limiting the remedies available to the Purchasers and the Holders, the Company and the Guarantor acknowledge that any failure by the Company 8 10 and the Guarantor to comply with their obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantor's obligations under Section 2(a) and Section 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company and the Guarantor with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company and the Guarantor shall: a. prepare and file with the SEC a Registration Statement or Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the relevant Registrable Securities by the Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; and use their reasonable best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; provided, however, that if (1) such filing is pursuant to Section 2(b), or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to and afford the Holders of the Registrable Securities covered by the relevant Shelf Registration Statement and each such Participating Broker-Dealer covered by such Registration Statement, as the case may be, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (at least five Business Days prior to such filing). The Company and the Guarantor shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded, pursuant to this Section 3(a), an opportunity to review prior to the filing thereof, if the Majority Holders or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably and promptly object in writing; b. prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be; and cause each Prospectus to be supplemented by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all securities covered by such Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker-Dealer); 9 11 c. in the case of a Shelf Registration, (i) notify each Holder covered by such Shelf Registration Statement, at least 10 days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holder that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders; and (ii) furnish to each Holder covered by such Shelf Registration Statement and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities (it being understood that the Company and the Guarantor hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders in accordance with the terms hereof, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto); d. in the case of a Shelf Registration, use their reasonable best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions by the time the applicable Registration Statement is declared effective by the SEC as any Holder covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company and the Guarantor shall not be obligated to qualify as foreign corporations in any jurisdiction in which they are not so qualified or to take any action that would subject them to general consent to service of process in any jurisdiction in which they are not now so subject or to subject them to general taxation in any such jurisdiction in which they are not now so subject; e. in the case of (1) a Shelf Registration or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, promptly notify each Holder covered by such Shelf Registration Statement, or such Participating Broker-Dealers, as the case may be, their counsel and the managing underwriters, if any, and promptly confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if the Company or the Guarantor receives any notification with respect to the suspension of the qualification of the Registrable Securities or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts, during the period a Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which causes such Registration Statement or Prospectus to omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were 10 12 made, not misleading and (vi) of the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; f. make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; g. in the case of a Shelf Registration, furnish to each Holder covered by such Shelf Registration Statement, without charge, at least one conformed copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); h. in the case of a Shelf Registration, cooperate with the selling Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and cause such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the Holders or the underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities; i. in the case of a Shelf Registration or an Exchange Offer Registration, upon the occurrence of any circumstance contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, use their reasonable best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; j. in the case of a Shelf Registration, a reasonable time prior to the filing of any document which is to be incorporated by reference into a Registration Statement or a Prospectus after the initial filing of a Registration Statement, provide a reasonable number of copies of such document to the Holders covered by such Shelf Registration Statement; and make such of the representatives of the Company and the Guarantor as shall be reasonably requested by such Holders or the Purchasers on behalf of such Holders available for discussion of such document; k. obtain a CUSIP number for all Exchange Notes or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Notes or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depository; l. cause the Indenture to be qualified under the TIA, in connection with the registration of the Exchange Notes or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use their 11 13 reasonable best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; m. in the case of a Shelf Registration, enter into such agreements as are customary in shelf registrations and take all such other appropriate actions as are reasonably requested in order to expedite or facilitate the registration or the disposition of such Registrable Securities, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (i) make such representations and warranties to Holders of such Registrable Securities and the underwriters (if any), with respect to the business of the Company and its subsidiaries as then conducted or proposed to be conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers in shelf registrations to underwriters and selling securityholders, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and the Guarantor and updates thereof in form and substance reasonably satisfactory to the managing underwriters (if any) and the Holders of a majority in principal amount of the Registrable Securities being sold, addressed to each Holder and the underwriters (if any) covering the matters customarily covered in opinions requested in shelf registrations and such other matters as may be reasonably requested by such Holders and underwriters; (iii) obtain "cold comfort" letters and updates thereof in form and substance reasonably satisfactory to the recipients from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the selling Holders and to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with shelf registrations and such other matters as reasonably requested by such selling Holders and underwriters (including, without limitation, negative assurance with respect to any interim financial period included in the Registration Statement or the Prospectus and with respect to any period after the date of the latest balance sheet included therein and up to five days prior to the closing date in respect of any such sale); and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other provisions and procedures acceptable to selling Holders of a majority in aggregate principal amount of Registrable Securities covered by such Registration Statement and the managing underwriters or agents) with respect to all parties to be indemnified pursuant to Section 4 hereof (including, without limitation, such underwriters and Holders). The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder; n. if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the applicable period, make available for inspection by any selling Holder being sold, or each such Participating Broker-Dealer, as the case may be, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating 12 14 Broker-Dealer, as the case may be (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable the Inspectors to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its subsidiaries to supply all relevant information in each case reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary in the opinion of nationally-recognized counsel to avoid or correct a misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. Each selling Holder and each Participating Broker Dealer will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in any securities other than for the purposes expressly set forth in this Agreement unless and until such is made generally available to the public. Each selling Holder and each such Participating Broker Dealer will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give prompt notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential (it being understood that the Holders shall at all times be unrestricted in complying with any order of any court or tribunal of competent jurisdiction); o. comply with all applicable rules and regulations of the SEC and make generally available to the Company's security holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods; p. if an Exchange Offer is to be consummated, upon delivery of the Registrable Securities by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes, the Company shall mark, or cause to be marked, on such Registrable Securities delivered by such Holders that such Registrable Securities are being cancelled in exchange for the Exchange Notes; in no event shall such Registrable Securities be marked as paid or otherwise satisfied; q. cooperate with each seller of Registrable Securities covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; 13 15 r. use their reasonable best efforts to take all other steps necessary to effect the registration of the Registrable Securities covered by a Registration Statement contemplated hereby; s. in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," which section shall be reasonably acceptable to the Purchasers or another representative of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer (a "Participating Broker-Dealer") that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of the Purchasers or such other representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Notes for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request (it being understood that the Company hereby consents to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Notes covered by the Prospectus or any amendment or supplement thereto), (iii) use their reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements in order to resell the Exchange Notes; provided, however, that such period shall not be required to exceed 180 days (or such longer period if such 180-day period is extended pursuant to the last sentence of Section 3 hereof) and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer: (1) the following provision or a provision substantially similar thereto: "If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Notes received in respect of such Registrable Securities pursuant to the Exchange Offer"; and (2) a statement to the effect that by a broker-dealer making the acknowledgement described in clause (1) and by delivering a Prospectus in connection with the exchange of Registrable 14 16 Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such seller and the proposed distribution of such Registrable Securities, as the Company may from time to time reasonably request in writing. The Company may exclude from such registration the Registrable Securities of any seller who fails to furnish such information within a reasonable time after receiving such request. In the case of (1) a Shelf Registration Statement or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities or Exchange Notes, as the case may be, current at the time of receipt of such notice. If the Company or the Guarantor shall give any such notice to suspend the disposition of Registrable Securities or Exchange Notes, as the case may be, pursuant to a Registration Statement or the Prospectus that is then available pursuant to the Exchange Offer Registration Statement, the Company and the Guarantor shall file and use their reasonable best efforts to have declared effective (if an amendment) as soon as practicable an amendment or supplement to the Registration Statement or such Prospectus, and shall extend the period during which such Registration Statement shall be maintained effective (or such Prospectus is required to be made available) pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Company shall have made available to the Holders (x) copies of the supplemented or amended Prospectus necessary to resume such dispositions or (y) the Advice. 4. Indemnification and Contribution. a. The Company and the Guarantor shall indemnify and hold harmless each Purchaser, each Holder, each Participating Broker-Dealer, each underwriter who participates in an offering of Registrable Securities, their respective affiliates, each Person, if any, who controls any of such parties (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and each of their respective directors, officers, employees and agents, as follows: (a) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto), covering Registrable Securities or Exchange Notes, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a 15 17 material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (b) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 4(d) below) any such settlement is effected with the prior written consent of the Company; and (c) from and against any and all expenses whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Purchasers, such Holder, such Participating Broker-Dealer or any underwriter (except to the extent otherwise provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a); provided, however, that this Section 4(a) shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished in writing to the Company by either Purchaser, any Holder, any Participating Broker-Dealer or any underwriter with respect to either Purchaser, Holder, Participating Broker-Dealer or underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). b. Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantor, each Purchaser, each underwriter who participates in an offering of Registrable Securities and the other selling Holders and each of their respective directors, officers (including each officer of the Company who signed the Registration Statement), employees and agents and each Person, if any, who controls the Company and the Guarantor, either Purchaser, any underwriter or any other selling Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any amendment thereto), or any such Prospectus (or any amendment or supplement thereto); provided, however, that, in the case of Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement. c. Each indemnified party shall give notice as promptly as reasonably practicable 16 18 to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder except to the extent it is materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (expect with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution is sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. d. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that, unless such indemnifying party is contesting the payment of such fees and expenses in good faith, it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 90 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received written notice of all of the terms of such settlement at least 60 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. e. If the indemnification provided for in Section 4(a) or (b) hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantor on the one hand and the Holder, the Participating Broker-Dealer or Purchaser, as the case may be, on the other hand from the offering of the Securities pursuant to the Purchase Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Guarantor on the one hand and of the Holder, the Participating Broker-Dealer or Purchaser, as the case may be, on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantor on the one hand and the Holder, the Participating Broker-Dealer or the Purchasers, as the case may be, on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or 17 19 the omission or alleged omission to state a material fact relates to information supplied by the Company or the Guarantor, or by the Holder, the Participating Broker-Dealer or the Purchasers, as the case may be, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantor and the Holders and the Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4(e). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4(e), each Person, if any, who controls a Holder, a Purchaser or a Participating Broker-Dealer (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) shall have the same rights to contribution as such other Person, and each director of the Company and the Guarantor, each officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company and the Guarantor (within the meaning of Section 15 of the Securities act or Section 20 of the Exchange Act) shall have the same rights to contribution as the Company and the Guarantor. 5. Participation in Underwritten Registrations. No Holder may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents reasonably required under the terms of such underwriting arrangements. 6. Selection of Underwriters. The Holders covered by the Shelf Registration Statement who desire to do so may sell the securities covered by such Shelf Registration in an underwritten offering. In any such underwritten offering, the underwriter or underwriters and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Registrable Securities included in such offering; provided, however, that such underwriters and managers must be reasonably satisfactory to the Company. 7. Miscellaneous. a. Rule 144 and Rule 144A. For so long as the Company or any Guarantor is subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any Registrable Securities remain outstanding, the Company and the Guarantor covenant that they will comply with their reporting obligations under the Securities Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the SEC thereunder, that if they cease to be required to file periodic reports thereunder, they will upon the request of any Holder (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Securities Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Securities Act, 18 20 and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. For so long as the Company or the Guarantor is subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any Registrable Securities remain outstanding, upon the request of any Holder, the Company and the Guarantor will deliver to such Holder a written statement as to whether they have complied with such requirements. b. No Inconsistent Agreements. The Company and the Guarantor have not entered into nor will the Company and the Guarantor on or after the date of this Agreement enter into any agreement which may require any action which would violate the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and do not under any circumstances require any action which would violate the rights granted to the holders of the Company's other issued and outstanding securities under any other agreements in effect on the date hereof. c. Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of (A) the Holders of not less than a majority in aggregate principal amount of the then outstanding Registrable Securities and (B) in circumstances that would adversely affect the Participating Broker- Dealers, the Participating Broker-Dealers holding not less than a majority in aggregate principal amount of the Exchange Notes held by all Participating Broker-Dealers; provided, however, that Section 4 and this Section 7(c) may not be amended, modified or supplemented without the prior written consent of each Holder and each Participating Broker-Dealer (including any Person who was a Holder or Participating Broker-Dealer of Registrable Securities or Exchange Notes, as the case may be, disposed of pursuant to any Registration Statement). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders may be given by Holders of at least a majority in aggregate principal amount of the Registrable Securities being sold by such Holders pursuant to such Registration Statement. d. Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 7(d), which address initially is, with respect to the Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the Company or the Guarantor, initially at the Company's address set forth in the Purchase Agreement to the attention of General Counsel and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 7(d), with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022, Attention: Howard A. Sobel, Esq. All such notices and communications shall be deemed to have been duly given: at the 19 21 time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. e. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Purchasers, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. f. Third Party Beneficiary. Each of the Purchasers shall be a third party beneficiary of the agreements made hereunder between the Company and the Guarantor, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. g. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. h. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. i. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. j. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. k. Securities Held by the Company or Its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable 20 22 Securities held by the Company or the Guarantor or their affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. l. Entire Agreement. This Agreement, together with the Purchase Agreement and the Indenture, is intended by the parties as a final and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein and any and all prior oral or written agreements, representations, or warranties, contracts, understandings, correspondence, conversation and memoranda between the Purchasers on the one hand and the Company and the Guarantor on the other, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest with respect to the subject matter hereof and thereof are merged herein and replaced hereby. [Signature Page Follows] 21 23 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. MAXXAM GROUP HOLDINGS INC. By: /s/ BYRON L. WADE ------------------------------------- Name: Byron L. Wade Title: Vice President MAXXAM INC. By: /s/ ANTHONY R. PIERNO ------------------------------------- Name: Anthony R. Pierno Title: Senior Vice President S-1 24 Confirmed and accepted as of the date first above written: BEAR, STEARNS & CO. INC. By: [Signature Illegible] ------------------------------------------------ Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ JAMES T. SINGTON ------------------------------------------------ Name James T. Sington Title: Managing Director S-2 EX-10.1 7 TAX ALLOCATION AGREEMENT 12/23/96 1 EXHIBIT 10.1 MAXXAM INC. TAX ALLOCATION AGREEMENT WITH MAXXAM GROUP HOLDINGS INC. OF DECEMBER 23, 1996 This Agreement is made as of December 23, 1996, between MAXXAM Inc. ("Parent"), a Delaware corporation, and MAXXAM Group Holdings Inc. ("MGHI"), a Delaware corporation. WHEREAS, MGHI is currently a member of the affiliated group within the meaning of Section 1504(a) of The Internal Revenue Code of 1986, as amended (the "Code") of which Parent is the common parent corporation (the "Group"); and WHEREAS, pursuant to a tax allocation agreement dated as of May 21, 1988 (the "May 88 Agreement"), Parent and certain of its then existing subsidiaries, including MAXXAM Group Inc. ("MGI"), a Delaware Corporation, The Pacific Lumber Company ("Pacific Lumber"), a Delaware corporation, MAXXAM Properties Inc. ("MPI"), a Delaware corporation, and Yosuba Farms ("Yosuba"), a California corporation, established a Tax Allocation Method, as hereinafter defined. As used herein, the term "Tax Allocation Method" shall mean a method for allocating the consolidated tax liability of a group among its members and for reimbursing the group's parent for the payment of such liability; and WHEREAS, pursuant to a tax allocation agreement dated as of July 3, 1990, Parent and Britt Lumber Co., Inc. ("Britt"), a California corporation, established a Tax Allocation Method (the "Britt Agreement"); and WHEREAS, pursuant to a tax allocation agreement dated as of March 23, 1993, Parent and Pacific Lumber amended the May 88 Agreement with respect to Pacific Lumber and established a Tax 1 2 Allocation Method with respect to certain Pacific Lumber subsidiaries (the "PL Agreement"); and WHEREAS, on December 23, 1996, MGHI issued $130,000,000 of its Senior Secured Notes due 2003 (the "Notes"); and WHEREAS, from time to time, MGHI or any of its Restricted Subsidiaries (as hereinafter defined) may incorporate a Restricted Subsidiary which may become a member of the Group; and WHEREAS, pursuant to a tax allocation agreement dated as of August 4, 1993, Parent and MGI further amended the May 88 Agreement solely with respect to MGI such that MGI and its subsidiaries, excluding Salmon Creek Corporation, will ultimately pay Parent Federal income taxes as if they filed on a consolidated basis with respect to taxable periods beginning on or after August 4, 1993 (the "Revised MGI Agreement"). NOW, THEREFORE, in consideration of the promises and of the mutual agreements and covenants contained herein, Parent and MGHI hereby agree as follows: 1. MGHI shall cause any Restricted Subsidiary, at the time that it becomes a member of the Group, to agree to be included in Parent's consolidated Federal income tax return for all taxable years during which such Restricted Subsidiary is eligible to be included in Parent's consolidated Federal income tax return. Restricted Subsidiary shall mean a Restricted Subsidiary as defined in the indenture dated as of December 23, 1996 by and between MGHI, as Issuer, Parent, as Guarantor, and First Bank National Association, as Trustee, for the Notes (the "Indenture"). 2. MGHI shall cause any Restricted Subsidiary which becomes a member of the Group to execute any consents and other documents as are necessary in connection therewith. 2 3 3. Except with respect to any payments to Parent that are required under this Agreement, the May 88 Agreement, the Britt Agreement, the PL Agreement or the Revised MGI Agreement, Parent shall indemnify MGHI and each MGHI Subgroup Subsidiary (as hereinafter defined) and hold them harmless against all Federal income tax liabilities relating to taxable years of MGHI and each MGHI Subgroup Subsidiary during which MGHI and each MGHI Subgroup Subsidiary is or was a member of the Group. 4. (a) For purposes of making the computations described herein, MGHI and all lower (with respect to MGHI) tier entities, including newly-formed Restricted Subsidiaries but excluding Salmon Creek Corporation, (individually and collectively referred to as "MGHI Subgroup Subsidiary" or "MGHI Subgroup Subsidiaries") in which MGHI has direct or indirect ownership shall be treated as an affiliated group of corporations (the "MGHI Subgroup"), the common parent of which is MGHI, provided, however, that the MGHI Subgroup shall only include any MGHI Subgroup Subsidiary to the extent that such MGHI Subgroup Subsidiary meets the test of affiliation under Section 1504 of the Code as it would apply to the MGHI Subgroup. MGHI and each MGHI Subgroup Subsidiary shall sometimes be referred to as "MGHI Subgroup Members". (b) The tax liability required of MGHI shall be equal to MGHI's Tentative Tax Liability (as hereinafter defined) minus MGI's Tentative Tax Liability (as determined under the Revised MGI Agreement). (c) The computation of the Federal income tax liability of MGHI shall take into account the taxable income, loss, credits and other tax attributes of each MGHI Subgroup Subsidiary as if MGHI filed a consolidated return with 3 4 each MGHI Subgroup Subsidiary (taking into account all applicable limitations under the Code) ("MGHI's Tentative Tax Liability"). In calculating such liability, all intercompany transactions between MGHI Subgroup Members shall be treated consistent with the consolidated return Treasury Regulations. (d) To the extent that MGHI's Tentative Tax Liability is less than MGI's Tentative Tax Liability, Parent shall pay the amount of such difference to MGHI. (e) For purposes of Section 4(c) of this Agreement, any net operating loss carryforwards available to the MGI Subgroup on the date hereof under the Revised MGI Agreement shall be available to offset income of the MGHI Subgroup in the same manner as under the Revised MGI Agreement. (f) If the calculation of MGHI's Tentative Tax Liability in Section 4(c) results in a net operating loss that can be carried back to a prior taxable period or periods with respect to which MGHI made payments to Parent under this Agreement, then, in that event, Parent shall pay MGHI an amount equal to the tax refund to which MGHI would have been entitled consistent with this Section 4. (g) If the calculation of MGHI's Tentative Tax Liability in Section 4(c) results in a net operating loss that cannot be carried back pursuant to the preceding subsection (f), then, in that event, such net operating loss shall be a net operating loss carryover to be used by the MGHI Subgroup in computing its Federal income tax liability pursuant to the preceding subsection (c) for future taxable periods, under the law applicable to net operating loss carryovers in general. 4 5 5. This Agreement shall be effective for the Group's 1996 taxable period and all subsequent taxable periods until the earliest date on which (i) MGHI ceases to be a member of the Group, (ii) the Group no longer remains in existence within the meaning of Treasury Regulation Section 1.1502-75(a), or (iii) the Group is no longer eligible to file, or is no longer eligible to join in the filing of, a consolidated return for Federal income tax purposes. Prior to or upon termination of this Agreement, the parties may enter into a new agreement, consistent with the provisions of this Agreement, taking into account, among other things, to the extent applicable, the manner in which MGHI ceased to be a member of the Group, the reason that the Group is no longer in existence, or the reason that Parent and/or MGHI can no longer join in the same consolidated return. 6. This Agreement is entered into by the parties solely in recognition of the mutual benefits resulting from filing a Federal (or state or other local) consolidated or combined tax return. The respective amounts of tax liability allocated to each MGHI Subgroup Member for purposes of computing such corporation's earnings and profits for Federal (or any other) income tax purposes may differ from those determined in accordance with this Agreement. Furthermore, any amount treated for Federal (or state or other local) income tax purposes, on account of such a difference, as a contribution to capital or a distribution with respect to stock, or a combination thereof, as the case may be, shall be treated as a contribution to capital, a distribution with respect to stock, or a combination thereof, solely for Federal (or state or other local) income tax purposes. 7. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 5 6 IN WITNESS WHEREOF, Parent and MGHI have executed this Agreement by authorized officers thereof as of the date first above written. MAXXAM Inc. By: /s/ RONALD L. REMAN ----------------------------------- Name: Ronald L. Reman Title: Vice President - Taxes MAXXAM Group Holdings Inc. By: /s/ TERRY FREEMAN ----------------------------------- Name: Terry Freeman Title: Assistant Controller EX-10.8 8 NON-NEGOTIABLE INTERCOMPANY NOTE 12/23/96 1 EXHIBIT 10.8 NON-NEGOTIABLE INTERCOMPANY NOTE December 23, 1996 FOR VALUE RECEIVED, the undersigned, MAXXAM Inc., a Delaware corporation (the "Company"), HEREBY PROMISES TO PAY to the order of MAXXAM Group Holdings Inc., a Delaware corporation (the "Payee"), the principal sum of ONE HUNDRED TWENTY-FIVE MILLION DOLLARS ($125,000,000) on August 1, 2003. 1. The Company shall pay interest on the outstanding principal amount of this Note at the rate of 11% per annum (computed on the basis of a 360-day year of twelve 30-day months), semiannually on February 1 and August 1 of each year, commencing on February 1, 1997; provided, however, that the Company may, at its option, defer the payment of interest on this Note on any interest payment date to the extent that the Payee has sufficient available funds to satisfy its obligations on the Payee Notes (as hereinafter defined) on such date. Any such deferred interest will be automatically added to the principal amount of this Note (as of the interest payment date on which such interest would otherwise have been payable) and be payable at the maturity hereof. As used in this Note, the term "Payee Notes" means the Payee's 12% Senior Secured Notes due 2003, as amended, restated, restructured, renewed, extended, or otherwise modified, in whole or in part, from time to time, issued pursuant to the Indenture dated as of December 23, 1996, among the Payee (as Issuer), the Company (as Guarantor) and First Bank National Association, as Trustee (the "Trustee"), as such Indenture may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof (the "Indenture"). 2 2. The Company may, at any time, at its option, prepay this Note in whole, or from time to time in part, without premium or penalty, on not less than five (5) days written notice to the Payee. 3. Anything in this Note or in the Indenture to the contrary notwithstanding, any payment made by the Company pursuant to Article 12 of the Indenture shall automatically reduce the outstanding principal amount of this Note by an amount equal to the amount of such payment, provided that such reduction shall be reinstated to the extent that any holder of Payee Notes or the Trustee is required by any court or otherwise to return to the Company or any Custodian (as such term is defined in the Indenture), trustee, liquidator or other similar official acting in relation to the Company any amount paid by any such entity to the Trustee or such holder of Payee Notes. 4. This Note may be amended at any time or from time to time by written agreement between the Company and the Payee, provided that such amendment does not result in a violation of the Payee's obligations under Section 4.11 of the Indenture. 5. The Company shall make each payment hereunder not later than 11:00 A.M. (New York City time) on the day when due in lawful money of the United States of America to the holder of this Note by delivery of a certified or bank cashier's check in the amount of such payment or, at such holder's option, by wire transfer of immediately available funds. 6. Whenever any payment to be made hereunder shall be stated to be due on a Saturday, Sunday or a public or bank holiday or the equivalent for banks generally under the laws -2- 3 of the State of New York (any other day being a "Business Day"), such payment may be made on the next succeeding Business Day. 7. All parties hereto, whether as makers, endorsers or otherwise, generally waive presentment for payment, demand, protest and notice of dishonor. 8. This Note is the Intercompany Note (as such term is defined in the Indenture). 9. This Note shall be binding upon the Company and its successors and assigns, and the terms and provisions of this Note shall inure to the benefit of Payee and its respective successors and assigns, including subsequent holders hereof. 10. This Note shall be governed by, and construed in accordance with, the internal laws of the State of New York without regard to principles of conflict of laws. -3- 4 IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered to the Payee on the date and year first above written. MAXXAM Inc. By: /s/ BYRON L. WADE -------------------------------- Name: Byron L. Wade Title: Vice President -4- EX-12.1 9 COMPUTATION OF RATIO OF THE COMPANY 1 EXHIBIT 12.1 MAXXAM GROUP HOLDINGS INC. CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------- ------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ----- ----- ----- ----- ------ ------ ------ (IN MILLIONS OF DOLLARS) Historical: Earnings are calculated as follows: Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................ $ 3.4 $ 2.3 $ 5.9 $16.1 $(17.7) $(10.7) $ 42.1 Add (deduct): Fixed charges as calculated below........ 58.8 58.4 78.0 77.5 81.9 91.4 94.2 ----- ----- ----- ----- ------ ------ ------ $62.2 $60.7 $83.9 $93.6 $ 64.2 $ 80.7 $136.3 ===== ===== ===== ===== ====== ====== ====== Fixed charges are calculated as follows: Interest expense............. $56.1 $56.1 $74.9 $74.6 $ 78.5 $ 89.5 $ 94.2 Amortization of deferred financing costs........... 2.3 2.1 2.9 2.8 3.4 1.9 -- Interest component of rental expense................... .4 .2 .2 .1 -- -- -- ----- ----- ----- ----- ------ ------ ------ $58.8 $58.4 $78.0 $77.5 $ 81.9 $ 91.4 $ 94.2 ===== ===== ===== ===== ====== ====== ====== Ratio of earnings to fixed charges...................... 1.1x 1.0x 1.1x 1.2x 1.4x ===== ===== ===== ===== ====== Fixed charge coverage deficiency................... $(17.7) $(10.7) ====== ====== Pro Forma: Earnings are calculated as follows: Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles................ $ 1.3 $ 3.2 Add (deduct): Fixed charges as calculated below........ 71.1 94.4 ----- ----- $72.4 $97.6 ===== ===== Fixed charges are calculated as follows: Interest expense............. $67.8 $90.5 Amortization of deferred financing costs........... 2.9 3.7 Interest component of rental expense................... .4 .2 ----- ----- $71.1 $94.4 ===== ===== Ratio of earnings to fixed charges...................... 1.0x 1.0x ===== =====
EX-12.2 10 COMPUTATION OF RATIO OF MAXXAM 1 EXHIBIT 12.2 MAXXAM INC. CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended September 30, Years Ended December 31, ----------------- ------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- -------- -------- ------- ------- (In millions of dollars) Historical: Earnings are calculated as follows: Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles..................... $ 8.4 $ 59.5 $ 94.5 $ (171.8) $ (211.4) $(13.2) $ 67.4 Add (deduct): Fixed charges as calculated below.................... 143.5 162.5 216.3 229.3 213.8 215.1 233.1 Undistributed (earnings) losses of less than 50% owned companies.................................... (9.2) (17.2) (19.2) 1.9 3.3 1.9 19.2 Capitalized interest, included in fixed charges...... (3.3) (2.0) (2.8) (3.0) (4.3) (5.2) (5.1) Preferred stock dividend requirements of subsidiaries, included in fixed charges............ (1.5) (17.2) (21.7) (35.5) (10.9) (4.6) (2.0) Equity in losses of less than 50% owned companies where a majority owned subsidiary of the Company has guaranteed the debt of such companies.......... -- -- -- (4.7) (2.5) -- (4.4) ------ ------ ------ -------- -------- ------ ------ $137.9 $185.6 $267.1 $ 16.2 $ (12.0) $194.0 $308.2 ====== ====== ====== ======== ======== ====== ====== Fixed charges are calculated as follows: Interest expense....................................... $128.8 $129.7 $172.7 $ 167.3 $ 169.5 $181.8 $198.8 Amortization of deferred financing costs............... 6.7 6.4 8.6 9.6 15.6 13.8 12.1 Capitalized interest................................... 3.3 2.0 2.8 3.0 4.3 5.2 5.1 Interest component of rental expense................... 3.2 7.2 10.5 9.8 10.5 9.7 9.7 Preferred stock dividend requirements of subsidiaries......................................... 1.5 17.2 21.7 35.5 10.9 4.6 2.0 Interest expense related to guaranteed debt of less than 50% owned companies (incurring losses) of the Company's majority owned subsidiary.............. -- -- -- 4.1 3.0 -- 5.4 ------ ------ ------ -------- -------- ------ ------ $143.5 $162.5 $216.3 $ 229.3 $ 213.8 $215.1 $233.1 ====== ====== ====== ======== ======== ====== ====== Ratio of earnings to fixed charges....................... 1.1x 1.2x 1.3x ====== ====== ====== Fixed charge coverage deficiency......................... $ (5.6) $ (213.1) $(225.8) $(21.1) ====== ======== ======== ====== Pro Forma: Earnings are calculated as follows: Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles..................... $(13.7) $ 62.2 Add (deduct): Fixed charges as calculated below.................... 165.6 246.7 Undistributed (earnings) losses of less than 50% owned companies.................................... (9.2) (19.2) Capitalized interest, included in fixed charges...... (3.3) (2.8) Preferred stock dividend requirements of subsidiaries, included in fixed charges............ (1.5) (21.7) Equity in losses of less than 50% owned companies where a majority owned subsidiary of the Company has guaranteed the debt of such companies.......... -- -- ------ ------ $137.9 $265.2 ====== ====== Fixed charges are calculated as follows: Interest expense....................................... $149.7 $201.5 Amortization of deferred financing costs............... 7.9 10.2 Capitalized interest................................... 3.3 2.8 Interest component of rental expense................... 3.2 10.5 Preferred stock dividend requirements of subsidiaries......................................... 1.5 21.7 Interest expense related to guaranteed debt of less than 50% owned companies (incurring losses) of the Company's majority owned subsidiary.............. -- -- ------ ------ $165.6 $246.7 ====== ====== Ratio of earnings to fixed charges....................... 1.1x ====== Fixed charge coverage deficiency......................... $(27.7) ======
EX-21.1 11 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 PRINCIPAL SUBSIDIARIES OF MAXXAM GROUP HOLDINGS INC. Listed below are the principal subsidiaries and the jurisdiction of their incorporation or organization. Certain subsidiaries are omitted which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. State or Province of Incorporation Name or Organization ---- ----------------- Britt Lumber Co., Inc. California MAXXAM Group Inc. Delaware MAXXAM Properties Inc. Delaware Salmon Creek Corporation Delaware Scotia Pacific Holding Company Delaware The Pacific Lumber Company Delaware EX-21.2 12 SUBSIDIARIES OF MAXXAM 1 EXHIBIT 21.2 PRINCIPAL SUBSIDIARIES OF MAXXAM INC. Listed below are MAXXAM Inc.'s principal subsidiaries and the jurisdiction of their incorporation or organization. Certain subsidiaries are omitted which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. State or Province of Incorporation Name or Organization - ---------------------------------------------------- -------------------- ALUMINUM OPERATIONS Alpart Jamaica Inc. Delaware Alumina Partners of Jamaica (partnership) Delaware Anglesey Aluminium Limited United Kingdom Kaiser Alumina Australia Corporation Delaware Kaiser Aluminum Corporation Delaware Kaiser Aluminum International, Inc. Delaware Kaiser Aluminum & Chemical Corporation Delaware Kaiser Aluminum & Chemical of Canada Limited Ontario Kaiser Bauxite Company Nevada Kaiser Finance Corporation Delaware Kaiser Jamaica Bauxite Company (partnership) Jamaica Kaiser Jamaica Corporation Delaware Queensland Alumina Limited Queensland Volta Aluminium Company Limited Ghana FOREST PRODUCTS OPERATIONS Britt Lumber Co., Inc. California MAXXAM Group Holdings Inc. Delaware MAXXAM Group Inc. Delaware MAXXAM Properties Inc. Delaware Salmon Creek Corporation Delaware Scotia Pacific Holding Company Delaware The Pacific Lumber Company Delaware REAL ESTATE OPERATIONS Horizon Corporation Delaware MAXXAM Property Company Delaware MCO Properties Inc. Delaware MCO Properties L.P. (limited partnership) Delaware MXM General Partner, Inc. Delaware MXM Mortgage L.P. (limited partnership) Delaware Palmas del Mar Properties, Inc. Delaware RACE PARK OPERATIONS New SHRP Acquisition, Inc. Delaware SHRP General Partner, Inc. Delaware Sam Houston Entertainment Corp. Texas Sam Houston Race Park, Ltd. (limited partnership) Texas EX-23.1 13 CONSENT ARTHUR ANDERSEN 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Houston, Texas December 23, 1996 EX-23.3 14 CONSENTTHELEN MARRIN JOHNSON & BRIDGES 1 EXHIBIT 23.3 [THELEN, MARRIN, JOHNSON & BRIDGES LLP LETTERHEAD] December 24, 1996 MAXXAM Group Holdings Inc. 5847 San Felipe, Suite 2600 Houston, Texas 77257 Dear Sirs: With respect to the Registration Statement on Form S-4 relating to an exchange offer for $100 million of Senior Secured Notes due 2003, to be filed by MAXXAM Group Holdings Inc., a Delaware corporation (the "Registration Statement"), we hereby consent to the use of our name, and to references to advice rendered by our firm, in the prospectus included in the Registration Statement under the headings (i) Management's Discussion and Analysis of Financial Condition and Results of Operation of MAXXAM -- MAXXAM (Parent Company) -- Aluminum Operations; (ii) Note 8 of the Notes to Consolidated Financial Statements of Kaiser Aluminum Corporation; (iii) Note 4 of the Notes to Interim Consolidated Financial Statements of Kaiser Aluminum Corporation; (iv) Note 7 of the Notes to Consolidated Financial Statements of MAXXAM Inc.; and (v) Note 7 of the Notes to Interim Consolidated Financial Statements of MAXXAM Inc. Very truly yours, /s/ THELEN, MARRIN, JOHNSON & BRIDGES LLP THELEN, MARRIN, JOHNSON & BRIDGES LLP EX-23.4 15 CONSENT WHARTON LEVIN EHRMANTRAUT KLEIN & NASH 1 EXHIBIT 23.4 We hereby consent to (i) any references to our firm, or (ii) any references to advice rendered by our firm and contained in that certain Registration Statement on Form S-4 of MAXXAM Group Holdings Inc. dated December , 1996, relating to $100,000,000 of Senior Secured Notes due 2003. December 24, 1996 WHARTON, LEVIN, EHRMANTRAUT, KLEIN & NASH, P.A. /s/ JOHN D. KLEIN EX-25 16 FORM T-1 1 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________ FORM T-1 Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee FIRST BANK NATIONAL ASSOCIATION (Exact name of Trustee as specified in its charter) United States 41-0256895 (State of Incorporation) (I.R.S. Employer Identification No.) First Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 (Address of Principal Executive Offices) (Zip Code) MAXXAM GROUP HOLDINGS INC. (Exact name of registrant as specified in its charter) Delaware 76-0518669 (State of Incorporation) (I.R.S. Employer Identification No.) 5847 San Felipe, Suite 2600 Houston TX 77057-3010 (Address of Principal Executive Offices) (Zip Code) % SERIES B SENIOR SECURED NOTES DUE 2003 GUARANTEES OF THE % SERIES B SENIOR SECURED NOTES DUE 2003 (Title of the Indenture Securities) 2 GENERAL 1. General Information Furnish the following information as to the Trustee. (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None See Note following Item 16. Items 3-15 are not applicable because to the best of the Trustee's knowledge the obligor is not in default under any Indenture for which the Trustee acts as Trustee. 16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement of eligibility and qualification. Each of the exhibits listed below is incorporated by reference from registration number 33-90786. 1. Copy of Articles of Association. 2. Copy of Certificate of Authority to Commence Business. 3. Authorization of the Trustee to exercise corporate trust powers (included in Exhibits 1 and 2; no separate instrument). 4. Copy of existing By-Laws. 5. Copy of each Indenture referred to in Item 4. N/A. 6. The consents of the Trustee required by Section 321(b) of the act. 7. Copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. 3 NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, First Bank National Association, an Association organized and existing under the laws of the United States, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Saint Paul and State of Minnesota on the 16th day of December, 1996. FIRST BANK NATIONAL ASSOCIATION [SEAL] /s/ RICHARD PROKOSCH ------------------------------- Richard Prokosch Trust Officer /s/ KATHE BARRETT - -------------------------- Kathe Barrett Assistant Secretary 4 NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors or affiliates, are based upon information furnished to the Trustee by the obligors, While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, First Bank National Association, an Association organized and existing under the laws of the United States, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Saint Paul and State of Minnesota on the 16th day of December, 1996. FIRST BANK NATIONAL ASSOCIATION [SEAL] /s/ Richard Prokosch -------------------- Richard Prokosch Trust Officer /s/ Kathe Barrett - ----------------- Kathe Barrett Assistant Secretary 5 EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: December 16, 1996 FIRST BANK NATIONAL ASSOCIATION -------------------- Richard Prokosch Trust Officer 6 EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: December 16, 1996 FIRST BANK NATIONAL ASSOCIATION /s/ Richard Prokosch -------------------- Richard Prokosch Trust Officer 7 AMENDED AND RESTATED ARTICLES OF ASSOCIATION FIRST BANK NATIONAL ASSOCIATION FIRST. The title of this Association, which shall carry on the business of banking under the laws of the United States, shall be "First Bank National Association." SECOND. The main office of the Association shall be in the City of Minneapolis, County of Hennepin, State of Minnesota. The general business of the Association shall be conducted at its main office and branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five members. At any meeting of the shareholders held for the purpose of electing Directors, or changing the number thereof, the number of Directors may be determined by a majority of the votes cast by the shareholders in person or by proxy. Between meetings of the shareholders held for the purpose of electing Directors, the Board of Directors by a majority vote of the full Board may increase the size of the Board by not more than four Directors in any one year, but not to more than a total of twenty-five Directors, and fill any vacancy so created in the Board. A majority of the Board of Directors shall be necessary to constitute a quorum for the transaction of business at any Directors' meeting. Each Director, during the full term of his directorship, shall own a minimum of $1,000 par value of stock of this Association, or any equivalent interest in stock of First Bank System, Inc. FOURTH. The regular annual meeting of the shareholders of this Association shall be held at its main banking house, or other convenient place duly authorized by the Board of Directors, on such day of each year as is specified therefor in the By-laws, but if no election is held on that day, it may be held on any subsequent day according to such lawful rules as may be prescribed by the Board of Directors. FIFTH. The authorized amount of capital stock of this Association shall be divided into 3,500,000 shares of common stock at the par value of Fifty Dollars ($50.00) each; but said capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. If the capital stock is increased by the sale of additional shares thereof, each shareholder shall be entitled to subscribe for such additional share in proportion to the number of shares of said capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. The Board of Directors shall have the power to prescribe a reasonable period of time within which the preemptive rights to subscribe to the new shares of capital stock must be exercised. Page 1 of 6 8 If the capital stock is increased by a stock dividend, each shareholder shall be entitled to his proportionate amount of such increase in accordance with the number of shares of capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. The Association, and at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. In the event said debt obligations are convertible to capital stock of the Association, each shareholder shall be entitled to subscribe for such additional shares in proportion to the number of shares of capital stock owned by him one month prior to the issuance of capital stock in satisfaction of said convertible debt obligations. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board may also appoint one or more of its members to serve as Vice Chairman. The Board shall have the power to appoint such officers and employees as may be required to transact the business of this Association; to fix the salaries to be paid to such officers and employees of this Association; and to dismiss any of such officers or employees and appoint others to take their place. The Board of Directors shall have the power to define the duties of officers and employees of this Association and to require adequate bonds from them for the faithful performance of their duties; to regulate the manner in which any increase of the capital of the Association shall be made; to make all By-laws that may be lawful for the general regulation of the business of this Association and the management of its affairs; and generally to do and perform all acts that may be lawful for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office of this Association to any other place within the limits of the City of Minneapolis, Minnesota, without the approval of the shareholders of this Association but subject to the approval of the Comptroller of the Currency; and shall have the power to change the location of any branch or branches of this Association to any other location, without the approval of the shareholders of this Association but subject to the approval of the Comptroller of the Currency. EIGHTH. This Association shall have succession from the date of its organization certificate until such time as it be dissolved by the act of its shareholders in accordance with the provisions of the banking laws of the United States, or until its franchise becomes forfeited by reason of violation of law, or until terminated by either a general or a special act of Congress, or until its affairs be placed in the hands of a receiver and finally wound up by him. NINTH. The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than ten per centum of the stock of this Page 2 of 6 9 Association, may call a special meeting of shareholders at any time; provided, however, that unless otherwise provided by law, not less than ten days prior to the date fixed for any such meeting, a notice of the time, place, and purpose of the meeting shall be given by first-class mail, postage prepaid, to all shareholders of record of this Association at their respective addresses as shown upon the books of the Association. TENTH. Any action required to be taken at a meeting of the shareholders or directors of or any action which may be taken at a meeting of shareholders or directors may be taken without a meeting if consent in writing, setting forth the action as taken shall be signed by all the shareholders or directors entitled to vote with respect to the matter thereof. Such action shall be effective on the date on which the last signature is place on the writing, or such earlier date as is set forth therein. ELEVENTH. Meetings of the Board of Directors or shareholders, regular or special, may be held by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can simultaneously hear each other, and participation in such meeting by such aforementioned means shall constitute presence in person at such meeting. TWELFTH. (a) Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than any action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation, unless similar indemnification is provided by such other corporation, partnership, joint venture, trust or other enterprise (any funds received by any person as a result of the provisions of this Article being deemed an advance against his receipt of any such other indemnification from any such other corporation, partnership, joint venture, trust or other enterprise), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person seeking indemnification did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Page 3 of 6 10 Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other corporation, partnership, joint venture, trust or other enterprise shall be indemnified by the Corporation, unless similar indemnification is provided by such other corporation, partnership, joint venture, trust or other enterprise (any funds received by any person as a result of the provisions of this Article being deemed an advance against his receipt of any such other indemnification from any such other corporation, partnership, joint venture, trust or other enterprise), against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, such person shall be indemnified by the Corporation against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. (d) Except as set forth in paragraph (c) of this Article, any indemnification under paragraphs (a) and (b) of this Article (unless ordered by the court), shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Article. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, of if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of any undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or seeking advancement of expenses may be entitled under any by-law, agreement, vote of Page 4 of 6 11 stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. (g) By action of the Board of Directors, notwithstanding any interest of the directors in the action, the Corporation may purchase and maintain insurance, in such amounts as the Board of Directors deems appropriate, on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation shall have the power to indemnify him against such liability under the provisions of this Article. (h) For purpose of this Article, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this Article, references to "other enterprises" shall include employee benefit plans; reference to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. (j) The indemnification and advancement of expenses hereby provided shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. THIRTEENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law and in that case by the vote of the holders of such greater amount. The Page 5 of 6 12 \notice of any shareholders' meeting at which an amendment to the Articles of Association of this Association is to be considered shall be given as hereinabove set forth. IN WITNESS WHEREOF, we have hereunto set our hands as of the 23rd day of February, 1995. - --------------------------------- ------------------------------------ John F. Grundhofer Philip G. Heasley - --------------------------------- ------------------------------------ William F. Farley Richard A. Zona - --------------------------------- ------------------------------------ Daniel C. Rohr Michael J. O'Rourke - --------------------------------- J. Robert Hoffmann Page 6 of 6 13 BYLAWS OF FIRST BANK NATIONAL ASSOCIATION ARTICLE I. MEETINGS OF SHAREHOLDERS The regular annual meeting of the shareholders for the election of directors and for the transaction of such other business as properly may come before the meeting shall be held at the main banking house of the Association in the City of Minneapolis, Minnesota, or other convenient place duly authorized by the Board of Directors (hereinafter referred to as the "Board"), on the last Thursday in February of each year at 9:30 o'clock A.M. of said day, or such other date or time which the Board may designate at any Board meeting held prior to the required date for sending notice of the annual meeting to the shareholders. The holders of a majority of the outstanding shares entitled to vote, and represented at any annual or special meeting of the shareholders, may choose persons to act as Chairman and as Secretary of the meeting. ARTICLE II. BOARD OF DIRECTORS Section 1. Number. As provided in the Articles of Association, the Board of this Association shall consist of not less than five nor more than twenty-five members. At any meeting of the shareholders held for the purpose of electing directors, or changing the number thereof, the number of directors may be determined by a majority of the votes cast by the shareholders in person or by proxy. Any vacancy occurring in the Board shall be filled by the remaining directors. Between meetings of the shareholders held for the purpose of electing directors, the Board by a majority vote of the full Board may increase the size of the Board by not more than four directors in any one year, but not to more than a total of twenty-five directors, and fill any vacancy so created in the Board. All directors shall hold office until their successors are elected and qualified. Section 2. Powers. The Board shall have and may exercise all of the powers granted to or conferred upon it by the Articles of Association and Bylaws of the Association and by law. The Board may appoint from time to time one or more committees for any purposes and with such powers as the Board may determine. Section 3. Organization. The President or the Chairman of the Board shall notify the directors-elect of their election and of the time at which they are required to meet for the purpose of organizing the new Board. If, at the time fixed for such meeting, there is not a quorum in attendance, the members present may adjourn from time to time until a quorum 1 14 is secured, and no business shall be transacted until a majority of the directors-elect shall have taken the oath of office prescribed by law and shall otherwise duly qualified. The Board shall appoint one of its members President of this Association, who shall be Chairman of the Board, but the Board may appoint a Director in lieu of the President, to be Chairman of the Board, in which case the latter shall preside at all meetings and shall perform such other duties as may be designated by the Board. If a Chairman of the Board is so appointed in lieu of the President, in his absence the President shall preside at meetings of the Board. In the absence of a presiding officer, the Board shall appoint a Chairman pro tem. The Board shall appoint a recording officer who shall keep a record of the meetings and proceedings of the Board. The recording officer need not be a member of the Board. Section 4. Meetings. The regular meetings of the Board shall consist of the annual meeting following the annual election of directors by the shareholders, and quarterly meetings which shall be held at such place and at such time as the Chairman or President from time to time may designate. When the date of any regular meeting of the Board falls on a holiday, the meeting shall be held on the next ensuing business day other than a Saturday, or on such day and at such time as may have been ordered. Special meetings of the Board shall be held at any time upon the call of the Chairman of the Board, a Vice Chairman, the President, or the acting Chief Executive Officer, or upon written request of any three (3) directors. Notice of all meetings of the Board, whether regular or special, shall be given to each director either orally in person or by mail, telegraph or telephone, on or before the day of the meeting. Meetings of the Board or shareholders may be held by conference telephone or similar communication device by means of which all persons participating in the meeting can simultaneously hear each other. Participating in such a meeting shall constitute presence in person at such meeting. Section 5. Quorum. A majority of all the qualified directors shall constitute a quorum and shall be necessary for the transaction of business, but, if at any meeting there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is in attendance. Section 6. Advisory Board of Directors. The Board may appoint persons, who need not be shareholders or directors, to serve as advisory directors on an Advisory Board of Directors established to serve this bank or a group of affiliated banks of which this bank is one. An advisory director shall have such power and duties as may be determined by the Board, provided that advisory directors shall have no power to vote on matters presented to the Board for final decision and, provided further, that the Board's responsibility for the affairs of the Association shall in no respect be delegated or diminished. Section 7. Directors' Fees, etc. The Board shall have the power to fix and vote fees and compensation to directors and advisory directors of the Association for their services as directors and advisory directors, and also for their services as member of any committee or committees of the Association contemplated by these Bylaws or otherwise created or 2 15 appointed by the Board, the Executive Committee, or the President of the Association. Nothing herein contained shall be construed to preclude any director or advisory director from serving the Association in any other capacity and being paid compensation therefor by the Association. ARTICLE III. OFFICERS Section 1. Officers. The Board may elect a Chairman of the Board of Directors and one (1) or more Vice Chairmen. The Board shall also elect a President. The Board shall elect, as appropriate, such additional officers as it may determine, including Executive Vice Presidents or Senior Vice Presidents. The Chief Executive Officer or in the absence of the Chief Executive Officer, the President, may appoint such other officers necessary to conduct the affairs of the Association. Section 2. Chief Executive Officer. The Board of Directors may designate a Chief Executive Officer of the Association, who shall be either the President or Chairman of the Board. The Board may also designate an officer or director to serve as acting Chief Executive Officer in the absence or incapacity of the Chief Executive Officer. Subject to the law and the control of the Board and the Executive Committee, the Chief Executive Officer, or, in the absence of the Chief Executive Officer, the President shall have authority to manage the affairs and business of the Association and prescribe and define the duties of its officers, agents and employees. Section 3. Term of Office. Any officer elected by the Board shall hold his office for the current year for which the Board by which he is elected was elected, unless he shall resign, become disqualified or be removed. The Chairman, Vice Chairman, and President can be removed by action of a majority of the Board. All other elected officers can be removed by order of the Chief Executive Officer, or in his absence, the President. Any other officer shall hold his office at the pleasure of the Chief Executive Officer, or, in his absence, the President. Section 4. Bonds. All officers, agents or employees as the business of the Association may require, shall give bond with surety to be approved and in a sum to be fixed by the Board or the Chairman or the President, conditioned upon the faithful and honest discharge of their respective duties. ARTICLE IV. STOCK CERTIFICATES 3 16 Section 1. Forms. Certificates of stock, signed by any elected officer and any other officer, shall be issued to the shareholders, and each certificate shall state upon its face that such stock is transferable only upon the books of the Association. Section 2. Transfers. Certificates of stock of this Association shall be assignable and transferable only on the books of this Association subject to the restrictions and provisions of the national banking laws, and a transfer book shall be provided in which all assignments and transfers of stock shall be made. When stock is transferred, the certificates representing the same shall be returned to the bank, canceled and preserved, and new certificates issued. Section 3. Dividends. Transfers of stock shall not be suspended preparatory to the declaration of dividends; and, unless an agreement to the contrary shall be expressed in the assignment or assignments, dividends shall be paid to the shareholders in whose name the stock shall stand at the date of declaration of dividends. ARTICLE V. MINUTE BOOK The organization papers of this Association, the Bylaws as revised or amended from time to time and the proceedings of all regular and special meetings of the shareholders and the directors shall be recorded in a minute book or books. All reports of committees required to be made to the Board shall be recorded in a minute book or shall be filed by the recording officer. The minutes of each meeting of the shareholders and the Board shall be signed by the recording officer and approved by the Chairman of the meeting. ARTICLE VI. CONVEYANCES, CONTRACTS, ETC. All transfers and conveyances of real estate, mortgages, and transfers, endorsements or assignments of stock, bonds, notes, debentures or other negotiable instruments, securities or personal property shall be signed by any elected or appointed officer. All checks, drafts, certificates of deposit, mortgage satisfactions, releases, all types of loans, all obligations of the Association, and all funds of the Association held in its own or in a fiduciary capacity may be paid out by an order, draft or check bearing the manual or facsimile signature of any elected or appointed officer of the Association or of such other employees or agents as may be designated by the Chief Executive Officer or the President. All other instruments not hereinabove specifically provided for, whether to be executed in a fiduciary capacity or otherwise, may be signed on behalf of the Association by any officer thereof. 4 17 The Secretary of the Association or other proper officer may execute and certify that required action or authority has been given or has taken place by resolution of the Board under this Bylaw without the necessity of further action by the Board. ARTICLE VII. SEAL The following is an impression of the seal if this Association. ARTICLE VIII. INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES Section 1. The Association shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the pertinent corporation) by reason of the fact that he is or was a director, advisory director or officer of the Association, or is or was serving at the request of the Association as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the pertinent corporation. The termination of any action, suit, or proceeding by judgment, order, settlement, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the pertinent corporation. Section 2. The Association shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the pertinent corporation to procure a judgment in its favor by reason of the fact that he is or was a director, advisory director or officer of the Association, or is or was serving at the request of the Association as a director or officer of another corporation, 5 18 partnership, joint venture, trust, or other enterprise, against expenses, (including attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the pertinent corporation and except that no indemnification shall be made in respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the pertinent corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which such court shall deem proper. Section 3. To the extent that a director, advisory director, or officer has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 1 or 2 of this Article, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 4. Any indemnification under Sections 1 and 2 of this Article (unless ordered by a court) shall be made by the Association only upon a determination that indemnification of the director, advisory director, or officer is proper in the circumstances because he has met the applicable standards of conduct set fourth in said Sections 1 and 2. Such determination shall be made: (a) by the Board of the Association by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding; or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel (who may be regular counsel for the Association or pertinent corporation) in a written opinion; or (c) by the stockholders of the Association. Section 5. Expenses incurred by any person who may have a right of indemnification under this Article in defending a civil or criminal action, suit, or proceeding may be paid by the Association in advance of the final disposition of such action, suit, or proceeding as authorized by its Board upon receipt of an undertaking by or on behalf of such person, to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Association pursuant to this Article. Section 6. The indemnification provided by this Article is in addition to and independent of and shall not be deemed exclusive of any other rights to which any person may be entitled under any certificate of incorporation, articles of incorporation, articles of association, bylaw, agreement, vote of stockholders, or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another while holding such office, and shall continue as to a person who has ceased to be a director, advisory director, or officer and shall inure to the benefit of the heirs, executors, and administrators of such a person; provided, that any indemnification realized other than under this Article shall apply as a credit against any indemnification provided by this Article. Section 7. The Association may purchase and maintain insurance on behalf of any person who is or was a director, advisory director, officer, employee, or agent of the 6 19 Association, or is or was serving at the request of the Association as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, if the Association would have the power to indemnify him against such liability under the provisions of the Article or of applicable law, if and whenever the Board of the Association deems it to be in the best interest of the Association to do so. Section 8. For purposes of this Article and indemnification hereunder, any person who is or was a director or officer of any other corporation of which the Association owns or controls or at the time owned or controlled directly or indirectly a majority of the shares of stock entitled to vote for election of directors of such other corporation shall be conclusively presumed to be serving or to have served as such director or officer at the request of the Association. Section 9. The Association may provide indemnification under this Article to any employee or agent of the Association or of any other corporation of which the Association owns or controls or at the time owned or controlled directly or indirectly a majority of the shares of stock entitled to vote for election of directors or to any director, officer, employee, or agent of any other corporation, partnership, joint venture, trust, or other enterprise in which the Association)'n has or at the time had an interest as an owner, creditor, or otherwise, if and whenever the Board of the Association deems it in the best interest of the Association to do so. Section 10. The Association may, to the fullest extent permitted by applicable law from time to time in effect, indemnify any and all persons whom the Association shall have power to indemnify under said law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said law, if and whenever the Board of the Association deems it to be in the best interest of the Association to do so. ARTICLE IX. AMENDMENTS These Bylaws, or any of them, may be added to, altered, amended or repealed by the Board at any regular or special meeting of the Board. (Adopted July 19, 1990) 7 EX-27 17 FINANCIAL DATA SCHEDULE
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. 0001029500 MAXXAM GROUP HOLDINGS INC. 1,000 12-MOS 9-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 SEP-30-1996 48,396 53,112 36,568 31,852 20,576 11,466 0 0 81,181 78,113 195,446 182,594 159,453 166,322 58,420 65,108 740,867 713,273 69,250 56,019 778,505 772,877 0 0 0 0 1 1 (126,507) (125,884) 740,867 713,273 242,592 199,580 242,592 199,580 127,124 114,617 127,124 114,617 41,180 31,519 0 0 77,824 58,388 5,827 3,433 1,621 (1,090) 4,236 4,523 0 0 0 0 0 0 4,236 4,523 0 0 0 0
EX-99.1 18 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ALL OF ITS 12% SENIOR SECURED NOTES DUE 2003 FOR ITS 12% SERIES B SENIOR SECURED NOTES DUE 2003 PURSUANT TO THE PROSPECTUS DATED , 1997 ---------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 1997, UNLESS EXTENDED. ---------------------------------------------------------------- To: EXCHANGE AGENT FIRST BANK NATIONAL ASSOCIATION By Mail By Hand/Overnight Express: First Bank National Association First Bank National Association 180 E. 5th Street 180 E. 5th Street St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Rick Prokosch Attention: Rick Prokosch Trust Officer Trust Officer Facsimile Transmission: To confirm receipt: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned acknowledges receipt of the Prospectus, dated , 199 ("Exchange Offer"), of MAXXAM Group Holdings Inc., a Delaware corporation (the "Company"), relating to the offer of the Company, upon the terms and subject to the conditions set forth in the Exchange Offer and in this Letter of Transmittal and the instructions hereto (which together with the Exchange Offer and the instructions hereto constitute the "Offer"), to exchange its 12% Series B Senior Secured Notes due 2003 ("New Notes") for any and all of its outstanding 12% Senior Secured Notes due 2003 ("Old Notes"), at the rate of $1,000 principal amount of the New Notes for each $1,000 principal amount of the Old Notes. Capitalized terms used but not defined herein have the meanings given to them in the Exchange Offer. The undersigned has completed the appropriate boxes below and signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Offer. 2 This Letter of Transmittal is to be used whether the Old Notes are to be physically delivered herewith, or whether guaranteed delivery procedures or book-entry delivery procedures are being used, pursuant to the procedures set forth under "The Exchange Offer" in the Exchange Offer. If delivery of Old Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company ("DTC"), this Letter of Transmittal need not be manually executed, provided, however, that tenders of Old Notes must be effected in accordance with the procedures mandated by DTC and the procedures set forth in the Exchange Offer under the caption "The Exchange Offer--Procedures for Tendering Old Notes--Book Entry Delivery." If a person or entity in whose name Old Notes are registered on the books of the Registrar (a "Registered Holder") desires to tender Old Notes and such Old Notes are not immediately available or time will not permit all documents required by the Offer to reach the Exchange Agent (or such Registered Holder is unable to complete the procedure for book-entry transfer on a timely basis) prior to the Expiration Date, a tender may be effected in accordance with the guaranteed delivery procedures set forth in the Exchange Offer under the caption "The Exchange Offer--Procedures for Exchanging Old Notes--Guaranteed Delivery Procedures." See Instruction 1. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY LADIES AND GENTLEMEN: Upon the terms and subject to the conditions of the Offer, the undersigned hereby tenders to the Company the principal amount of the Old Notes indicated below. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby irrevocably sells, assigns and transfers to or upon the order of the Company all right, title and interest in and to such Old Notes and hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said exchange agent also acts as the agent of the Company) with respect to such Old Notes, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to take such further action as may be required in connection with the delivery, tender and exchange of the Old Notes. The undersigned acknowledges that this Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) a person that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. See "Morgan Stanley & Co. Inc.," SEC No-Action Letter (available June 5, 1991); The Exchange Offer under the caption "The Exchange Offer -- Resales of the New Notes." THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY TENDERING HOLDER IF THE COMPANY DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS. The undersigned, if the undersigned is a beneficial holder, represents, or, if the undersigned is a broker, dealer, commercial bank, trust company or other nominee, represents that it has received representations from the beneficial owners of the Old Notes stating, (as defined in the Exchange Offer) that (i) the New Notes to be acquired in connection with the Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes are being acquired by the Eligible Holder (as defined in the Exchange Offer) and each 3 Beneficial Owner in the ordinary course of business of the Eligible Holder and each Beneficial Owner, (ii) the Eligible Holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the Eligible Holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters that are discussed in the Exchange Offer under the caption "The Exchange Offer -- Resales of the New Notes," (iv) that if the Eligible Holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the Eligible Holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by item 507 of Regulations S-K of the Securities Act and (vi) neither the Eligible Holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or of the Guarantor except as otherwise disclosed to the Company in writing. In addition, if the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes, it represents that the Old Notes to be exchanged for New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned understands and acknowledges that the Company reserves the right in its sole discretion to purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or as set forth in the Exchange Offer under the caption "The Exchange Offer -- Conditions of the Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The term of any such purchases or offers could differ from the terms of the Exchange Offer. The undersigned hereby represents and warrants that the undersigned accepts the terms and conditions of the Offer, has full power and authority to tender, exchange, assign and transfer the Old Notes tendered hereby, and that when the same are accepted for exchange by the Company, the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim or right. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be reasonably necessary or desirable to complete the sale, assignment and transfer the Old Notes tendered hereby. The undersigned agrees that all authority conferred or agreed to be conferred by this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrations, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. The undersigned understands that tenders of the Old Notes pursuant to any one of the procedures described under "The Exchange Offer -- Procedures for Tendering Old Notes" in the Exchange Offer and in the instructions hereto 4 will constitute a binding agreement between the undersigned and the Company in accordance with the terms and subject to the conditions of the Offer. The undersigned understands that by tendering Old Notes pursuant to one of the procedures described in the Exchange Offer and the instructions thereto, the tendering holder will be deemed to have waived the right to receive any payment in respect of interest on the Old Notes accrued up to the date of issuance of the New Notes. The undersigned recognizes that, under certain circumstances set forth in the Exchange Offer, the Company may not be required to accept for exchange any of the Old Notes tendered. Old Notes not accepted for exchange or withdrawn will be returned to the undersigned as the address set forth below unless otherwise indicated under "Special Delivery Instructions" below. Unless otherwise indicated herein under the box entitled "Special Exchange Instructions" below, please deliver New Notes in the name of the undersigned. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send New Notes to the undersigned at the address shown below the signature of the undersigned. The undersigned recognizes that the Company has no obligation pursuant to the "Special Exchange Instructions" to transfer any Old Notes from the name of the Registered Holder thereof if the Company does not accept for exchange any of the principal amount of such Old Notes so tendered. 5 THE UNDERSIGNED BY COMPLETING THE BOX "DESCRIPTION OF OLD NOTES" BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AND MADE CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE EXCHANGE OFFER. PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH) (IMPORTANT: ALSO COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE(S) OF OWNER(S) Dated: , 199 ----------------------------------------------------------------- If the holder(s) is/are tendering any Old Notes, this Letter of Transmittal must be signed by the Registered Holder(s) as the name(s) appear(s) on the Old Notes or on a security position listing or by person(s) authorized to become Registered Holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s) ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Capacity: ----------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number -------------------------------------------------- Tax Identification or Social Security No(s).: --------------------------------------------------------- (SEE INSTRUCTION 12 AND COMPLETE SUBSTITUTE FORM W-9 ON THE REVERSE SIDE) SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) Signature(s) Guaranteed by an Eligible Institution: Authorized Signature: ----------------------------------------------------------- Printed Name: ------------------------------------------------------------------- Title: -------------------------------------------------------------------------- Name of Firm: ------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number -------------------------------------------------- Dated: , 199 ----------------------------------------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE OLD NOTES OR A NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. 6 List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, the certificate numbers and principal amounts should be listed on a separate signed schedule affixed thereto. See Instruction 7. The minimum permitted tender is $1,000 principal amount of Old Notes; all other tenders must be in integral multiples of $1,000. DESCRIPTION OF OLD NOTES - --------------------------------------------------------------------------------
(I) (II) (III) (IV) NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE AGGREGATE PRINCIPAL PRINCIPAL AMOUNT (PLEASE FILL IN, IF BLANK) NUMBER(S) AMOUNT REPRESENTED TENDERED ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- TOTAL ---------------------------------------------------------------------------------------------------
* Unless otherwise indicated in the column labeled "Principal Amount Tendered" and subject to the terms and conditions of the Offer, the undersigned will be deemed to have tendered the entire aggregate principal amount represented by the Old Notes indicated in the column labeled "Aggregate Principal Amount Represented." See Instruction 8. [ ] CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH. [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING (See Instructions 1 and 3): Name(s) of Registered Holder(s): --------------------------------------- Date of Execution of Notice of Guaranteed Delivery: -------------------- Name of Eligible Institution that Guaranteed Delivery: ----------------- [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: --------------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- If delivery of Old Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at DTC, then tenders of Old Notes must be effected in accordance with the procedures mandated by DTC and the procedures set forth in the Exchange Offer under the caption "The Exchange Offer -- Procedures for Tendering Old Notes--Book Entry Delivery." 7 SPECIAL EXCHANGE INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if Old Notes in a principal amount not exchanged and/or New Notes are to be registered in the name of or issued to someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal above. Issue and mail: (check appropriate box(es)): [ ] New Notes to: [ ] Old Notes to: Name(s) ------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (ZIP CODE) - -------------------------------------------------------------------------------- EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (COMPLETE THE SUBSTITUTE FORM W-9) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4 AND 5) To be completed ONLY if Old Notes in a principal amount not exchanged and/or New Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal above or to such person or persons at an address other than that shown in the box entitled "Description of Old Notes" on this Letter of Transmittal above. Mail and deliver: (check appropriate box(es)): [ ] New Notes to: [ ] Old Notes to: Name(s) ------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (ZIP CODE) - -------------------------------------------------------------------------------- EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER 8 TO BE COMPLETED BY ALL EXCHANGING HOLDERS (SEE INSTRUCTION 5) PAYER'S NAME: FIRST BANK NATIONAL ASSOCIATION - -------------------------------------------------------------------------------- SUBSTITUTE PART I - PLEASE PROVIDE YOUR TIN SOCIAL SECURITY NUMBER IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. OR FORM W-9 EMPLOYER IDENTIFICATION NUMBER
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) PART 2 -- CERTIFICATION -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS -- You must cross out Item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such Item (2). - -------------------------------------------------------------------------------- PART 3 SIGNATURE ______________________ DATE ______________, 199 AWAITING TIN [ ] - -------------------------------------------------------------------------------- 9 NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a Taxpayer Identification Number has not been issued to me, and either (1) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administration Office, or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a Taxpayer Identification Number within sixty days, 31% of all reportable payments made to me thereafter will be withheld until I provide a Taxpayer Identification Number. SIGNATURE ________________________________ DATE ___________________ 199 10 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. Delivery of this Letter of Transmittal and Old Notes: Guaranteed Delivery Procedures. To be effectively tendered pursuant to the Offer, the Old Notes, together with a properly completed Letter of Transmittal (or manually signed facsimile hereof) duly executed by the Registered Holder thereof, and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at one of its addresses set forth on the front page of this Letter of Transmittal and tendered Old Notes must be received by the Exchange Agent at one of such addresses on or prior to the Expiration Date; provided, however, that book-entry transfers of Old Notes may be effected in accordance with the procedures set forth in the Exchange Offer under the caption "The Exchange Offer -- Procedures For Tendering Old Notes -- Book Entry Delivery." If the Beneficial Owner of any Old Notes is not the Registered Holder, then such person may validly tender such person's Old Notes only by obtaining and submitting to the Exchange Agent a properly completed Letter of Transmittal from the Registered Holder. LETTERS OF TRANSMITTAL OF OLD NOTES SHOULD BE DELIVERED ONLY BY HAND OR BY COURIER, OR TRANSMITTED BY MAIL, AND ONLY TO THE EXCHANGE AGENT AND NOT TO THE COMPANY OR TO ANY OTHER PERSON. THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND IF SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IF OLD NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. If a holder desires to tender Old Notes and such holder's Old Notes are not immediately available or time will not permit such holder to complete the procedures for book-entry transfer on a timely basis or time will not permit such holder's Letter of Transmittal and other required documents to reach the Exchange Agent on or before the Expiration Date, such holder's tender may be effected if: (a) such tender is made by or through an Eligible Institution (as defined below); (b) on or prior to the Expiration Date, the Exchange Agent has received a telegram, facsimile transmission or letter from such Eligible Institution setting forth the name and address of the holder of such Old Notes, the certificate number(s) of such Old Notes (except in the case of book-entry tenders) and the principal amount of Old Notes tendered and stating that the tender is being made thereby and guaranteeing that, within three business days after the Expiration Date, a duly executed Letter of Transmittal, or facsimile thereof, together with the Old Notes, and any other documents required by this Letter of Transmittal and Instructions, will be deposited by such Eligible Institution with the Exchange Agent; and (c) this Letter of Transmittal, or a manually signed facsimile hereof, and Old Notes, in proper form for transfer (or a Book-Entry confirmation with respect to such Old Notes), and all other required documents are received by the Exchange Agent within three business days after the Expiration Date. 2. Withdrawal of Tenders. Tendered Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To be effective, a written, telegraphic or facsimile transmission notice of withdrawal must (i) be timely received by the Exchange Agent at one of its addresses set forth on the first page of this Letter of Transmittal before the Exchange Agent receives notice of acceptance from the Company, (ii) specify 11 the name of the person who tendered the Old Notes, (iii) contain the description of the Old Notes to be withdrawn, the certificate number(s) of such Old Notes (except in the case of book-entry tenders) and the aggregate principal amount represented by such Old Notes or a Book-Entry Confirmation with respect to such Old Notes, and (iv) be signed by the holder of such Old Notes in the same manner as the original signature appears on this Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence satisfactory to the Company that the person withdrawing the tender has succeeded to the beneficial ownership of the Old Notes. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution unless such Old Notes have been tendered (i) by a Registered Holder (which term for purposes of this document shall include any participant tendering by book-entry transfer) of Old Notes who has not completed either the box entitled "Special Exchange Instruction" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) for the account of an Eligible Institution. If the Old Notes have been tendered pursuant to the procedure for book-entry tender set forth in the Exchange Offer under the caption "Exchanging Book Entry Old Notes," a notice of withdrawal is effective immediately upon receipt by the Exchange Agent of a written, telegraphic or facsimile transmission notice of withdrawal even if physical release is not yet effected. In addition, such notice must specify, in the case of Old Notes tendered by delivery of such Old Notes, the name of the Registered Holder (if different from that of the tendering holder) to be credited with the withdrawn Old Notes. Withdrawals may not be rescinded, and any Old Notes withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer -- Procedures for Tendering Old Notes" in the Exchange Offer at any time on or prior to the applicable Expiration Date. 3. Signatures on this Letter of Transmittal, Bond Powers and Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed by the Registered Holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the Old Notes without any change whatsoever. If any Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any Old Notes tendered hereby are registered in different names, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of Old Notes. When this Letter of Transmittal is signed by the Registered Holder or Holders specified herein and tendered hereby, no endorsements of such Old Notes or separate bond powers are required. If, however, New Notes are to be issued, or any untendered principal amount of Old Notes are to be reissued to a person other than the Registered Holder, then endorsements of any Old Notes transmitted hereby or separate bond powers are required. If this Letter of Transmittal is signed by a person other than the Registered Holder or Holders, such Old Notes must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the Registered Holder or Holders appear(s) on the Old Notes. If this Letter of Transmittal or a Notice of Guaranteed Delivery or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority so to act must be submitted. Except as describe in this paragraph, signatures on this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution which is a firm which is a member of a registered 12 national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution"). Signatures on this Letter of Transmittal or a notice of withdrawal, as the case may be, need not be guaranteed if the Old Notes tendered pursuant hereto are tendered (i) by a Registered Holder of Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) for the account of an Eligible Institution. Endorsement on Old Notes or signatures on bond forms required by this Instruction 3 must be guaranteed by an Eligible Institution. 4. Special Issuance and Delivery Instructions. Tendering holders should indicate in the applicable box the name and address to which New Notes and/or substitute Old Notes for the principal amounts not exchanged are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter of Transmittal. 5. Taxpayer Identification Number and Backup Withholding. Federal income tax law of the United States requires that a holder of Old Notes whose Old Notes are accepted for exchange provide the Company with such holder's correct taxpayer identification number, which, in the case of a holder who is an individual, is the holder's social security number, or otherwise establish an exemption from backup withholding. If the Company is not provided with the holder's correct taxpayer identification number, the exchanging holder of Old Notes may be subject to a penalty imposed by the Internal Revenue Service. In addition, interest on the New Notes acquired pursuant to the Offer may be subject to backup withholding in an amount equal to 31 percent of any interest payment. If withholding occurs and results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service by filing a return. To prevent backup withholding, each exchanging holder of Old Notes subject to backup withholding must provide his correct taxpayer identification number by completing the Substitute Form W-9 provided in this Letter of Transmittal, certifying that the taxpayer identification number provided is correct (or that the exchanging holder of Old Notes is awaiting a taxpayer identification number) and that either (a) the exchanging holder has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of failure to report all interest or dividends or (b) the Internal Revenue Service has notified the exchanging holder that he is no longer subject to backup withholding. Certain exchanging holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding requirements. A foreign individual and other exempt holders (e.g., corporations) should certify, in accordance with the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9, to such exempt status on the Substitute Form W-9 provided in this Letter of Transmittal. Nonresident aliens should submit Form W-8, available from the Exchange Agent upon request. 6. Transfer Taxes. Holders tendering pursuant to the Offer will not be obligated to pay brokerage commissions or fees or to pay transfer taxes with respect to their exchange under the Offer unless the box entitled "Special Issuance Instructions" in this Letter of Transmittal has been completed, or unless the securities to be received upon exchange are to be issued to any person other than the holder of the Old Notes tendered for exchange. The Company will pay all other charges or expenses in connection with the Offer. If holders tender Old Notes for exchange and the Offer is not 13 consummated, such Old Notes will be returned to the holders at the Company expense. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Old Notes specified in this Letter of Transmittal. 7. Inadequate Space. If the space provided herein is inadequate, the aggregate principal amount of the Old Notes being tendered and the security numbers (if available) should be listed on a separate schedule attached hereto and separately signed by all parties required to sign this Letter of Transmittal. 8. Partial Tenders. Tenders of Old Notes will be accepted only in integral multiples of $1,000. If tenders are to be made with respect to less than the entire principal amount of any Old Notes, fill in the principal amount of Old Notes which are tendered in column (iv) of the "Description of Old Notes." In the case of partial tenders, the Old Notes in fully registered form for the remainder of the principal amount of the Old Notes will be sent to the persons(s) signing this Letter of Transmittal, unless otherwise indicated in the appropriate place on this Letter of Transmittal, as promptly as practicable after the expiration or termination of the Offer. Unless otherwise indicated in column (iv) in the box labeled "Description of Old Notes," and subject to the terms and conditions of the Offer, tenders made pursuant to this Letter of Transmittal will be deemed to have been made with respect to the entire aggregate principal amount represented by the Old Notes indicated in column (iii) of such box. 9. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 10. Validity and Acceptance of Tenders. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. 11. Requests for Assistance or Additional Copies. First Bank National Association is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent at the addresses or facsimile number set forth on the first page of this Letter of Transmittal. Questions and requests for assistance and requests for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: 14 First Bank National Association 108 E. 5th Street St. Paul, Minnesota 55101 Attention: Richard Prokosch Trust Officer Facsimile Transmission: (612) 244-0711 To confirm receipt: Tel. (612) 244-0721 15 MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 12% SENIOR SECURED NOTES DUE 2003 FOR ITS 12% SERIES B SENIOR SECURED NOTES DUE 2003 ------------------------------------------------------------------ THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 1997, UNLESS THE EXCHANGE OFFER IS EXTENDED. ------------------------------------------------------------------ To Our Clients: Enclosed for your consideration is a Prospectus dated , 199 ("Prospectus") and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Exchange Offer") relating to an offer by MAXXAM Group Holdings Inc., a Delaware corporation ("Company"), to exchange all its outstanding 12% Senior Secured Notes due 2003 ("Old Notes") for its 12% Series B Senior Secured Notes due 2003 upon the terms and subject to the conditions set forth in the Exchange Offer. WE ARE THE HOLDER OF RECORD OF OLD NOTES HELD BY US FOR YOUR ACCOUNT. A TENDER FOR EXCHANGE OF SUCH OLD NOTES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER FOR EXCHANGE OLD NOTES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender for exchange on your behalf any or all of such Old Notes held by us for your account, pursuant to the terms and subject to the conditions set forth in the Exchange Offer. Your attention is directed to the following: 1. The Exchange Offer and withdrawal rights will expire at 5:00 P.M., New York City time, on , , 1997, unless the Exchange Offer is extended. Your instructions to us should be forwarded to us in ample time to permit us to submit a tender on your behalf. 2. The Exchange Offer is made for all Old Notes outstanding, constituting $100,000,000 aggregate principal amount as of the date of the Prospectus. 3. The minimum permitted tender is $1,000 principal amount of Old Notes, and all tenders must be in integral multiples of $1,000. 4. The Offer is conditioned upon the satisfaction of certain conditions set forth in the Prospectus under the caption "The Exchange Offer--Conditions of the Exchange Offer." The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. 5. Tendering Eligible Holders (as defined in the Prospectus) will not be obligated to pay brokerage fees or commissions or, except as 16 set forth in Instruction 6 of the Letter of Transmittal, transfer taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer. 6. In all cases, exchange of Old Notes tendered and accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by First Bank National Association ("Exchange Agent") of (i) certificates representing such Old Notes or timely confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company ("Book-Entry Transfer Facility") pursuant to the procedures set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering Old Notes," (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in the Prospectus) in connection with a book-entry transfer, and (iii) any other documents required by the Letter of Transmittal. Accordingly, payment may be made to tendering Eligible Holders at different times if delivery of the Old Notes and other required documents occurs at different times. The Exchange Offer is being made solely by the Prospectus and the related Letter of Transmittal and is being made to all Eligible Holders of Old Notes. The Company is not aware of any state where the making of the Exchange Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Company becomes aware of any valid state statute prohibiting the making of the Exchange Offer or the acceptance of Old Notes tendered for exchange pursuant thereto, the Company will make a good faith effort to comply with any such state statute or seek to have such statute declared inapplicable to the Exchange Offer. If, after such good faith effort, the Company cannot comply with such state statute the Exchange Offer will not be made to, nor will tenders be accepted from or on behalf of, the holders of Old Notes in such state. In any jurisdiction where the securities, blue sky or other laws require the Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer shall be deemed to be made on behalf of the Company by one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. If you wish to have us tender any or all of the Old Notes held by us for your account, please instruct us by completing, executing and returning to us the instruction form contained in this letter. If you authorize a tender for exchange of your Old Notes, the entire aggregate principal amount of such Old Notes will be tendered for exchange unless otherwise specified in such instruction form. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. 17 INSTRUCTIONS WITH RESPECT TO THE MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ALL OF ITS 12% SENIOR SECURED NOTES DUE 2003 FOR ITS 12% SERIES B SENIOR SECURED NOTES DUE 2003 The undersigned acknowledge(s) receipt of your letter enclosing the Prospectus dated , 1997, and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Exchange Offer") pursuant to an offer by MAXXAM Group Holdings Inc., a Delaware corporation, to exchange all of its outstanding % Senior Secured Notes due 2003 ("Old Notes") for its 12% Series B Senior Secured Notes due 2003. This will instruct you to tender the principal amount of Old Notes indicated below (or, if no number is indicated below, the entire aggregate principal amount) which are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Exchange Offer. - -------------------------------------------------------------------------------- Aggregate Principal Amount of Old Notes to be Tendered:* $______________________ Dated: ________________________, 199 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGN HERE Signature(s):___________________________________________________________________ Please print name(s):___________________________________________________________ Address:________________________________________________________________________ Area Code and Telephone Number:_________________________________________________ Tax Identification or Social Security Number:___________________________________ - -------------------------------------------------------------------------------- - ----------------- * Unless otherwise indicated, it will be assumed that the entire principal amount of the Old Notes held by us for your account are to be tendered for exchange. The minimum permitted tender is $1,000 principal amount of Old Notes; all other tenders must be in integral multiples of $1,000. 18 MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 12% SENIOR SECURED NOTES DUE 2003 FOR ITS 12% SERIES B SENIOR SECURED NOTES DUE 2003 ------------------------------------------------------------------ THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 1997, UNLESS THE EXCHANGE OFFER IS EXTENDED. ------------------------------------------------------------------ To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: MAXXAM Group Holdings Inc., a Delaware corporation ("Company"), is offering to exchange all of its outstanding 12% Senior Secured Notes due 2003 ("Old Notes") for its 12% Series B Senior Secured Notes due 2003 upon the terms and subject to the conditions set forth in the Prospectus dated , 1997 ("Prospectus") and in the related Letter of Transmittal (which, together with any amendment or supplements thereto, collectively constitute the "Exchange Offer") enclosed herewith. The Exchange Offer is conditioned upon satisfaction of certain conditions set forth in the Prospectus under the caption "The Exchange Offer -- Conditions of the Exchange Offer." The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. Enclosed herewith for your information and forwarding to your clients for whose accounts you hold Old Notes registered in your name or in the name of your nominee are copies of the following documents: 1. The Prospectus dated , 1997. 2. The blue Letter of Transmittal to tender Old Notes for exchange (for your use and for the information of your clients). Facsimile copies of the Letter of Transmittal may be used to tender Old Notes for exchange. 3. The gray Notice of Guaranteed Delivery (to be used to tender Old Notes for exchange if certificates for Old Notes are not immediately available or if such certificates for Old Notes and all other required documents cannot be delivered to First Bank National Association ("Exchange Agent") on or prior to the Expiration Date or if the procedures for book-entry transfer cannot be completed on a timely basis). 4. A yellow printed form of letter which may be sent to your clients for whose accounts you hold Old Notes registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer. 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 6. A return envelope addressed to the Exchange Agent. 19 YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 199 , UNLESS THE EXCHANGE OFFER IS EXTENDED. In order for Old Notes to be validly tendered pursuant to the Exchange Offer, (i) a duly executed and properly completed Letter of Transmittal (or a facsimile thereof) together with any required signature guarantees, or an Agent's Message (as defined in the Prospectus) in connection with a book-entry delivery of Old Notes, and any other documents required by the Letter of Transmittal, must be received by the Depository on or prior to the Expiration Date, and (ii) either certificates representing tendered Old Notes must be received by the Exchange Agent or such Old Notes must be tendered by book-entry transfer into the Exchange Agent account maintained at the Book-Entry Transfer Facility (as described in the Prospectus), and Book-Entry Confirmation must be received by the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If an Eligible Holder (as defined in the Prospectus) desires to tender Old Notes for exchange pursuant to the Exchange Offer and such Eligible Holder's Old Note certificates are not immediately available or such Eligible Holder cannot deliver the Old Note certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or such Eligible Holder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such Old Notes may nevertheless be tendered for exchange by following the guaranteed delivery procedures specified in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering Old Notes -- Guaranteed Delivery Procedures." The Company will not pay any fees or commissions to any broker or dealer or any other person for soliciting tenders of Old Notes pursuant to the Exchange Offer. The Company will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Company will pay or cause to be paid any transfer taxes applicable to the exchange of Old Notes pursuant to the Exchange Offer, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquires you may have with respect to the Exchange Offer should be addressed to the Exchange Agent, at its address and telephone numbers set forth on the back cover of the Prospectus. Additional copies of the enclosed material may be obtained from the Exchange Agent. Very truly yours, MAXXAM Group Holdings Inc. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS THEREIN. EX-99.2 19 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY MAXXAM GROUP HOLDINGS INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 12% SENIOR SECURED NOTES DUE 2003 FOR ITS 12% SERIES B SENIOR SECURED NOTES DUE 2003 As set forth in Prospectus described below, this Notice of Guaranteed Delivery or one substantially equivalent hereto must be used to tender for exchange 12% Senior Secured Notes due 2003 ("Old Notes"), of MAXXAM Group Holdings Inc., a Delaware corporation ("Company"), pursuant to the Exchange Offer (as defined below) if certificates for Old Notes are not immediately available or the certificates for Old Notes and all other required documents cannot be delivered to the Exchange Agent on or prior to the Expiration Date (as defined in the Prospectus), or if the procedures for delivery by book-entry transfer cannot be completed on a timely basis. This instrument may be delivered by hand or transmitted by facsimile transmission or mailed to the Exchange Agent. The Exchange Agent for the Exchange Offer is: FIRST BANK NATIONAL ASSOCIATION By Mail By Hand/Overnight Express: First Bank National Association First Bank National Association 180 E. 5th Street 180 E. 5th Street St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Richard Prokosch Attention: Richard Prokosch Trust Officer Trust Officer By Facsimile Transmission: Confirm by telephone: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution under the Instructions to the Letter of Transmittal, such signature guarantee must appear in the applicable space provided in the signature box in the Letter of Transmittal. ------------------------------------------------------------------ THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 1997, UNLESS THE EXCHANGE OFFER IS EXTENDED. ------------------------------------------------------------------ 2 Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Prospectus dated , 199 ("Prospectus") and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Exchange Offer"), receipt of each of which is hereby acknowledged, the principal amount of Old Notes indicated below pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering Old Notes -- Guaranteed Delivery Procedures. Signature(s) ___________________________________________________________________ Name(s) of Eligible Holders ____________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ PLEASE TYPE OR PRINT Principal Amount of Old Notes Tendered for Exchange $______________________________________________________________________ Old Note Certificate No(s). (If available) _____________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Dated ___________________________________________, 199 Address(es) ____________________________________________________________________ ________________________________________________________________________________ Zip Code Area Code and Tel. No.(s) ______________________________________________________ (Check box if shares will be tendered by book-entry transfer) [ ] The Depository Trust Company Account Number _________________________________________________________________ 3 - -------------------------------------------------------------------------------- GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, an Eligible Institution (as defined in the Prospectus), having an office or correspondent in the United States, hereby (a) represents that the above named person(s) "own(s)" the Old Notes tendered hereby within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 14e-4"), (b) represents that such tender of Old Notes complies with Rule 14e-4, and (c) guarantees to either deliver to the Exchange Agent the certificates representing all the Old Notes tendered hereby, in proper form for transfer, or to deliver such Old Notes pursuant to the procedure for book-entry transfer into the Exchange Agent's account at The Depository Trust Company, in either case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees or an Agent's Message (as defined in the Prospectus) in the case of a book-entry transfer, and any other required documents, all within three New York Stock Exchange trading days after the date hereof. - -------------------------------------------------------------------------------- - ----------------------------------- ------------------------------------ Name of Firm Authorized Signature - ----------------------------------- ----------------------------------- Address Please Type or Print - ----------------------------------- ----------------------------------- Zip Code
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS NOTICE. CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 4 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. - -- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: I.e. 00-0000000. The table below will help determine the number to give the payer.
- ------------------------------------------------------------------------------------------------------------------------------ FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF -- - ------------------------------------------------------------------------------------------------------------------------------ 1. An individual's account The individual 2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint account) The actual owner of the account or, if joint funds, either person(1) 4. Custodian account of a minor (Uniform Gift to The minor(2) Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor(1) 6. Account in the name of guardian or committee for a The ward, minor, or incompetent person(3) designated ward, minor, or incompetent person 7. a. The usual revocable savings trust account The grantor-trustee(1) (grantor is also trustee) b. So-called trust account that is not a The actual owner(1) legal or valid trust under State law 8. Sole proprietorship account The owner(4) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF -- - ------------------------------------------------------------------------------------------------------------------------------ 9. A valid trust, estate, or pension trust The legal entity (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or educational organization The organization account 12. Partnership account held in the name of the The partnership business 13. Association, club or other tax-exempt organization The organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of Agriculture in the The public entity name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - ------------------------------------------------------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. 5 (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 6 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service (the "IRS") and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under Section 501(a), or an individual retirement plan. - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any political subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any agency or instrumentality thereof. - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - A real estate investment trust. - A common trust fund operated by a bank under Section 584(a). - An exempt charitable remainder trust, or a non-exempt trust described in Section 4947(a)(1). - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under Section 1441. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under Section 852). - Payments described in Section 6049(b)(5) to non-resident aliens. - Payments on tax-free covenant bonds under Section 1451. - Payments made by certain foreign organizations. - Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. 7 Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under Sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1984, payers must generally withhold 20% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--if you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE 8 RETURN - -------------------------------------- - -------------------------------------- - -------------------------------------- - -------------------------------------- Re: MAXXAM Group Holdings Inc. First Bank National Association 180 E. 5th Street St. Paul, Minnesota 55101 Attn: Richard Prokosch Trust Officer -----END PRIVACY-ENHANCED MESSAGE-----