-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, DGIBy/6jkukCqTpfxxNIv6JxkOt0H9nzHPX2phSP/s6FAGFQFZL0YZP0FIIaI6+M 1NjYB2nepKVW7Q3DoX1o3A== 0000900421-94-000005.txt : 19940404 0000900421-94-000005.hdr.sgml : 19940404 ACCESSION NUMBER: 0000900421-94-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: 6552 IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-03924 FILM NUMBER: 94519338 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673669 MAIL ADDRESS: STREET 1: P O BOX 572887 CITY: HOUSTON STATE: TX ZIP: 77257-2887 FORMER COMPANY: FORMER CONFORMED NAME: MCO HOLDINGS INC DATE OF NAME CHANGE: 19881115 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP DATE OF NAME CHANGE: 19800630 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP OF CALIFORNIA DATE OF NAME CHANGE: 19691118 10-K 1 MAXXAM INC. 1993 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 Commission File Number 1-3924 MAXXAM INC. (Exact name of Registrant as Specified in its Charter) DELAWARE 95-2078752 (State or other (I.R.S. Employer jurisdiction Identification Number) of incorporation or organization) 5847 SAN FELIPE, SUITE 2600 HOUSTON, TEXAS 77057 (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (713) 975-7600 __________________ Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED 12 1/2% Subordinated Debentures due December 15, 1999 American 14% Senior Subordinated Reset Notes due May 20, 2000 American Common Stock, $.50 par value American, Pacific, Philadelphia Shares of common stock outstanding at March 15, 1994: 8,698,464 Securities registered pursuant to Section 12(g) of the Act: None. __________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No /___/ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Based upon the March 15, 1994 American Stock Exchange closing price of $37.125 per share, the aggregate market value of the Registrant's outstanding Common Stock held by non-affiliates was approximately $222.9 million. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Registrant's annual report to stockholders for the fiscal year ended December 31, 1993 are incorporated by reference under Part II. Certain portions of Registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the Registrant's fiscal year, are incorporated by reference under Part III. MAXXAM INC. PART I ITEM 1. BUSINESS GENERAL MAXXAM Inc. and its majority and wholly owned subsidiaries are collectively referred to herein as the "Company" or "MAXXAM" unless otherwise indicated or the context indicates otherwise. The Company, through Kaiser Aluminum Corporation ("Kaiser") and Kaiser's principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), is a fully integrated aluminum company. The Company's voting interest in Kaiser is approximately 61% on a fully diluted basis. See "--Aluminum Operations." In addition, the Company is engaged in forest products operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries, The Pacific Lumber Company and its wholly owned subsidiaries (collectively referred to herein as "Pacific Lumber," unless the context indicates otherwise), and Britt Lumber Co., Inc. ("Britt"). See "--Forest Products Operations." The Company is also engaged in real estate management and development, principally through MAXXAM Property Company (and its subsidiaries), MCO Properties Inc. ("MCOP"), Palmas del Mar Properties, Inc. and various other wholly owned subsidiaries. See "--Real Estate Operations." The Company, through its subsidiaries, also has various interests in a Class 1 thoroughbred and quarter horse racing facility currently under construction just northwest of Houston. See "--Sam Houston Race Park." See Note 11 to the Consolidated Financial Statements for certain financial information by industry segment and geographic area. ALUMINUM OPERATIONS INDUSTRY OVERVIEW Primary aluminum is produced by the refining of bauxite (the major aluminum-bearing ore) into alumina (the intermediate material) 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 and transportation 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 1992, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. The aluminum packaging market in the United States, Japan and Western Europe grew at a rate of approximately 4.0% per year during the period 1982-1992, and total United States aluminum beverage can shipments increased at a rate of approximately 2.5% in 1993, 1.5% in 1992 and 3.9% in 1991. Nearly all beer cans and approximately 95% of the soft drink cans manufactured for the United States market are made of aluminum. Despite the flat demand currently being experienced in the can stock market, growth in the packaging area is generally expected to continue in the 1990's due to general population increase and to further penetration of the beverage can market in Western Europe and Japan, where aluminum cans are a substantially lower percentage of the total beverage container market than in the United States. In the transportation industry, which accounted for approximately 28% of aluminum consumption in the United States, Japan and Western Europe in 1992, automotive manufacturers use aluminum instead of steel or copper for an increasing number of components, including radiators, wheels and engines, in order to meet more stringent environmental and fuel efficiency requirements through vehicle weight reduction. Management believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. According to industry sources, aluminum content in United States automobiles nearly doubled in the last 15 years to an average of 191 pounds per vehicle and the amount of aluminum consumed in the manufacture of Japanese automobiles more than doubled from 1983 to 1990. Management believes that the use of aluminum in automobiles in the United States and Japan will approximately double between 1991 and 2006. Supply As of year-end 1993, Western world aluminum capacity from 109 smelting facilities was approximately 16.4 million tons per year. Net exports of aluminum from the Commonwealth of Independent States (the "C.I.S.") increased substantially from 1990 levels during the period from 1991 through 1993 and have contributed to a significant increase in London Metal Exchange stocks of primary aluminum. Based upon information currently available, Kaiser believes that only moderate additions will be made during 1994-1995 to Western world alumina and primary aluminum production capacity; however, due to the decline of primary aluminum prices since January 1, 1991, and other factors, curtailments or permanent shutdowns have been announced, to management's knowledge, with respect to approximately 3 million tons of primary aluminum production capacity (all references to tons herein are to metric tons of 2,204.6 pounds). See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Trends- -Aluminum Operations" on pages 34 and 35 of the Company's 1993 Annual Report to Stockholders. The increases in alumina capacity during 1994 -1995 will come from incremental expansions of existing refineries and not from new plants, which generally require a four to five year design, engineering and construction period. Recent Industry Trends The aluminum industry has been cyclical and market prices of alumina and primary aluminum have been volatile from time to time. During 1989, tight supply conditions for alumina and strong demand for primary aluminum resulted in unusually high spot prices for alumina. During 1990, a moderate surplus of alumina supply developed due to new alumina production from two facilities restarted in prior years (including Kaiser's Alpart refinery) and increased production at other refineries. Furthermore, curtailments of primary aluminum production in response to declining ingot prices have increased the surplus of alumina supply. Since 1990, spot prices of alumina have declined substantially due to these factors and slow economic growth in major aluminum consuming countries. Contract prices for deliveries of alumina in 1993 were in a lower range than the ranges applicable during the past several years. As a result of these factors and the continuing expansion of existing alumina refineries during 1992-1993, the current surplus of alumina is expected to continue. During 1989 and 1990, primary aluminum smelters throughout the world operated at near capacity levels. This factor, combined with increased production from smelter capacity additions during 1989 and 1990, resulted in a reduction of the market price of primary aluminum from 1988 peak prices. Additions to smelter capacity in 1991, 1992 and 1993, continued high operating rates in the Western world and slow economic growth in major aluminum consuming countries as well as exports from the C.I.S. have contributed to an oversupply of primary aluminum and a significant increase in primary aluminum inventories in the world. If Western world production and exports from the C.I.S. continue at current levels, primary aluminum inventory levels are expected to increase further in 1994. The foregoing factors have contributed to a significant reduction in the market price of primary aluminum, and may continue to adversely affect the market price of primary aluminum in the future. The average price of primary aluminum was at historic lows in real terms for the year ended 1993. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations --Trends--Aluminum Operations" on pages 34 and 35 of the Company's 1993 Annual Report to Stockholders. Government officials from the European Union, the United States, Canada, Norway, Australia and the Russian Federation met in a multilateral conference in January 1994 to discuss the current excess global supply of primary aluminum. All participants have ratified as a trade agreement the resulting Memorandum which provides, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of the date of ratification of the Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production, and (iii) certain assistance to the Russian aluminum industry. A Russian Federation Trade Ministry official has publicly stated that the output reduction would remain in effect for 18 months to two years, provided that other worldwide production cutbacks occur, existing trade restrictions on aluminum are eliminated, and no new trade restrictions on aluminum are imposed. The Memorandum does not require specific levels of production cutbacks by other producing nations. The Memorandum was finalized at a second meeting of the participants held at the end of February 1994. KAISER ALUMINUM General Kaiser operates in all principal aspects of the aluminum industry--the mining of bauxite, the refining of bauxite into alumina, the production of primary aluminum from alumina, and the manufacture of fabricated (including semi-fabricated) aluminum products. In addition to the production utilized by Kaiser in its operations, Kaiser sells significant amounts of alumina and primary aluminum in the domestic and international markets. In 1993, Kaiser produced approximately 2,826,600 tons of alumina, of which approximately 71% was sold to third parties, and produced 436,200 tons of primary aluminum, of which approximately 56% was sold to third parties. Kaiser is also a major domestic supplier of fabricated aluminum products. In 1993, Kaiser shipped approximately 373,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic shipments in 1993. A majority of Kaiser's fabricated products are used by customers as components in the manufacture and assembly of finished end-use products. The following table sets forth total shipments and intracompany transfers of Kaiser's alumina, primary aluminum and fabricated aluminum operations:
Year Ended December 31, 1993 1992 1991 (In thousands of tons) ALUMINA: Shipments to Third Parties . . . . . . . . . . . . . 1,997.5 2,001.3 1,945.9 Intracompany Transfers . . . . . . . . . . . . . . . 807.5 878.2 884.2 PRIMARY ALUMINUM: Shipments to Third Parties . . . . . . . . . . . . . 242.5 355.4 340.6 Intracompany Transfers . . . . . . . . . . . . . . . 233.6 224.4 199.6 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties . . . . . . . . . . . . . 373.2 343.6 314.2
Business Strategy Kaiser has made significant changes in the mix of products sold to customers by disposing of selected assets, restarting and increasing its percentage ownership interest in the Alumina Partners of Jamaica ("Alpart") alumina refinery, and increasing production of alumina at Gramercy, Louisiana, and Queensland Australia Limited ("QAL") in Australia. The percentage of Kaiser's alumina production sold to third parties increased from approximately 35% in 1987 to approximately 71% in 1993, and the percentage of its primary aluminum production sold to third parties increased from approximately 20% in 1987 to approximately 56% in 1993. Kaiser has concentrated its fabricated products operations on the beverage container market (which historically has been recession- resistant); high value-added, heat-treated sheet and plate products for the aerospace industry; hubs, wheels and other products for the truck, trailer and shipping container industry; parts for air bag canisters and other automotive components; and distributor markets for a variety of semifabricated aluminum products. Since January 1, 1989, Kaiser has constructed four new fabrication facilities and has modernized and expanded others, with the objective of reducing manufacturing costs and expanding sales in selected product markets in which Kaiser has production expertise, high quality capability and geographic and other competitive advantages. Kaiser has taken steps to control and reduce costs, improve the efficiency and increase the capacity of its alumina and primary aluminum production and fabricating operations, modernize its facilities, and streamline and decentralize its management structure to reduce corporate overhead and shift decision making and accountability to its business units. In October 1993, Kaiser announced that it is restructuring its flat-rolled products operation at its Trentwood plant in Spokane, Washington, to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million after it has been fully implemented (which is expected to occur by the end of 1995). See "Fabricated Products--Flat- Rolled Products" below. Primary aluminum production at Kaiser's Mead and Tacoma smelters was curtailed in 1993 because of a power reduction imposed by the Bonneville Power Administration (the "BPA"), which reduced the operating rates for such smelters. See "--Primary Aluminum Products" below. Furthermore, Kaiser announced on February 24, 1994 that it will curtail approximately 9.3% of its annual production capacity currently available from its primary aluminum smelters. Kaiser has also attempted to lessen its exposure to possible future declines in the market prices of alumina and primary aluminum by entering into fixed and variable rate power and fuel supply contracts, and a labor contract with the United Steelworkers of America (the "USWA") which provides for semi-variable compensation with respect to approximately 73% of Kaiser's domestic hourly work force. See "- -Production Operations" and "--Employees" below. 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. Through its variable cost structures, forward sales and hedging program, Kaiser has attempted to mitigate its exposure to possible further declines in the market prices of alumina and primary aluminum while retaining the ability to participate in favorable pricing environments that may materialize. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -Trends--Aluminum Operations--Sensitivity to Prices and Hedging Programs" on pages 34 and 35 of the Company's 1993 Annual Report to Stockholders. Production Operations Kaiser's operations are conducted through decentralized business units which compete throughout the aluminum industry. - The Alumina Business Unit, which mines bauxite and obtains additional bauxite tonnage under long term contracts, produced approximately 8% of Western world alumina in 1993. During 1993, Kaiser utilized approximately 82% of its bauxite production at its alumina refineries and the remainder was either sold to third parties or tolled into alumina by a third party. In addition, during 1993 Kaiser utilized approximately 29% of its alumina for internal purposes and sold the remainder to third parties. Kaiser's share of total Western world alumina capacity was 8% in 1993. - The Primary Aluminum Products Business Unit operates two domestic smelters wholly owned by KACC and two foreign smelters in which KACC holds significant ownership interests. In 1993, Kaiser utilized approximately 44% of its primary aluminum for internal purposes and sold the remainder to third parties. Kaiser's share of total Western world primary aluminum capacity was 3% in 1993. - Fabricated products are manufactured by three Business Units -- Flat-Rolled Products, Extruded Products (including rod and bar), and Forgings -- which manufacture a variety of fabricated products (including body, lid and tab stock for beverage containers, sheet and plate products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters and other forgings and extruded products) and operate plants located in principal marketing areas of the United States and Canada. Substantially all of the primary aluminum utilized in Kaiser's fabricated products operations is obtained internally, with the balance of the metal utilized in its fabricated products operations obtained from scrap metal purchases. In 1993, Kaiser shipped approximately 373,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic fabricated shipments for such year. Alumina The following table lists Kaiser's bauxite mining and alumina refining facilities as of December 31, 1993:
Total Total Available Annual Company to Production Activity Facility Location Ownership Kaiser Capacity (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 Kaiser Jamaica Bauxite Company, 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 Kaiser Jamaica Bauxite Company ("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. Kaiser has entered into a series of medium term contracts for the supply of natural gas to the Gramercy plant. The price of such gas varies based upon certain spot natural gas prices, with floor and ceiling prices applicable to approximately one-half of the delivered gas. Kaiser has, however, established a fixed price for a portion of the delivered gas through a hedging program. Alpart holds bauxite reserves and owns an alumina plant located in Jamaica. KACC has a 65% interest in Alpart and Hydro Aluminium a.s. ("Hydro") owns the remaining 35% interest. KACC has management responsibility for the facility on a fee basis. KACC and Hydro have agreed to be responsible for their proportionate shares of Alpart's costs and expenses. Alpart began a program of modernization and expansion of its facilities in 1991. As a part of that program, the capacity of the Alpart alumina refinery has been increased to 1,450,000 tons per year as of December 31, 1992. In 1981, the Government of Jamaica granted Alpart a mining lease covering bauxite reserves sufficient to operate the Alpart plant until December 31, 2019. In connection with the expansion program, the Alpart partners have entered into an agreement with the Government of Jamaica designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery, as it has been expanded and as it may be expanded through the year 2024 (to a capacity of 2,000,000 tons per year). In mid-1990, Alpart entered into a five-year agreement for the supply of substantially all of its fuel oil, the refinery's primary energy source. In February 1992, the term of this agreement was extended for one year and the quantity of fuel oil to be supplied was increased. The price for 80% of the initial quantity remains fixed at a price which prevailed in the fourth quarter of 1989; the price for 80% of the increased quantity is fixed at a negotiated price; and the price for the balance of the initial and increased quantities was based upon certain spot fuel oil prices plus transportation costs. Alpart has purchased all of the quantities of fuel oil which could be purchased based upon certain spot fuel oil prices under both the initial and extended agreements. KACC holds a 28.3% interest in 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 contracts. The stockholders, including KACC, purchase bauxite from another QAL stockholder pursuant to long-term supply contracts. KACC has contracted to take approximately 751,000 tons per year of capacity or pay standby charges. KACC is unconditionally obligated to pay amounts calculated to service its share ($73.6 million at December 31, 1993) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. QAL's annual production capacity is approximately 3,300,000 tons, of which approximately 934,000 tons are available to KACC. 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 and trading intermediaries who resell raw materials to end-users. In 1993, Kaiser sold all of its bauxite to one customer, and sold alumina to 13 customers, the largest and top five of which accounted for approximately 22% and 79% of such sales, respectively. Among alumina producers, the Company believes Kaiser is now the 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 pursuant to forward sales contracts. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations --Trends--Sensitivity to Prices and Hedging Programs" on pages 34 and 35 of the Company's 1993 Annual Report to Stockholders. Marketing and sales efforts are conducted by executives of the Alumina Business Unit and Kaiser. Primary Aluminum Products The following table lists Kaiser's primary aluminum smelting facilities as of December 31, 1993:
Annual Rated Capacity Total Available Annual 1993 Company to Rated Operating Location Facility Ownership Kaiser Capacity Rate (tons) (tons) DOMESTIC: Washington Mead 100% 200,000 200,000 80% Washington Tacoma 100% 73,000 73,000 77% ----------- ----------- Subtotal 273,000 273,000 ----------- ----------- INTERNATIONAL: Ghana Valco 90% 180,000 200,000 88% Wales, U.K. Anglesey 49% 55,000 112,000 112% ----------- ----------- 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, almost all of which is used at Kaiser's Trentwood fabricating facility and the balance of which is 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, reduced the number of anodes used in the smelting process, changed from pencil to liquid pitch to produce carbon anodes which achieved environmental and operating savings, and engaged in efforts to increase production through the use of improved, higher-efficiency reduction cells. Electrical power represents an important production cost for Kaiser at its Mead and Tacoma smelters. The electricity supply contracts between the BPA and the Company expire in 2001. The electricity supply contracts between the BPA and its direct service industry customers (which consist of fifteen energy intensive companies, principally aluminum producers, including Kaiser) permit the BPA to interrupt up to 25% of the amount of power which it normally supplies to such customers. Both the Mead and Tacoma plants operated at approximately full rated capacity during 1991-1992, but operated at less than rated capacity throughout 1993. As a result of drought conditions, in January 1993 the BPA reduced the amount of power it normally supplies to its direct service industry customers. In response to such reduction, Kaiser removed three reduction potlines from production (two at the Mead smelter and one at the Tacoma smelter) and purchased substitute power in the first quarter of 1993 at increased costs. Despite the temporary availability of such power through July 1993, Kaiser has operated its Mead and Tacoma smelters at the reduced operating rates introduced in January 1993, and has operated its Trentwood fabrication facility without any curtailment of its production. The Company currently anticipates that in 1994 it will operate the Mead and Tacoma smelters at rates which do not exceed the current operating rates of 75% of full capacity for such smelters. The BPA has recently notified its direct service industry customers that it intends to restore full power through July 31, 1994. Through June 1996, Kaiser pays for power on a basis which varies, within certain limits, with the market price of primary aluminum, and thereafter Kaiser will pay for power at variable rates to be negotiated. During 1993, Kaiser paid for power under its power supply contract with the BPA at the floor rate. Effective October 1, 1993, an increase in the base rate BPA charges to its direct service industry customers for electricity was adopted which will increase Kaiser's production costs at the Mead and Tacoma smelters by approximately $15.0 million per year (approximately $9.1 million per year based on Kaiser's current operating rate of approximately 75% of full capacity). The rate increase generally is expected to remain in effect for two years. In the event that the BPA's revenues fall below certain levels prior to April 1994, the BPA may impose up to a 10% surcharge on the base rate it charges to its direct service industry customers, effective during the period from October 1994 through October 1995 (which would increase Kaiser's production costs at the Mead and Tacoma smelters by approximately $9.1 million per year based on Kaiser's current operating rate of approximately 75% of full capacity). In addition, in order to comply with certain federal laws and regulations applicable to endangered fish species, the BPA may be required in the future to reduce its power generation and to purchase substitute power (at greater expense) from other sources. KACC manages, and holds a 90% interest in, the Volta Aluminium Limited ("Valco") aluminum smelter in Ghana. The Valco smelter uses prebake technology and processes alumina supplied by KACC and the other participant into primary aluminum under long-term tolling contracts which provide for proportionate payments by the participants in amounts intended to pay not less than all of Valco's operating and financing costs. KACC's share of the primary aluminum is sold to third parties. Power for the Valco smelter is supplied under an agreement which expires in 1997, subject to Valco's right to extend the agreement for 20 years. The agreement indexes the price of two-thirds of the contract quantity to the market price of primary aluminum and fixes the price for the remainder. The agreement also provides for a review and adjustment of the base power rate and the price index every five years. The Valco smelter restarted production early in 1985 after being closed for more than two years due to lack of rainfall and the resultant hydroelectricity shortage. The Company believes that there has been sufficient rainfall and water storage such that an adequate supply of electricity for the Valco plant at its current operating rate is probable for at least one year. KACC has a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses prebake technology. KACC supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum output. KACC sells its share of Anglesey's output to third parties. Power for the Anglesey aluminum smelter is supplied under an agreement which expires in 2001. Kaiser has developed and installed proprietary retrofit technology in all of its smelters. This technology -- which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved "feed" systems that add alumina to the cells, and a computerized system that controls energy flow in the cells -- enhances 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 "--Research and Development" below. 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 1993, Kaiser sold the approximately 56% of its primary aluminum production not utilized for internal purposes to approximately 50 customers, the largest and top five of which accounted for approximately 44% and 64% of such sales, respectively. 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 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 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, both domestic and foreign. In 1993, seven domestic beverage container manufacturers constituted the leading customers for Kaiser's fabricated products and accounted for approximately 19% of Kaiser's sales revenue. Kaiser's fabricated products compete with those of numerous domestic and foreign producers and with products made with steel, copper, glass, plastic and other materials. Product quality, price and availability are the principal competitive factors in the market for fabricated aluminum products. As a result, Kaiser has refocused its fabricated products operations to concentrate on selected products in which Kaiser has production expertise, high quality capability, and geographic and other competitive advantages. Flat-Rolled Products. The Flat-Rolled Products 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 substantially more than one-half of Kaiser's 1993 fabricated products shipments. The business unit supplies the beverage container market (producing body, lid and tab stock), the aerospace market, and the tooling plate, heat-treated alloy and common alloy coil markets, both directly and through distributors. Kaiser announced in October 1993 that it is restructuring its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million (which is expected to occur by the end of 1995). In connection with the restructuring, Trentwood completed an organizational streamlining that included a reduction of approximately 80 salaried employees. In addition, Kaiser has reached an agreement with the USWA that will reduce the total number of hourly employees at Trentwood by approximately 300 employees, or about 25%, by the end of 1995. The agreement with the USWA also includes a commitment by Kaiser to spend up to $50 million of capital at Trentwood over three years provided that goals on cost reduction and profitability are met or exceeded. Kaiser's flat-rolled products are sold primarily to beverage container manufacturers located in the western United States where Kaiser has a transportation advantage. Quality of products for the beverage container industry, timeliness of delivery and price are the primary bases on which Kaiser competes. The Company believes that capital improvements at Trentwood have enhanced the quality of Kaiser's products for the beverage container industry and the capacity and efficiency of Kaiser's manufacturing operations. The Company believes that Kaiser is one of the highest quality producers of aluminum beverage can stock in the world. In 1993, the Flat-Rolled Products Business Unit had 22 foreign and domestic can stock customers, the majority of which were beverage can manufacturers (including seven of the eight major domestic beverage can manufacturers) and the balance of which were brewers. The largest and top five of such customers accounted for approximately 25% and 56%, respectively, of the business unit's sales revenue. In 1993, the business unit shipped products to over 200 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 10% of the business unit's sales revenue. The marketing staff for the Flat-Rolled Products Business Unit is headquartered in Pleasanton, California, and is also located at the Trentwood facility. Sales are made directly to customers (including distributors) from ten sales offices located throughout the United States. International customers are served by a sales office in the Netherlands and by independent sales agents in Asia and Latin America. See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Trends--Sensitivity to Prices and Hedging Programs-- Aluminum Processing" on page 34 and 35 of the Company's Annual Report to Stockholders for a discussion of demand for fabricated products in the aerospace market. 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; and rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging stock and billet. 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 distribution, durable goods, defense, building and construction, ordnance, and electrical markets. In 1993, the Extruded Products Business Unit had over 900 customers for its products, the largest and top five of which accounted for approximately 6% and 19%, respectively, of its sales revenue. Sales are made directly from plants as well as marketing locations across the United States. Forgings. The Forgings Business Unit operates forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood, South Carolina; and a machine shop at Greenwood, South Carolina. The Forgings 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 aluminum make it particularly well suited for automotive applications. The Forgings Business Unit entered the castings business by purchasing the assets of Winters Industries, which supplies cast aluminum engine manifolds to the automobile, truck and marine markets. The casting production facilities include two foundries and a machining facility in Ohio. Kaiser has recently implemented a plan to discontinue its castings operations at these facilities. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Aluminum Operations--Operating Income (Loss)--Aluminum Processing" on pages 21 and 22 of the Company's 1993 Annual Report to Stockholders. In 1993, the Forgings Business Unit had over 500 customers for its products, the largest and top five of which accounted for approximately 20% and 57%, respectively, of the Forgings Business Unit's sales revenue. The Forgings Business Unit's headquarters is located in Erie, Pennsylvania, and additional sales, marketing and engineering groups are located in the midwestern and western United States. Competition Aluminum products compete in many markets with steel, copper, glass, plastic and numerous other materials. Within the aluminum business, Kaiser competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. Kaiser's principal competitors in the sale of alumina include Alcoa of Australia Ltd., Billiton International Metals B.V., Clarendon Ltd. and Pechiney S.A. In addition to the foregoing, Kaiser competes with most aluminum producers in the production of primary aluminum. Many of Kaiser's competitors have greater financial resources than Kaiser. In addition, the C.I.S. has been supplying large quantities of primary aluminum to the Western world. 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. The Company 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 Kaiser's customers, including intermediaries, would not have a material adverse effect on Kaiser's business or operations. 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 Kaiser has production expertise, high quality capability, and geographic and other competitive advantages. Research and Development Kaiser conducts research and development activities principally at three facilities dedicated to that purpose -- the Center for Technology ("CFT") in Pleasanton, California; the Primary Aluminum Products Division Technology Center ("DTC") adjacent to the Mead smelter in Washington; and the Alumina Development Laboratory ("ADL") at the Gramercy, Louisiana refinery. Net expenditures for Kaiser-sponsored research and development activities were $18.5 million in 1993, $13.5 million in 1992, and $11.4 million in 1991. Kaiser's research staff totaled 160 at December 31, 1993. Kaiser estimates that research and development net expenditures will be in the range of approximately $17-- $19 million in 1994. Kaiser actively engages in efforts to license its technology and sell technical and managerial assistance. CFT provided technology and technical assistance to Samyang Metal Co. Ltd. in building an aluminum rolling mill in Yongju, Korea. CFT also is engaged in cooperative research and development projects with Furukawa Electric Co., Ltd., Pechiney Rhenalu and Kawasaki Steel Corporation of Japan, with respect to the ground transportation market. DTC-developed technology has been installed in aluminum smelters located in the C.I.S., West Virginia, Ohio, Missouri, Kentucky, Sweden, Germany, India, Australia, New Zealand, Ghana and the United Kingdom. Kaiser's alumina refinery technology is in use in alumina refineries in the Americas, Australia, India and Europe. Kaiser's technology sales and revenue from technical assistance to third parties were $12.8 million in 1993, $14.1 million in 1992 and $10.9 million in 1991. Employees During 1993, Kaiser employed an average of approximately 10,220 persons, compared with an average of approximately 10,130 employees in 1992, and approximately 9,970 employees in 1991. As of December 31, 1993, Kaiser's workforce was approximately 10,030, including a domestic workforce of approximately 5,930, of whom approximately 4,150 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 73% of such employees are covered by a master agreement (the "Labor Contract") with the USWA which expires on October 31, 1994. The Labor Contract covers Kaiser's plants in Spokane (Trentwood); Mead and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract provides for floor level wages at all covered plants. In addition, for workers covered by the Labor Contract at the Mead and Newark plants, for any quarterly period when the average Midwest U.S. transaction price of primary aluminum is $.54 per pound or above, a bonus payment is made. The amount of the quarterly bonus payment changes incrementally with each full cent change in the price of primary aluminum between $.54 per pound and $.61 per pound, remains constant when the price is $.61 or more per pound but is below $.74 per pound, changes incrementally again with each full cent change in the price between $.74 per pound and $.81 per pound, and remains at the ceiling when the price is $.81 per pound or more. Workers covered by the Labor Contract at the Trentwood, Tacoma and Gramercy plants may receive quarterly bonus payments based on various indices of productivity, efficiency and other aspects of specific plant performance, as well as, in certain cases, the price of alumina or primary aluminum. The particular quarterly bonus variable compensation formula currently applicable at each plant will remain applicable for the remainder of the contract term. Pursuant to the Labor Contract, base wage rates were raised $.50 per hour effective November 1, 1993. Each of the employees covered by the Labor Contract has received $2,000 in lump-sum signing and special bonuses. In addition, in the first quarter of 1991, Kaiser acquired up to $4,000 of preference stock held in the stock bonus plan for the benefit of approximately 80% of the employees covered by the Labor Contract, and in February 1994 acquired an additional $2,000 of such preference stock held in the stock bonus plan for the benefit of substantially the same employees. In the first quarter of 1991, Kaiser also acquired up to $4,000 of preference stock which had been held for the benefit of each of certain salaried employees, and in February 1994 acquired an additional $2,000 of such preference stock held in the stock bonus plan for the benefit of substantially the same employees. The February 1994 acquisitions of preference stock aggregated $5.4 million. Kaiser considers its employee relations to be satisfactory. Environmental Matters Kaiser and KACC are subject to a wide variety of international, state and local environmental laws and regulations (the "Environmental Laws") which continue to be adopted and amended. 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 (the "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 Item 3. "Legal Proceedings--Kaiser Environmental Litigation." Kaiser 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"). Kaiser, along with several other entities, has been named as a Potentially Responsible Party ("PRP") for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA and in certain instances, may be exposed to joint and several liability for those costs or damages to natural resources. Kaiser's Mead, Washington facility has been listed on the National Priorities List under CERCLA. 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. While the ultimate extent of Kaiser's liability for pending or potential fines, penalties, remedial costs, claims and litigation relating to environmental and health and safety matters cannot be determined at this time and, in light of evolving case law relating to insurance coverage for environmental claims, the Company is unable to determine definitively the extent of such coverage, the Company believes that the resolution of these matters (even without giving effect to potential insurance recovery) should not have a material adverse effect on Kaiser's consolidated financial position or results of operations. Environmental capital spending was $12.6 million in 1993, $13.1 million in 1992 and $11.2 million in 1991. Annual operating costs for pollution control, not including corporate overhead or depreciation, were approximately $22.4 million in 1993, $21.6 million in 1992, and $17.8 million in 1991. Legislative, regulatory and economic uncertainties make it difficult to project future spending for these purposes; however, Kaiser currently anticipates that in the 1994-1995 period, environmental capital spending will be within the range of approximately $7.0--$20.0 million per year, and operating costs for pollution control will be within the range of $20.0--$22.0 million per year. These expenditures will be made to assure compliance with applicable Environmental Laws and are expected to include, among other things, additional "red mud" disposal facilities and improved levees at the Gramercy, Louisiana refinery (which are being financed by the industrial revenue bonds), bath crushing improvements, baking furnace modernization, and improved calcining controls at the Mead, Washington facility, new and continuing environmental projects at the Trentwood, Washington facility, and environmental projects required under the Clean Air Act Amendments of 1990. In addition, $7.2 million in cash expenditures in 1993, $9.6 million in 1992 and $14.0 million in 1991 were charged to previously established reserves relating to environmental cost. Approximately $7.0 million is expected to be charged to such reserves in 1994. See also Note 10 to the Consolidated Financial Statements. Other Kaiser's obligations under its 1994 Credit Agreement are secured by, among other things, mortgages on Kaiser's plants located in Spokane (the Trentwood and Mead plants) and Tacoma, Washington; Erie, Pennsylvania; Newark, Ohio; and Sherman, Texas. FOREST PRODUCTS OPERATIONS GENERAL The Company also engages in forest products operations through MGI and MGI's wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber, which has been in continuous operation for 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. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber. PACIFIC LUMBER REFINANCING On March 23, 1993 (the "Closing Date"), Pacific Lumber transferred (the "Transfer") approximately 179,000 acres of timberlands (the "Subject Timberlands"), its geographical information system and certain other assets to its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), in exchange for (i) the assumption by SPHC of $323.4 million of Pacific Lumber's public indebtedness consisting of all of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes") and a portion of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (ii) all of SPHC's outstanding common stock. SPHC was organized as a special purpose Delaware corporation to facilitate the Transfer and the offering of the Timber Notes described below. The Subject Timberlands consist substantially of residual old growth and young growth redwood and Douglas-fir timber. On the Closing Date, Pacific Lumber and SPHC entered into a Master Purchase Agreement, a Services Agreement, an Additional Services Agreement and certain other agreements providing for a variety of ongoing relationships. See "--Pacific Lumber Operations-- Relationships among Pacific Lumber, SPHC and Britt Lumber." On the Closing Date, Pacific Lumber also transferred to its newly-formed wholly owned subsidiary, Salmon Creek Corporation ("Salmon Creek"), in exchange for all of Salmon Creek's common stock, approximately 3,000 contiguous acres of its virgin old growth redwood timber, together with approximately 3,000 additional acres of adjacent timberlands owned by Pacific Lumber which could not be readily segregated from such virgin old growth redwood timberlands (collectively, the "Salmon Creek Property"). Pacific Lumber retained the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the Subject Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the Subject Timberlands. In addition, Pacific Lumber retained its lumber milling, manufacturing, cogeneration and related facilities, as well as approximately 11,000 acres of real property located in Humboldt County, California, which do not constitute part of the Subject Timberlands (collectively, the "Pacific Lumber Real Property"). The Pacific Lumber Real Property consists of the town of Scotia, the land on which Pacific Lumber's sawmills, manufacturing facilities and related facilities are located and areas adjacent thereto, certain potential residential and commercial development sites and other areas, including timberlands owned by Pacific Lumber which cannot be readily segregated from the foregoing properties. Pacific Lumber is milling logs and producing and marketing lumber products from timber located on the timberlands of SPHC, Pacific Lumber and Salmon Creek in substantially the same manner as conducted prior to the Transfer. Pacific Lumber is, pursuant to the Master Purchase Agreement, harvesting and purchasing from SPHC all or substantially all of the logs harvested from the Subject Timberlands. See "--Pacific Lumber Operations-- Relationships among Pacific Lumber, SPHC and Britt Lumber" below. On the Closing Date, Pacific Lumber consummated its offering of $235 million aggregate principal amount of 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and SPHC consummated its offering of $385 million aggregate principal amount of 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). The net proceeds of such offerings, together with cash and marketable securities, were used to redeem all of Pacific Lumber's outstanding public indebtedness (including the amounts assumed by SPHC), to make required deposits into certain accounts for the benefit of the holders of the Timber Notes, to repay Pacific Lumber's cogeneration loan and to pay a $25.0 million dividend to MAXXAM Properties Inc., a subsidiary of the Company ("MPI"). Substantially all of SPHC's assets, including the Subject Timberlands, were pledged as security for the Timber Notes. PACIFIC LUMBER OPERATIONS Timberlands Pacific Lumber owns and manages approximately 187,000 acres of commercial timberlands in Humboldt County in northern California. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located in close proximity to its sawmills and contains an extensive (1,100 mile) network of roads. These factors significantly reduce harvesting costs and facilitate Pacific Lumber's 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. 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 selectively harvested in the past. Pacific Lumber has engaged in extensive efforts, at relatively low cost, to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Regeneration of redwood timber generally is accomplished through the natural growth of 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 generation by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. During the 1992-93 planting season (December through March), Pacific Lumber planted approximately 488,000 redwood and Douglas-fir seedlings at a cost of approximately $215,500. Harvesting Practices The ability of Pacific Lumber to sell logs or lumber products will depend, in part, upon its ability to obtain regulatory approval of timber harvesting plans ("THPs"). THPs are required to be filed with the California Department of Forestry ("CDF") prior to the harvesting of timber and are designed to comply with existing environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs provided 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. The method of harvesting as set forth in a THP is chosen from among a number of accepted methods based upon suitability to the particular site conditions. 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, Pacific Lumber's foresters are able to develop detailed THPs which are required to be filed with and approved by the CDF prior to the harvesting of timber. Pacific Lumber principally harvests trees through selective harvesting, which harvests only a portion of the trees in a given area, as opposed to clearcutting, which harvests an entire area of trees in one logging operation. Selective harvesting generally accounts for over 90% (by volume on a net board foot basis) of Pacific Lumber's timber harvest in any given year. Harvesting by clearcutting is used only when selective harvesting methods are impractical due to unique conditions. Selective harvesting allows the remaining trees to obtain more light, nutrients and water thereby promoting faster growth rates. Due to the size of its timberlands and conservative harvesting practices, 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 249 million board feet, with approximately 228, 264 and 256 million board feet produced in 1993, 1992 and 1991, respectively. Pacific Lumber operates a finishing plant which processes rough lumber into a variety of finished products such as trim, fascia, siding and paneling. These finished products include the industry's largest variety of customized trim and fascia patterns. Pacific Lumber also enhances the value of some grades of common grade lumber by cutting out knot-free pieces and reassembling them into longer or wider pieces in Pacific Lumber's state-of-the-art end and edge glue plant. The result is a standard sized upper grade product which can be sold at a significant premium over common grade products. Pacific Lumber dries the majority of its upper grade lumber before it is sold. Upper grades of redwood lumber are generally air-dried for six to eighteen months and then kiln-dried for seven to twenty-four days to produce a dimensionally stable and high quality product which generally commands higher prices than "green" lumber (which is lumber sold before it has been dried). Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of approximately 95 million board feet, to dry its upper grades of lumber efficiently in order to produce a quality, premium product. Pacific Lumber also maintains several large enclosed storage sheds which hold approximately 25 million board feet of lumber. In addition, Pacific Lumber owns and operates a modern 25-megawatt cogeneration power plant which is fueled almost entirely by the wood residue from Pacific Lumber's 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 owned by Pacific Lumber where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1993, the sale of surplus power to Pacific Gas and Electric Company accounted for approximately 2% of Pacific Lumber's total revenues. 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. Standing timber on Pacific Lumber's timberlands suffered virtually no damage; however, among other damage, a large number of kilns used to dry upper grade redwood lumber and two sawmills were damaged, including one sawmill which was not operational for a period of approximately six weeks. Pacific Lumber maintains insurance coverage with respect to damage to its property and the disruption of its business from earthquakes. Consistent with its past practices and the owners of most other timber tracts in the United States, Pacific Lumber does not maintain earthquake or fire insurance in respect of standing timber. Products Lumber. Pacific Lumber primarily produces and markets lumber. In 1993, Pacific Lumber sold approximately 240 million board feet of lumber, which accounted for approximately 82% of Pacific Lumber's total revenues. Lumber products vary greatly by the species and quality of the timber from which it is produced. Lumber is sold not only by grade (such as "upper" grade versus "common" grade), but also by board size and the drying process associated with the lumber. Redwood lumber is Pacific Lumber's largest product category, constituting approximately 81% of Pacific Lumber's total lumber revenues and 67% of Pacific Lumber's total revenues in 1993. 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. During 1993, upper grade redwood lumber products accounted for approximately 25% of Pacific Lumber's total lumber production volume (on a net board foot basis), 49% of its total lumber revenues and 40% of its total revenues. 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. In 1993, common grade redwood lumber accounted for approximately 48% of Pacific Lumber's total lumber production volume (on a net board foot basis), 32% of its total lumber revenues and 26% of its total revenues. 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. In 1993, upper grade Douglas-fir lumber accounted for approximately 5% of Pacific Lumber's total lumber production volume (on a net board foot basis), 8% of its total lumber revenues and 6% of its total revenues. 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. In 1993, common grade Douglas-fir lumber accounted for approximately 22% of Pacific Lumber's total lumber production volume, 11% of its total lumber revenues and 9% of its total revenues. 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. In 1993, log sales accounted for approximately 10% of Pacific Lumber's total revenues. See "--Relationships among Pacific Lumber, SPHC and Britt Lumber" 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 the Company. See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- Forest Products Operations--Operating Income" for a description of 1993 log purchases by Pacific Lumber due to inclement weather conditions. Wood Chips. In 1990, Pacific Lumber installed a whole-log chipper to produce wood chips from hardwood trees which were previously left as waste. These chips primarily are sold to third parties for the production of facsimile and other specialty papers. In 1993, hardwood chips accounted for approximately 3% of Pacific Lumber's total revenues. 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. In 1993, softwood chips accounted for approximately 3% of Pacific Lumber's total revenues. Backlog and Seasonality Pacific Lumber's backlog of sales orders at December 31, 1993 and 1992 was approximately $16.0 million and $15.4 million, respectively, the substantial portion of which was delivered in the first quarter of the succeeding fiscal year. Pacific Lumber has historically experienced lower first and fourth 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 60% of these sales in 1993. Common grades of Douglas-fir lumber are sold primarily in California. In 1993, no single customer accounted for more than 6% of Pacific Lumber's total revenues. Exports of lumber accounted for approximately 4% of Pacific Lumber's total lumber revenues in 1993. 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 and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. Competition in the common grade redwood and Douglas-fir lumber market is more intense, and Pacific Lumber competes with numerous large and small lumber producers. Employees As of March 1, 1994, Pacific Lumber had approximately 1,200 employees. Relationships among Pacific Lumber, SPHC and Britt Lumber On the Closing Date, Pacific Lumber and SPHC 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 Subject Timberlands containing timber of SPHC ("SPHC Timber") not performed by SPHC's own employees. Such services include the furnishing of all equipment, personnel and expertise not within the SPHC's possession and reasonably necessary for the operation and maintenance of the Subject Timberlands containing the SPHC Timber. In particular, Pacific Lumber is required to regenerate SPHC Timber, prevent and control loss of the SPHC Timber by fires, maintain a system of roads throughout the Subject Timberlands, take measures to control the spread of disease and insect infestation affecting the SPHC Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber also is required (to the extent necessary) to assist SPHC personnel in updating the GIS and to prepare and file, on SPHC'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, SPHC 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 $100,000 per month in 1993 and is expected to be approximately $114,000 per month in 1994. Pursuant to the Additional Services Agreement, SPHC 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 SPHC 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 SPHC also entered into the Master Purchase Agreement on the Closing Date. The Master Purchase Agreement governs all purchases of logs by the Company from SPHC. Each purchase of logs by Pacific Lumber from SPHC is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the SPHC 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 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 established every six months. As Pacific Lumber purchases logs from SPHC pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing SPHC 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 SPHC's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. In connection with the Transfer, Pacific Lumber, SPHC 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, on the Closing Date, Pacific Lumber entered into an Environmental Indemnification Agreement with SPHC pursuant to which Pacific Lumber agreed to indemnify SPHC 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 Subject Timberlands. On the Closing Date, Pacific Lumber entered into an agreement with Britt which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold at applicable market prices, and administrative services are provided by Pacific Lumber based on Pacific Lumber's actual costs and an allocable share of Pacific Lumber's overhead expenses consistent with past practice. BRITT LUMBER OPERATIONS Business Britt is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters. Britt's primary business is the processing of small diameter redwood logs into wood fencing products for sale to retail and wholesale customers. Britt was incorporated in 1965 and operated as an independent manufacturer of fence products until July 1990, when it was purchased by a subsidiary of the Company. Britt purchases small diameter (6 to 14 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" to 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 "--Relationships among Pacific Lumber, SPHC, and Britt Lumber" for a description of Britt's log purchases from Pacific Lumber. Marketing In 1993, Britt sold approximately 73 million board feet of lumber products to approximately 90 different customers, compared to 1992 sales of approximately 68 million board feet of lumber products to approximately 100 customers. In both years, over one-half of its sales were in northern California. The remainder of its 1993 and 1992 sales were in southern California, Arizona, Colorado, Hawaii and Nevada. The largest and top five of such customers accounted for approximately 33% and 46%, respectively, of such 1993 sales and 33% and 80%, respectively, of 1992 sales. Britt markets its products through its own sales person to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers. 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 1/4 mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made on a yearly basis. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 40.3 million board feet of fencing products per year. As of March 1, 1994, Britt employed approximately 100 people. Competition Management estimates that Britt accounted for approximately 24% of the redwood fence market in 1993 in competition with the northern California mills of Louisiana Pacific and Georgia Pacific. 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 in some cases, federal laws and regulations dealing with timber harvesting, endangered species, 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 the 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. Pacific Lumber does not expect that compliance with such existing laws and regulations will have a material adverse effect on its timber harvesting practices or future operating results. There can be no assurance, however, that future legislation, governmental regulations or judicial or administrative decisions would not adversely affect Pacific Lumber. Additional BOF regulations (i.e., late succession forest stand rules and sensitive watershed rules) went into effect March 1, 1994. These new regulations require, among other things, the inclusion of more information in THPs (concerning, among other things, timber generation systems, the presence or absence of fish, wildlife and plant species, and potentially impacted watersheds) and modification of certain timber harvesting practices to comply with the new regulations. In early March 1994, the BOF also approved silviculture with sustained yield rules. The Office of Administrative Law (the "OAL") is expected to (i) approve these proposed regulations, (ii) request additional review, information or action and resubmittal to the OAL, or (iii) reject the proposed regulations. These proposed regulations are scheduled to become effective on May 1, 1994, and if approved, will require additional information to be included in THPs (concerning, among other things, compliance with long-term sustained yield objectives) and modifications of certain timber harvesting practices (including the creation of buffer zones between harvest areas and increases in the amount of timber required to be retained in a harvest area). Various groups and individuals have filed objections with the CDF regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's THPs, and the Company expects that such groups and individuals will continue to file objections to certain of Pacific Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved THPs. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth timber on its property during the past few years. To date, litigation with respect to Pacific Lumber's THPs relating to young growth and residual old growth timber has been limited; however, no assurance can be given as to the extent of such litigation in the future. In June 1990, the U.S. Fish and Wildlife Service (the "USFWS") designated the northern spotted owl as threatened under the ESA. The State of California also has adopted regulations designed to protect the northern spotted owl, although the northern spotted owl has not been listed as threatened or endangered under the CESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing 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. The USFWS has given its full concurrence to a northern spotted owl management plan (the "Owl Plan"), a comprehensive wildlife management plan submitted by Pacific Lumber with respect to the northern spotted owl. Pacific Lumber incorporates this plan into each THP filed with the CDF and is no longer required to receive individual approval of its northern spotted owl conservation practices in connection with each THP it submits. The Owl Plan enables Pacific Lumber to expedite the approval process with respect to its THPs. Both federal and state agencies continue to review and consider possible additional regulations regarding the northern spotted owl. It is uncertain if such additional regulations will become effective or their ultimate content. On March 12, 1992, the marbled murrelet was approved for listing as endangered under the CESA. Pacific Lumber has incorporated, and will continue to incorporate, additional mitigation measures into its THPs to protect and maintain habitat for marbled murrelets on its timberlands. The California Department of Fish and Game (the "CDFG") requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys and to provide certain other site specific mitigations in connection with its THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during April to July, the murrelets' nesting and breeding season. Accordingly, such surveys are expected to delay the approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys could prevent Pacific Lumber from conducting certain of its harvesting operations. 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. In January 1994, the USFWS proposed designation of critical habitat for the marbled murrelet under the ESA. This proposal is subject to public comment, hearings and possible future modification. Both federal and state agencies continue to review and consider possible additional regulations regarding the marbled murrelet. It is uncertain if such additional regulations will become effective or their ultimate content. Pacific Lumber's wildlife biologist is conducting research concerning the marbled murrelet on Pacific Lumber's timberlands and is currently developing a comprehensive management plan for the marbled murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific Lumber is continuing to work with the USFWS and the other government agencies on the Murrelet Plan. It is uncertain when the Murrelet Plan will be completed and approved. In October 1993, the USFWS received a petition proposing listing the coho salmon (which is found on Pacific Lumber's property) as threatened or endangered. 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. A variety of bills are currently pending 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 and the restriction, regulation and and administration of timber harvesting practices. For example, the U.S. Congressman for the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, incorporate within the boundaries of an existing national forest approximately 42,000 acres of Pacific Lumber's timberlands and would designate approximately 12,000 acres of Pacific Lumber's timberlands to be studied for possible inclusion within such national forest. Corresponding legislation has been introduced in the California legislature. These 54,000 acres constitute approximately 30% of Pacific Lumber's timberlands. Since this and the other bills are subject to amendment, it is premature to assess the ultimate content of these bills, the likelihood of any of the bills passing, or the impact of any of these bills on the consolidated financial position or results of operations 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, administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or consolidated financial position of the Company. REAL ESTATE OPERATIONS The Company, principally through its wholly owned subsidiaries, is also engaged in the business of real estate development and commercial real estate investment in Arizona, California, Colorado, New Mexico, Texas and Puerto Rico. The Company has outstanding receivables from the financing of real estate sales in its developments and may continue to finance such real estate sales in the future. The Company also holds other receivables as a portion of its commercial real estate investments. Properties Texas. In 1991, a subsidiary of the Company purchased for approximately $122.0 million a portfolio of real property and loans secured by real property at auction from the Resolution Trust Corporation. Substantially all of the real property was located in Texas, with the largest concentration in the vicinity of San Antonio, Houston, Austin and Dallas. During 1993 and the first two months of 1994, an aggregate of $12.5 million of the loans were sold or paid off, approximately $20.9 million of real property securing loans was acquired in lieu of foreclosure and eighteen properties were sold. The largest of these sales was completed in December 1993 and resulted in the sale of sixteen properties for $113.6 million. As of March 1, 1994, the Company had six loans and seventeen properties remaining. Certain of the remaining assets are being marketed by the Company. Palmas del Mar. Palmas del Mar ("Palmas"), a resort, time- sharing and land development and sales business, located on the southeastern coast of Puerto Rico near Humacao, was acquired in 1984. Originally 2,762 acres, Palmas now includes approximately 2,160 acres of undeveloped land, 100 condominiums utilized in its time-sharing program (comprising 5,300 time-share intervals of which approximately 1,135 remain to be sold), a 100-room hotel and adjacent executive convention center known as the Candelero Hotel, a 23-room luxury hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole golf course, 20 tennis courts, golf and tennis pro shops, restaurants, beach and pool facilities, an equestrian center and a sailing center. 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 by their owners throughout the year for rental to vacationers. Since 1985, the Company has been actively engaged in the development and sale of condominiums, estate lots and villas. In 1993, Palmas sold approximately twenty-five condominium units, one estate lot and thirty-one time-shares intervals. Fountain Hills. In 1968, a subsidiary of the Company purchased and began developing approximately 12,100 acres of real property at Fountain Hills, Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As of March 1, 1994, Fountain Hills had approximately 5,000 acres of undeveloped land, 90 commercial tracts and 65 developed residential lots available for sale. The population of Fountain Hills is approximately 11,000. The Company is planning the development of certain of its remaining acreage. Future sales are expected to consist mainly of undeveloped acreage, semi-developed parcels and fully-developed lots, although the Company expects to continue limited construction and direct sale of residential units. In 1993, approximately 150 lots and 20 acres were sold. Lake Havasu City. In 1963, a subsidiary of the Company purchased and began developing approximately 16,700 acres of real property at Lake Havasu City, Arizona, which were offered for sale in the form of subdivided single and multiple family residential, commercial and industrial sites. The Company has sold substantially all of its lot inventory in Lake Havasu City and is currently planning the development of its remaining acreage. Rancho Mirage. In 1991, a subsidiary of the Company acquired Mirada, a 195-acre luxury resort-residential project located in Rancho Mirage, California. The Company is currently marketing the project's fully-developed lots. Other. The Company, through its subsidiaries, owns a number of other properties in Arizona, New Mexico, Texas and Colorado. Efforts are underway to sell most of these properties. Marketing The Company is engaged in marketing and sales programs of varying magnitudes at its real estate developments. In recent years, the Company has constructed residential units and sold time-share intervals at certain of its real estate developments. The Company intends to continue selling land to builders and developers and lots to individuals and expects to continue to construct and sell completed residential units at certain of its developments. It also expects to sell certain of its commercial real estate assets. All sales are made directly to purchasers through the Company's marketing personnel, independent contractors or through independent real estate brokers who are compensated through the payment of customary real estate brokerage commissions. Competition and Regulation and Other Industry Factors There is intense competition among companies in the real estate development business and the commercial real estate business for sales to residential and commercial lot purchasers and to commercial property investors. 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 similar 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. Palmas' resort and time-sharing business competes with similar businesses in the Caribbean, Florida and other locations. Palmas' resort operations are seasonal and are subject to, among other things, the condition of the United States economy and tourism business in Puerto Rico. The Company's real estate operations are subject to comprehensive federal, state and local regulation. Applicable statutes and regulations may require disclosure of certain information concerning real estate developments and credit policies of the Company and its subsidiaries. Periodic approval is required from various agencies in connection with the layout and design of developments, the nature and extent of improvements, construction activity, land use, zoning, and numerous other matters. Failure to obtain such approval, or periodic renewal thereof, could adversely affect real estate development and marketing operations of the Company and its subsidiaries. Various jurisdictions also require inspection of properties by appropriate authorities, approval of sales literature, disclosure to purchasers of specific information, bonding for property improvements, approval of real estate contract forms and delivery to purchasers of a report describing the property. SAM HOUSTON RACE PARK General and Financing On July 8, 1993, subsidiaries of the Company acquired various interests in a Class 1 thoroughbred and quarter horse racing facility (the "Race Park") currently under construction just northwest of Houston. Houston is the fourth largest city in the United States and the largest city without pari-mutuel horse racing. Sam Houston Race Park, Ltd. (the "Partnership") owns the land, facilities and the racing license with respect to the Race Park. On July 8, 1993, the Partnership obtained the funds required to finance the construction and initial start-up costs of the Race Park through (i) the sale by the Partnership and its wholly owned subsidiary, SHRP Capital Corp., of $75,000,000 principal amount of 11 3/4% Senior Secured Notes due 1999 (ii) the sale by the sole general partner of the Partnership (the "SHRP General Partner") of warrants to acquire shares of Class A Common Stock, and (iii) the sale and issuance of limited partnership interests by the Partnership (collectively, the "Offering"). In connection with the Offering, subsidiaries of the Company acquired, for a total investment of $9.1 million, (i) a 28.7% equity interest in the Partnership through the purchase of existing limited partnership interests (thereby becoming the largest limited partner in the Partnership), (ii) all of the outstanding Class B Common Stock of SHRP General Partner (representing a further 1% equity interest in the Partnership), and (iii) a 75% interest in Race Track Management Enterprises, the manager of the Race Park (the "Manager"). The Race Park is expected to be substantially completed and open for live racing by April 29, 1994. 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 each wagering pool among the state of Texas, purses, special equine programs, the racetrack and betting participants and empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. Only four Class 1 racetracks may be licensed and operated in Texas under the Racing Act. While an unlimited number of Class 2, 3 and 4 racetracks may be licensed, the Company believes Class 1 racetracks will be the "flagship" Texas racetracks, having the largest facilities and the highest caliber horses and offering the greatest number of live race and simulcasting days (discussed below). The Racing Commission, in settlement of a lawsuit, has also granted an existing Class 2 racetrack located to the west of Fort Worth ("Trinity Meadows") an upgrade to a Class 1 license, subject to the fulfillment of certain conditions. The Racing Commission has licensed two additional prospective Class 1 horse racetracks, one in Dallas and the other in San Antonio. The Company does not expect the Race Park to compete with the other Class 1 tracks for patrons. The Company expects the Race Park to offer pari-mutuel wagering on live thoroughbred or quarter horse racing or simulcast racing generally six 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. In Texas, the broadcast may only be sent to licensed racetracks, as the Racing Act does not provide for off-track betting. Class 1 and Class 2 racetracks in Texas must take simulcast signals from Texas Class 1 tracks in preference to signals from other tracks when such signals are made available to them. The Race Park may offer simulcast wagering only on races simulcast from other Class 1 Texas racetracks on those days when the other Class 1 tracks make their signals available to the Race Park. On days that signals are not made available from other Texas Class 1 racetracks, the Race Park may simulcast out-of-state horse races with the approval of the Racing Commission. The Partnership intends to enter into revenue-sharing arrangements both with racetracks that will send simulcast signals to the Race Park and with racetracks that will receive simulcast signals of races held at the Race Park. 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 arrangements. The number and scheduling of race days at the Racing Facility will depend on the scheduling of live race days at other Class 1 horse racing facilities. Under the Racing Act, Class 1 racetracks generally may not have overlapping live race schedules for the same breed of horse with other Class 1 racetracks unless the tracks with the overlapping schedules each consent. In its settlement with the Racing Commission, Trinity Meadows agreed that it would not participate in a Texas racing circuit and that its race dates would not be exclusive. If the other three Class 1 racetracks in Texas were open and operating on a six-day live race week and the live race schedule were equally divided among the three tracks to avoid overlapping race dates, each track would generally be allocated 102 live race days for each breed of horse. The Racing Commission has allocated to the Race Park 45 thoroughbred racing days commencing April 29, 1994 and ending on June 19, 1994 and an additional 66 thoroughbred racing days starting again October 11 and continuing through the end of the year. The Racing Commission has also allocated to the Race Park 69 quarter horse racing days commencing July 1, 1994 and ending on September 18, 1994. When the Dallas and San Antonio Class 1 racetracks are constructed and operational, the Company believes that it is likely that a Texas horse racing circuit will develop. Under such a circuit, the Class 1 racetracks would coordinate their activities such that, in general, at any one time and for several months at a time, there would be thoroughbred racing at one track, quarter horse racing at another track and the third track would have wagering on races simulcast from both of the other Class 1 tracks. No assurance can be given, however, that a Texas racing circuit will develop. In addition to revenues from wagering and simulcasting, the Partnership will derive revenues from admission fees, food services, club memberships, luxury suites, advertising sales and other sources. Race Park Facilities The Race Park is located on approximately 240 acres of land in northwest Harris County approximately 18 miles from the Houston central business district and approximately 15 miles from Houston Intercontinental Airport. The Race Park, which will have a one-mile dirt track and a one and one-eighth mile turf course, has been designed for an average patron capacity of approximately 18,000, with additional capacity for approximately 12,000 patrons on the infield. The Race Park is bordered by the Sam Houston Parkway on the north and is accessible by freeway and expects that access to the Race Park by nearby surface streets will improve within the near future. The Partnership has delegated to the Manager, pursuant to a management agreement, the right, power and authority to manage, conduct and make all decisions relating to the business and affairs of the Partnership insofar as they relate to the Race Park, except that The Partnership has retained pre-approval rights over certain major decisions by the Manager. Marketing and Competition The Race Park intends to focus its marketing on the greater Houston metropolitan area, including encouraging family attendance at the facility. The Race Park will compete with other forms of entertainment, including a greyhound racetrack located 60 miles from the Race Park and a wide range of live and televised professional and collegiate sporting events that are available in the Houston area. The Race Park could in the future also be competing with other forms of gambling in Texas, including riverboat gambling and casino gambling on Indian reservations or otherwise. In this regard, the Alabama and Coushatta Tribe, whose reservation is approximately 95 miles from the Race Park, has applied for a license to construct a casino and/or conduct gambling operations. In addition, two bills which would have authorized riverboat gambling were introduced in the last session of the Texas legislature, although neither passed. Employees As of March 1, 1994, the Partnership had approximately 55 employees. The Company expects that the Race Park will employ approximately 75 year-round employees and an additional 600 employees during live racing seasons. EMPLOYEES At March 1, 1994, the Company and its subsidiaries employed approximately 2,320 persons, exclusive of those involved in Aluminum Operations. ITEM 2. PROPERTIES For information concerning the principal properties and operations of the Company, see Item 1. "Business." ITEM 3. LEGAL PROCEEDINGS KAISER 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") 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 major remedy selected for the Sites would have a cost of $32 million. Other possible remedies described in the ROD would have estimated costs of approximately $53 million and $222 million, respectively. Kaiser understands that the EPA is also investigating contamination of groundwater at the Sites. 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. A number of other companies are also named as respondents. KACC has entered into an Agreement in Principle with certain of the respondents to participate jointly in responding to the Administrative Orders, 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. A definitive PRP Participation Agreement is currently awaiting execution by the group. By letter dated July 6, 1993, KACC has notified the EPA of its ongoing participation with such group of respondents which, as a group, are intending to comply with the Administrative Orders to the extent consistent with applicable law. By letters dated December 30, 1993, the EPA notified KACC of its potential liability for, and requested that KACC, along with a number 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 30 years of operation and maintenance, at approximately $11.8 million. KACC, along with other notified parties, plans to meet with representatives of the EPA to discuss whether an agreement to perform this remediation is possible. Based upon the information presently available to it, Kaiser is unable to determine whether KACC has any liability with respect to any of the Sites or, if there is any liability, the amount thereof. Two government witnesses have testified that KACC acquired pesticide products from the operator of the formulation site over a two to three year period. KACC has been unable to confirm the accuracy of this testimony. United States of America v. Kaiser Aluminum & Chemical Corporation In February 1989, a civil action was filed by the United States Department of Justice 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 Kaiser'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. In the course of the litigation, questions arose as to whether the observers who recorded the alleged exceedances were qualified under the Washington SIP to read opacity. In July 1990, KACC and the Department of Justice agreed to a voluntary dismissal of the action. At that time, however, the EPA had arranged for increased surveillance of the Trentwood facility by consultants and the EPA's personnel. From May 1990 through May 1991, these observers recorded approximately 130 alleged exceedances of the SIP opacity rule. Justice Department representatives have stated their intent to file a second lawsuit against KACC based on the opacity observations recorded during that period. The second lawsuit has not yet been filed. Instead, KACC has entered into negotiations with the EPA to resolve the claims against KACC through a consent decree. Although the EPA and KACC have made substantial progress in negotiating the terms of the consent decree, key issues remain to be resolved. Anticipated elements of any settlement would include a commitment by KACC to improve the emission control equipment at the Trentwood facility and a civil penalty assessment against KACC, in an amount to be determined. At this time, Kaiser cannot predict the likelihood that the EPA and KACC will reach an agreement upon the terms of a consent decree. In the event that the negotiations are not successful the matter likely would be resolved in federal court. 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 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. Plaintiffs allege, among other things, that the Defendants are jointly and severally liable for response costs, declaratory relief and natural resources damages under CERCLA, and that Defendant Catellus is strictly liable on grounds of continuing nuisance, continuing trespass and negligence for such discharge, deposit, disposal or release, and is liable for fraudulent concealment of the alleged contamination. KACC is alleged to have performed certain excavation activities on the Property and, as a result thereof, to have released contaminants on the Property and to have arranged for the transportation, treatment and disposal of such contaminants Catellus has 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. The Third Party Complaint, as amended, seeks contribution and indemnity from KACC and another party under a variety of theories (including negligence, nuisance, waste and alleged contractual indemnities) for, among other things, Catellus' response costs and natural resources damages under CERCLA, any liability or judgment imposed against Cattelus, and treble damages for the injury to its interest in the Property, and treble damages from KACC pursuant to California Code of Civil Procedure Section 732. By an October 1992 letter, counsel for certain underwriters at Lloyd's London and certain London Market insurance companies (the "London Insurers") advised that the London Insurers agreed to reimburse KACC for defense expenses in the third party action filed by Catellus, subject to a full reservation of rights. The Plaintiffs filed a motion for leave to file a Third Amended Complaint which would have added KACC as a first party defendant. This motion was denied. In October 1992, the Plaintiffs served a separate Complaint against KACC for damages and declaratory relief. The claims asserted by the Plaintiffs are for, among other things, (i) response costs, recovery of costs, natural resources damages and declaratory relief under CERCLA; (ii) damages for injury to the Property arising from negligence, and (iii) damages under a theory of strict liability. This matter has been tendered to the London Insurers. Picketville Road Landfill Matter In July, 1991, the EPA served on KACC and thirteen other PRPs a Unilateral Administrative Order For Remedial Design and Remedial Action (the "Order") at the Picketville Road Landfill site in Jacksonville, Florida. The EPA seeks remedial design and remedial action pursuant to CERCLA from some, but apparently not all, PRPs based upon a Record of Decision outlining remedial cleanup measures to be undertaken at the site adopted by the EPA in September 1990. The site was operated as a municipal and industrial waste landfill from 1968 to 1977 by the City of Jacksonville. KACC was first notified by the EPA in January 1991, that wastes from one of KACC's plants may have been transported to and deposited in the site. In its Record of Decision, the EPA estimated that the total capital, operations and maintenance costs of its elected remedy for the site would be approximately $9.9 million. In addition, the EPA has reserved the right to seek recovery of its costs incurred relating to the Order, including, but not relating to, reimbursement of the EPA's cost of response. Through negotiations with the EPA and other PRPs, KACC has reached an agreement with such PRPs under which KACC will fund $146,700 of the cost of the remedial action (unless remedial costs exceed $19 million in which event the settlement agreement will be re-opened). The implementation of the foregoing agreement is subject to continuing discussions among the EPA, the other PRPs and KACC. Asbestos-related Litigation KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment with KACC or 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 number of such lawsuits instituted against KACC increased substantially in 1993 and management believes the number of such lawsuits will continue to increase at a greater annualized rate than in prior years. For additional information, see Note 10 to the Consolidated Financial Statements. The Company currently believes that there is no more than a remote possibility (under generally accepted accounting principles) that KACC's ultimate asbestos-related costs net of related insurance recoveries will exceed those accrued as of December 31, 1993 and, accordingly, that the resolution of such uncertainties and the incurrence of such net costs should not have a material adverse effect on Kaiser's consolidated financial position or results of operations. OTHER KAISER LITIGATION Various other lawsuits and claims are pending against Kaiser. The Company believes that resolution of the lawsuits and claims made against Kaiser, including the matters discussed above, will not have a material adverse effect on Kaiser's consolidated financial position. PACIFIC LUMBER MERGER LITIGATION During the mid-to-late 1980's, Pacific Lumber was named as defendant along with several other entities and individuals, including the Company and MGI, in various class, derivative and other actions brought in the Superior Court of Humboldt County by former stockholders of Pacific Lumber relating to the cash tender offer (the "Tender Offer") for the shares of Pacific Lumber by a subsidiary of MGI and the subsequent merger (the "Merger"), as a result of which Pacific Lumber became a wholly-owned subsidiary of MGI (the "Humboldt County Lawsuits"). The Humboldt County Lawsuits which remain open are captioned: Fries, et al. v. Carpenter, et al. (No. 76328) ("Fries State"); Omicini, et al. v. The Pacific Lumber Company, et al. (No. 76974) ("Omicini"); Thompson, et al. v. Elam, et al. (No. 78467) ("Thompson State"); and Russ, et al. v. Milken, et al. (No. DR-85429) ("Russ"). The Humboldt County Lawsuits generally allege, among other things, that in documents filed with the Securities and Exchange Commission (the "Commission"), the defendants made false statements concerning, among other things, the estimated value of Pacific Lumber's assets, financing for the Tender Offer and the Merger and minority stockholders' appraisal rights, and that the individual directors of Pacific Lumber breached certain fiduciary duties owed stockholders and other constituencies of Pacific Lumber. The Company and MGI are alleged to have aided and abetted these violations and committed other wrongs. The Thompson State, Omicini and Fries State suits seek compensatory damages in excess of $1 billion, exemplary damages in excess of $750 million, rescission and other relief. The Russ suit does not specify the amount of damages sought. There has been no activity in the Fries State case since 1987 nor in the Omicini case since 1986. The Thompson State and Russ actions are stayed pending the outcome of the In re Ivan F. Boesky Multidistrict Securities Litigation described below. In 1988, the plaintiffs in the Fries State action filed another action entitled Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT), in United States District Court, Central District of California ("Fries Federal") against the Company, Pacific Lumber, MGI and others. Fries Federal repeats many of the allegations and seeks damages and relief similar to that contained in the Humboldt County Lawsuits, and, among other things, asserts that the defendants violated RICO and the Hart-Scott-Rodino Antitrust Improvements Act, and further alleges that, as a result of alleged arrangements between Ivan F. Boesky and others, MGI beneficially owned, for purposes of Pacific Lumber's bylaws, more than 5% of Pacific Lumber's outstanding shares so that the Merger required the approval of 80% of the outstanding shares rather than a majority. In 1988, plaintiffs in the Thompson State action and others filed a complaint in the United States District Court, Central District of California, entitled Thompson, et al. v. MAXXAM Group Inc., et al. (No. 88-06274) ("Thompson Federal"). The defendants in the Thompson Federal action include Pacific Lumber, the Company, MGI and others. This action, as amended, repeats the allegations, asserts claims and seeks damages and relief similar to that contained in the Fries Federal and Fries State actions. In May 1989, the Thompson Federal and Fries Federal actions were consolidated in the In re Ivan F. Boesky Multidistrict Securities Litigation in the United States District Court, Southern District of New York (MDL No. 732 M 21-45-MP) ("Boesky"). An additional action filed in November 1989, entitled American Red Cross, et al. v. Hurwitz, et al. (No. 89 Civ 7722) ("American Red Cross"), has been consolidated with the Boesky action. The American Red Cross action contains allegations and seeks damages and relief similar to that contained in the Russ, Thompson Federal and Fries Federal actions. In September 1990, the Court in the Boesky action certified a class of plaintiffs comprised of persons who sold their shares in Pacific Lumber on or after September 27, 1985. Various plaintiffs in the Boesky action have opted out of the certified class of plaintiffs and are prosecuting their claims individually within the Boesky proceeding. The Boesky action has been set for trial commencing April 11, 1994. In September 1989, seven past and present employees of Pacific Lumber brought an action against Pacific Lumber, the Company, MGI, certain current and former directors and officers of the Company, Pacific Lumber and MGI, and First Executive Life Insurance Company ("First Executive") (subsequently dismissed as a defendant) in the United States District Court, Northern District of California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) ("Kayes"). Plaintiffs purport to be participants in or beneficiaries of Pacific Lumber's former Retirement Plan (the "Retirement Plan") for whom a group annuity contract was purchased from Executive Life Insurance Company ("Executive Life") in 1986 after termination of the Retirement Plan. The Kayes action alleges that the Company, Pacific Lumber and MGI defendants breached their ERISA fiduciary duties to participants and beneficiaries of the Retirement Plan by purchasing the group annuity contract from First Executive and selecting First Executive to administer the annuity payments. Plaintiffs seek, among other things, a new group annuity contract on behalf of the Retirement Plan participants and beneficiaries. This case was dismissed on April 14, 1993 and was refiled as Jack Miller, et al. v. Pacific Lumber Company, et al. (No. C-89-3500-SBA) ("Miller") on April 26, 1993; the Miller case was dismissed on May 14, 1993. These dismissals have been appealed. On October 28, 1993, a bill amending ERISA, was passed by the U.S. Senate which appears to be intended, in part, to overturn the District Court's dismissal of the Miller action and to make available certain remedies. This bill has not been voted upon by the House of Representatives. It is impossible to say if the bill will be enacted or if enacted its ultimate content. In June 1991, the U.S. Department of Labor filed a civil action entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in the United States District Court, Northern District of California, against the Company, Pacific Lumber, MGI and certain of their current and former officers and directors. The allegations in the DOL civil action are substantially similar to that in the Kayes action. The DOL civil action has been stayed pending resolution of the Kayes and Miller appeals. Management is of the opinion that the outcome of the foregoing litigation is unlikely to have a material adverse effect on the Company's consolidated financial position. Management is unable to express an opinion as to whether the outcome of such litigation is unlikely to have a material adverse effect on the Company's results of operations in respect of any fiscal year. In April 1991, the California Commissioner of Insurance (the "Commissioner") filed for conservatorship of Executive Life in Los Angeles County Superior Court in proceedings entitled Insurance Commissioner of the State of California v. Executive Life Insurance Co. and Does 1-1000 (Case No. BS006912) ("Executive Life Conservatorship"). In September 1993, the final rehabilitation plan for Executive Life (the "Plan") was closed. The Commissioner expects that for nearly all policyholders who chose to remain with Aurora National Life Assurance Corporation, the new owner and successor of Executive Life ("Aurora"), such persons will receive full payments. Policyholders who chose to "opt-out" of the Plan (i.e., chose to terminate their policy and cash in at a discounted rate), will be paid in accordance with their choice to opt-out. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against the Company, MGI, MAXXAM Properties Inc. ("MPI") and certain of the Company's directors in the Court of Chancery of the State of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785. Plaintiff purports to bring this action as a stockholder of the Company derivatively on behalf of the Company and MPI. In May 1989, a second action containing substantially similar allegations was filed in the Court of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. (No. 10846) and the two cases were consolidated (collectively, the "Zero Coupon Note" actions). The Zero Coupon Note actions relate a Put and Call Agreement entered into between MPI and Mr. Charles Hurwitz (Chairman of the Board of the Company, MGI and MPI), as well as a predecessor agreement (the "Prior Agreement"). Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase from MPI certain notes (or the common stock of the Company into which they were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call and acquired 990,400 shares of the Company's common stock. The Zero Coupon Note actions generally allege that in entering into the Prior Agreement Mr. Hurwitz usurped a corporate opportunity belonging to the Company, that the Put and Call Agreement constituted a waste of corporate assets of the Company and MPI, and that the defendant directors breached their fiduciary duties in connection with these matters. Plaintiffs seek to have the Put and Call Agreement declared null and void, among other remedies. RANCHO MIRAGE LITIGATION In May 1991, a derivative action entitled Progressive United Corporation v. MAXXAM Inc., et al. (No. 12111) ("Progressive United") was filed in the Court of Chancery, State of Delaware against the Company, Federated Development Company ("Federated"), MCO Properties Inc. ("MCOP"), a wholly-owned subsidiary of the Company, and the Company's Board of Directors. The action alleges abuse of control and breaches of fiduciary obligations based on, and unfair consideration for, the Company's Agreement in Principle with Federated to (a) forgive payments of principal and interest of approximately $32.2 million due from Federated under two loan agreements entered into between MCOP and Federated in 1987, and (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"). See Note 10 to the Consolidated Financial Statements for a description of the exchange to which this action and the actions referenced below relate. Plaintiff seeks to have the Agreement in Principle rescinded, an accounting under the loan agreements, repayment of any losses suffered by the Company or MCOP, costs and attorneys fees. The following six additional lawsuits similar to the Progressive United case were filed in Delaware Chancery Court challenging the now-completed Mirada transactions action has been: NL Industries, et al. v. MAXXAM Inc., et al. (No. 12353); Kahn, et al. v. Federated Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377); Glinert, et al. v. Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al. (No. 12390); and Kassoway, et al. v MAXXAM Inc., et al. (No. 12404). The Kahn, Glinert, Friscia and Kassoway actions have been consolidated with the Progressive United action into In re MAXXAM Inc./Federated Development Shareholders Litigation (No. 12111); the NL Industries action has been "coordinated" with the consolidated actions; the Thistlethwaite action has been stayed pending the outcome of the consolidated actions. In January 1994, a derivative action entitled NL Industries, Inc., et al. v. Federated Development Company, et al. (No. 94-00630) was filed in the District Court of Dallas County, Texas, against the Company (as nominal defendant) and Federated. This action contains allegations and seeks relief similar to that contained in the In re MAXXAM Inc./Federated Development Shareholders Litigation. OTHER LITIGATION MATTERS The Company and certain of its subsidiaries are also involved in other claims and litigation, both as plaintiffs and defendants, in the ordinary course of business. Management is of the opinion that the outcome of such other litigation will not have a material adverse effect upon the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to this section in the portions of the Company's 1993 Annual Report to Stockholders (the "Annual Report") which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Reference is made to this section in the portions of the Annual Report which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to this section in the portions of the Annual Report which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the consolidated financial statements and notes thereto and the quarterly financial information in the portions of the Annual Report which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Information required under Part III (Items 10, 11, 12 and 13) has been omitted from this report since the Company intends to file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14A which involves the election of directors. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8- K (A) INDEX TO FINANCIAL STATEMENTS
PAGE ---- 1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8): The consolidated financial statements and the Report of Independent Public Accountants are included on pages 36 to 65 of the Annual Report which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on Financial Statement Schedules 37 Schedule II - Amounts receivable from related parties and underwriters, promoters and employees other than related parties for the years ended December 31, 1993, 1992 and 1991 38 Schedule III - Condensed financial information of Registrant at December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991 40 Schedule V - Property, plant and equipment for the years ended December 31, 1993, 1992 and 1991 (consolidated) 45 Schedule VI - Accumulated depreciation, depletion and amortization of property, plant and equip- ment for the years ended December 31, 1993, 1992 and 1991 (consolidated) 46 Schedule X - Supplementary consolidated statement of operations information for the years ended December 31, 1993, 1992 and 1991 47
All other schedules are inapplicable or the required information is included in the consolidated financial statements or the notes thereto. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 49), which index is incorporated herein by reference. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of MAXXAM Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in MAXXAM Inc.'s 1993 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 24, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index on page 36 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state 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 & CO. Houston, Texas February 24, 1994 SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Balance at end Deductions of period ---------------------- --------------------- Balance at beginning Amounts Amounts Not Name of debtor of period Additions collected forgiven Current Current ----------------------------- ---------- ---------- ---------- -------- -------- --------- (In thousands of dollars) 1993: Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100 Jacques C. Lazard (a) . . . . . 100 - (39) - - 61 James D. Noteware (b) . . . . . - 100 (100) - - - Anthony R. Pierno (c) . . . . . 320 - - (15) 200 105 Paul N. Schwartz (d) . . . . . . 310 - (75) (20) 200 15 Byron Wade (e) . . . . . . . . . - 100 (80) - - 20 1992: Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100 Jacques C. Lazard (a) . . . . . 100 - - - - 100 Anthony R. Pierno (c) . . . . . 335 - - (15) - 320 Paul N. Schwartz (d) . . . . . . 330 - - (20) - 310 1991: Diane M. Dudley (a) . . . . . . $ 100 $ - $ - $ - $ - $ 100 Jacques C. Lazard (a) . . . . . 100 - - - - 100 Anthony R. Pierno (c) . . . . . 350 - - (15) - 335 Paul N. Schwartz (d) . . . . . . 350 - - (20) - 330 John Seidl (f) . . . . . . . . . 1,114 21 (1,135) - - - Federated Development Company (g) 31,076 3,186 -------------------- (a) Amounts outstanding from these individuals bore interest at an annual rate of 6% in 1993, 1992 and 1991. The loans are generally due on demand; each is secured by real estate owned by each individual. (b) In July 1993, MAXXAM Inc. (the "Company") loaned Mr. Noteware $100,000 pursuant to the terms of an unsecured promissory note which bore interest at an annual rate of 6%. The loan was repaid within approximately one month. (c) Mr. Pierno has entered into a five-year employment agreement with the Company effective March 8, 1990. Pursuant to the terms of the agreement, personal loans of Mr. Pierno outstanding on the date of the agreement ($150,000) are to be forgiven at the rate of $15,000 per year beginning March 8, 1991, with any remaining balance due and payable upon termination of employment. The agreement also provides for an additional loan of $200,000 which Mr. Pierno received in 1990. As of December 31, 1993, Mr. Pierno had total loans outstanding of $305,000, interest on which is payable monthly at an annual rate of 6%. $105,000 of principal on the loan is payable on demand (unless forgiven as indicated above) and $200,000 is payable on December 15, 1994 (with prepayments due upon the exercise of certain stock appreciation rights). The loans are secured by real estate owned by Mr. Pierno. (d) Mr. Schwartz has entered into a five-year employment agreement with the Company effective March 8, 1990. Pursuant to the terms of the agreement, personal loans of Mr. Schwartz outstanding on the date of the agreement ($100,000) are to be forgiven at the rate of $20,000 per year beginning March 8, 1991, with any remaining balance due and payable upon termination o employment. The agreement also provided for additional loans to Mr. Schwartz, all of which were received by Mr. Schwartz in 1990. As of December 31, 1993, Mr. Schwartz had total loans outstanding of $215,000, interest on which is payable monthly at a annual rate of 6%. $15,000 of principal on the loan is payable on demand (unless forgiven as indicated above) and $200,000 is payable on December 15, 1994 (with prepayments due upon the exercise of certain stock appreciation rights). The loans are secured by real estate owned by Mr. Schwartz. (e) In July 1993, the Company loaned Mr. Wade $100,000 pursuant to the terms of an unsecured promissory note which bore interest at an annual rate of 6%. The loan was repaid within approximately one month with a cash payment of $50,000 and a new unsecured promissory note for $50,000, interest on which is payable monthly at an annual rate of 6%. The new note is payable upon the earliest to occur of July 20, 1998 or Mr. Wade's termination of employment with the Company. In December 1993, Mr. Wade repaid $30,000 of the outstanding principal balance of the note. (f) In June 1990, Mr. Seidl entered into an agreement with the Company relating to his move to Houston. Pursuant to the terms of such agreement, the Company loaned $1,000,000 to Mr. Seidl at an annual rate of 8.9%, payable quarterly. The agreemen required full or partial payments upon Mr. Seidl's receipt of any payments pursuant to the Kaiser Long-Term Incentive Plan. In accordance with this provision, the loan was paid in full in 1991. The agreement also provided for the Company to reimburse Mr Seidl for certain expenses incurred in connection with his move, with Mr. Seidl being entitled to borrow (at the federal short- term interest rate) the reimbursable amount until reimbursement was made. All such expenses were reimbursed in 1991. Mr. Seid terminated his employment and resigned as a director of the Company and subsidiary companies effective December 31, 1992. (g) The Company had loan agreements with Federated Development Company ("Federated") for loans secured by real estate located in Rancho Mirage, California ("Mirada"). Federated is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. In July 1991, in exchange for the Mirada and other consideration, MCO Properties Inc., a wholl owned subsidiary of the Company, assumed the outstanding principal and accrued interest on the loans.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED)
December 31, ------------------------ 1993 1992 ------------ --------- (In millions of dollars) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . $ 26.7 $ 3.2 Marketable securities and other current assets . 32.3 54.0 ------------ --------- Total current assets . . . . . . . . . . . 59.0 57.2 Investment in subsidiaries . . . . . . . . . . . . . 3.6 637.0 Deferred income taxes . . . . . . . . . . . . . . . . 136.4 - Other assets . . . . . . . . . . . . . . . . . . . . 6.0 6.6 ------------ --------- $ 205.0 $ 700.8 ============ ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities . . . . $ 9.3 $ 8.6 Deferred income taxes . . . . . . . . . . . . . 9.4 - Long-term debt, current maturities . . . . . . . 4.1 3.9 ------------ --------- Total current liabilities . . . . . . . . . 22.8 12.5 Long-term debt, less current maturities . . . . . . . 48.0 70.7 Note payable to and advances from subsidiaries . . . 191.5 123.2 Other noncurrent liabilities . . . . . . . . . . . . 110.6 50.5 ------------ --------- Total liabilities . . . . . . . . . . . . . 372.9 256.9 ------------ --------- Stockholders' equity (deficit): Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1993 - 679,084 and 1992 - 681,811 . . . . . . . . .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 . . . . . . . . . . . . . . . . 5.0 5.0 Additional capital . . . . . . . . . . . . . . . 51.2 47.9 Retained earnings (deficit) . . . . . . . . . . (180.8) 419.4 Pension liability adjustment . . . . . . . . . . (23.9) (9.0) Treasury stock, at cost (shares held: preferred - 845; common: 1993 - 1,364,895 and 1992 - 1,367,622) . . . . . . . . . . . . . . . . . . . . . (19.7) (19.7) ------------ --------- Total stockholders' equity (deficit) . . . (167.9) 443.9 ------------ --------- $ 205.0 $ 700.8 ============ ========= See notes to consolidated financial statements and accompanying notes.
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
Years Ended December 31, --------------------------------------------------- 1993 1992 1991 -------------- -------------- ------------- (In millions of dollars) Investment, interest and other income . . . $ 3.0 $ 2.8 $ 4.1 Interest expense . . . . . . . . . . . . . (13.7) (15.1) (36.2) General and administrative expenses . . . . (15.4) (8.4) (12.0) Equity in earnings (losses) of subsidiaries (615.5) 9.3 66.2 -------------- -------------- ------------- Income (loss) before income taxes and cumulative effect of changes in accounting principles . . . . . . . . (641.6) (11.4) 22.1 Credit (provision) for income taxes . . . . (3.1) 4.1 35.4 -------------- -------------- ------------- Income (loss) before cumulative effect of changes in accounting principles . . . (644.7) (7.3) 57.5 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) . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5 ============== ============== ============= See notes to consolidated financial statements and accompanying notes.
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
Years Ended December 31, --------------------------------------------------- 1993 1992 1991 --------------- ------------ --------------- (In millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Equity in losses (earnings) of subsidiaries 615.5 (9.3) (66.2) Amortization of deferred financing costs and discounts on long-term debt . . . . . .5 .6 .6 Cumulative effect of changes in accounting principles, net . . . . . . . . . . . (44.5) - - Increase (decrease) in accounts payable and 7.5 (1.8) .3 other liabilities . . . . . . . . . . Decrease (increase) in accrued and deferred income taxes . . . . . . . . . . . . . (3.7) (6.5) (3.5) Decrease in receivables . . . . . . . . . . .8 1.1 2.2 Other . . . . . . . . . . . . . . . . . . . 2.6 (1.4) 10.8 --------------- ------------ --------------- Net cash provided by (used for) operating activities . . . . . . . . . (14.1) (24.6) 1.7 --------------- ------------ --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Dividends received from subsidiaries . . . . . . 66.1 18.1 110.9 Net sales (purchases) of marketable securities . 18.3 (30.7) - Investments in and net advances from (to) subsidiaries . . . . . . . . . . . . . . . . . . (22.2) 18.0 (51.5) Capital expenditures . . . . . . . . . . . . . . (.3) (1.5) (1.6) --------------- ------------ --------------- Net cash provided by investing activities . . . . . . . . . . . . . . 61.9 3.9 57.8 --------------- ------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption, repurchase of and principal payments on long-term debt . . . . . . . . . . . . . (24.3) (3.9) (34.7) Proceeds from issuance of common stock . . . . . - .6 2.3 --------------- ------------ --------------- Net cash used for financing activities (24.3) (3.3) (32.4) --------------- ------------ --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23.5 (24.0) 27.1 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . 3.2 27.2 .1 --------------- ------------ --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . $ 26.7 $ 3.2 $ 27.2 =============== ============ =============== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net assets transferred from subsidiary . . . . . $ 30.5 Dividend of the Company's notes payable and marketable securities received from subsidiary . . . $ 14.9 $ 100.1 Gain from initial public offering of Kaiser Aluminum Corporation common stock . . . . . . . . . . 28.5 Excess of fair value of assets acquired over affiliate's basis . . . . . . . . . . . . . . . (24.0) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid . . . . . . . . . . . . . . . . . $ 6.8 $ 11.1 $ 15.9 Income taxes paid (refunded) . . . . . . . . . . (.5) (1.9) 2.9 See notes to consolidated financial statements and accompanying notes.
NOTES TO FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) A. SIGNIFICANT TRANSACTIONS On August 4, 1993, contemporaneously with the consummation of the MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the Company) refinancing transaction (as described below), MGI (i) transferred to the Company 50 million common shares of Kaiser Aluminum Corporation ("Kaiser," a majority owned subsidiary of the Company) held by a subsidiary of MGI, representing MGI s (and the Company s) entire interest in Kaiser s common stock, (ii) transferred to the Company 60,075 shares of the Company's common stock held by a subsidiary of MGI, (iii) transferred to the Company certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to MGI of approximately $1.1 and (iv) exchanged with the Company 2,132,950 Depositary Shares, acquired from Kaiser on June 30, 1993 for $15.0, such exchange being in satisfaction of a $15.0 promissory note evidencing a cash loan made by the Company to MGI in January 1993 (the "MGI Loan"). On the same day, the Company assumed approximately $17.5 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. Contemporaneously with these transfers, MGI issued $100.0 aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and $126.7 aggregate principal amount (approximately $70.0 net of original issue discount) of 12 1/4% Senior Secured Discount Notes due 2003 (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 The Pacific Lumber Company, Britt Lumber Co., Inc. and MAXXAM Properties Inc. (wholly owned subsidiaries of MGI) and by the Company s pledge of 28 million shares of Kaiser s common stock it received from MGI. Additionally, on September 28, 1993, MGI transferred to the Company its interest in the real estate management and development operation located at Palmas del Mar in Puerto Rico. On October 13, 1993, Kaiser filed a registration statement with the Securities and Exchange Commission for the sale to the public of the 2,132,950 Depositary Shares the Company exchanged for the MGI Loan, as described above. The registration statement was declared effective by the Securities and Exchange Commission on November 15, 1993. The Company may consummate the sale of all or any portion of such Depositary Shares at any time. B. DEFERRED INCOME TAXES 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 of 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. C. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ------------------------------ 1993 1992 ------------ ------------- 14% Senior Subordinated Reset Notes due May 20, 2000 . . . . . . . . . $ 25.0 $ 45.0 12 1/2% Subordinated Debentures due December 15, 1999, net of discount of $2.4 and $2.9 at December 31, 1993 and 1992, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.2 27.6 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2.0 ------------ ------------- 52.1 74.6 Less: current maturities . . . . . . . . . . . . . . . . . . . . . . . (4.1) (3.9) ------------ ------------- $ 48.0 $ 70.7 ============ =============
Maturities Scheduled maturities of long-term debt outstanding at December 31, 1993 are as follows: years ending December 31, 1994 - $4.1; 1995 - $4.1; 1996 - $3.6; 1997 - $3.3; 1998 - $3.3; thereafter - $36.1. D. NOTE PAYABLE TO SUBSIDIARY At December 31, 1993, the Company had a $181.9 unsecured note payable to a real estate subsidiary which bears interest at 6% per annum. SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (CONSOLIDATED) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Balance at beginning Additions Retirements Balance at of year at cost and sales Other(1) end of year ------------- ------------ ------------- ---------- ------------ (In millions of dollars) 1993: Land and improvements . . $ 139.6 $ 3.2 $ (1.3) $ 15.7 $ 157.2 Buildings . . . . . . . . 209.4 8.9 (.1) 21.9 240.1 Machinery and equipment . 1,108.5 74.6 (19.3) 100.1 1,263.9 Construction in progress . 71.1 (5.3) - (.7) 65.1 ------------- ------------ ------------- ---------- ------------ $ 1,528.6 $ 81.4 $ (20.7) $ 137.0 $ 1,726.3 ============= ============ ============= ========== ============ Timber and timberlands . . $ 484.8 $ .3 $ - $ (38.3) $ 446.8 ============= ============ ============= ========== ============ 1992: Land and improvements . . $ 96.5 $ 17.5 $ - $ 25.6 $ 139.6 Buildings . . . . . . . . 184.0 22.1 (.5) 3.8 209.4 Machinery and equipment . 1,012.6 103.7 (6.0) (1.8) 1,108.5 Construction in progress . 87.7 (16.2) - (.4) 71.1 ------------- ------------ ------------- ---------- ------------ $ 1,380.8 $ 127.1 $ (6.5) $ 27.2 $ 1,528.6 ============= ============ ============= ========== ============ Timber and timberlands . . $ 484.3 $ .5 $ - $ - $ 484.8 ============= ============ ============= ========== ============ 1991: Land and improvements . . $ 83.2 $ 4.0 $ (.6) $ 9.9 $ 96.5 Buildings . . . . . . . . 171.1 8.7 (1.1) 5.3 184.0 Machinery and equipment . 933.5 79.9 (7.9) 7.1 1,012.6 Construction in progress . 52.4 37.0 (.1) (1.6) 87.7 ------------- ------------ ------------- ---------- ------------ $ 1,240.2 $ 129.6 $ (9.7) $ 20.7 $ 1,380.8 ============= ============ ============= ========== ============ Timber and timberlands . . $ 484.0 $ .3 $ - $ - $ 484.3 ============= ============ ============= ========== ============ -------------------- (1) Amounts for 1993 are principally attributable to the restatement of assets and liabilities to their pre-tax amounts from their net of tax amounts originally recorded in connection with the acquisition of various subsidiaries in prior years. The restatement is due to the Company's implementation of Financial Accounting Standards No. 109, Accounting for Income Taxes, on January 1, 1993.
Amounts for 1992 and 1991 are principally due to various reclassifications. SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (CONSOLIDATED) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Additions Balance at charged to beginning costs and Retirements Balance at of year expenses and sales Other(1) end of year ------------ ---------- ------------ ----------- ------------ (In millions of dollars) 1993: Land and improvements . . $ 11.9 $ 4.2 $ (.2) $ 8.0 $ 23.9 Buildings . . . . . . . . 56.7 8.4 (.5) 3.0 67.6 Machinery and equipment . 272.9 90.2 (6.0) 32.7 389.8 ------------ ---------- ------------ ----------- ------------ $ 341.5 $ 102.8 $ (6.7) $ 43.7 $ 481.3 ============ ========== ============ =========== ============ Timber and timberlands . . $ 100.9 $ 15.2 $ - $ (7.9) $ 108.2 ============ ========== ============ =========== ============ 1992: Land and improvements . . $ 10.1 $ 1.9 $ - $ (.1) $ 11.9 Buildings . . . . . . . . 47.6 7.5 (.2) 1.8 56.7 Machinery and equipment . 197.6 79.0 (1.9) (1.8) 272.9 ------------ ---------- ------------ ----------- ------------ $ 255.3 $ 88.4 $ (2.1) $ (.1) $ 341.5 ============ ========== ============ =========== ============ Timber and timberlands . . $ 84.2 $ 16.7 $ - $ - $ 100.9 ============ ========== ============ =========== ============ 1991: Land and improvements . . $ 8.1 $ 2.1 $ (.3) $ .2 $ 10.1 Buildings . . . . . . . . 40.2 6.7 (.4) 1.1 47.6 Machinery and equipment . 126.1 72.9 (3.2) 1.8 197.6 ------------ ---------- ------------ ----------- ------------ $ 174.4 $ 81.7 $ (3.9) $ 3.1 $ 255.3 ============ ========== ============ =========== ============ Timber and timberlands . . $ 68.3 $ 15.9 $ - $ - $ 84.2 ============ ========== ============ =========== ============ -------------------- (1) Amounts for 1993 are principally attributable to the restatement of assets and liabilities to their pre-tax amounts from their net of tax amounts originally recorded in connection with the acquisition of various subsidiaries in prior years. The restatement is due to the Company's implementation of Financial Accounting Standards No. 109, Accounting for Income Taxes, on January 1, 1993.
Amounts for 1992 and 1991 are principally due to various reclassifications. SCHEDULE X - SUPPLEMENTARY CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION
Years Ended December 31, -------------------------------------------- 1993 1992 1991 ------------ ----------- ------------- (In millions of dollars) Maintenance and repairs . . . . . . . . . . $ 183.1 $ 159.4 $ 173.2 ============ =========== ============= Taxes other than payroll and income taxes: Production levy on bauxite . . . . . . $ 27.9 $ 31.5 $ 34.0 ============ =========== =============
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAXXAM INC. Date: March 30, 1994 By: JOHN T. LA DUC John T. La Duc Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 30, 1994 By: JACQUES C. LAZARD Jacques C. Lazard Vice President and Corporate Controller (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 30, 1994 By: CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President and Chief Executive Officer Date: March 30, 1994 By: ROBERT J. CRUIKSHANK Robert J. Cruikshank Director Date: March 30, 1994 By: EZRA G. LEVIN Ezra G. Levin Director Date: March 30, 1994 By: STANLEY D. ROSENBERG Stanley D. Rosenberg Director
MAXXAM INC. INDEX OF EXHIBITS
Exhibit Number Description _______ _____________________ 3.1 Restated Certificate of Incorporation of MAXXAM Inc. (the "Company" or "MAXXAM") dated April 10, 1989 (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) 3.2 Certificate of Powers, Designations, Preferences and Relative, Participating, Optional and Other Rights of the Company's Class B Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) 3.3 By-laws of the Company, as amended on October 6, 1988 (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988) 4.1 Indenture regarding the Company's 14% Senior Subordinated Reset Notes due May 20, 2000 (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 33-20096) 4.2 Indenture dated as of November 15, 1979 between the Company and Bank of America National Trust and Savings Association, Trustee, regarding the Company's 12 1/2% Subordinated Debentures due December 15, 1999 (incorporated herein by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1980) 4.3 Indenture dated as of August 4, 1993 by and between Shawmut Bank, N.A. and MAXXAM Group Inc. ("MGI") regarding MGI's 11 1/4% Senior Secured Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form 10-K") 4.4 Indenture dated as of November 1, 1991 by and between MGI and First Trust National Association, Trustee, regarding MGI's 12 3/4% Notes due November 15, 1995 (incorporated herein by reference to Exhibit 4(a) to Amendment No. 4 to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300; the "MGI 1991 Registration Statement") 4.5 Indenture among Kaiser Aluminum & Chemical Corporation ("KACC"), certain related corporations and The First National Bank of Boston, Trustee, 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 fiscal year ended December 31, 1993, File No. 1-3605. 4.6 First Supplemental Indenture, dated as of May 1, 1993 to the KACC Senior Subordinated Note Indenture (incorporated herein by reference to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605) 4.7 Indenture dated as of February 17, 1994 among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9 7/8% Senior Notes due 2002 (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1- 3605; the "KACC 1993 Form 10-K") 4.8 Credit Agreement, dated as of February 17, 1994 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) 4.9 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") 4.10 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) 4.11 Certificate of Designation of 8.255% Preferred Redeemable Increased Dividend Equity Securities of Kaiser, dated February 17, 1993 (incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-9447; the "Kaiser 1993 Form 10-K") 4.12 Credit Agreement dated as of December 13, 1989 among KACC, Kaiser, Bank of America National Trust and Savings Association, as Agent, Mellon Bank, N.A., as Collateral Agent, and certain financial institutions signatory thereto (the "Kaiser 1989 Credit Agreement") (incorporated herein by reference to Exhibit 4.3 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645) 4.13 First Amendment to Kaiser 1989 Credit Agreement dated as of April 17, 1990 (incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1990) 4.14 Second Amendment to Kaiser 1989 Credit Agreement, dated as of September 17, 1990 (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1990) 4.15 Third Amendment to Kaiser 1989 Credit Agreement, dated as of December 7, 1990 (incorporated herein by reference to Exhibit 4.6 to Amendment No. 1 to the Registration Statement of Kaiser on Form S-1, Registration No. 33-37895) 4.16 Fourth Amendment to the Kaiser 1989 Credit Agreement, dated April 19, 1991 (incorporated herein by reference to Exhibit 4.1 of KACC's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1991, File No. 1-3605) 4.17 Fifth Amendment to the Kaiser 1989 Credit Agreement, dated as of March 13, 1992 (incorporated herein by reference to Exhibit 4.8 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-9447) 4.18 Seventh Amendment to the Kaiser 1989 Credit Agreement, dated November 6, 1992 (incorporated herein by reference to Exhibit 4.10 to Amendment No. 5 to the Form S-1 on Form S-2 Registration Statement of KACC, Registration No. 33-48260; the "KACC 1993 Registration Statement") 4.19 Eighth Amendment to the Kaiser 1989 Credit Agreement, dated January 7, 1993 (incorporated herein by reference to Exhibit 4.12 to the KACC 1993 Registration Statement) 4.20 Ninth Amendment to the Kaiser 1989 Credit Agreement, dated as of May 19, 1993, including the form of Intercompany Note annexed thereto (incorporated herein by reference to Exhibit 4.10 to Amendment No. 2 to the Registration Statement of KACC on Form S-1, Registration No. 33-49555) 4.21 Tenth Amendment to the Kaiser 1989 Credit Agreement, dated as of July 23, 1993 (incorporated herein by reference to Exhibit 4.13 to Amendment No. 2 to the Registration Statement of KACC on Form S-3, Registration No. 50097; the "KACC 1994 Registration Statement") 4.22 Eleventh Amendment to the Kaiser 1989 Credit Agreement, dated as of August 27, 1993 (incorporated herein by reference to Exhibit 4.13 to the Registration Statement of Kaiser on Form S-3, Registration No. 33-50581) 4.23 Twelfth Amendment to the Kaiser 1989 Credit Agreement, dated as of December 20, 1993 (incorporated herein by reference to Exhibit 4.15 to Amendment No. 3 to the KACC 1994 Registration Statement) 4.24 Indenture between The Pacific Lumber Company ("Pacific Lumber") and The First National Bank of Boston, as Trustee, regarding Pacific Lumber's 10 1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber, Registration Statement No. 33-56332; the "Pacific Lumber Registration Statement") 4.25 Indenture between Scotia Pacific Holding Company ("SPHC") and The First National Bank of Boston, as Trustee, regarding SPHC's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Form S-1 Registration Statement of SPHC, Registration No. 33- 55538; the "SPHC Registration Statement") 4.26 Form of Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment among SPHC, The First National Bank of Boston, as Trustee, and The First National Bank of Boston, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to SPHC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993; the "SPHC 1993 Form 10-K") 4.27 Indenture dated as of July 1, 1986 between Pacific Lumber Company and Bank of America National Trust and Savings Association, Trustee, regarding Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 and 12.2% Series B Senior Notes due July 1, 1996 (incorporated herein by reference to Exhibit 1 to Amendment No. 1 to Form 8-A of Pacific Lumber filed on July 15, 1986) 4.28 Indenture dated as of July 1, 1986 between Pacific Lumber and Manufacturers Hanover Trust Company, Trustee, regarding Pacific Lumber's 12.5% Senior Subordinated Debentures due July 1, 1998 (incorporated herein by reference to Exhibit 2 to Amendment No. 1 to Form 8-A of Pacific Lumber filed on July 15, 1986) 4.29 Revolving Credit Agreement dated as of June 23, 1993 between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.19 to Amendment No. 2 to the Form S-2 Registration Statement of MGI, Registration No. 33-56332; the "MGI 1993 Registration Statement") 4.30 Letter Amendment to the Pacific Lumber Revolving Credit Agreement, dated October 5, 1993 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-9204) 4.31 Loan Agreement dated June 17, 1991 by and between General Electric Capital Corporation ("GECC") and MXM Mortgage Corp. (the "GECC Loan Agreement") (incorporated herein by reference to Exhibit 10(dd) to Amendment No. 4 to the MGI 1991 Registration Statement") 4.32 Unconditional Guarantee of Payment and Performance dated June 17, 1991 by the Company and MGI to and for the benefit of GECC (incorporated herein by reference to Exhibit 10(ee) to the 1991 MGI Registration Statement) 4.33 First Renewal, Extension and Modification Agreement dated as of June 17, 1992 among GECC, MXM Mortgage Corp. and the Company (incorporated herein by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992) 4.34 Loan Increase, Extension and Modification Agreement among GECC, MXM Mortgage Corp. and the Company executed as of December 30, 1992 (incorporated herein by reference to Exhibit 4.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992; the "Company 1992 Form 10-K") 4.35 Modification Agreement, dated as of June 29, 1993, to the GECC Loan Agreement (incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993) *4.36 Consent and Assumption Agreement, dated as of December 10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage L.P., the Company and MGI *4.37 Third Modification Agreement, dated as of December 30, 1993, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. *4.38 Release and Termination of Unconditional Guarantee of Payment and Performance, dated as of December 30, 1993, executed by GECC *4.39 Fourth Amendment to Loan Agreement, dated as of December 30, 1993, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. 4.40 Indenture, dated July 7, 1993, by and among Sam Houston Race Park, Ltd., SHRP Capital Corp., SHRP, Inc. and Chemical Bank (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 of SHRP, Inc., Registration No. 33-67736; the "SHRP Registration Statement") 4.41 Deed of Trust, Assignment, Security Agreement and Financing Statement dated July 7, 1993 (incorporated herein by reference to Exhibit 10.2 to the SHRP Registration Statement) 4.42 License Negative Pledge Agreement dated July 7, 1993 (incorporated herein by reference to Exhibit 10.3 to the SHRP Registration Statement) 4.43 Senior Subordinated Intercompany Note between KACC and the Company (incorporated herein by reference to Exhibit 4.13 to the KACC 1993 Registration Statement) 4.44 Senior Subordinated Intercompany Note between Kaiser and KACC, dated February 15, 1994 (incorporated herein by reference to Exhibit 4.22 to the Kaiser 1993 Form 10-K) 4.45 Senior Subordinated Intercompany Note between Kaiser and KACC, dated March 17, 1994 (incorporated herein by reference to Exhibit 4.23 to the Kaiser 1993 Form 10-K) 4.46 Senior Subordinated Intercompany Note between Kaiser and KACC, dated June 30, 1993 (incorporated herein by reference to Exhibit 4.24 to the Kaiser 1993 Form 10-K) 4.47 Intercompany Note between Kaiser and KACC (incorporated herein by reference to Exhibit 4.2 to Amendment No. 5 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645) Note: Pursuant to Regulation Section 229.601, Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Company and its consolidated subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of the total consolidated assets of the Company. 10.1 Tax Allocation Agreement among the Company and KACC dated as of December 21, 1989 (incorporated herein by reference to Exhibit 10.21 to Amendment No. 6 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645) 10.2 Tax Allocation Agreement between Kaiser and the Company (incorporated herein by reference to Exhibit 10.23 to Amendment No. 4 to the Registration Statement of Kaiser on Form S-1, Registration No. 33-37895) 10.3 Tax Allocation Agreement between the Company and MGI, dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the MGI 1993 Registration Statement) 10.4 Tax Allocation Agreement dated as of May 21, 1988 among the Company, MGI, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.5 Tax Allocation Agreement among Pacific Lumber, SPHC, Salmon Creek Corporation and the Company, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to the SPHC Registration Statement) 10.6 Tax Allocation Agreement between the Company and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.4 to the MGI 1993 Form 10-K) 10.7 Tax Allocation Agreement between the Company and SHRP, Inc., dated November 4, 1993 (incorporated herein by reference to Exhibit 10.23 to Amendment No. 10.1 to the Form S-1 Registration Statement of SHRP, Inc., Registration No. 33-67736) 10.8 Amended and Restated Alumina Supply Agreement, dated as of October 11, 1989 (incorporated herein by reference to Exhibit 10.19 to Amendment No. 3 to the Registration Statement of KACC on Form S-1, Registration No. 33-30645) 10.9 Assumption Agreement, dated as of October 28, 1988 (incorporated herein by reference to Exhibit HHH to the Final Amendment to the Schedule 13D of MGI and others in respect of the common stock of the Company) 10.10 Agreement, dated as of June 30, 1993, between Kaiser and the Company (incorporated herein by reference to Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-3605) 10.11 Undertaking, dated as of August 4, 1993, by the Company in favor of MGI (incorporated herein by reference to Exhibit 10.27 to the MGI 1993 Form 10-K) 10.12 Form of Master Purchase Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.1 to the SPHC 1993 Form 10-K) 10.13 Form of Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.2 to the SPHC 1993 Form 10-K) 10.14 Form of Additional Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.3 to the SPHC 1993 Form 10-K) 10.15 Form of Reciprocal Rights Agreement among Pacific Lumber, SPHC and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the SPHC 1993 Form 10-K) 10.16 Form of Environmental Indemnification Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.5 to the SPHC 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 the Pacific Lumber Registration Statement) 10.18 Exchange Agreement dated as of May 20, 1991 by and among the Company, MCO Properties Inc. ("MCOP") and Federated Development Company (incorporated by reference from Exhibit 10(ff) to the MGI 1991 Registration Statement) 10.19 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 the Company'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 the Company's Registration Statement on Form S-4, Registration No. 33-20096) 10.21 Put and Call Agreement dated November 16, 1987 (the "Put and Call Agreement") between Charles E. Hurwitz and MAXXAM Properties Inc. ("MPI") (incorporated herein by reference to Exhibit C to Schedule 13D dated November 24, 1987, filed by MGI with respect to the Company's common stock) 10.22 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 MGI relating to the Company'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 the Company's Annual Report on Form 10-K for the year ended December 31, 1988) 10.24 Note Purchase Agreement dated July 26, 1982, as amended, between the Company and Drexel Burnham Lambert Incorporated, relating to the Company's Zero Coupon Senior Subordinated Notes due 2007 (incorporated herein by reference to Exhibit B to Schedule 13D dated November 24, 1987, filed by MGI relating to the Company's common stock) 10.25 Second Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd. (incorporated herein by reference to Exhibit 3.2 to the SHRP Registration Statement) 10.26 Warrant Agreement by and between SHRP, Inc., as issuer, and Chemical Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to the SHRP Registration Statement) 10.27 Registration Rights Agreement by and among the Sam Houston Race Park, Ltd., SHRP, Inc., SHRP Capital Corp., and Salomon Brothers Inc., as Initial Purchasers (incorporated herein by reference to Exhibit 4.4 to the SHRP Registration Statement) 10.28 Voting Agreement, dated July 7, 1993, by and among SHRP, Inc., SHRP General Partner, Inc. and Salomon Brothers Inc., as Initial Purchasers (incorporated herein by reference to Exhibit 9 to the SHRP Registration Statement) 10.29 Amended and Restated Management Agreement, dated July 7, 1993, by and between Race Track Management Enterprises and Sam Houston Race Park, Ltd. (incorporated herein by reference to Exhibit 10.6 to the SHRP Registration Statement) Executive Compensation Plans and Arrangements __________________________________ 10.30 Revised Capital Accumulation Plan effective January 1, 1988 (incorporated herein by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-4, Registration No. 33-20096) 10.31 The Company's 1984 Phantom Share Plan, as amended (the "Company Phantom Share Plan") (incorporated herein by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.32 Amendment dated as of March 8, 1990 relating to the Company Phantom Share Plan (incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.33 Form of Phantom Share Agreement relating to the Company Phantom Share Plan (incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988) 10.34 MAXXAM Group Inc. 1976 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10(a) to MGI's Annual Report on Form 10-K for the year ended December 31, 1984, File No. 1-8857) 10.35 MAXXAM Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(jj) to the 1991 MGI Registration Statement) 10.36 KACC's Limited Long-Term Incentive Plan dated June 2, 1989 (incorporated herein by reference to Exhibit 10.14 to KACC's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-3605) 10.37 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) 10.38 Amendment No. 2 to Kaisertech Limited Long Term Incentive Plan, dated as of December 18, 1991 (incorporated herein by reference to Exhibit 10.7 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-9447) 10.39 Amendment No. 3 to Kaiser Aluminum Corporation Long Term Incentive Plan, dated as of December 31, 1991 (incorporated herein by reference to Exhibit 10.8 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 1-9447) 10.40 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) 10.41 KACC's Middle Management Long-Term Incentive Plan dated June 25, 1990, as amended (incorporated herein by reference to Exhibit 10.22 to Kaiser's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 33-37895) 10.42 Employment Agreement, dated as of October 1, 1992, among Kaiser, KACC and A. Stephens Hutchcraft, Jr. (incorporated herein by reference to Exhibit 10.15 to the 1993 KACC Registration Statement) 10.43 Severance Agreement, dated July 1, 1985, between KACC and A. Stephens Hutchcraft, Jr. (the "Hutchcraft Severance Agreement") (incorporated herein by reference to Exhibit (10)(f) to KACC's Annual Report on Form 10-K for the period ended December 31, 1988, File No. 1-3605) 10.44 Amendment, dated October 31, 1989, to the Hutchcraft Severance Agreement (incorporated herein by reference to Exhibit 10.24 to Amendment No. 5 of KACC's Registration Statement on Form S-1, Registration No. 33-30645) *10.45 Consulting Agreement, dated November 19, 1993, between KACC and A. Stephens Hutchcraft 10.46 Employment Agreement dated as of March 8, 1990 between the Company and Anthony R. Pierno (incorporated herein by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.47 Promissory Note dated February 1, 1989 by Anthony R. Pierno and Beverly J. Pierno to the Company (incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for year ended December 31, 1988) 10.48 Promissory Note dated July 19, 1990 by Anthony R. Pierno to the Company (incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.49 Commercial Guaranty, dated February 22, 1993, executed by MAXXAM in favor of Charter National Bank--Houston with respect to a loan of Anthony R. Pierno (incorporated herein by reference to Exhibit 10.27 to Kaiser's Annual Report on Form 10-K for the period ended December 31, 1992, File No. 1-9447) *10.50 Commercial Guaranty, dated January 24, 1994, between the Company and Charter National Bank-Houston with respect to a loan of Anthony R. Pierno, and a related letter agreement 10.51 Employment Agreement dated as of March 8, 1990 between the Company and Paul N. Schwartz (incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.52 Real Estate Lien Note dated July 3, 1990 by Paul N. Schwartz and Barbara M. Schwartz, Trustee, to the Company and related Deed of Trust and Letter Agreement (incorporated herein by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.53 Employment Agreement dated as of March 8, 1990 between the Company and Diane M. Dudley (incorporated herein by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.54 Real Estate Lien Note dated September 27, 1990 by Diane M. Dudley to the Company and related Deed of Trust and Letter Agreement (incorporated herein by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.55 Employment Agreement dated September 26, 1990 among the Company, KACC and John T. La Duc (incorporated herein by reference to Exhibit 10.20 to Amendment No. 1 to Kaiser's Registration Statement on Form S-1, Registration No. 33-37895) 10.56 Employment Agreement dated as of March 8, 1990 between the Company and Jacques C. Lazard (incorporated herein by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.57 Real Estate Lien Note dated June 27, 1990 by Jacques C. Lazard and Lorel S. Lazard to the Company and related Deed of Trust and Letter Agreement (incorporated herein by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.58 Employment Agreement dated as of March 8, 1990 between the Company and Byron L. Wade (incorporated herein by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) *10.59 Promissory Note, dated July 20, 1993 between the Company and Byron L. Wade 10.60 Employment Agreement dated as of August 22, 1990 between the Company, KACC and Robert W. Irelan (incorporated herein by reference to Exhibit 10.53 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.61 Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) 10.62 Real Estate Lien Note dated October 4, 1990 by Robert W. Irelan and Barbara M. Irelan to KACC and related Deed of Trust (incorporated herein by reference to Exhibit 10.55 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) *10.63 Employment Agreement, dated August 20, 1993 between KACC and Robert E. Cole *11 Computation of Net Income Per Common and Common Equivalent Share Information *13.1 The portions of the Company's Annual Report to Stockholders for the year ended December 31, 1993 which are incorporated herein by reference 13.2 Footnote 11 to the consolidated financial statements of KACC, entitled Subsidiary Guarantors, (incorporated herein by reference to KACC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3605) *21 List of the Company's Subsidiaries *23 Consent of Independent Public Accountants by Arthur Andersen & Co. -------------------- * Included with this filing.
EX-11 2 EXHIBIT 11 EXHIBIT 11 MAXXAM INC. COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (IN MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Years Ended December 31, ------------------------------------------------------ 1993 1992 1991 -------------- -------------- --------------- Weighted average common and common equivalent shares outstanding during each year . . . . . . . . . . . . 9,376,703 9,367,974 9,333,574 Common equivalent shares attributable to stock options and convertible securities . . . . . . . . . 80,380 59,037 124,679 -------------- -------------- --------------- Total common and common equivalent shares . . . 9,457,083 9,427,011 9,458,253 ============== ============== =============== Income (loss) before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . . . . . . . . . . . . $ (131.9) $ (7.3) $ 57.5 Extraordinary item . . . . . . . . . . . . . . . . . (50.6) - - Cumulative effect of changes in accounting principles (417.7) - - -------------- -------------- --------------- Net income (loss) . . . . . . . . . . . . . . . . . . $ (600.2) $ (7.3) $ 57.5 ============== ============== =============== Per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles . . . . . . . . . . . . . . . . . . . $ (13.95) $ (.77) $ 6.08 Extraordinary item . . . . . . . . . . . . . . . (5.35) - - Cumulative effect of changes in accounting principles . . . . . . . . . . . . . . . . . . . (44.17) - - -------------- -------------- --------------- Net income (loss) . . . . . . . . . . . . . . . $ (63.47) $ (.77) $ 6.08 ============== ============== ===============
EX-21 3 EXHIBIT 21 EXHIBIT 21 MAXXAM INC. SUBSIDIARIES OF THE REGISTRANT Listed below are MAXXAM Inc.'s principal subsidiaries and the jurisdiction of their incorporation or organization. Certain subsidiaries are omitted which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
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 Aluminium Europe (U.K.) Limited United Kingdom Kaiser Aluminium International, Inc. Delaware Kaiser Aluminum & Chemical Corporation Delaware Kaiser Aluminum & Chemical International N.V. Netherlands, Antilles Kaiser Aluminum & Chemical of Canada Limited Ontario Kaiser Aluminum Technical Services, Inc. California Kaiser Bauxite Company Nevada Kaiser Center, Inc. California Kaiser Center Properties (partnership) California Kaiser Finance Corporation Delaware Kaiser Jamaica Bauxite Company (partnership) Jamaica Kaiser Jamaica Corporation Delaware Queensland Alumina Limited Queensland Strombus International Insurance Company, Ltd. Bermuda Trochus Insurance Company, Ltd. Bermuda Volta Aluminium Company Limited Ghana Forest Products Operations -------------------------- Britt Lumber Co., Inc. California MAXXAM Group Inc. Delaware MAXXAM Properties Inc. Delaware Salmon Creek Corporation Delaware Scotia Pacific Holding Company Delaware The Pacific Lumber Company Delaware Real Estate Operations ---------------------- Horizon Corporation Delaware MAXXAM Property Company Delaware MCO Properties Inc. Delaware MCO Properties L.P. (partnership) Delaware MXM Mortgage L.P. (partnership) Delaware Palmas del Mar Properties, Inc. Delaware Race Park Operations -------------------- Race Track Management Enterprises Delaware Sam Houston Race Park, Ltd. Delaware SHRP Acquisition, Inc. Delaware SHRP Capital Corp. Delaware SHRP General Partner, Inc. Texas SHRP Inc. Delaware SHRP Management, Inc. Delaware
EX-23 4 EXHIBIT 23 EXHIBIT 23 MAXXAM INC. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-22436. ARTHUR ANDERSEN & CO. Houston, Texas March 25, 1994 EX-13 5 EXHIBIT 13.1 MAXXAM Inc. and Subsidiaries S e l e c t e d F i n a n c i a l D a t a The following summary of consolidated financial information for each of the five years ended December 31, 1993, is not reported upon herein by independent public accountants and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto which are contained elsewhere herein.
Years Ended December 31, ---------------------------------------------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Consolidated statement of operations: Net sales $2,031.1 $2,202.6 $2,254.5 $2,360.7 $2,423.3 Operating income (loss) (96.1) 130.8 235.5 413.9 468.8 Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (131.9) (7.3) 57.5 144.4 116.8 Extraordinary item, net (50.6) - - 17.5 - Cumulative effect of changes in accounting principles, net (417.7) - - - - Net income (loss) (600.2) (7.3) 57.5 161.9 116.8 Per common and common equivalent share -- primary: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (13.95) (.77) 6.08 15.19 12.97 Extraordinary item, net (5.35) - - 1.84 - Cumulative effect of changes in accounting principles, net (44.17) - - - - Net income (loss) (63.47) (.77) 6.08 17.03 12.97 Per common and common equivalent share -- fully diluted: Income before extraordinary item and cumulative effect of changes in accounting principles 12.46 Net income 12.46 Consolidated balance sheet at end of period: Total assets 3,572.0 3,198.8 3,215.0 3,027.5 3,183.2 Long-term debt 1,567.9 1,592.7 1,551.9 1,445.5 1,551.2 Stockholders equity (deficit) (167.9) 443.9 459.6 395.3 233.1 Stockholders equity (deficit) per common and common equivalent share (17.91) 47.34 49.12 42.49 25.07 Cash dividends declared - - - - -
MAXXAM Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The Company operates in three industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through MAXXAM Group Inc. ("MGI") and its wholly owned subsidiaries; and real estate management and development, principally through MAXXAM Property Company and various other wholly owned subsidiaries. The Company has restated its presentation of the results of operations for its forest products group and other items not directly related to industry segments as a result of the Forest Products Group Formation described in Note 1 to the Company s Consolidated Financial Statements. The following should be read in conjunction with the Company s Consolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991, contained elsewhere herein. ALUMINUM OPERATIONS The following table presents selected operational and financial information for the three-year period ended December 31, 1993, with respect to Kaiser s operations. 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. Kaiser, through its principal subsidiary Kaiser Aluminum & Chemical Corporation ("KACC"), operates in two business segments: bauxite and alumina, and aluminum processing. Aluminum operations account for a significant portion of the Company s revenues and operating results.
Years Ended December 31, ------------------------------------- (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) 1993 1992 1991 ----------- ----------- ----------- Shipments(1): Alumina 1,997.5 2,001.3 1,945.9 Aluminum products: Primary aluminum 242.5 355.4 340.6 Fabricated products 373.2 343.6 314.2 -------- ------- ------- Total aluminum products 615.7 699.0 654.8 ======== ======= ======= Average realized sales price: Alumina (per ton) $169 $195 $240 Primary aluminum (per pound) .56 .66 .72 Net sales: Bauxite and alumina: Alumina $338.2 $390.8 $466.5 Other(2)(3) 85.2 75.7 84.3 -------- ------- ------- Total bauxite and alumina 423.4 466.5 550.8 -------- ------- ------- Aluminum processing: Primary aluminum 301.7 515.0 538.5 Fabricated products 981.4 913.7 898.9 Other(3) 12.6 13.9 12.6 -------- ------- ------- Total aluminum processing 1,295.7 1,442.6 1,450.0 -------- ------- ------- Total net sales $1,719.1 $1,909.1 $2,000.8 ======== ======= ======= Operating income (loss) $(117.4) $91.6 $216.4 ======== ======= ======= Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $(201.7) $33.8 $154.0 ======== ======= ======= Capital expenditures $67.7 $114.4 $118.1 ======== ======= ======= (1)Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2)Includes net sales of bauxite. (3)Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
Net Sales Bauxite and alumina. Net sales of bauxite and alumina to third parties were $423.4 million in 1993 compared to $466.5 million in 1992 and $550.8 million in 1991. Revenue from alumina decreased 13% to $338.2 million in 1993 from $390.8 million in 1992 because of lower average realized prices. Revenue from alumina decreased 16% to $390.8 million in 1992 from $466.5 million in 1991 as significantly lower average realized prices more than offset a 3% increase in alumina shipments, which was principally attributable to increased production at all three of Kaiser's alumina refineries. The remainder of the segment's sales revenues were from sales of bauxite, which remained about the same throughout the three years, and the portion of sales of alumina attributable to the minority interest in the Alumina Partners of Jamaica ("Alpart"). Aluminum processing. Net sales to third parties for the aluminum processing segment were $1,295.7 million in 1993 compared to $1,442.6 million in 1992 and $1,450.0 million in 1991. The bulk of the segment's sales represents Kaiser's primary aluminum and fabricated aluminum products, with the remainder due to the portion of sales of primary aluminum attributable to the minority interest in Volta Aluminium Company Limited. Revenue from primary aluminum decreased 41% to $301.7 million in 1993 from $515.0 million in 1992 because of lower shipments and lower average realized prices. Shipments of primary aluminum to third parties were approximately 39% of total aluminum products shipments in 1993 compared to approximately 51% in 1992. Revenue from primary aluminum decreased 4% to $515.0 million in 1992 from $538.5 million in 1991, as an 8% decrease in average realized prices more than offset a 4% increase in primary aluminum shipments. Shipments of primary aluminum to third parties were approximately 51% of total aluminum products shipments in 1992 compared to approximately 52% in 1991. Revenue from fabricated aluminum products increased 7% to $981.4 million in 1993 compared to $913.7 million in 1992, principally due to increased shipments of most fabricated aluminum products, partially offset (to a lesser extent) by a decrease in average realized prices of most of these products. Revenue from fabricated aluminum products increased 2% to $913.7 million in 1992 compared to $898.9 million in 1991, primarily because lower average realized prices were more than offset by a 9% increase in shipments of fabricated aluminum products. Operating Income (Loss) Operating losses in 1993 were $117.4 million, compared to operating income of $91.6 million in 1992 and $216.4 million in 1991. In the fourth quarter of 1993, Kaiser recorded pre-tax charges of $35.8 million relating to the restructuring of aluminum operations (see "-- Aluminum processing") and approximately $19.4 million and $29.0 million in the fourth quarter of 1993 and 1992, respectively, because of reductions in the carrying value of its inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated products. Kaiser's corporate general and administrative expenses of $72.6 million, $77.6 million and $84.2 million in 1993, 1992 and 1991, respectively, were allocated by the Company to the bauxite and alumina and aluminum processing segments based upon those segments' ratio of sales to unaffiliated customers. Bauxite and alumina. Operating losses for the bauxite and alumina segment were $20.1 million in 1993, compared to operating income of $44.6 million in 1992 and $127.7 million in 1991. In 1993 compared to 1992, operating income was adversely affected principally due to a decrease in average realized prices for alumina, which more than offset above-market prices for virtually all of its excess alumina sold forward in prior periods under long-term contracts. In 1992 compared to 1991, operating income was adversely affected by a decrease in average realized prices for alumina, which more than offset higher alumina shipments and above-market prices for significant quantities of alumina sold forward in prior periods under long-term contracts. Aluminum processing. Operating losses for the aluminum processing segment were $97.3 million in 1993, compared to operating income of $47.0 million in 1992 and $88.7 million in 1991. In 1993 compared to 1992, operating income was adversely affected due principally to reduced shipments and lower average realized prices of primary aluminum products which more than offset increased shipments of fabricated products. In 1993, KACC implemented a restructuring plan for its flat-rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. Additionally, KACC implemented a plan to discontinue its casting operations, which include three facilities located in Ohio. This entire restructuring is expected to be completed by the end of 1995 and will affect approximately 670 employees. The pre-tax charge for this restructuring of $35.8 million includes $25.2 million for pension, severance and other termination benefits; $4.7 million for a writedown of the casting facilities to their net realizable value; $3.3 million for the estimated losses of the casting facilities to the expected date of closure or sale; and $2.6 million relating to a variety of other items. The Trentwood restructuring is expected to result in annual cost savings of at least $50.0 million after it has been fully implemented. Other contributing factors were lower production at Kaiser's smelters in the Pacific Northwest in 1993 as a result of the removal of three reduction potlines from production at those smelters in January 1993 in response to the Bonneville Power Administration's (the "BPA") reduction during the first quarter of 1993 of the amount of power it normally provides to Kaiser, and the increased cost of substitute power in such quarter. In 1993, Kaiser's average realized price from sales of primary aluminum was approximately $.56 per pound, compared to the average Midwest U.S. transaction price of approximately $.54 per pound during such period. Operating income in 1992 was adversely affected by a decrease in average realized prices for primary aluminum and most fabricated aluminum products, partially offset by increased shipments. In 1993, 1992 and 1991, 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 Losses before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles in 1993 were $201.7 million, compared to income of $33.8 million in 1992. This decrease resulted from the operating losses previously described and approximately $10.8 million of other pre-tax charges, principally related to establishing additional litigation and environmental reserves. Income before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles in 1992 was $33.8 million, compared to $154.0 million in 1991. This decrease resulted from the lower operating income previously described. Investment, interest and other income remained about the same in 1992 and 1991, as approximately $14.0 million of income for non-recurring adjustments to previously recorded liabilities and reserves in the fourth quarter of 1992 approximately equaled the receipt of a $12.0 million fee in the first quarter of 1991 from the Company's minority partner in Alpart in consideration for the execution of an expansion agreement for the Alpart alumina refinery. As described in Note 1 to the Consolidated Financial Statements, Kaiser's cumulative losses in the first and second quarter of 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions as described in Note 6 to the Consolidated Financial Statements, eliminated Kaiser's equity with respect to its common stock; accordingly, the Company recorded 100% of Kaiser's losses in the third and fourth quarters of 1993, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7 to the Consolidated Financial Statements). The Company will record 100% of Kaiser's losses and profits until such time as the losses recorded by the Company with respect to Kaiser's minority common stockholders are recovered. Information concerning net sales, operating income (loss) and assets attributable to certain geographic areas and industry segments is set forth in Note 11 to the Consolidated Financial Statements. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by MGI through its principal operating subsidiaries, The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt").
Years Ended December 31, ---------------------------------- (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) 1993 1992 1991 ---------- --------- ----- Shipments: Lumber(1): Redwood upper grades 68.3 76.6 86.7 Redwood common grades 184.7 193.9 197.2 Douglas-fir upper grades 10.7 10.2 11.7 Douglas-fir common grades 46.4 56.0 37.8 ------ ------ ------- Total lumber 310.1 336.7 333.4 ====== ====== ====== Logs(2) 18.6 19.1 14.5 ====== ====== ======= Wood chips(3) 156.8 202.7 168.4 ====== ====== ======= Average sales price: Lumber(4): Redwood upper grades $1,275 $1,141 $1,085 Redwood common grades 469 427 347 Douglas-fir upper grades 1,218 1,125 1,033 Douglas-fir common grades 447 298 262 Logs(4) 704 366 373 Wood chips(5) 81 83 79 Net sales: Lumber, net of discount $202.6 $194.2 $180.2 Logs 13.1 7.0 5.4 Wood chips 12.7 16.9 13.4 Cogeneration power 3.8 3.7 4.8 Other 1.3 1.6 1.9 ------ ------ ------- Total net sales $233.5 $223.4 $205.7 ====== ====== ======= Operating income $54.3 $64.1 $55.3 ====== ====== ======= Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $(17.7) $(28.4) $(31.8) ====== ======= ======= Capital expenditures $11.1 $8.7 $6.4 ====== ======= ======= (1)Lumber shipments are expressed in millions of board feet. (2)Log shipments are expressed in millions of board 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.
Shipments Lumber shipments to third parties in 1993 were 310.1 million board feet, a decrease of 8% from 336.7 million board feet in 1992. This decrease was attributable to a 5% decrease in redwood common lumber shipments, a 14% decrease in shipments of Douglas-fir lumber and an 11% decrease in shipments of upper grade redwood lumber. The Company believes the decrease in total lumber shipments was caused primarily by a decline in construction related activity resulting from weak economic conditions in the Western region of the United States and, to a lesser extent, by the difficulties related to weather conditions in the West and Midwestern United States during 1993. Log shipments in 1993 were 18.6 million feet (net Scribner scale), a decrease of 3% from 19.1 million feet in 1992. Lumber shipments to third parties in 1992 of 336.7 million board feet increased 1% from 333.4 million board feet in 1991. This increase was attributable to a 48% increase in common grade Douglas-fir shipments, partially offset by a 12% decrease in upper grade redwood shipments and a 2% decrease in shipments of redwood common lumber. During the second quarter of 1992, Pacific Lumber experienced lumber production delays attributable to the earthquake and aftershocks which struck Humboldt County, California in April. The earthquake and related aftershocks disabled, for a period of approximately six weeks, a large number of the kilns used to dry the upper grade redwood lumber and the sawmill which produces a significant portion of Pacific Lumber's upper grade redwood lumber. Pacific Lumber initiated additional shifts at two of its other sawmills in order to minimize the impact of the lost production. The increased production at one of the sawmills was predominantly from Douglas-fir logs that had recently been salvaged from an area that experienced a forest fire in 1990. These factors resulted in substantially increased shipments of Douglas-fir lumber and the decline in shipments of redwood lumber discussed above. Log shipments in 1992 of 19.1 million feet increased 32% from 14.5 million feet in 1991. The increase in log shipments resulted primarily from the sale, to unaffiliated parties during the second quarter of 1992, of certain logs salvaged from the 1990 forest fire that were not of a suitable quality for Pacific Lumber's sawmills. Net Sales Revenues from net sales for 1993 increased by approximately 5% from 1992. This increase was principally due to a 12% increase in the average realized price of upper grade redwood lumber, a 10% increase in the average realized price of redwood common lumber, a 92% increase in the average realized price of log sales and a 50% increase in the average realized price of common grade Douglas-fir lumber, partially offset by decreased shipments of lumber and logs, as previously discussed, and decreased sales of wood chips. The decrease in sales of wood chips resulted from the closure of a pulp mill by one of Pacific Lumber's customers. Revenues from net sales for 1992 increased by approximately 9% from 1991. This increase was principally due to a 23% increase in the average realized price of redwood common lumber, higher shipments of common grade Douglas-fir lumber, a 5% increase in the average realized price of upper grade redwood lumber, increased sales of wood chips, a 14% increase in the average realized price of common grade Douglas-fir lumber and higher log shipments, partially offset by lower shipments of upper and common grades of redwood lumber and lower sales of electrical power resulting from damage sustained by Pacific Lumber's cogeneration facility during the earthquake and aftershocks in April 1992. Operating Income Operating income for 1993 decreased by approximately 15% as compared to 1992. This decrease was primarily due to the additional cost of logs purchased from third parties, lower shipments of high margin wood chips and higher overhead costs, partially offset by the increase in sales of lumber and logs, as previously discussed. The Company arranged for the purchase of a significant number of logs earlier in the year in response to concerns regarding inclement weather conditions hindering logging activities on the Company'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. Cost of goods sold for 1992 was reduced by a $3.3 million business interruption insurance claim as a result of the April 1992 earthquake. The business interruption insurance claim represents partial compensation for the added costs and lower realized gross margins on lumber sales, primarily due to lost production capacity of Pacific Lumber's drying kilns as described above under "Shipments." Cost of goods sold for 1993 includes a reduction of $1.2 million reflecting an additional business interruption insurance claim. Operating income for 1992 increased by approximately 16% as compared to 1991. This increase was principally attributable to the factors impacting shipments and sales, as previously discussed. Cost of goods sold for 1991 reflects a benefit of $3.3 million due to a reduction of Pacific Lumber's LIFO inventories. Cost of goods sold as a percentage of sales was approximately 58%, 51% and 50% for 1993, 1992 and 1991, respectively. The increase for 1993 reflects the impact of purchased logs as discussed above. 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, the Company has significantly increased its production of manufactured lumber products by assembling knot-free pieces of common grade lumber into wider and longer pieces in the Company's end and edge glue plant. This manufactured lumber results in a significant increase in lumber recovery and produces a standard size upper grade product which is sold at a premium price compared to common grade products of similar dimensions. The Company has instituted a number of measures at its sawmills during the past several years designed to enhance the efficiency of its operations such as expansion of its manufactured lumber facilities and other improvements in lumber recovery, automated lumber handling and the modification of its production scheduling to increase cogeneration power revenues. 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 decreased for 1993 as compared to 1992 due to an increase in investment, interest and other income and a decrease in interest expense, partially offset by the decrease in operating income. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles decreased for 1992 as compared to 1991, primarily due to the increase in operating income and a decrease in interest expense. Investment, interest and other income for 1993 includes net gains on marketable securities of $6.7 million. Investment, interest and other income for 1992 includes estimated minimum insurance recoveries of $1.6 million for earthquake damage incurred in April 1992. Investment, interest and other income for 1991 includes a pre-tax gain of $4.0 million resulting from the sale of Pacific Lumber's San Mateo County, California timberlands in June 1991 for $7.5 million. Interest expense decreased in 1993 as compared to 1992 due to lower interest rates resulting from the refinancing of the Company's long-term debt during 1993. See "--Financial Condition and Investing and Financing Activities."Interest expense decreased in 1992 as compared to 1991 primarily due to the repurchase of $15.5 million principal amount of long-term debt in 1991 (see Note 4 to the Consolidated Financial Statements). REAL ESTATE OPERATIONS
Years Ended December 31, ------------------------------ (IN MILLIONS OF DOLLARS) 1993 1992 1991 -------- -------- -------- Net sales $78.5 $70.1 $48.0 Operating loss (13.5) (9.3) (18.8) Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles 38.1 (5.2) (21.8)
Net Sales Net sales for 1993 were $78.5 million, an increase of 12% from $70.1 million in 1992. This increase was primarily due to revenues associated with the real properties purchased from the Resolution Trust Corporation ("RTC") in June 1991. Net sales for 1992 increased 46% from $48.0 million in 1991. This increase was primarily due to revenues associated with the real properties purchased from the RTC, together with an increase in sales at the Company's Palmas del Mar development in Puerto Rico ("Palmas"). Operating Loss The operating loss for 1993 was $13.5 million, an increase of $4.2 million from 1992. This increase was primarily due to a $5.9 million writedown of certain of the Company's nonstrategic real estate holdings to their estimated net realizable value in the first quarter of 1993, partially offset by improved operations at the multi-family properties purchased from the RTC. The operating loss for 1992 was $9.3 million, a decrease of $9.5 million from 1991. This decrease was primarily attributable to the increase in net sales, along with lower allocations of general and administrative expenses associated with the Company's real estate development operations. 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 1993 was $38.1 million, an increase of $43.3 million from 1992. This increase was primarily due to an increase in investment, interest and other income and a decrease in interest expense, offset by the increased operating losses discussed above. Investment, interest and other income for 1993 includes the sale of sixteen multi-family real estate properties from the RTC portfolio in December 1993 for $113.6 million, resulting in a pre-tax gain of $47.8 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. Interest income decreased for 1993 as compared to 1992 due to the loan sales and the Company's acquisition of properties that were collateral for certain loans. The decrease in interest expense for 1993 as compared to 1992 resulted from lower interest rates and repayments on the debt related to the RTC portfolio. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1992 was $5.2 million, a decrease of $16.6 million from 1991. This decrease was primarily attributable to the improved operating results discussed above and an increase in investment, interest and other income, offset by increased interest expense. Investment, interest and other income for 1992 includes the sale of six real properties and four loans from the RTC portfolio resulting in pre-tax gains of $6.7 million. The increase in interest expense for 1992 as compared to 1991 is attributable to the debt incurred in connection with the purchase of the RTC portfolio in June 1991. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Years Ended December 31, ------------------------------ (IN MILLIONS OF DOLLARS) 1993 1992 1991 --------- --------- --------- Operating loss $(19.5) $(15.6) $(17.4) Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (30.1) (13.4) (33.0)
Operating Loss The operating losses represent corporate general and administrative expenses that are not allocated to the Company's industry segments. The operating loss for 1993 was $19.5 million, an increase of $3.9 million from 1992. This increase was primarily due to a $6.5 million charge related to litigation contingencies. The operating loss for 1992 was $15.6 million, a decrease of $1.8 million from 1991. This decrease was primarily due to 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 and interest expense, including amortization of deferred financing costs, that are not allocated to the Company's industry segments. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1993 was $30.1 million, an increase of $16.7 million from 1992. This increase was primarily due to lower investment, interest and other income and the increased operating losses discussed above. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1992 was $13.4 million, a decrease of $19.6 million from 1991. This decrease was primarily due to lower interest expense resulting from lower debt and interest rates, $5.1 million in other income resulting from a non-recurring adjustment to previously recorded accruals in the first quarter of 1992 and the reduced operating losses as previously described. Minority Interests Minority interests represent the minority stockholders' interest in the Company's aluminum operations. Extraordinary Item The refinancing activities of KACC and Pacific Lumber in the first quarter of 1993 and MGI in the third quarter of 1993, as described in Note 4 to the Consolidated Financial Statements, resulted in an extraordinary loss of $50.6 million, net of benefits for minority interests of $2.8 million and income taxes of $27.5 million. The extraordinary loss consists primarily of the respective tender and redemption premiums paid and the write-off of unamortized discount and deferred financing costs on the KACC 14 1/4% Senior Subordinated Notes, Pacific Lumber's 12% Series A Senior Notes, 12.2% Series B Senior Notes and 12 1/2% Senior Subordinated Debentures (referred to collectively as the "Old Pacific Lumber Securities") and the MGI 12 3/4% Notes. Cumulative Effect of Changes in Accounting Principles As of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"), Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") as more fully described in Notes 5 and 6 to the Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased 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. The new accounting methods have no effect on the Company's cash outlays for postretirement and postemployment benefits, nor will the cumulative effect of the changes in accounting principles 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. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES During 1993 and through February 17, 1994, subsidiaries of the Company's Aluminum Operations and Forest Products Operations completed a number of transactions designed to enhance their liquidity and significantly extend their debt maturities. Collectively, these transactions included public offerings for approximately $1.4 billion of debt securities, approximately $210 million of additional equity capital and the replacement of approximately $280 million of revolving credit facilities. The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. The Company's consolidated indebtedness decreased $57.7 million to $1,606.2 million at December 31, 1993 from $1,663.9 million at December 31, 1992. The decrease is due to KACC's prepayment of the remaining amounts outstanding on its Term Loan under the 1989 Credit Agreement (as defined below), the reduction of the outstanding borrowings on the revolving credit facility of the 1989 Credit Agreement with the proceeds it received from Kaiser's sale of Depositary Shares (as defined below) and principal payments made in connection with sales of real estate, partially offset by increased indebtedness incurred by Kaiser, Pacific Lumber and MGI as a result of their recent refinancings. PARENT COMPANY The Company conducts its operations primarily through its subsidiaries. Creditors of and holders of minority interests in subsidiaries of the Company have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of the Company, including the holders of the Company's public debt. As of December 31, 1993, the indebtedness of the subsidiaries and the minority interests reflected on the Company's Consolidated Balance Sheet were $1,555.5 million and $224.3 million, respectively. Certain of the Company's subsidiaries, principally Kaiser and MGI, are restricted by their various debt agreements as to the amount of funds that can be paid in the form of dividends or loaned to the Company. KACC's 1994 Credit Agreement (as defined below) and the indentures governing KACC's 9 7/8% Senior Notes due 2002 (the "KACC Senior Notes") and 12 3/4% Senior Subordinated Notes due 2003 (the "KACC Notes") contain covenants which, among other things, limit Kaiser's ability to pay cash dividends and restrict transactions between Kaiser and its affiliates. Under the most restrictive of these covenants, Kaiser is not currently permitted to pay dividends on its common stock. The indenture governing MGI's 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes" and together with the MGI Senior Notes, the "MGI Notes") contains various covenants which, among other things, limit the payment of dividends and restrict transactions between MGI and its affiliates. At December 31, 1993, under the most restrictive of these covenants, no dividends may be paid by MGI. Under the most restrictive covenants governing debt of the Company's real estate subsidiaries, approximately $24.0 million could be paid as of December 31, 1993. On October 13, 1993, Kaiser filed a registration statement with the Securities and Exchange Commission for the sale to the public of the 2,132,950 Depositary Shares the Company exchanged for a $15.0 million promissory note issued by KACC which evidenced a $15.0 million cash loan made by MGI to KACC in January 1993 (the "MGI Loan"), as described below. The registration statement was declared effective by the Securities and Exchange Commission on November 15, 1993. The Company may consummate the sale of all or any portion of such Depositary Shares at any time. On March 1, 1994, the New York Stock Exchange reported the closing price of Depositary Shares as $8.50 per share. The Company intends to use the net proceeds from the sale of the Depositary Shares for general corporate purposes. Contemporaneously with the issuance of the MGI Notes (see "--Forest Products Operations"), MGI (i) transferred to the Company 50 million common shares of Kaiser held by a subsidiary of MGI, representing MGI's (and the Company's) entire interest in Kaiser's common stock, (ii) transferred to the Company 60,075 shares of the Company common stock held by a subsidiary of MGI, (iii) transferred to the Company certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to MGI of approximately $1.1 million and (iv) exchanged with the Company 2,132,950 Depositary Shares (acquired by MGI from Kaiser in exchange for the MGI Loan), such exchange being in satisfaction of a $15.0 million promissory note evidencing a cash loan made by the Company to MGI in January 1993. On the same day, the Company assumed approximately $17.5 million 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. On August 4, 1993, the Company pledged 28 million shares of the Kaiser common stock as collateral for the MGI Notes. Additionally, on September 28, 1993, MGI transferred its interest in Palmas to the Company. MGI 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. 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 million dividend to the Company. The Company used such proceeds to redeem, on August 20, 1993, $20.0 million aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 (the "Reset Notes") 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 and the redemption of $20.0 million aggregate principal amount of the Reset Notes of approximately $9.8 million. On July 8, 1993, MAXXAM became the general partner in a Class 1 thoroughbred and quarter horse racing track currently under construction on approximately 240 acres of land northwest of Houston. Financing for the track was completed through a private placement of $75.0 million aggregate principal amount of 11 3/4% Senior Secured Notes due 1999, along with a $9.1 million investment, representing an equity interest of approximately 29.7%, from MAXXAM. The track is the first of its type in Texas and is expected to be operating by spring of 1994. Certain affiliated parties of the Company, including Mr. Charles E. Hurwitz, President and Chief Executive Officer of the Company, collectively hold less than an 11% equity interest in the facility. In November 1991, MGI issued $150.0 million aggregate principal amount of the 12 3/4% Notes, due November 15, 1995, at 99% of their face amount. MGI used a portion of the proceeds from the sale of the 12 3/4% Notes to pay a $30.9 million cash dividend to the Company, which together with a portion of the Company's existing cash resources enabled the Company to redeem its 14 1/4% Senior Subordinated Notes. The remaining proceeds from the sale of the 12 3/4% Notes together with a portion of MGI's existing cash resources (a portion of which was obtained from Kaiser through Kaiser's initial public offering of its common stock as described below) were used to redeem MGI's 13 5/8% Senior Subordinated Notes. As of December 31, 1993, the Company (excluding its aluminum, forest products and real estate subsidiary companies) had cash and marketable securities of approximately $53.6 million. Interest and sinking fund obligations with respect to parent company indebtedness will aggregate approximately $10 million per year in 1994 and 1995. Although there are no restrictions on the Company's ability to pay dividends on its capital stock, the Company has not paid any dividends for a number of years and has no present intention to pay dividends in the foreseeable future.The Company believes that its existing cash and marketable securities (excluding its aluminum, forest products and real estate subsidiaries) together with the funds available to it will be sufficient to fund its working capital requirements. ALUMINUM OPERATIONS On a pro forma basis, after giving effect to the refinancing transactions completed on February 17, 1994 as described below, Kaiser and its subsidiaries would have had consolidated working capital of $389.4 million and long-term debt of $755.7 million (net of current maturities). The offering of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES"), the concurrent issuance of the KACC Senior Notes and the replacement of the 1989 Credit Agreement on February 17, 1994 completed the final steps of a comprehensive refinancing plan which Kaiser began in January 1993 which extended the maturities of Kaiser's outstanding indebtedness, enhanced its liquidity and raised new equity capital. Kaiser anticipates that cash flows from operations and borrowings under available sources of financing will be sufficient to satisfy its debt service and capital expenditures requirements through at least December 31, 1995. On February 17, 1994, Kaiser and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association and certain other lenders (the "1994 Credit Agreement"). The 1994 Credit Agreement replaced the credit agreement entered into in December 1989 by Kaiser and KACC with a syndicate of commercial banks and other financial institutions (as amended, the "1989 Credit Agreement") and consists of a $250.0 million 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 million) in an aggregate amount equal to the lesser of $250.0 million or a borrowing base relating to eligible accounts receivable and inventory. As of February 24, 1994, KACC had $67.4 million of letters of credit outstanding under the 1994 Credit Agreement. The 1994 Credit Agreement is unconditionally guaranteed by Kaiser and by all significant subsidiaries of KACC which were guarantors of KACC's obligations under the 1989 Credit Agreement. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to (i) a Reference Rate plus 1 1/2% or (ii) LIBOR 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 upon a financial test, determined quarterly. KACC will record a pre-tax extraordinary loss of approximately $8.3 million in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. The 1994 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 common stock dividends, undertake transactions with affiliates, make capital expenditures and enter into unrelated lines of business. 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. Concurrent with the offering of the PRIDES on February 17, 1994, KACC issued $225.0 million 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 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. On February 17, 1994, Kaiser consummated a public offering for the sale of 8,000,000 shares of its PRIDES. The net proceeds from the sale of the PRIDES were approximately $90.6 million. Kaiser used $30.0 million of such net proceeds to make a non-interest bearing loan to KACC (evidenced by a note) which is designed to provide sufficient funds to make the required dividend payments on the PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $60.6 million of such net proceeds to make a capital contribution to KACC. In connection with the PRIDES offering, Kaiser granted the underwriters an over allotment option for up to 1,200,000 of such shares. Each share of PRIDES is convertible into one share of Kaiser's common stock (or a fraction thereof as described in Note 7 to the Consolidated Financial Statements); however, Kaiser may call for the redemption of all or any portion of the outstanding PRIDES during the period from December 31, 1996 to the PRIDES Mandatory Conversion Date. In addition, the holders of the PRIDES have the option to convert their shares at any time prior to the PRIDES Mandatory Conversion Date. The PRIDES call for the payment of quarterly dividends of approximately $1.9 million ($.2425 per share). On June 30, 1993, Kaiser issued 17,250,000 of $.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 the MGI Loan. Kaiser used approximately $81.5 million of the net proceeds it received from the sale of the Depositary Shares together with the MGI Loan to make a capital contribution to KACC, and $37.8 million of the net proceeds it received from the sale of the Depositary Shares to make a non-interest bearing loan to KACC which is designed to provide sufficient funds to make the required dividend payments on the Series A Shares until June 30, 1996 (the "Series A Shares Mandatory Conversion Date"). KACC used approximately $13.7 million of such funds to prepay the remaining balance of the Term Loan under the 1989 Credit Agreement and $105.6 million of such funds to reduce outstanding borrowings under the Revolving Credit Facility of the 1989 Credit Agreement. Each Depositary Share is convertible into one share of Kaiser's common stock (or a fraction thereof as described in Note 7 to the Consolidated Financial Statements); however, Kaiser may call for the redemption of all or any portion of the outstanding Depositary Shares prior to the Series A Shares Mandatory Conversion Date. The Depositary Shares call for the payment of quarterly dividends (when and as declared by Kaiser's Board of Directors) of approximately $3.2 million ($.1625 per share). As a result of the issuance of the PRIDES and the Depositary Shares, the Company's voting interest in Kaiser decreased from approximately 87.2% to approximately 61% on a fully diluted basis. On February 1, 1993, KACC issued $400.0 million of the KACC Notes. The net proceeds from the sale of the KACC Notes were used to retire the KACC 14 1/4% Senior Subordinated Notes, to prepay $18.0 million of the Term Loan under KACC's 1989 Credit Agreement and to reduce outstanding borrowings under the Revolving Credit Facility of the 1989 Credit Agreement. The obligations of KACC with respect to the KACC Notes and the KACC Senior Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the KACC Senior Notes and the KACC Notes contain, among other things, restrictions on KACC's ability to incur debt, undertake transactions with affiliates and pay dividends. The declaration and payment of dividends by Kaiser and KACC with respect to shares of their common stock is subject to certain covenants contained in the 1994 Credit Agreement; currently, such covenants do not permit Kaiser or KACC to pay any dividends on their common stock. The declaration and payment of dividends by Kaiser with respect to the Depositary Shares and the PRIDES are expressly permitted by the terms of the 1994 Credit Agreement to the extent Kaiser receives payments on the respective intercompany notes established in connection with the issuance of the Depositary Shares and the PRIDES or certain other permitted distributions from KACC. In July 1991, Kaiser consummated an initial public offering of 7.25 million shares of its common stock at a price of $14.00 per share. The 7.25 million shares represented approximately a 12.7% interest in Kaiser. Kaiser received approximately $93.2 million, net of related offering costs, from the sale. Seventy-five percent of the net proceeds were used to prepay certain notes together with accrued interest thereon to MGI, and the remaining 25% was used to prepay a portion of the indebtedness under Kaiser's 1989 Credit Agreement. In December 1991, Alpart entered into a $60.0 million 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. 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. Alpart's obligations under the loan agreement are secured by a $64.2 million letter of credit severally guaranteed by the partners in Alpart (of which $22.5 million is guaranteed by Kaiser's minority partner). During each of the past three years, Kaiser entered into a number of commodity futures and commodity option contracts as a component of its plan to mitigate its exposure to declining aluminum prices. The terms of these contracts allowed Kaiser to withdraw certain amounts of its equity in those contracts at various times, provided the current aggregate market value of such contracts exceeded their cost. The equity withdrawn from these option contracts decreased during 1992 by $66.3 million over 1991. Kaiser has historically participated in various raw material joint ventures outside the United States. At December 31, 1993, Kaiser was unconditionally obligated for $73.6 million of indebtedness of one such joint venture affiliate. Kaiser's capital expenditures of approximately $300.2 million (of which $42.6 million was funded by Kaiser's minority partners in certain foreign joint ventures) during the three years ended December 31, 1993 were made primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities and construct new facilities. Kaiser's capital expenditures were $67.7 million in 1993, compared to $114.4 million in 1992 and $118.1 million in 1991 (of which $9.4 million, $17.1 million and $16.1 million were funded by the minority partners in certain foreign joint ventures in 1993, 1992 and 1991, respectively). Kaiser's capital expenditures are expected to be in the range of $50 million to $75 million per year in the 1994 -- 1996 period (of which approximately 5% is expected to be funded by Kaiser's minority partners in certain foreign joint ventures). As described in Note 10 to the Consolidated Financial Statements, Kaiser and KACC are subject to a wide variety of environmental laws and regulations, 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 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. Additionally, KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment with KACC or to products containing asbestos produced or sold by KACC. While uncertainties are inherent in the ultimate outcome of these matters and it is impossible to presently determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes the resolution of such uncertainties and the incurrence of such net costs should not have a material adverse effect upon KACC's consolidated financial position, results of operations or liquidity. FOREST PRODUCTS OPERATIONS As of December 31, 1993, MGI and its subsidiaries had consolidated working capital of $81.9 million and long-term debt of $738.7 million (net of current maturities and restricted cash deposited in the Liquidity Account). MGI anticipates that cash flows from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund the working capital requirements of MGI and its respective subsidiaries; however, due to its highly leveraged condition, MGI is more sensitive than less leveraged companies to factors affecting its operations, including governmental regulation affecting its timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. On August 4, 1993, MGI issued $100.0 million aggregate principal amount of MGI Senior Notes and $126.7 million aggregate principal amount (approximately $70.0 million net of original issue discount) of MGI Discount Notes. The MGI Notes are secured by MGI's pledge of 100% of the common stock of Pacific Lumber, Britt and MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of MGI), and by the Company's pledge of 28 million shares of Kaiser's common stock. 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. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which liabilities would include the 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") of Pacific Lumber and the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") of Scotia Pacific Holding Company ("SPHC"), a wholly owned subsidiary of Pacific Lumber. MGI conducts its operations primarily through its subsidiaries. Creditors of MGI's subsidiaries have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of MGI, including the holders of the MGI Notes. As of December 31, 1993, the indebtedness of the subsidiaries reflected on MGI's Consolidated Balance Sheet was $614.9 million. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes and Pacific Lumber's Revolving 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 SPHC (for periods subsequent to March 1, 1993), exclusive of the net income and depletion of SPHC so long as any Timber Notes are outstanding. On February 24, 1994, Pacific Lumber paid dividends of $5.7 million which represents the entire amount permitted at December 31, 1993. 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 SPHC. MGI expects that Pacific Lumber will provide a major portion of its future operating cash flow. Pacific Lumber is dependent upon SPHC 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 flow of SPHC and the holders of the Pacific Lumber Senior Notes have priority over the claims of creditors of MGI with respect to the assets and cash flows of Pacific Lumber. Under the terms of the indenture governing the Timber Notes (the "Timber Note Indenture"), SPHC will not have available cash for distribution to Pacific Lumber unless SPHC'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. See Note 4 to the Consolidated Financial Statements for a description of the principal payment requirements of the Timber Notes. MGI expects that, consistent with SPHC's purposes and its need to fund operating and capital expenses, substantially all of SPHC's available cash will be periodically distributed to Pacific Lumber. Once appropriate provision for current debt service on the Timber Notes and expenditures for operating and capital costs are made and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgements, the Timber Note Indenture does not limit monthly distributions of available cash from SPHC to Pacific Lumber. In the event SPHC's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes and to service its other indebtedness would be materially impaired and MGI's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. SPHC paid $58.3 million of dividends to Pacific Lumber during the period from March 23, 1993 to December 31, 1993. The MGI Senior Notes require annual interest payments of $11.3 million. The MGI Discount Notes will require annual interest payments of $15.5 million beginning on February 1, 1999. As of December 31, 1993, MGI (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $11.4 million. MGI believes, although there can be no assurance, that the aggregate dividends that will be available to it from Pacific Lumber and Britt, during the five year period in which cash interest will not be payable on the MGI Discount Notes, will exceed MGI's cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, MGI believes that it will be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. On June 23, 1993, Pacific Lumber entered into a new Revolving Credit Agreement with a bank which provides for borrowings of up to $30.0 million, of which $15.0 million may be used for standby letters of credit. As of December 31, 1993, $19.7 million of borrowings was available under the Revolving Credit Agreement, of which $4.7 million was available for letters of credit. No borrowings were outstanding as of December 31, 1993, and letters of credit outstanding amounted to $10.3 million. The Revolving Credit Agreement expires May 31, 1996, is secured by Pacific Lumber's trade receivables and inventories and contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. On March 23, 1993, Pacific Lumber transferred to SPHC substantially all of Pacific Lumber's non-virgin old growth redwood and Douglas-fir timber and timberlands, together with certain other assets, in exchange for (i) the assumption by SPHC of $323.4 million aggregate principal amount of Pacific Lumber's outstanding public indebtedness and (ii) all of SPHC's outstanding common stock. On the same date, Pacific Lumber issued $235.0 million of the Pacific Lumber Senior Notes and SPHC issued $385.0 million of the Timber Notes. The net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's existing cash and marketable securities, were used to (i) retire the Old Pacific Lumber Securities; (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities (at approximately 1.7% of the principal amount thereof); (iv) repay Pacific Lumber's $28.9 million cogeneration facility loan; (v) fund the initial deposit of $35.0 million to an account held by the trustee for the Timber Notes (the "Liquidity Account"); and (vi) pay a $25.0 million dividend to a subsidiary of MGI. The Timber Notes are secured by substantially all of the assets of SPHC. The Timber Notes are generally designed to link deemed depletion of SPHC's timber to the required amortization of the Timber Notes. The indenture governing the Timber Notes prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands. During the years ended December 31, 1993, 1992 and 1991, Pacific Lumber's operating income plus depletion and depreciation ("operating cash flow") amounted to $76.6 million, $90.1 million and $83.2 million, respectively, which exceeded interest accrued on all of its indebtedness in those years by $17.4 million, $24.5 million and $14.5 million, respectively. The Company believes that Pacific Lumber's and SPHC's level of operating cash flow and other available sources of financing will enable them to meet the debt service requirements on the Pacific Lumber Senior Notes and the Timber Notes, respectively. Pacific Lumber's and Britt's capital expenditures of approximately $26.2 million for the three years ended December 31, 1993 were made to increase capacity, improve operating efficiency and reduce operating costs. Pacific Lumber's and Britt's capital expenditures were $11.1 million, $8.7 million and $6.4 million for the years ended December 31, 1993, 1992 and 1991, respectively. Capital expenditures for 1994 are expected to be $10 million and for the 1995 -- 1996 period are estimated to be between $5 million and $10 million per year. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by the April 1992 earthquake were approximately $1.6 million for 1993 and are expected to be approximately $2 million to $3 million for 1994 when construction is completed. The Company anticipates that the funds necessary to finance Pacific Lumber's and Britt's capital expenditures will be obtained through cash flows generated by operations and other available sources of financing. In February 1994, Pacific Lumber received a franchise tax refund of approximately $7.2 million, including interest, from the State of California relating to tax years 1972 through 1985. This amount will be recognized in investment, interest and other income during the first quarter of 1994. During 1991, Pacific Lumber repurchased $15.5 million principal amount of the Old Pacific Lumber Securities for $15.0 million. REAL ESTATE OPERATIONS As of December 31, 1993, the Company's real estate subsidiaries had approximately $25.8 million available for use under various credit agreements. Substantially all of the availability was attributable to the credit availability pursuant to the loan agreement secured by real properties, and certain loans secured by income producing real property, purchased from the RTC. The Company believes that the existing cash and credit facilities of its real estate subsidiaries are sufficient to fund their respective working capital requirements. In June 1991, MXM Mortgage Corp. ("MXM"), a wholly owned subsidiary of the Company, purchased, for approximately $122.3 million, 28 loans secured by real properties and 27 parcels of income producing real property (the "Portfolio") from the RTC. Substantially all of the real properties were located in Texas, with the largest concentrations in the vicinity of San Antonio, Houston and Dallas. MXM borrowed approximately $108.3 million to finance a portion of the purchase of the Portfolio. In December 1993, substantially all of the remaining assets in the Portfolio and the related debt were transferred to the Company's wholly owned partnership, MXM Mortgage L.P. ("MXM L.P."). The notes mature on December 31, 1997 and bear interest at the prime rate plus 3% per annum, payable monthly. The loan agreement, as amended, provides for additional borrowings of up to $22.0 million on or before March 31, 1994. Upon the sale of any secured property or loan, the terms of the loan agreement require MXM L.P. to make principal payments based on the release price (as defined) of such property or loan. In addition, the loan agreement requires MXM L.P. to repay the entire outstanding balance of the notes if such balance declines to less than $10.0 million or if less than 40% of such balance is allocated to multi-family assets. Principal payments of $60.2 million were made on the notes in December 1993 in connection with the sale of sixteen multi-family properties. The Company received net cash proceeds of $47.0 million after such principal payments and related closing costs. TRENDS Aluminum Operations -- General Exports from the Commonwealth of Independent States ("C.I.S."), additions to smelter capacities during the past several years, continued high operating rates and other factors have contributed to a significant increase in primary aluminum inventories in the Western world. If Western world production and exports from the C.I.S. continue at current levels, primary aluminum inventory levels will increase further in 1994. The foregoing factors, among others, have contributed to a significant reduction in the market price of primary aluminum and may continue to adversely affect the market price of primary aluminum in the future. Government officials from the European Union, the United States of America, Canada, Norway, Australia and the Russian Federation met in a multilateral conference in January 1994 to discuss the current excess global supply of primary aluminum. All six participating governments have ratified as a trade agreement the resulting Memorandum which provides, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of ratification of the Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production and (iii) certain assistance to the Russian aluminum industry. A Russian Federation Trade Ministry official has publicly stated that the output reduction would remain in effect for 18 months to two years, provided that other worldwide production cutbacks occur, existing trade restrictions on aluminum are eliminated and no new trade restrictions on aluminum are imposed. The Memorandum does not require specific levels of production cutbacks by other producing nations. There can be no assurance that the implementation of the Memorandum will adequately address the current oversupply of primary aluminum. If Kaiser's average realized sales prices in 1994 for substantial quantities of its primary aluminum and alumina were based on the current market price of primary aluminum, Kaiser would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 before extraordinary losses and cumulative effect of changes in accounting principles, restructuring charges, reductions in the carrying value of inventories and additions to litigation and environmental reserves described in Notes 1 and 10 to the Consolidated Financial Statements. Effective October 1, 1993, an increase in the base rate the BPA charges to its direct service industry customers for electricity was adopted, which will increase Kaiser's production costs at the Mead and Tacoma smelters by approximately $15.0 million per year (approximately $11.3 million per year, based on the current operating rate of approximately 75% of full capacity). The rate increase is generally expected to remain in effect for two years. Aluminum Operations -- 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. Consequently, Kaiser has developed strategies to mitigate its exposure to possible further declines in the market prices of alumina and primary aluminum while retaining the ability to participate in favorable pricing environments that may materialize. Alumina. Kaiser has sold forward substantially all of the alumina available to it in excess of its projected internal smelting requirements for 1994, and a substantial portion of such excess alumina for 1995. Approximately 95% of 1994 sales and virtually all of 1995 sales were made at prices indexed to future prices of primary aluminum. Approximately 75% of 1994 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed Kaiser's estimated cash production costs. The remainder of 1994 sales were made either at fixed prices that exceed Kaiser's estimated cash production costs or are subject to prices indexed to future prices of primary aluminum but without minimum prices. Approximately 85% of 1995 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed Kaiser's estimated cash production costs. Aluminum Processing. As of the date of this report, Kaiser has sold forward at fixed prices approximately 75% of its primary aluminum in excess of its projected internal fabrication requirements in 1994 and approximately 55% of such surplus in 1995 at fixed prices that exceed the current market price of primary aluminum. Hedging programs already in place would allow Kaiser to participate in higher market prices, should they materialize, for approximately 40% of Kaiser's excess primary aluminum sold forward in 1994, and 100% of Kaiser's excess primary aluminum sold forward in 1995. In response to the low price of primary aluminum caused by the current surplus, a number of companies have closed smelting facilities. In addition, in response to certain power reductions undertaken by the BPA in the Pacific Northwest, a number of companies (including Kaiser) have curtailed or shut down production capacities at their smelter facilities in the Pacific Northwest. Furthermore, after continued assessment of its production levels in light of market prices, industry inventory levels, production costs and user demand, on February 25, 1994, Kaiser announced that in April 1994 it will curtail approximately 9.3% of its primary aluminum current annual production capacity. Fabricated aluminum prices, which vary considerably among products, are heavily influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to six months. A significant portion of Kaiser's fabricated product shipments consist of body, lid and tab stock for the beverage container market. Kaiser may not be able to receive increases in primary aluminum prices from its can stock customers as promptly as in the recent past because of competition from other aluminum producers and because of excess supply in the industry. Kaiser also ships fabricated products to customers in the aerospace market. Aluminum demand in the aerospace market is decreasing as a result of the structural contraction of the defense industry caused by the end of the Cold War. In addition, the commercial aerospace market is experiencing a cyclical downturn in business due to the recent economic recessions in the United States, Canada, Australia and the United Kingdom, and slow economic growth in other countries. Forest Products Operations The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and, in some cases, federal laws and regulations dealing with timber harvesting, endangered species, water quality and air and water pollution. Pacific Lumber does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future operating results. 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. A variety of bills are currently pending 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 and the restriction, regulation and administration of timber harvesting practices. For example, the U.S. Congressman for the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, incorporate within the boundaries of an existing national forest approximately 42,000 acres of Pacific Lumber's timberlands and would designate approximately 12,000 acres of Pacific Lumber's timberlands to be studied for possible inclusion within such national forest. These 54,000 acres constitute approximately 30% of Pacific Lumber's timberlands. Since this and the other bills are subject to amendment, it is premature to assess the ultimate content of these bills, the likelihood of any of the bills passing or the impact of any of these bills on the financial position or results of operations of Pacific Lumber. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or financial position of Pacific Lumber. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's timber harvesting plans, and Pacific Lumber expects that such groups and individuals will continue to file objections to Pacific Lumber's timber harvesting plans. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved timber harvesting plans. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth redwood timber on its property during the past few years, as well as substantial amounts of virgin Douglas-fir timber which are located in virgin old growth redwood stands. No assurance can be given as to the extent of such litigation in the future. Pacific Lumber believes that environmentally focused challenges to its timber harvesting plans are likely to occur in the future. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, to date such challenges have not had a material adverse effect on Pacific Lumber's financial position or results of operations. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the operating results or financial position of Pacific Lumber. MAXXAM Inc. and Subsidiaries Report of Independent Public Accountants To the Stockholders and Board of Directors of MAXXAM Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1993. 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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. Houston, Texas February 24, 1994 MAXXAM Inc. and Subsidiaries Consolidated Balance Sheet
December 31, ------------------------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $83.9 $81.9 Marketable securities 44.7 70.6 Receivables: Trade, net of allowance for doubtful accounts of $3.2 and $3.5 at December 31, 1993 and 1992, respectively 175.3 196.0 Other 90.8 114.4 Inventories 503.6 503.0 Prepaid expenses and other current assets 93.3 67.3 ------ ------ Total current assets 991.6 1,033.2 Property, plant and equipment, net 1,245.0 1,187.1 Timber and timberlands, net of depletion of $108.2 and $100.9 at December 31, 1993 and 1992, respectively 338.6 383.9 Investments in and advances to unconsolidated affiliates 183.2 150.1 Real estate 113.3 182.0 Deferred income taxes 359.9 - Long-term receivables and other assets 340.4 262.5 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $135.6 $148.5 Accrued interest 53.7 39.4 Accrued compensation and related benefits 114.2 95.4 Other accrued liabilities 161.5 147.7 Payable to affiliates 74.0 65.0 Long-term debt, current maturities 38.3 71.2 ------- ------ Total current liabilities 577.3 567.2 Long-term debt, less current maturities 1,567.9 1,592.7 Accrued postretirement benefits 720.1 - Other noncurrent liabilities 650.3 418.3 ------- ------ Total liabilities 3,515.6 2,578.2 ------- ------ Commitments and contingencies Minority interests 224.3 176.7 Stockholders' equity (deficit): Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1993 -- 679,084 and 1992 -- 681,811 .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 5.0 5.0 Additional capital 51.2 47.9 Retained earnings (deficit) (180.8) 419.4 Pension liability adjustment (23.9) (9.0) Treasury stock, at cost (shares held: preferred -- 845; common: 1993 -- 1,364,895 and 1992 -- 1,367,622) (19.7) (19.7) ------- ------ Total stockholders' equity (deficit) (167.9) 443.9 ------- ------ $3,572.0 $3,198.8 ======= ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MAXXAM Inc. and Subsidiaries Consolidated Statement of Operations
Years Ended December 31, ------------------------------------ (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1993 1992 1991 ---------- ---------- ---------- Net sales: Aluminum operations $1,719.1 $1,909.1 $2,000.8 Forest products operations 233.5 223.4 205.7 Real estate operations 78.5 70.1 48.0 ------- ------- ------- 2,031.1 2,202.6 2,254.5 ------- ------- ------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations 1,587.7 1,619.3 1,594.2 Forest products operations 134.6 113.8 103.3 Real estate operations 65.3 53.8 38.1 Depreciation and depletion 120.8 111.4 106.1 Selling, general and administrative expenses 183.0 173.5 177.3 Restructuring of aluminum operations 35.8 - - ------- ------- ------- 2,127.2 2,071.8 2,019.0 ------- ------- ------- Operating income (loss) (96.1) 130.8 235.5 Other income (expense): Investment, interest and other income 69.8 51.6 42.8 Interest expense (169.5) (181.8) (198.8) Amortization of deferred financing costs (15.6) (13.8) (12.1) ------- ------- ------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (211.4) (13.2) 67.4 Credit (provision) for income taxes 82.5 9.2 (2.0) Minority interests (3.0) (3.3) (7.9) ------- ------- ------- Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (131.9) (7.3) 57.5 Extraordinary item: Loss on early extinguishment of debt, net of related benefits for minority interests of $2.8 and income taxes of $27.5 (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) $(600.2) $(7.3) $57.5 ======= ======= ======= Per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles $(13.95) $(.77) $6.08 Extraordinary item (5.35) - - Cumulative effect of changes in accounting principles (44.17) - - ------- ------- ------- Net income (loss) $(63.47) $(.77) $6.08 ======= ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MAXXAM Inc. and Subsidiaries Consolidated Statement of Cash Flows
Years Ended December 31, -------------------------------- (IN MILLIONS OF DOLLARS) 1993 1992 1991 --------- --------- --------- Cash flows from operating activities: Net income (loss) $(600.2) $(7.3) $57.5 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Cumulative effect of changes in accounting principles, net 417.7 - - Depreciation and depletion 120.8 111.4 106.1 Extraordinary loss on early extinguishment of debt, net 50.6 - - Amortization of deferred financing costs and discounts on long-term debt 21.7 19.9 20.3 Equity in losses of unconsolidated affiliates 4.9 1.9 19.5 Minority interests 3.0 3.3 7.9 Incurrence of financing costs (47.9) (7.1) (12.3) Net gain on sales of real estate, mortgage loans and other assets (45.8) (6.4) (5.8) Net losses (gains) on marketable securities (7.1) 6.3 .7 Recognition of previously deferred income from a forward alumina sale (.6) (25.7) (42.0) Increase (decrease) in payable to affiliates and other liabilities 110.5 (72.0) (25.0) Decrease (increase) in prepaid expenses and other assets 18.0 9.4 (47.1) Increase (decrease) in accrued interest 14.3 (1.6) 1.8 Decrease in inventories 10.9 66.7 30.7 Decrease (increase) in receivables 5.0 (63.1) 4.7 Decrease (increase) in accrued and deferred income taxes (96.5) (16.3) 5.8 Decrease in accounts payable (14.1) (6.1) (.7) Other 10.9 17.2 15.1 -------- -------- -------- Net cash provided by (used for) operating activities (23.9) 30.5 137.2 -------- -------- -------- Cash flows from investing activities: Net proceeds from disposition of property and investments 143.0 45.7 16.1 Net sales (purchases) of marketable securities 31.1 (7.0) (24.5) Capital expenditures (86.2) (132.7) (130.9) Acquisition of real estate properties and mortgages - - (16.4) Other (12.2) 2.3 (6.8) -------- -------- -------- Net cash provided by (used for) investing activities 75.7 (91.7) (162.5) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 1,201.3 26.7 218.4 Proceeds from issuance of Kaiser Depositary Shares 119.3 - - Redemptions, repurchase of and principal payments on long- term debt (1,219.4) (65.3) (268.4) Net borrowings (payments) under revolving credit agreements and short-term borrowings (107.6) 84.1 39.7 Restricted cash deposits (33.6) - - Redemption of preference stock (4.2) (7.3) (20.4) Proceeds from issuance of common stock - .7 2.3 Proceeds from initial public offering of Kaiser Aluminum Corporation common stock - - 93.2 Other (5.6) (.9) (.7) -------- -------- -------- Net cash provided by (used for) financing activities (49.8) 38.0 64.1 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 2.0 (23.2) 38.8 Cash and cash equivalents at beginning of year 81.9 105.1 66.3 -------- -------- -------- Cash and cash equivalents at end of year $83.9 $81.9 $105.1 ======== ======== ======== Supplementary schedule of non-cash investing and financing activities: Acquisition of real estate properties and mortgages: Assets acquired $135.9 Issuance of long-term debt 108.3 Notes receivable exchanged 34.2 Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $149.1 $177.3 $188.8 Income taxes paid 13.2 6.3 23.8 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MAXXAM Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Deficit)
Preferred Retained Pension Stock Common Stock Additional Earnings Liability Treasury -------------------- (IN MILLIONS OF DOLLARS AND ($.50 Par) Shares ($.50 Par) Capital (Deficit) Adjustment Stock Total SHARES) --------- --------- --------- --------- --------- --------- ---------- ----- Balance, January 1, 1991 $.3 8.6 $5.0 $40.6 $369.2 $- $(19.8) $395.3 Net income - - - - 57.5 - - 57.5 Common stock issued under employee stock option plans - .1 - 2.3 - - - 2.3 Gain from initial public offering of Kaiser Aluminum Corporation common stock - - - 28.5 - - - 28.5 Excess of fair value of assets acquired over affiliate's basis - - - (24.0) - - - (24.0) -------- -------- -------- -------- -------- -------- -------- ------- Balance, December 31, 1991 .3 8.7 5.0 47.4 426.7 - (19.8) 459.6 Net loss - - - - (7.3) - - (7.3) Common stock issued under employee stock option plans - - - .5 - - .1 .6 Additional pension liability - - - - - (9.0) - (9.0) -------- -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1992 .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) ======== ======== ======== ======== ======== ======== ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MAXXAM Inc. and Subsidiaries Notes to Consolidated Financial Statements (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of MAXXAM Inc. and its majority and wholly owned subsidiaries, collectively referred to herein as the "Company." Investments in unconsolidated affiliates are accounted for utilizing the equity method of accounting. In connection with the implementation of the new accounting standard for income taxes as described in Note 5, the Company has restated certain assets and liabilities recorded in connection with its acquisition of various subsidiaries in prior years. Additionally, certain reclassifications have been made to prior years' financial statements to be consistent with the presentation in the current year. The cumulative losses of Kaiser Aluminum Corporation ("Kaiser," a majority owned subsidiary of the Company) in the first and second quarter 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, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7). The Company will record 100% of Kaiser's losses and profits until such time as the losses recorded by the Company with respect to Kaiser's minority common stockholders are recovered. On August 4, 1993, contemporaneously with the consummation of the MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the Company) refinancing transaction (as described in Note 4), MGI (i) transferred to the Company 50 million common shares of Kaiser held by a subsidiary of MGI, representing MGI's (and the Company's) entire interest in Kaiser's common stock, (ii) transferred to the Company 60,075 shares of the Company common stock held by a subsidiary of MGI, (iii) transferred to the Company certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to MGI of approximately $1.1 and (iv) exchanged with the Company 2,132,950 Depositary Shares (as described in Note 7), acquired from Kaiser on June 30, 1993 for $15.0, such exchange being in satisfaction of a $15.0 promissory note evidencing a cash loan made by the Company to MGI in January 1993. On the same day, the Company assumed approximately $17.5 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 the Company its interest in the real estate management and development operation located at Palmas del Mar in Puerto Rico. The foregoing transactions are collectively referred to as the "Forest Products Group Formation." SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. The carrying amount of these instruments approximates fair value. Marketable Securities On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance with the provisions of SFAS 115, marketable securities are carried at market value on December 31, 1993. Prior to that date, 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. Market values are determined based on quoted prices. The cost and market values of securities held at December 31, 1992 were $72.6 and $70.6, respectively. Included in investment, interest and other income for each of the three years ended December 31, 1993 were: 1993 -- net realized gains of $4.2, the recovery of $2.0 of net unrealized losses and net unrealized gains of $.9; 1992 -- net realized losses of $6.0 and net unrealized losses of $.3; and 1991 -- net realized losses of $1.0 and the recovery of $.3 of net unrealized losses. 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. Inventories consist of the following:
December 31, --------------------- 1993 1992 --------- -------- Aluminum Operations: Finished fabricated products $83.7 $91.2 Primary aluminum and work in process 141.4 128.7 Bauxite and alumina 94.0 107.4 Operating supplies and repair and maintenance parts 107.8 112.6 -------- -------- 426.9 439.9 -------- -------- Forest Products Operations: Lumber 58.4 54.2 Logs 18.3 8.9 -------- -------- 76.7 63.1 -------- -------- $503.6 $503.0 ======== ========
The Company recorded pre-tax charges of approximately $19.4 and $29.0 in 1993 and 1992, respectively, because of reductions in the carrying value of its aluminum operations inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated products and a reduction in LIFO inventories which increased cost of sales by $10.2 in 1992. Reductions in the Company's forest products operations inventories reduced cost of sales in 1991 by $3.3. 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 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, 1993, cash and cash equivalents includes $20.3 reserved for debt service payments on the Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"), and long-term receivables and other assets includes $33.6 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 for its flat-rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. Additionally, Kaiser implemented a plan to discontinue its casting operations, which include three facilities located in Ohio. This entire restructuring is expected to be completed by the end of 1995 and will affect approximately 670 employees. The pre-tax charge for this restructuring of $35.8 includes $25.2 for pension, severance and other termination benefits; $4.7 for a writedown of the casting facilities to net realizable value; $3.3 for estimated 1994 casting operating losses to the expected date of closure or sale; and $2.6 for various other items. Investment, Interest and Other Income Investment, interest and other income for the year ended December 31, 1993 included 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, and $10.8 of pre-tax charges related principally to the establishment of additional litigation and environmental reserves by Kaiser. Included in investment, interest and other income for the year ended December 31, 1992 was $19.1 of pre-tax income for unrelated and non-recurring adjustments to previously recorded liabilities and reserves. Included in investment, interest and other income for the year ended December 31, 1991 was the receipt of a $12.0 fee in the first quarter from Kaiser's minority partner in consideration for the execution of an expansion agreement for the Alumina Partners of Jamaica ("Alpart") alumina refinery. The agreement provides for a program of expansion and modernization of Alpart at the existing ownership interest of 65% for Kaiser and 35% for Kaiser's minority partner. The prior expansion agreement provided for expansion rights of 75% for Kaiser and 25% for Kaiser's minority partner. Futures Contracts and Options The Company periodically enters into forward foreign exchange, commodity futures and commodity and currency option contracts which are primarily accounted for as hedges of its revenues and costs. The gains and losses on these contracts are reflected in results of operations concurrently with the hedged revenues or costs. The cash flows from these contracts are classified in a manner consistent with the underlying nature of the transactions. At December 31, 1993, the net fair market value of the Company's position in these contracts was not material. Foreign Currency Translation The Company uses the United States dollar as the functional currency for its foreign operations. 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 9,457,083 shares, 9,427,011 shares and 9,458,253 shares for the years ended December 31, 1993, 1992 and 1991, respectively. 2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Kaiser's investments in unconsolidated affiliates are held by its principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("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 $206.6, $219.4 and $238.7 for the years ended December 31, 1993, 1992 and 1991, respectively (see Note 10). KACC's equity in income (loss) before income taxes of such operations is treated as a reduction (increase) in costs of sales. At December 31, 1993 and 1992, KACC's net receivables from these affiliates were not material. Summarized combined financial information for KACC's investees is as follows:
December 31, --------------------- 1993 1992 --------- --------- Current assets $312.3 $295.0 Property, plant and equipment, net 371.1 389.4 Other assets 46.3 49.9 ------- ------- Total assets $729.7 $734.3 ======= ======= Current liabilities $130.4 $132.8 Long-term debt 290.0 275.0 Other liabilities 17.8 20.0 Stockholders' equity 291.5 306.5 ------- ------- Total liabilities and stockholders' equity $729.7 $734.3 ======= ======= Years Ended December 31, --------------------------------- 1993 1992 1991 --------- --------- --------- Net sales $510.3 $586.6 $589.0 Costs and expenses (527.2) (586.7) (630.7) Credit for income taxes 1.9 6.9 9.5 ------- ------- -------- Net income (loss) $(15.0) $6.8 $(32.2) ======= ======= ======== KACC's equity in losses of affiliates $(3.3) $(1.9) $(19.5) ======= ======= ========
KACC's equity in losses 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, 1993, KACC's investment in these affiliates exceeded its equity in their net assets by $80.7. KACC is amortizing this amount over a twelve-year period which results in an annual charge of approximately $11.9. On July 8, 1993, the Company, through wholly owned subsidiaries, acquired control of the general partner and became responsible for the management of Sam Houston Race Park, Ltd. ("SHRP"). The Company acquired its interest in SHRP (approximately 29.7%) and an interest in the management contract with respect to the facility for $9.1. Currently the track is under construction on approximately 240 acres of land in northwest Houston and is expected to begin operations by spring of 1994. As of December 31, 1993, SHRP had assets of $92.7 ($48.7 current), liabilities of $90.4 ($13.9 current) and partners' equity of $2.3. SHRP incurred losses for the year ended December 31, 1993 of $5.9. The Company's equity in these losses was $1.6 for the period from July 8, 1993 to December 31, 1993. The Company's investment in SHRP exceeded its equity in SHRP's net assets at December 31, 1993 by approximately $6.5. The Company is amortizing this amount over a period of forty years. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
December 31, --------------------- Estimated Useful Lives 1993 1992 ------------- ---------- --------- Land and improvements 8 -- 25 years $157.2 $139.6 Buildings 15 -- 45 years 240.1 209.4 Machinery and equipment 10 -- 22 years 1,263.9 1,108.5 Construction in progress 65.1 71.1 -------- -------- 1,726.3 1,528.6 Less: accumulated depreciation (481.3) (341.5) -------- -------- $1,245.0 $1,187.1 ======== ========
Depreciation expense for the years ended December 31, 1993, 1992 and 1991 was $104.9, $90.2 and $82.4, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ----------------------------- 1993 1992 ----------- ----------- Corporate: 14% Senior Subordinated Reset Notes due May 20, 2000 $25.0 $45.0 12 1/2% Subordinated Debentures due December 15, 1999, net of discount 25.2 27.6 Other .5 1.1 Aluminum Operations: 1989 Credit Agreement: Revolving Credit Facility 188.0 290.0 Term Loan - 36.6 Alpart CARIFA Loan 60.0 60.0 12 3/4% Senior Subordinated Notes due February 1, 2003 400.0 - 14 1/4% Senior Subordinated Notes due December 15, 1995, net of discount - 320.5 Other 78.1 83.9 Forest Products Operations: 7.95% Timber Collateralized Notes due July 20, 2015 377.0 - 11 1/4% Senior Secured Notes due August 1, 2003 100.0 - 12 1/4% Senior Secured Discount Notes due August 1, 2003, net of discount 73.5 - 10 1/2% Senior Notes due March 1, 2003 235.0 - 12 3/4% Notes due November 15, 1995, net of discount - 148.9 12% Series A Senior Notes due July 1, 1996, net of discount - 159.0 12.2% Series B Senior Notes due July 1, 1996, net of - 297.3 discount 12 1/2% Senior Subordinated Debentures due July 1, 1998, net of discount - 40.2 Other 2.9 34.3 Real Estate Operations: Secured notes due December 31, 1997, interest at prime plus 3% 17.2 88.4 Other notes and contracts, secured by receivables, buildings, real estate and equipment 23.8 31.1 -------- -------- 1,606.2 1,663.9 Less: current maturities (38.3) (71.2) -------- -------- $1,567.9 $1,592.7 ======== ========
CORPORATE 14% Senior Subordinated Reset Notes (the "Reset Notes") The Reset Notes have borne interest at a rate of 14% per annum since November 20, 1991 and, prior to such date, bore interest at a rate of 16% per annum subsequent to May 20, 1989. 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% Subordinated Debentures (the "12 1/2% Debentures") The 12 1/2% Debentures, which are net of discount of $2.4 and $2.9 at December 31, 1993 and 1992, respectively, have mandatory redemptions of $3.3 in December of each year through 1998. The 12 1/2% Debentures are redeemable at the Company's option, in whole or in part, at par. ALUMINUM OPERATIONS The 1994 Credit Agreement On February 17, 1994, Kaiser and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association and certain other lenders (the "1994 Credit Agreement"). The 1994 Credit Agreement replaced the 1989 Credit Agreement (as defined below) and consists of a $250.0 five-year secured, revolving line of credit, scheduled to mature in 1999. Kaiser 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 $250.0 or a borrowing base relating to eligible accounts receivable and inventory. As of February 24, 1994, KACC had $67.4 of letters of credit outstanding under the 1994 Credit Agreement. The 1994 Credit Agreement is unconditionally guaranteed by Kaiser and by all significant subsidiaries of KACC which were guarantors of KACC's obligations under the 1989 Credit Agreement. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to (i) a Reference Rate plus 1 1/2% or (ii) LIBOR 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 upon a financial test, determined quarterly. KACC will record a pre-tax extraordinary loss of approximately $8.3 in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. The 1994 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 common stock dividends, undertake transactions with affiliates, make capital expenditures and enter into unrelated lines of business. 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. 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 Credit Agreement indebtedness. The 1989 Credit Agreement Kaiser and KACC entered into a credit agreement with a syndicate of commercial banks and other financial institutions comprised of a Revolving Credit Facility, a five-year Term Loan and certain other agreements (as amended, the "1989 Credit Agreement"). The obligations of KACC in respect of the credit facilities were guaranteed by Kaiser, and by a number of wholly owned subsidiaries of KACC. The five-year Revolving Credit Facility under the 1989 Credit Agreement provided for loans not to exceed the lesser of $350.0 or a borrowing base relating to the amount of eligible accounts receivable and inventory of KACC and certain of its subsidiaries. Up to $50.0 of availability under the Revolving Credit Facility could have been used for letters of credit. As of December 31, 1993, $113.6 of borrowing capacity was unused under the Revolving Credit Facility of the 1989 Credit Agreement (of which $12.8 could also have been used for letters of credit). The five-year Term Loan component of the 1989 Credit Agreement, which was originally to be repaid in ten equal semi-annual installments, commencing May 31, 1990, was prepaid in June 1993 with funds provided from the issuance of the Depositary Shares (as described in Note 7). 9 7/8% Senior Notes due 2002 (the "KACC Senior Notes") Concurrent with the offering of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") on February 17, 1994 (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 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. 12 3/4% Senior Subordinated Notes (the "KACC Notes") On February 1, 1993, KACC issued $400.0 of the KACC Notes. The net proceeds from the sale of the KACC Notes were used to retire KACC's 14 1/4% Senior Subordinated Notes due 1995, to prepay $18.0 of the Term Loan under KACC's 1989 Credit Agreement 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, 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 Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the KACC Senior Notes and the KACC Notes and the 1994 Credit Agreement restrict, among other things, KACC's and Kaiser's ability to incur debt, undertake transactions with affiliates and pay dividends. At December 31, 1993, under the most restrictive of these covenants, Kaiser was not permitted to pay dividends on its common stock. 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. The Series A bonds bear interest at a floating rate of 87% of the applicable LIBID rate (LIBOR less 1/8 of 1%) on $37.5 of the principal amount (2.9% at December 31, 1993) with the remaining $.5 bearing interest at a fixed rate of 6.35%. 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 Timber Notes and 10 1/2% Senior Notes (the "Pacific Lumber Senior Notes") On March 23, 1993, The Pacific Lumber Company ("Pacific Lumber") issued $235.0 of the Pacific Lumber Senior Notes and its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), issued $385.0 of the Timber Notes. Pacific Lumber and SPHC used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163.8 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299.7 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (c) $41.7 aggregate principal amount of Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (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 SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of SPHC and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) SPHC's timber and timberlands, (ii) substantially all of SPHC's property and equipment, (iii) SPHC's contract rights and certain other assets and (iv) 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 cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The actual required amount of such 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 SPHC 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 SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC 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 SPHC will pay the final installment of principal is July 20, 2009. Principal and interest on the Timber Notes is payable semi-annually on January 20 and July 20. The Timber Notes are redeemable at the option of SPHC, 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. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes and Pacific Lumber's other debt contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. On February 24, 1994, Pacific Lumber paid dividends of $5.7 which represents the entire amount permitted at December 31, 1993. 11 1/4% Senior Secured Notes (the "MGI Senior Notes") and 12 1/4% Senior Secured Discount Notes (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 Lumber Co., Inc. ("Britt") and MAXXAM Properties Inc. ("MPI," a wholly owned subsidiary of MGI) and by the Company'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. At December 31, 1993, under the most restrictive of these covenants, no dividends may be paid by MGI. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which includes the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $53.2 at December 31, 1993. The MGI Senior Notes will pay interest semiannually on February 1 and August 1 of each year beginning on February 1, 1994. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semiannual 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 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 OPERATIONS Secured Notes The secured notes represent borrowings of the Company's wholly owned partnership, MXM Mortgage L.P. ("MXM L.P."). The proceeds from the notes were originally used by MXM Mortgage Corp., a wholly owned subsidiary of the Company, to finance a portion of the purchase for $122.3 of certain loans secured by real properties and certain parcels of income producing real property from the Resolution Trust Corporation. The notes mature on December 31, 1997 and bear interest at the prime rate plus 3% per annum, payable monthly. The amended loan agreement provides for additional borrowings of up to $22.0 on or before March 31, 1994. Upon the sale of any secured property or loan, the terms of the loan agreement require MXM L.P. to make principal payments based on the release price (as defined) of such property or loan. In addition, the loan agreement requires MXM L.P. to repay the entire outstanding balance of the notes if such balance declines to less than $10.0 or if less than 40% of such balance is allocated to multi-family assets. Principal payments of $60.2 were made in December 1993 in connection with the sale of multi-family properties discussed in Note 1 -- "Investment, Interest and Other Income." OTHER Repurchase of Debt In 1991, the Company redeemed $170.9 of corporate debt and repurchased $16.0 of its other debt. A significant portion of the funds used to redeem the corporate debt was provided through the sale of the MGI 12 3/4% Notes and proceeds from the initial public offering of Kaiser's common stock as described in Note 8. The funds used to repurchase debt were provided by operations. Maturities Scheduled maturities of long-term debt outstanding at December 31, 1993 are as follows:
Years Ending December 31, --------------------------------------------------------------- There- 1994 1995 1996 1997 1998 after --------- -------- -------- ------- ------- ------- 14% Senior Subordinated Reset Notes $- $- $- $- $- $25.0 12 1/2% Subordinated Debentures 3.3 3.3 3.3 3.3 3.3 11.1 1989 Credit Agreement - - - - - 188.0 Alpart CARIFA Loan - - - - - 60.0 12 3/4% Senior Subordinated Notes - - - - - 400.0 7.95% Timber Collateralized Notes 13.1 13.6 14.1 16.2 19.3 300.7 11 1/4% Senior Secured Notes - - - - - 100.0 12 1/4% Senior Secured Discount Notes - - - - - 126.7 10 1/2% Senior Notes - - - - - 235.0 Secured real estate notes - - - 17.2 - - Other 21.9 16.6 9.6 9.4 9.4 38.4 -------- -------- -------- -------- -------- -------- $38.3 $33.5 $27.0 $46.1 $32.0 $1,484.9 ======== ======== ======== ======== ======== ========
Capitalized Interest Interest capitalized during the years ended December 31, 1993, 1992 and 1991 was $4.4, $5.2 and $5.1, 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, 1993, all of the assets relating to the Company's aluminum and forest products operations are subject to such restrictions. The restricted net assets of the Company's real estate subsidiaries totaled $4.0 at December 31, 1993. Under the most restrictive covenants governing debt of the Company's real estate subsidiaries, approximately $24.0 could be paid as of December 31, 1993. Fair Value The estimated fair value of the Company's long-term debt is based on the quoted market prices for the publicly-traded issues (except for the KACC 14 1/4% Senior Subordinated Notes, where fair value is based on the amount used to retire the notes in February 1993) and on the current rates offered for borrowings similar to the other debt. At December 31, 1993 and 1992, the fair value of the Company's long-term debt is estimated to be $1,647.0 and $1,709.1, respectively. 5. INCOME TAXES 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 changes 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. The restatement of the assigned values with respect to assets and liabilities recorded as a result of the acquisitions and the recomputation of deferred income tax liabilities under SFAS 109 resulted in: (i) an increase of $101.6 in the net carrying value of property, plant, and equipment, (ii) an increase of $47.8 in investments in and advances to unconsolidated affiliates, (iii) a decrease of $29.7 in the net carrying value of timber and timberlands, (iv) an increase of $21.7 in deferred income tax liabilities (a substantial portion of which has been netted against deferred income tax assets on the Consolidated Balance Sheet), (v) a decrease of $11.4 in other assets, (vi) an increase of $56.0 in other noncurrent liabilities and (vii) an increase of $4.3 in other liabilities. As a result of restating the assets and liabilities as described above, 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. Concurrent with the adoption of SFAS 109, the Company implemented the changes in accounting methods for postretirement and postemployment benefits pursuant to 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"). The pre-tax cumulative effect of the changes in accounting principles relating to SFAS 106 and SFAS 112 was a charge of $684.5, net of benefits for minority interests of $64.6. These accounting method changes resulted in the recognition of deferred income tax assets of $240.2, net of valuation allowances. 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, ----------------------------------- 1993 1992 1991 ---------- ----------- ----------- Domestic $(223.4) $(112.3) $(47.5) Foreign 12.0 99.1 114.9 -------- -------- -------- $(211.4) $(13.2) $67.4 ======== ======== ========
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, ------------------------------------ 1993 1992 1991 ----------- ----------- ----------- Current: Federal $(.1) $(.4) $(.5) State and local (1.3) 1.2 (1.3) Foreign (7.9) (11.4) (8.9) ----- ----- -------- (9.3) (10.6) (10.7) ----- ----- -------- Deferred: Federal 77.1 4.9 7.5 State and local 2.7 11.6 2.6 Foreign 12.0 3.3 (1.4) ----- ----- -------- 91.8 19.8 8.7 ----- ----- -------- $82.5 $9.2 $(2.0) ===== ===== ========
The Omnibus Budget Reconciliation Act of 1993 (the "Act"), enacted on August 10, 1993, retroactively increased the maximum federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. 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 includes a $7.0 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment of the Act due to the increase in the federal statutory income tax rate. The deferred credit (provision) for income taxes results from the following timing differences for 1992 and 1991:
Years Ended December 31, ------------------------ 1992 1991 ------------ --------- Revision of prior years' tax estimates $14.9 $8.7 Undistributed earnings or losses of foreign and unconsolidated affiliates 12.3 12.4 Inventory costing differences 4.6 (3.0) Employee benefit plans 1.9 (.1) Income from forward sales (9.0) (7.9) Depreciation and depletion (7.1) (5.6) State taxes (.4) 2.4 Change in unrealized losses on short-term marketable securities (.2) (.5) Other 2.8 2.3 ----- ---- $19.8 $8.7 ===== ====
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, --------------------------------- 1993 1992 1991 --------- --------- --------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $(211.4) $(13.2) $67.4 ======= ======= ======= Amount of federal income tax based upon the statutory rate $74.0 $4.5 $(22.9) Increase in net deferred income tax assets due to tax rate change 7.0 - - Percentage depletion 6.4 6.3 6.0 Removal of Kaiser from the Company's consolidated federal return group 3.5 - - State and local taxes, net of federal tax benefit .9 .6 2.1 Foreign taxes, net of federal tax benefit (5.0) (8.1) (1.5) Revision of prior years' tax estimates and other changes in valuation allowances (.6) 14.9 8.7 Financial reporting/tax basis differences - .1 9.4 Losses and expenses for which no federal tax benefit was recognized - (9.2) - Other (3.7) .1 (3.8) ------- ------- ------- $82.5 $9.2 $(2.0) ======= ======= =======
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 federal income taxes of $27.5 which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. The related deferred income tax benefits recorded by the Company in respect of SFAS 106 and SFAS 112 were recorded at the federal statutory rate in effect on the dates the accounting standards were adopted before giving effect to certain valuation allowances. At December 31, 1993 and 1992, the Company recorded a charge to equity for additional pension liabilities pursuant to Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions. The Company recorded the 1993 charge net of related deferred federal and state income taxes of $8.7, which approximated the federal and state statutory rate. The Company did not record a tax benefit with respect to the 1992 charge. The components of the Company's net deferred income tax assets (liabilities) are as follows:
January 1, 1993 (date of December 31, 1993 adoption) ---------------- ---------------- Deferred income tax assets: Postretirement benefits other than pensions $288.2 $273.6 Loss and credit carryforwards 161.5 137.3 Other liabilities 116.8 75.0 Real estate 75.9 39.1 Pensions 60.7 46.2 Timber and timberlands 46.5 41.2 Foreign and state deferred income tax liabilities 33.0 44.6 Property, plant and equipment 24.1 24.5 Other 36.1 45.0 Valuation allowances (149.3) (160.4) -------- -------- Total deferred income tax assets, net 693.5 566.1 -------- -------- Deferred income tax liabilities: Property, plant and equipment (224.2) (215.6) Investments in and advances to unconsolidated affiliates (60.6) (60.9) Inventories (33.3) (36.3) Other (31.2) (44.2) -------- -------- Total deferred income tax liabilities (349.3) (357.0) -------- -------- Net deferred income tax assets $344.2 $209.1 ======== ========
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1993, approximately $206.8 of the net deferred income tax assets listed above are attributable to Kaiser. Of this amount, approximately $82.4 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, 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 $124.4. 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 recent decline in profitability. The net deferred income tax assets listed above which are not attributable to Kaiser are approximately $137.4, as of December 31, 1993. This amount includes approximately $122.4 which relates to the excess of the tax basis over financial statement basis with respect to timber and timberlands and real estate. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. Certain of the deferred income tax assets and liabilities listed above are included on the Consolidated Balance Sheet in the captions entitled prepaid expenses and other current assets, other accrued liabilities and other noncurrent liabilities. 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 will file a consolidated federal income tax return for taxable periods beginning on or after July 1, 1993. 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 following table presents the tax attributes for federal income tax purposes at December 31, 1993 attributable to the Company and to the New Kaiser Tax Group. The allocation of these attributes among the companies, as well as the amounts listed, may change based upon the final 1993 tax returns. The utilization of certain of these tax attributes are subject to limitations.
The Company New Kaiser Tax Group ---------------------- ------------------------ Expiring Expiring Through Through ---------- ------------ Regular Tax Attribute Carryforwards: Current year net operating loss $14.0 2008 $83.4 2008 Prior year net operating losses 16.0 2007 54.9 2006 General business tax credits .9 2002 41.6 2006 Foreign tax credits - - 19.8 1998 Alternative minimum tax credits 1.6 Indefinite 15.3 Indefinite Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $- - $56.0 2008 Prior year net operating losses 8.5 2007 24.0 2002 Foreign tax credits - - 12.0 1998
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. Kaiser amended certain salaried retiree group insurance benefits effective January 1, 1994 to provide for additional cost-sharing features, such as reducing certain reimbursements and requiring future retiree contributions which will lower salaried retiree medical expenses. The Company adopted SFAS 106 as of January 1, 1993. The costs of postretirement benefits other than pensions are now 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. A summary of the components of net periodic postretirement benefit cost for the year ended December 31, 1993 is as follows: Service cost -- benefits earned during the year $7.4 Interest cost on accumulated postretirement benefit 59.0 obligation ----- Net periodic postretirement benefit cost $66.4 =====
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. Kaiser's cost of providing postretirement health care and life insurance benefits to retired employees was $47.2 and $40.2 for the years ended December 31, 1992 and 1991, respectively. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet was:
January 1, 1993 December 31, (date of 1993 adoption) ----------- --------- Retirees $631.2 $583.5 Actives eligible for benefits 35.1 32.7 Actives not eligible for benefits 133.2 122.1 ------- ------- Accumulated postretirement benefit obligation 799.5 738.3 Unrecognized prior service cost 35.0 - Unrecognized net loss (66.8) - ------- ------- Postretirement benefit liability $767.7 $738.3 ======= =======
The annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rates) are approximately 9.5% and 8.0% for retirees under age 65 and over age 65, respectively, and are assumed to decrease gradually to approximately 5.25% for 2006 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, 1993 by approximately $97.0 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $9.6. The discount rate and rate of compensation increase used in determining the accumulated postretirement benefit obligation were 7.5% and 5.0% at December 31, 1993, respectively, and 8.25% and 5.0% at January 1, 1993, respectively. Retirement Plans The Company has various retirement plans which cover essentially all employees. Most of the Company's employees are covered by defined benefit plans. The benefits are determined under formulas based on years of service and the employee's compensation. The Company's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by ERISA. The Company has various defined contribution savings plans designed to enhance the existing retirement programs of participating employees. Under the MAXXAM Inc. Savings Plan, 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, 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. 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, ------------------------------------- 1993 1992 1991 ---------- ---------- ---------- Defined benefit plans: Service cost-benefits earned during the year $13.0 $13.1 $11.5 Interest cost on projected benefit obligations 60.8 60.2 60.4 Return on assets: Actual gain (73.9) (28.2) (102.4) Deferred gain (loss) 15.9 (31.2) 49.9 Net amortization and deferral 4.7 2.9 1.9 ------ ------ ------- Net periodic pension cost 20.5 16.8 21.3 Defined contribution plans 1.7 1.7 3.6 Non-qualified retirement and incentive plans 4.3 5.5 4.8 ------ ------ ------- $26.5 $24.0 $29.7 ====== ====== =======
The following table sets forth the funded status and amounts recognized for the defined benefit plans in the Consolidated Balance Sheet:
December 31, --------------------- 1993 1992 --------- --------- Actuarial present value of accumulated plan benefits: Vested benefit obligation $724.1 $678.2 Non-vested benefit obligation 42.2 51.4 ------- ------- Total accumulated benefit obligation $766.3 $729.6 ======= ======= Projected benefit obligation $816.8 $767.1 Plan assets at fair value, primarily fixed income (590.8) (588.6) securities and common stocks ------- ------- Projected benefit obligation in excess of plan assets 226.0 178.5 Unrecognized net transition obligation (1.7) (2.7) Unrecognized net loss (76.2) (34.9) Unrecognized prior service cost (17.8) (17.0) Adjustment required to recognize minimum liability 47.7 25.3 ------- ------- Accrued pension cost $178.0 $149.2 ======= =======
The assumptions used in accounting for the defined benefit plans were as follows:
December 31, ----------------------------- 1993 1992 1991 --------- --------- --------- Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.5% 8.25% 8.25% Expected long-term rate of return on assets 10.0% 10.0% 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 charge to stockholders' equity. In 1993 and 1992, the additional pension liability charged to stockholders' equity amounted to $14.9 and $9.0, respectively. Postemployment Benefits The Company adopted SFAS 112 as of January 1, 1993. The costs of postemployment benefits are now 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. Incentive Plans Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees. 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 Kaiser as of December 31, 1993. Under the LTIP, as amended, 764,092 shares of Kaiser common stock were distributed to participants during 1993 which will generally vest at the rate of 25% per year. Kaiser will record the related expense of approximately $6.5 over the four-year period ending December 31, 1996. In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. At December 31, 1993, Kaiser had 1,151,608 shares of its common stock reserved for awards or for payment of rights granted under this plan. In 1993, the stockholders approved the award of 584,300 shares as "nonqualified stock options" to members of management other than those participating in the LTIP. These options will generally vest at the rate of 20% per year over the next five years, commencing May 18, 1994. The exercise price of these shares is $7.25 per share (the quoted market price at the date of grant). 7. MINORITY INTERESTS Minority interests represent the following:
December 31, --------------------- 1993 1992 --------- --------- Kaiser Aluminum Corporation: Common stock, par $.01 (Note 8) $ - $71.8 $.65 Depositary Shares 119.3 - Subsidiary redeemable preference stock: KACC Series A and B Cumulative Preference Stock, par $1 33.6 32.8 KACC Cumulative Convertible Preference Stock, par $100 1.8 2.0 KACC Minority Interest: Alumina Partners of Jamaica 56.9 58.8 Volta Aluminium Company Limited 11.5 11.3 Kaiser LaRoche Hydrate Partners 1.2 - ------ ------ $224.3 $176.7 ====== ======
As a result of Kaiser's public offering of its common stock in 1991, the issuance of preferred stock in 1993 and 1994 (each as described below) and, to a lesser extent, the issuance of common stock in connection with the LTIP (as described above), the Company's voting interest in Kaiser has decreased to approximately 61% on a fully diluted basis, as of February 17, 1994. $.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 used approximately $81.5 of the net proceeds it received from the sale of the Depositary Shares together with the MGI Loan to make a capital contribution to KACC, and $37.8 of the net proceeds it received from the sale of the Depositary Shares to make a non-interest bearing loan to KACC (evidenced by a note) which is designed to provide sufficient funds to make the required dividend payments on the Series A Shares until June 30, 1996 (the "Series A Shares Mandatory Conversion Date"). KACC used approximately $13.7 of such funds to prepay the remaining balance of the Term Loan under the 1989 Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the Revolving Credit Facility of the 1989 Credit Agreement. On June 30, 1996, each of the outstanding Depositary Shares will automatically convert (upon the automatic conversion of the Series A Shares) into (i) one share of Kaiser's common stock, plus (ii) the right to receive an amount in cash equal to the accrued and unpaid dividends payable with respect to such Depositary Shares. Automatic conversion of the outstanding Depositary Shares (and the Series A Shares) will occur upon certain mergers or consolidations of Kaiser (as defined). At any time or from time to time prior to June 30, 1996, Kaiser may call the outstanding Depositary Shares (by calling the Series A Shares) for redemption, in whole or in part, at a call price per Depositary Share initially equal to $12.46, declining by $.0018 on each day following the date of issue to $10.624 on April 30, 1996, and equal to $10.51 thereafter, payable in shares of common stock having an aggregate Current Market Price (as defined) equal to the applicable call price, plus an amount in cash equal to all accrued and unpaid dividends payable with respect to such Depositary Share. Holders of Depositary Shares (based on the voting rights of the Series A Shares) have one vote for each Depositary Share held of record, except as required by law, and are entitled to vote with the holders of common stock on all matters submitted to a vote of Kaiser's common stockholders. The Depositary Shares call 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 has accounted for Kaiser's issuance of the Depositary Shares as additional minority interest. On October 13, 1993, Kaiser filed a registration statement with the Securities and Exchange Commission for the sale to the public of the 2,132,950 Depositary Shares the Company exchanged for the MGI Loan, as described above. The registration statement was declared effective by the Securities and Exchange Commission on November 15, 1993. The Company may consummate the sale of all or any portion of such Depositary Shares at any time. Subsidiary Redeemable Preference Stock In March 1985, KACC entered into a three-year agreement with the United Steelworkers of America ("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 $54.1 at December 31, 1993. Issuances and redemptions of Series A and B Stock are as follows:
Years Ended December 31, --------------------------------------- 1993 1992 1991 ----------- ----------- ----------- Shares: Beginning of year 1,163,221 1,305,550 1,718,051 Issued - - 1,868 Redeemed (81,673) (142,329) (414,369) ---------- ---------- ---------- End of year 1,081,548 1,163,221 1,305,550 ========== ========== ==========
No additional Series A or B Stock will be issued based on compensation earned in 1992 or subsequent years. 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 on or after March 1, 1991, with 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 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 1992 and 1993, KACC contributed $7.0 and $4.3 for the years ended December 31, 1991 and 1992, respectively, and will contribute $4.3 in March 1994 for the year ended December 31, 1993. Under the USWA labor contract effective November 1, 1990, KACC was obligated to offer to purchase up to 80 shares of Series A Stock from each active participant in 1991 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 40 shares from each participant in 1994. The employees may 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 80 shares of Series B Stock from active participants in 1991 and 40 shares 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. 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. 8.255% Preferred Redeemable Increased Dividend Equity Securities On February 17, 1994, Kaiser consummated a public offering for the sale of 8,000,000 shares of its PRIDES. The net proceeds from the sale of the PRIDES were approximately $90.6. Kaiser used $30.0 of such net proceeds to make a non-interest bearing loan to KACC (evidenced by a note) which is designed to provide sufficient funds to make the required dividend payments on the PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $60.6 of such net proceeds to make a capital contribution 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 (including the Series A Shares) 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 (i) one share of Kaiser's common stock, subject to adjustment in certain events, and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends thereon. Shares of PRIDES are not redeemable 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 (A) the sum of (i) $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, (ii) 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 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 $1.9 ($.2425 per share). The Company will account for Kaiser's issuance of the PRIDES as additional minority interest in 1994. 8. STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock The holders of the Company's Class A Preferred Stock are entitled to receive, if and when declared, preferential cash dividends at the rate of $.05 per share per annum and will participate thereafter on a share for share basis with the holders of common stock in all cash dividends, other than cash dividends on the common stock in any fiscal year to the extent not exceeding $.05 per share. Stock dividends declared on the common stock will result in the holders of the Class A Preferred Stock receiving an identical stock dividend payable in shares of Class A Preferred Stock. At the option of the holder, the Class A Preferred Stock is convertible at any time into shares of common stock at the rate of one share of common stock for each share of Class A Preferred Stock. Each holder of Class A Preferred Stock is generally entitled to ten votes per share on all matters presented to a vote of the Company's stockholders. Sale of Subsidiary Stock On July 18, 1991, Kaiser consummated its initial public offering of 7.25 million shares of its common stock at a price of $14 per share. The 7.25 million shares represented approximately a 12.7% interest in Kaiser. Kaiser received approximately $93.2, net of related offering costs, from the sale. Seventy-five percent of the net proceeds were used to prepay certain notes together with accrued interest thereon to MGI, and the remaining 25% was used to prepay a portion of the indebtedness under Kaiser's 1989 Credit Agreement. As a result of the sale of Kaiser's common stock, the Company's equity in Kaiser's net assets immediately after the sale was approximately $28.5 higher than its historical cost. The Company has accounted for this difference as an increase in additional capital. Stock Option Plans The 1980 Incentive Plan authorized the granting of options to purchase up to 750,000 shares of the Company's common stock through June 1990. Options granted were exercisable at the market price at the date of grant and became exercisable in five equal annual installments, commencing one year from the date of grant, and expiring ten years from the date of grant. On July 1, 1988, pursuant to the terms of the 1980 Incentive Plan, holders of the 1980 Incentive Plan options were granted stock appreciation rights. During the years ended December 31, 1992 and 1991, 63,000 options and 110,000 options were exercised at prices ranging from $7.875 to $15.75 per share resulting in the issuance of 19,761 shares and 54,037 shares, respectively. At December 31, 1992, all options to purchase shares under the 1980 Incentive Plan had been exercised. In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the "MGI 1976 Plan"), at prices ranging from $7.875 to $18.75 per share, 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 and 1992, 60,000 options and 100,000 options granted under the MGI 1976 Plan at prices of $10.875 and $11.625 per share, respectively, were surrendered for a cash payment in lieu of the consideration referred to above. At December 31, 1993, all options granted under the MGI 1976 Plan had been exercised. Shares Reserved for Issuance At December 31, 1993, the Company had 678,239 common shares reserved for future issuance upon conversion of the Class A Preferred Stock. Rights On November 29, 1989, the Board of Directors of the Company declared a dividend to its stockholders consisting of (i) one Series A Preferred Stock Purchase Right (the "Series A Right") for each outstanding share of the Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase Right (the "Series B Right") for each outstanding share of the Company's common stock. The Series A Right and the Series B Right are collectively referred to herein as the "Rights."The Rights are exercisable only if a person or group of affiliated or associated persons (an "Acquiring Person") acquires beneficial ownership, or the right to acquire beneficial ownership, of 15% or more of the Company's common stock, or announces a tender offer that would result in beneficial ownership of 15% or more of the outstanding common stock. Any person or group of affiliated or associated persons who, as of November 29, 1989, was the beneficial owner of at least 15% of the outstanding common stock will not be deemed to be an Acquiring Person unless such person or group acquires beneficial ownership of additional shares of common stock (subject to certain exceptions). Each Series A Right, when exercisable, entitles the registered holder to purchase from the Company one share of Class A Preferred Stock at an exercise price of $165.00, subject to adjustment. Each Series B Right, when exercisable, entitles the registered holder to purchase from the Company one one-hundredth of a share of the Company's new Class B Junior Participating Preferred Stock, with a par value of $.50 per share (the "Junior Preferred Stock"), at an exercise price of $165.00, subject to adjustment. Under certain circumstances, including if any person becomes an Acquiring Person other than through certain offers for all outstanding shares of stock of the Company, or if an Acquiring Person engages in certain "self-dealing" transactions, each Series A Right would enable its holder to buy Class A Preferred Stock (or, under certain circumstances, preferred stock of an acquiring company) having a value equal to two times the exercise price of the Series A Right, and each Series B Right shall enable its holder to buy common stock of the Company (or, under certain circumstances, common stock of an acquiring company) having a value equal to two times the exercise price of the Series B Right. Under certain circumstances, Rights held by an Acquiring Person will be null and void. In addition, under certain circumstances, the Board is authorized to exchange all outstanding and exercisable Rights for stock, in the ratio of one share of Class A Preferred Stock per Series A Right and one share of common stock of the Company per Series B Right. The Rights, which do not have voting privileges, expire in 1999, but may be redeemed by action of the Board prior to that time for $.01 per right, subject to certain restrictions. Voting Control Federated Development Company ("Federated") and Mr. Charles E. Hurwitz collectively own 97.0% of the Company's Class A Preferred Stock and 31.3% of the Company's common stock (resulting in combined voting control of approximately 60.0% 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. RELATED PARTY TRANSACTIONS In 1987, the Company entered into loan agreements with Federated for up to $26.0 of nonrecourse loans, secured by real estate located in Rancho Mirage, California ("Mirada"). In July 1991, these loans were assumed by MCO Properties Inc. ("MCOP"), a wholly owned subsidiary of the Company (see "Exchange" below). The Company recorded interest income on these loans amounting to $1.1 for the year ended December 31, 1991. In July 1991, an exchange agreement (the "Exchange") was consummated by and among the Company, MCOP and Federated. Pursuant to the terms of the Exchange, MCOP paid Federated $1.4 in cash, issued to Federated 394 shares of its 7% Cumulative Exchangeable Preferred Stock (having a liquidation value of $3.9) and assumed liabilities of $36.2, of which $34.2 was due the Company. The MCOP Preferred Stock is exchangeable into shares of the Company's common stock at an exchange price of approximately $55.40 per share, subject to various antidilution provisions. MCOP received the Mirada real estate assets, with an appraised value of approximately $42.9, and 801,941 common shares and 47,702 Series E preferred shares of United Financial Group, Inc. Due to the commonality of the ownership of the Company and Federated, the Mirada assets acquired by MCOP were valued for financial accounting purposes at Federated's basis immediately before the transaction of $13.6. Accordingly, the Exchange resulted in a charge to the Company's additional capital of approximately $24.0. Certain affiliated parties of the Company, including Mr. Charles E. Hurwitz, collectively hold less than an 11% equity interest in SHRP. 10. COMMITMENTS AND CONTINGENCIES Commitments The Company, principally through Kaiser, has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange contracts and forward sales contracts, letters of credit and other guarantees. Purchase agreements and tolling arrangements include agreements for the supply of alumina to, and the purchase of aluminum from, Anglesey. Similarly, KACC has 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. The aggregate minimum amount of required future principal payments at December 31, 1993 is $73.6, due in 1997. KACC's share of payments, including operating costs and certain other expenses under the agreement, was $86.7, $99.2 and $107.6 for the years ended December 31, 1993, 1992 and 1991, respectively. Minimum rental commitments under operating leases at December 31, 1993 are as follows: years ending December 31, 1994 -- $27.9; 1995 -- $27.0; 1996 -- $26.3; 1997 -- $24.6; 1998 -- $26.1; thereafter -- $248.8. Rental expense for operating leases was $31.3, $29.2 and $29.1 for the years ended December 31, 1993, 1992 and 1991, respectively. The minimum future rentals receivable under noncancelable subleases at December 31, 1993 were $92.8. Environmental Contingencies Kaiser and KACC are subject to a wide variety of environmental laws and regulations and 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 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 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, --------------------------------- 1993 1992 1991 --------- --------- --------- Balance at beginning of year $46.4 $51.5 $57.7 Additional amounts 1.7 4.5 7.8 Less expenditures (7.2) (9.6) (14.0) ------ ------ ------ Balance at end of year $40.9 $46.4 $51.5 ====== ====== ======
These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based upon 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 expenditures to be charged to the environmental accrual will be approximately $4.0 to $8.0 for the years 1994 through 1998 and an aggregate of approximately $12.8 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 by amounts which cannot presently be estimated. While uncertainties are inherent in the ultimate outcome of these matters and it is impossible to presently determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect upon Kaiser's consolidated financial position or results of operations. Asbestos Contingencies KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment with KACC or 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 year-end 1993, the number of such lawsuits pending was approximately 23,400 (approximately 11,400 of which were received in 1993). The number of such lawsuits instituted against KACC increased substantially in 1993, and management believes the number of such lawsuits will continue at approximately the same rate for the next few years. In connection with such litigation, during 1993, 1992, and 1991, KACC made cash payments for settlement and other related costs of $7.0, $7.1 and $6.1, respectively. Based upon prior experience, Kaiser estimates annual future cash payments in connection with such litigation of approximately $8.0 to $13.0 for the years 1994 through 1998, and will aggregate approximately $88.4 thereafter through 2006. Based upon 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 2006. Kaiser does not presently believe there is a reasonable basis for estimating such costs beyond 2006 and, accordingly, no accrual has been recorded for such costs which may be incurred. This accrual was calculated based upon the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, the advice of counsel and the anticipated effects of inflation and discounting at an estimated risk-free rate (5.25% at December 31, 1993). Accordingly, an accrual of $102.8 for asbestos-related expenditures is included primarily in other noncurrent liabilities at December 31, 1993. The aggregate amount of the undiscounted liability at December 31, 1993 of $141.5, before considerations for insurance recoveries, reflects an increase of $56.6 from the prior year, resulting primarily from an increase in claims filed during 1993 and Kaiser's belief that the number of such lawsuits will continue at approximately the same rate for the next few years. Kaiser believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While claims for recovery from one of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, Kaiser believes, based upon prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies and the advice of counsel, that substantial recoveries from the insurance carriers are probable. Accordingly, estimated insurance recoveries of $94.0, determined on the same basis as the asbestos-related cost accrual, are recorded primarily in long-term receivables and other assets as of December 31, 1993. Based upon the factors discussed in the two preceding paragraphs, management currently believes that there is no more than a remote possibility (under generally accepted accounting principles) that Kaiser's asbestos-related costs net of related insurance recoveries will exceed those accrued as of December 31, 1993 and, accordingly, that the resolution of such uncertainties and the incurrence of such net costs should not have a material adverse effect upon Kaiser's consolidated financial position or results of operations. Other Contingencies The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the actual 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 upon the Company's consolidated financial position or results of operations. 11. SEGMENT INFORMATION The following tables present financial information by industry segment and by geographic area at December 31, 1993 and 1992 and and for the three years ended December 31, 1993, 1992 and 1991. As a result of the Forest Products Group Formation described in Note 1, the Company has restated its presentation of operating income (loss) and identifiable assets of the forest products and corporate segments for the years ended December 31, 1992 and 1991. Industry Segments
Bauxite Forest Real Years and Aluminum Products Estate Ended Alumina Processing Operations Operations Corporate Total ------- ----------- ---------- ---------- ---------- ---------- ----------- Sales to unaffiliated customers 1993 $423.4 $1,295.7 $233.5 $78.5 $- $2,031.1 1992 466.5 1,442.6 223.4 70.1 - 2,202.6 1991 550.8 1,450.0 205.7 48.0 - 2,254.5 Operating income (loss) 1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1) 1992 44.6 47.0 64.1 (9.3) (15.6) 130.8 1991 127.7 88.7 55.3 (18.8) (17.4) 235.5 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 (losses) of unconsolidated affiliates 1993 (2.5) (.8) - - (1.6) (4.9) 1992 1.8 (3.7) - - - (1.9) 1991 (4.4) (15.1) - - - (19.5) Depreciation and depletion 1993 33.8 57.3 24.5 4.1 1.1 120.8 1992 29.4 49.2 28.4 3.5 .9 111.4 1991 25.8 47.0 30.4 2.2 .7 106.1 Capital expenditures 1993 35.8 31.9 11.1 7.1 .3 86.2 1992 60.0 54.4 8.7 8.1 1.5 132.7 1991 51.8 66.3 6.1 5.1 1.6 130.9 Investments in and advances to unconsolidated affiliates 1993 151.9 31.3 - - - 183.2 1992 136.7 13.4 - - - 150.1 Identifiable assets 1993 930.7 1,540.5 676.8 215.7 208.3 3,572.0 1992 816.0 1,341.8 666.0 308.3 66.7 3,198.8
Sales to unaffiliated customers excludes intersegment sales between bauxite and alumina and aluminum processing of $129.4, $179.9 and $194.6 for the years ended December 31, 1993, 1992 and 1991, 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 allocated to the Company's industry segments. General and administrative expenses of subsidiary companies are allocated in the Company's industry segment presentation based upon those segments' ratio of sales to unaffiliated customers. Geographical Information
Years Other Ended Domestic Caribbean Africa Foreign Eliminations Total --------- --------- --------- --------- --------- ----------- ----------- Sales to unaffiliated customers 1993 $1,515.8 $123.2 $207.5 $184.6 $- $2,031.1 1992 1,625.6 120.4 263.5 193.1 - 2,202.6 1991 1,614.8 172.3 269.2 198.2 - 2,254.5 Sales and transfers among geographic areas 1993 - 92.3 - 79.6 (171.9) - 1992 - 111.8 - 93.5 (205.3) - 1991 - 116.4 - 112.3 (228.7) - Operating income (loss) 1993 (125.2) (9.3) 34.1 4.3 - (96.1) 1992 21.2 12.8 78.8 18.0 - 130.8 1991 84.6 42.4 72.1 36.4 - 235.5 Equity in earnings (losses) of unconsolidated affiliates 1993 (1.6) - - (3.3) - (4.9) 1992 - - - (1.9) - (1.9) 1991 - - - (19.5) - (19.5) Investments in and advances to unconsolidated affiliates 1993 1.0 30.5 - 151.7 - 183.2 1992 1.4 29.5 - 119.2 - 150.1 Identifiable assets 1993 2,740.8 421.7 223.0 186.5 - 3,572.0 1992 2,326.1 433.3 227.5 211.9 - 3,198.8
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 $4.9, $12.0 and $1.2 for the years ended December 31, 1993, 1992 and 1991, respectively. Export sales were less than 10% of total revenues during the years ended December 31, 1993, 1992 and 1991. There was no single customer which accounted for more than 10% of total net sales for the year ended December 31, 1993. For the years ended December 31, 1992 and 1991, the Company had bauxite and alumina sales of $135.3 and $155.9 and aluminum processing sales of $144.9 and $160.9 to one customer, respectively. MAXXAM Inc. and Subsidiaries Quarterly Financial Information (unaudited) Summary quarterly financial information for the years ended December 31, 1993 and 1992 is as follows:
Three Months Ended ---------------------------------------------------- (IN MILLIONS OF DOLLARS, EXCEPT SHARE March 31 June 30 September 30 December 31 AMOUNTS) ---------- ---------- ------------ ---------- 1993: Net sales $513.7 $507.9 $506.5 $503.0 Operating loss (1.8) (1.1) (10.8) (82.4) Loss before extraordinary item and cumulative effect of changes in accounting principles (25.9) (15.8) (26.8) (63.4) Extraordinary item, net (44.1) - (6.5) - Cumulative effect of changes in accounting principles, net (417.7) - - - Net loss (487.7) (15.8) (33.3) (63.4) Per common and common equivalent share: Loss before extraordinary item and cumulative effect of changes in accounting principles (2.74) (1.67) (2.83) (6.71) Extraordinary item, net (4.66) - (.69) - Cumulative effect of changes in accounting principles, net (44.14) - - - Net loss (51.54) (1.67) (3.52) (6.71) 1992: Net sales $529.5 $565.0 $531.7 $576.4 Operating income 36.5 44.9 37.7 11.7 Net income (loss) .9 1.4 .7 (10.3) Per common and common equivalent share .10 .15 .07 (1.09)
MAXXAM Inc. and Subsidiaries Market for the Company's Common Equity and Related Stockholder Matters The Company's common stock is traded on the American, Pacific and Philadelphia Stock Exchanges. The stock symbol is MXM. The following table sets forth for the calendar periods indicated the high and low sales prices per share of the Company's common stock as reported on the American Stock Exchange Consolidated Composite Tape.
High Low --------- --------- 1993: First Quarter $35 3/4 $26 5/8 Second Quarter 27 1/4 21 3/4 Third Quarter 34 25 3/8 Fourth Quarter 38 7/8 28 3/8 1992: First Quarter $43 1/2 $29 3/8 Second Quarter 42 1/2 29 5/8 Third Quarter 33 1/4 24 1/4 Fourth Quarter 29 3/4 22 1/4
The following table sets forth the number of record holders of the Company's publicly-owned equity securities as of March 1, 1994.
Number of TITLE OF CLASS Record Holders ------------- Common Stock 6,413 Class A $.05 Non-Cumulative Participating Convertible Preferred Stock 44
The Company has not declared any cash dividends on its common stock or its Class A Preferred Stock and has no present intention of paying such dividends in the immediate future. EX-4 6 EXHIBIT 4.36 CONSENT AND ASSUMPTION AGREEMENT THIS CONSENT AND ASSUMPTION AGREEMENT is entered into as of December 10, 1993 by and among GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), MXM MORTGAGE CORP., a Delaware corporation ("Old Borrower"), MXM MORTGAGE L.P., a Delaware limited partnership ("New Borrower"), MAXXAM INC., a Delaware corporation, and MAXXAM GROUP INC., a Delaware corporation (MAXXAM Inc. and MAXXAM Group Inc. being herein together called "Guarantors"), on the following terms and conditions: R E C I T A L S: A. Lender made a loan to Old Borrower in the principal amount of up to $132,670,000 (the "Loan"), governed by that Loan Agreement dated June 17, 1991 as amended by that Loan Increase, Extension and Modification Agreement (the "Increase Modification") dated December 30, 1992 between Lender and Old Borrower (as amended, the "Loan Agreement") between Old Borrower and Lender, and evidenced by that Promissory Note, dated June 17, 1992, in the stated principal amount of $115,200,000, executed by Old Borrower, bearing interest and being payable to the order of Lender as therein provided (the "Note"), as amended by that First Renewal, Extension and Modification Agreement (the "First Extension") dated as of June 17, 1992, between Lender and Old Borrower, and further amended by the Increase Modification; and further evidenced by that Increase Promissory Note dated December 30, 1992, in the stated principal amount of $17,470,000, executed by Old Borrower and payable to the order of Lender as therein provided (the "Increase Note"; the Original Note and the Increase Note being herein together called the "Note"); B. The indebtedness evidenced by the Note is secured by, among other collateral, the following: (1) the following instruments styled First Deed of Trust and Security Agreement (collectively called the "First Deed of Trust"): (a) that First Deed of Trust and Security Agreement of even date with the Loan Agreement, executed by Borrower, recorded in Volume 5091, Page 0751, et seq., of the Official Public Records of Real Property of Bexar County, Texas, in Volume 91120, Page 2603, et seq., of the Deed of Trust Records of Dallas County, Texas, in Volume 3002, Page 1, et seq., of the Deed of Trust Records of Denton County, Texas, in Volume 2262, Page 494, et seq., of the Deed of Trust Records of Gregg County, Texas, under Film Code No. 037-12-1689 and corrected and refiled under Film Code No. ###-##-#### of the Official Public Records of Real Property of Harris County, Texas, in Volume 878, Page 805, et seq., of the Official Public Records of Hays County, Texas, in Volume 727, Page 416, et seq., of the Deed of Trust Records of Midland County, Texas, in Volume 10293, Page 1892, et seq., of the Deed of Trust Records of Tarrant County, Texas, in Volume 11462, Page 0662, et seq., of the Real Property Records of Travis County, Texas, and in Volume 2026, Page 871, et seq., of the Official Records of Williamson County, Texas, (b) that First Deed of Trust and Security Agreement dated October 18, 1991, executed by Borrower and recorded at Volume 5191, Page 1394, et seq., of the Official Public Records of Real Property of Bexar County, Texas; (c) that First Deed of Trust and Security Agreement dated November 5, 1991, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the Official Public Records of Real Property of Harris County, Texas; (d) that First Deed of Trust and Security Agreement dated February 4, 1992, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the Official Public Records of Real Property of Harris County, Texas; (e) that First Deed of Trust and Security Agreement dated June 2, 1992, executed by Borrower and recorded at Volume 10683, Page 2382, et seq., of the Deed of Trust Records of Tarrant County, Texas; (f) that First Deed of Trust and Security Agreement dated August 4, 1992, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N803821 and recorded at Film Code No. 106-59-2987, et seq., of the Official Public Records of Real Property of Harris County, Texas; and (g) that First Deed of Trust and Security Agreement dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1933, et seq., of the Official Public Records of Real Property of Bexar County, Texas, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442690 and recorded at Film Code No. 169-55-3591, et seq., of the Official Public Records of Real Property of Harris County, Texas, and recorded at Volume 11231, Page 0137, et seq., of the Deed of Trust Records of Tarrant County, Texas; each such instrument encumbering the real and other property described therein (the "Real Property"); and (2) that Second Deed of Trust and Security Agreement dated December 30, 1992, executed by Old Borrower and recorded in Volume 5581, Page 1347, et seq., of the Real Property Records of Bexar County, Texas, in Volume 3455, Page 0496, et seq., of the Real Property Records of Denton County, Texas, in Volume 2475, Page 1, et seq., of the Real Property Records of Gregg County, Texas, at Clerk's File No. P101069 and Film Code No. 120-51-2685, et seq., of the Real Property Records of Harris County, Texas, in Volume 976, Page 272, et seq., of the Real Property Records of Hays County, Texas, in Volume 778, Page 175, et seq., of the Deed of Trust Records of Midland County, Texas, in Volume 10957, Page 2238, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 2261, Page 292, et seq., of the Real Property Records of Williamson County, Texas (the "Second Deed of Trust"; the First Deed of Trust and the Second Deed of Trust being herein collectively called the "Deed of Trust") (3) the following instruments styled Assignment of Rents and Leases (collectively called the "Rental Assignment"): (a) that Assignment of Rents and Leases dated of even date with the Loan Agreement, executed by Borrower and recorded in Volume 5091, Page 0826, et seq., of the Official Public Records of Real Property of Bexar County, Texas, in Volume 91120, Page 2678, et seq., of the Deed of Trust Records of Dallas County, Texas, in Volume 3002, Page 0076, et seq., of the Deed of Trust Records of Denton County, Texas, in Volume 2262, Page 568, et seq., of the Deed of Trust Records of Gregg County, Texas, under Film Code No. 037-12-1763 of the Official Public Records of Real Property of Harris County, Texas, in Volume 879, Page 1, et seq., of the Official Public Records of Hays County, Texas, in Volume 1085, Page 176, et seq., of the Deed Records of Midland County, Texas, in Volume 10293, Page 1967, et seq., of the Deed of Trust Records of Tarrant County, Texas, in Volume 11462, Page 0736, et seq., of the Real Property Records of Travis County, Texas, and in Volume 2026, Page 943, et seq., of the Official Records of Williamson County, Texas; (b) that Assignment of Rents and Leases dated October 18, 1991, executed by Borrower and recorded at Volume 5191, Page 1421, et seq., of the Official Public Records of Real Property of Bexar County, Texas; (c) that Assignment of Rents and Leases dated November 5, 1991, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403253 and recorded at Film Code No. 006-52-1312, et seq., of the Official Public Records of Real Property of Harris County, Texas; (d) that Assignment of Rents and Leases dated February 4, 1992, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527999 and recorded at Film Code No. 014-55-1816, et seq., of the Official Public Records of Real Property of Harris County, Texas; (e) that Assignment of Rents and Leases dated June 2, 1992, executed by Borrower and recorded at Volume 10684, Page 0004, et seq., of the Deed Records of Tarrant County, Texas; (f) that Assignment of Rents and Leases dated August 4, 1992, executed by Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N803822 and recorded at Film Code No. 106-59-3015, et seq., of the Official Public Records of Real Property of Harris County, Texas; and (g) that Assignment of Rents and Leases dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et seq., of the Official Public Records of Real Property of Bexar County, Texas, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442691, and recorded at Film Code No. ###-##-####, et seq., of the Official Public Records of Real Property of Harris County, Texas, and recorded at Volume 11231, Page 0179, et seq., of the Deed Records of Tarrant County, Texas; (4) that Security Agreement and Pledge of Mortgage Loans and Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date with the Loan Agreement executed by Borrower and Lender and pledging to Lender, as security for the Loan, certain mortgage loans (the "Mortgage Loans"), as amended by the First Extension and the Increase Modification; and (5) that Unconditional Guarantee of Payment and Performance (the "Guaranty") dated June 17, 1991, executed by Guarantors, guaranteeing the payment and performance of the indebtedness and obligations of Borrower under the Loan; C. The Loan Agreement, the Notes, the Deed of Trust, the Rental Assignment, the Mortgage Pledge Agreement, the Guaranty, and all other documents evidencing, governing, guaranteeing, securing, or otherwise pertaining to the Loan (collectively, the "Loan Documents") have been modified and amended under the First Extension which is recorded in Volume 5465, Page 0671, et seq., of the Real Property Records of Bexar County, Texas, in Volume 92197, Page 6394, et seq., of the Real Property Records of Dallas County, Texas, in Volume 3346, Page 0215, et seq., of the Real Property Records of Denton County, Texas, in Volume 2426, Page 340, of the Real Property Records of Gregg County, Texas, in Film Code No. 111-43-2705, et seq., of the Real Property Records of Harris County, Texas, in Volume 952, Page 336, et seq., of the Real Property Records of Hays County, Texas, in Volume 767, Page 1, et seq., of the Real Property Records of Midland County, Texas, in Volume 10803, Page 0100, et seq., of the Real Property Records of Tarrant County, Texas, in Volume 11787, Page 1482, et seq., of the Real Property Records of Travis County, Texas, and in Volume 2201, Page 085, et seq., of the Real Property Records of Williamson County, Texas, and under the Increase Modification which is recorded at Volume 5581, Page 1386, et seq., of the Real Property Records of Bexar County, Texas, in Volume 3455, Page 0444, et seq., of the Real Property Records of Denton County, Texas, in Volume 2474, Page 598, et seq., of the Real Property Records of Gregg County, Texas, under Clerk's File No. P101068, Film Code No. 120-51-2633, et seq., of the Real Property Records of Harris County, Texas, in Volume 976, Page 221, et seq., of the Real Property Records of Hays County, Texas, in Volume 778, Page 125, et seq., of the Real Property Records of Midland County, Texas, in Volume 10957, Page 2186, et seq., of the Real Property Records of Tarrant County, Texas, and in Volume 2281, Page 241, et seq., of the Real Property Records of Williamson County, Texas; D. In connection with the Loan, Old Borrower and Guarantors executed and delivered to Lender that Hazardous Substances Indemnity Agreement and that Special Hazardous Substances Indemnity Agreement of even date with the Loan Agreement (together, the "Enviromental Indemnity"); E. Old Borrower has agreed to convey, transfer, and assign the Real Property, the Mortgage Loans, and its interest in the Loan Agreement and the other Loan Documents to New Borrower and New Borrower has agreed to accept such conveyance, transfer, and assignment subject to the consent of Lender, which consent is required in order that the conveyance, transfer and assignment of the Real Property, the Mortgage Loans, and the interest of Old Borrower in the Loan Agreement and the other Loan Documents to New Borrower will not be an Event of Default under Section 2.01(h) of the Deed of Trust or Section 10.5 of the Mortgage Pledge Agreement, or a violation of Section 4.19 of the Loan Agreement, or a default or breach of any other provision of any of the Loan Documents; F. Old Borrower and New Borrower have requested that Lender consent to the conveyance, assignment and transfer of the Property and the interest of Old Borrower in the Loan Agreement and the other Loan Documents to Old Borrower and the assumption by New Borrower of all of Old Borrower's obligations to Lender under the Loan Documents, and Lender has agreed to issue its consent subject to the terms and conditions set forth below: CONSENT AND ASSUMPTION: NOW, THEREFORE, for the premises considered, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender, Old Borrower, New Borrower, and Guarantors agree as follows: 1. New Borrower hereby assumes and agrees to pay and perform all the obligations of Old Borrower under and pursuant to the Loan Agreement, the Note, the Deed of Trust, the Mortgage Pledge Agreement, the Assignment, and all other Loan Documents, and New Borrower and Lender agree that all references in the Loan Agreement, the Note, or the Environmental Indemnity to "Borrower," all references in the Deed of Trust to "Grantor," all references in the Assignment to "Assignor," all references in the Mortgage Pledge Agreement to "Debtor," and all other references in the Loan Documents to Old Borrower shall hereafter refer and relate to New Borrower. 2. New Borrower agrees to execute such Uniform Commercial Code financing statements, change forms and continuation statements and other documents as Lender, in its sole discretion, deems necessary to maintain and continue the perfection and priority of the liens and security interests under the Loan Documents. 3. Lender hereby consents to the conveyance, transfers and assignments of the Real Property, the Mortgage Loans, and the interests of Old Borrower in the Loan Agreement to New Borrower, and Lender acknowledges and confirms that such conveyance, transfer and assignment shall not constitute an Event of Default under the Loan Agreement, the Deed of Trust, the Mortgage Pledge Agreement, or any of the other Loan Documents. 4. Old Borrower and New Borrower agree to pay all costs incurred in the execution and consummation of this Agreement, including but not limited to, all recording costs, the reasonable fees and actual expenses of Lender's legal counsel, premiums for endorsements requested by Lender to the Mortgagee Policy(ies) of Title Insurance insuring the validity and priority of the Deed of Trust, the Mortgage Pledge Agreement, and the other Loan Documents, as required by Lender in connection with this Agreement. 5. Old Borrower joins in this Agreement for the purpose of consenting hereto and agreeing to be bound hereby, and, in particular, agreeing to the terms of Section 4 of this agreement. 6. Guarantors join in the execution of this Agreement for purposes of consenting hereto, agreeing to be bound hereby and confirming that the Guaranty and the Environmental Indemnity remain in full force and effect notwithstanding the transfer of the Real Property and the Mortgage Loans to New Borrower and notwithstanding this Agreement, and further agreeing that the Guaranty does and shall guarantee the obligations of New Borrower under the Loan Documents in accordance with its terms. 7. As modified by the First Extension and the Increase Modification, and as modified hereby, all of the terms and conditions of the Loan Agreement, the Note, the Deed of Trust, the Mortgage Pledge Agreement, the Assignment, the Environmental Indemnity, and all other Loan Documents shall remain in full force and effect. EXECUTED as of the date and year first above written. GECC: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: Ty Albright, Project Manager New Borrower: MXM MORTGAGE L.P., a Delaware limited partnership By: MXM GENERAL PARTNER, INC., a Delaware corporation, General Partner By: Erik Eriksson, Jr., Vice President Old Borrower: MXM MORTGAGE CORP., a Delaware corporation By: Erik Eriksson, Jr., Vice President Guarantors: MAXXAM INC., a Delaware corporation By: Byron L. Wade, Vice President, Secretary and Deputy General Counsel MAXXAM GROUP INC., a Delaware corporation By: Byron L. Wade, Vice President, Secretary and Deputy General Counsel STATE OF TEXAS COUNTY OF DALLAS This instrument was acknowledged before me this _____ day of December, 1993, by TY ALBRIGHT, Project Manager of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, on behalf of said corporation. (S E A L) Notary Public in and for the State of Texas Printed/Typed Name of Notary My Commission Expires: STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December, 1993 by ERIK ERIKSSON, JR., Vice President of MXM GENERAL PARTNER, INC., a Delaware corporation and General Partner of MXM MORTGAGE L.P., a Delaware limited partnership, on behalf of said corporation and said limited partnership. (S E A L) Notary Public in and for the State of Texas Printed/Typed Name of Notary My Commission Expires: STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December, 1993, by ERIK ERIKSSON, JR., Vice President of MXM MORTGAGE CORP., a Delaware corporation, on behalf of said corporation. (S E A L) Notary Public in and for the State of Texas Printed/Typed Name of Notary My Commission Expires: STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December, 1993, by BYRON L. WADE, Vice President, Secretary and Deputy General Counsel of MAXXAM INC., a Delaware corporation, on behalf of said corporation. (S E A L) Notary Public in and for the State of Texas Printed/Typed Name of Notary My Commission Expires: STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December, 1993, by BYRON L. WADE, Vice President, Secretary and Deputy General Counsel of MAXXAM GROUP INC., a Delaware corporation, on behalf of said corporation. (S E A L) Notary Public in and for the State of Texas Printed/Typed Name of Notary My Commission Expires: EX-4 7 EXHIBIT 4.37 THIRD MODIFICATION AGREEMENT THIS THIRD MODIFICATION AGREEMENT (this "Agreement") is executed as of December __, 1993, by and among GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), MXM MORTGAGE, L.P., a Delaware limited partnership ("New Borrower"), MXM MORTGAGE CORP., a Delaware corporation ("Old Borrower"; New Borrower and Old Borrower being herein together called "Borrower"), on the following terms and conditions: RECITALS: A. Lender and Old Borrower entered into that Loan Agreement dated June 17, 1991, as amended by letter amendment dated August 22, 1991, as further amended by First Renewal, Extension and Modification Agreement (the "First Modification") dated June 17, 1992 among Lender, Old Borrower, Maxxam Inc. and Maxxam Group Inc. (Maxxam Inc. and Maxxam Group Inc. being herein together called "Guarantors"), and as further amended by Loan Increase, Extension and Modification Agreement dated December 30, 1992 among Lender, Old Borrower and Guarantors (the "Increase Modification"; the Loan Agreement, as amended, being herein called the "Loan Agreement"), pursuant to which Lender has agreed to make a loan to Borrower (the "Loan"), as evidenced by a $115,220,000 Promissory Note dated June 17, 1991, (the "Original Note"), and a $17,740,000 Promissory Note dated December 30, 1992 (the "Increase Note"; the Original Note and the Increase Note being herein collectively called the "Notes"), the Notes bearing interest and being payable to the order of Lender as therein provided. B. Taking into account releases of collateral, the indebtedness evidenced by the Original Note and the Increase Note is secured by, among other collateral, the following: (1) the following instruments styled First Deed of Trust and Security Agreement (collectively called the "First Lien Deed of Trust"): (a) that First Deed of Trust and Security Agreement of even date with the Loan Agreement, executed by Old Borrower, recorded in Volume 5091, Page 0751, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-12- 1689 and corrected and refiled under Film Code No. 038-03-0657 of the Official Public Records of Real Property of Harris County, Texas [Spring Valley, Westminster], in Volume 727, Page 416, et seq., of the Deed of Trust Records of Midland County, Texas [Oak Ridge], and in Volume 10293, Page 1892, et seq., of the Deed of Trust Records of Tarrant County, Texas [West Lake Gardens]; (b) that First Deed of Trust and Security Agreement dated November 5, 1991, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the Official Public Records of Real Property of Harris County, Texas [Richmond Square]; (c) that First Deed of Trust and Security Agreement dated February 4, 1992, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westchase]; (d) that First Deed of Trust and Security Agreement dated May 5, 1992, executed by Old Borrower and recorded at Volume 5356, Page 1511, et seq., of the Official Public Records of Real Property of Bexar County, Texas [San Antonio Imaging]; and (e) that First Deed of Trust and Security Agreement dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1933, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442690 and recorded at Film Code No. 169-55-3591, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westbrook, Colonies], and recorded at Volume 11231, Page 0137, et seq., of the Deed of Trust Records of Tarrant County, Texas [Bentley Village]; each such instrument encumbering the real and other property described therein (the "Real Property"); and (2) the following instruments styled Assignment of Rents and Leases (collectively called the "Rental Assignment"): (a) that Assignment of Rents and Leases dated of even date with the Loan Agreement, executed by Old Borrower and recorded in Volume 5091, Page 0826, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-12-1762 of the Official Public Records of Real Property of Harris County, Texas [Spring Valley, Westminster], in Volume 1085, Page 176, et seq., of the Deed Records of Midland County, Texas [Oak Ridge], and in Volume 10293, Page 1967, et seq., of the Deed of Trust Records of Tarrant County, Texas [West Lake Gardens], Texas; (b) that Assignment of Rents and Leases dated November 5, 1991, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403253 and recorded at Film Code No. 006-52-1312, et seq., of the Official Public Records of Real Property of Harris County, Texas [Richmond Square]; (c) that Assignment of Rents and Leases dated February 4, 1992, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527999 and recorded at Film Code No. 014-55-1816, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westchase]; (d) that Assignment of Rents and Leases dated May 5, 1992, executed by Old Borrower, recorded in Volume 5356, Page 1538, et seq., of the Official Public Records of Real Property of Bexar County, Texas [San Antonio Imaging]; and (e) that Assignment of Rents and Leases dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442691, and recorded at Film Code No. 169-55-3618, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westbrook, Colonies], and recorded at Volume 11231, Page 0179, et seq., of the Deed Records of Tarrant County, Texas [Bentley Village]; (3) that Second Deed of Trust and Security Agreement dated December 30, 1992, executed by Old Borrower and recorded in Volume 5581, Page 1347, et seq., of the Real Property Records of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza, San Antonio Imaging], at Clerk's File No. P101069 and Film Code No. 120-51-2685, et seq., of the Real Property Records of Harris County, Texas [Spring Valley, Westminster, Richmond Square, Westchase], in Volume 778, Page 175, et seq., of the Deed of Trust Records of Midland County, Texas [Oak Ridge], and in Volume 10957, Page 2238, et seq., of the Real Property Records of Tarrant County, Texas [Westlake Gardens] (the "Second Deed of Trust"; the First Deed of Trust and the Second Deed of Trust being herein collectively called the "Deed of Trust"); and (4) that Security Agreement and Pledge of Mortgage Loans and Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date with the Loan Agreement executed by Old Borrower and Lender and pledging to Lender, as security for the Loan, certain mortgage loans (the "Mortgage Loans") [Balcones, Enfield Courts, Park North Tech, Parc Bay, Turtle Creek, Trestles] (the Loan Agreement, the Notes, the Deed of Trust, the Rental Assignment, the Mortgage Pledge Agreement, the First Modification, the Increase Modification, and all other Security Instruments (as such term is defined in the Loan Agreement) or other documents evidencing, governing, guaranteeing, securing, or otherwise pertaining to the Loan being hereinafter collectively referred to as the "Loan Documents"); C. Lender, Old Borrower, New Borrower and Guarantors entered into that Consent and Assumption Agreement dated December 10, 1993, under which Lender consented to the transfer and conveyance of the Real Property and the Mortgage Loans to New Borrower (and pursuant to which Old Borrower has transferred and conveyed the Real Property, the Mortgage Loans, and the rights of Old Borrower under the Loan Agreement to New Borrower), and New Borrower has assumed the obligations and liabilities of Old Borrower under the Loan and the Loan Documents; and D. Borrower has requested that Lender make available $25,000,000 to Borrower as additional Subsequent Advances under the Loan Agreement, through re-advances of principal reductions of the Original Note, and Lender is agreeable to such additional Subsequent Advances on the terms of that Fourth Amendment to Loan Agreement of even date herewith between Lender and Borrower (the "Fourth Amendment"), and the modification of the Notes and the other Loan Documents as hereinafter set forth; AGREEMENT: NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, Lender, Borrower, and Guarantors do hereby agree as follows: 1. Revolving Line of Credit. The last two (2) sentences of the first paragraph of the Original Note are amended and restated as follows: To the extent of payments against the principal balance from applications of sales of Projects and Mortgage Loans and from payments made in satisfaction or partial satisfaction of Mortgage Loans, and other principal reductions, the Loan shall be a "revolving line of credit"; that is, subject to the terms of the Loan Agreement, and any amendments to the Loan Agreement, portions of the principal sum of this Note may be advanced, repaid, and readvanced. The books and records of GECC shall be prima facie evidence of all sums due GECC under this Note and the Other Security Documents. 2. Maturity Date. Borrower and Lender confirm that the Maturity Date (as defined in the Original Note and last amended in the Increase Modification) is and continues to be December 31, 1997, and that the Maturity Obligations (as defined in the Original Note) shall be fully payable on that date. 3. Payment Terms. Borrower and Lender agree (a) that from and after the date hereof, interest only on the outstanding principal balance of the Original Note shall be payable monthly on the first day of each month beginning January 1, 1994 and continuing to and including December 1, 1997, at the Contract Rate (as such rate was modified and redefined in Section 3 of the First Modification), and (b) that the obligation of Borrower to make quarterly payments from Excess Cash Flow for application to the outstanding principal balance of the Original Note, as agreed and established in Section 4 of the First Modification, is hereby waived. 4. Prepayment. The prepayment provisions set forth on pages 2 and 3 of the Note, as amended and restated in Section 4 of the First Modification, and further amended and restated in Section 17 of the Increase Modification, are further amended and restated as follows: Borrower may prepay the Note in part so long as (a) such prepayment would not reduce the unpaid principal balance of the Note below $10,000,000, and (b) the aggregate Loan allocation of that portion of the Mortgaged Property comprised of multi-family apartment projects, as determined in accordance with that Fourth Amendment to Loan Agreement between Borrower and GECC dated December 30, 1993 (the "Fourth Amendment to Loan Agreement"), is not less than forty percent (40%) of the aggregate Loan allocation of all of the Mortgaged Property and the Mortgage Loans, as determined in accordance with the Fourth Amendment to Loan Agreement (the "Apartments Percentage Requirement"), with proceeds from the payment or prepayment of any Mortgage Loan, or with proceeds of any sale of any Mortgage Loan to a third party, or with proceeds of any sale of any Project to any third party, upon ten (10) days prior written notice to Lender, by paying to GECC the Minimum Release Amount for such Mortgage Loan or Project (as defined and specified in the Loan Agreement, as modified in the Fourth Amendment to Loan Agreement); provided, however, and it is understood and agreed, (i) that Borrower shall have no right to prepay any portion of the principal balance of this Note before July 1, 1995 except through application of proceeds of the payment or prepayment of Mortgage Loans or the sale of Mortgage Loans and Projects to third parties, and (ii) that prior to July 1, 1995 Borrower shall not be entitled to prepay any portion of the principal balance of this Note through any whole or partial refinancing of the indebtedness under this Note; provided, however, that if as a result of any prepayment of the principal balance of this Note either (x) the outstanding principal balance of this Note would be less than $10,000,000, or (y) the Apartments Percentage Requirement would not be satisfied, then Borrower shall pay to GECC the entire outstanding principal balance of, and all accrued and unpaid interest, on this Note. All prepayments of the Note shall otherwise comply with the requirements for releases under the Loan Agreement, as modified by the Fourth Amendment to Loan Agreement. GECC reserves the right to require any payment of the indebtedness evidenced by this Note, whether such payment is of a regular installment or represents a prepayment, prepayment charge, or final payment, to be wired via federal funds or other immediately available funds. 5. Ratification and Confirmation of Loan Documents. Borrower and Lender agree that the Loan Agreement, the Notes, the Deed of Trust, the Rental Assignment, the Mortgage Pledge Agreement, and the other Loan Documents are hereby ratified and confirmed as valid and continuing obligations of Borrower, and that the Deed of Trust, the Rental Assignment, and the Mortgage Pledge Agreement shall continue to secure and/or provide payment for the Notes, as modified by this Agreement, and Borrower promises to pay to the order of Lender at P. O. Box 102771, Atlanta, Georgia 30368-0771, the indebtedness evidenced by the Notes, as herein modified. 6. No Impairment of Security. Borrower hereby agrees that the agreements contained herein shall in no manner affect or impair the Original Note or the Increase Note, the liens or security interests securing same, and that said liens and security interests shall not in any manner be waived, altered or vitiated by such agreements, and Borrower further agrees that, as expressly modified hereby, all terms and provisions of the Loan Documents shall be and remain in full force and effect. 7. No Default, Defenses, Counterclaims, Etc. Borrower hereby covenants and warrants that none of the Loan Documents are in default; that there are no defenses, counterclaims or offsets to such Loan Documents. 8. Costs and Expenses. Borrower agrees to pay all costs incurred in connection with the execution and consummation of this Agreement, including but not limited to, all recording costs, the premium for such endorsements to the policies of title insurance insuring the Deed of Trust as may be required by Lender with respect to this Agreement, and the reasonable fees and actual expenses of Lender's counsel. Borrower further covenants and agrees to deliver or cause to be delivered such evidence of existence, capacity, authorization, qualification, or enforceability of its obligations as Lender may require. 9. Limitation on Interest. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency, whether by reason of acceleration of the maturity of the Notes, or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the holder of the Notes exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to the holder of the Notes in excess of the maximum lawful amount, the interest payable to the holder of the Notes shall be reduced to the maximum amount permitted by applicable law; and if from any circumstance the holder of the Notes shall ever receive anything of value deemed interest by applicable law in excess of the maximum amount allowed by law, an amount equal to any excessive interest shall be applied to the reduction of the principal amount owing under the Notes, and not to the payment of interest, or if such excessive interest exceeds such unpaid balance of principal of the Notes, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Notes, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Notes (including the period of any renewal or extension thereof) so that the interest on the Notes shall not exceed the maximum amount permitted by applicable law. This paragraph shall control all agreements between Borrower and the holder of the Notes. EXECUTED by the parties hereto as of the date and year first above written. BORROWER: OLD BORROWER: MXM MORTGAGE CORP., a Delaware corporation By: Erik Eriksson, Jr., Vice President NEW BORROWER: MXM MORTGAGE, L.P., a Delaware limited partnership By: MXM GENERAL PARTNER, INC., a Delaware corporation, General Partner By: Erik Eriksson, Jr., Vice President LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: Ty Albright, Project Manager STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December 1993, by ERIK ERIKSSON, JR., Vice President of MXM MORTGAGE CORP., a Delaware corporation, on behalf of said corporation. (SEAL) Notary Public in and for the State of Texas Print name of notary My Commission Expires: STATE OF TEXAS COUNTY OF HARRIS This instrument was acknowledged before me this _____ day of December 1993, by ERIK ERIKSSON, JR., Vice President of MXM GENERAL PARTNER, INC., a Delaware corporation and General Partner of MXM MORTGAGE, L.P., a Delaware limited partnership, on behalf of said corporation and said limited partnership. (SEAL) Notary Public in and for the State of Texas Print name of notary My Commission Expires: STATE OF TEXAS COUNTY OF DALLAS This instrument was acknowledged before me this _____ day of December, 1993, by TY ALBRIGHT, Project Manager of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, on behalf of said corporation. (SEAL) Notary Public in and for the State of Texas Print name of notary My Commission Expires: EX-4 8 EXHIBIT 4.38 RELEASE AND TERMINATION OF UNCONDITIONAL GUARANTEE OF PAYMENT AND PERFORMANCE THIS RELEASE AND TERMINATION OF UNCONDITIONAL GUARANTEE OF PAYMENT AND PERFORMANCE (this "Release") is made as of December ___, 1993, by GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"), on the following terms and conditions: RECITALS: A. GECC has made a loan (the "Loan") to MXM Mortgage Corp. and MXM Mortgage L.P. (collectively, "Borrower"), as evidenced by Promissory Note dated June 17, 1991, in the stated principal amount of $115,220,000, executed by MXM Mortgage Corp., bearing interest and being payable to the order of GECC as therein provided, and by Promissory Note dated December 30, 1992, in the stated principal amount of $17,740,000, executed by MXM Mortgage Corp., bearing interest and being payable to the order of GECC as therein provided (collectively, the "Note"); B. As a condition to GECC making the Loan, MAXXAM INC., a Delaware corporation, and MAXXAM GROUP INC., a Delaware corporation (Maxxam Inc. and Maxxam Group Inc. being herein collectively called "Guarantors"), executed and delivered to GECC that Unconditional Guarantee of Payment and Performance dated June 17, 1991 (the "Guarantee"), guaranteeing to GECC the payment and performance of certain obligations of Borrower relating to the Loan; C. All capitalized terms in this Release, unless otherwise defined herein, shall have the same meanings assigned to such terms in the Guarantee; D. Section 1.14 of the Guarantee provides that when Borrower and Guarantors shall have demonstrated that the annualized Net Operating Income of the Mortgage Loans and the Real Property, over a consecutive six (6)-month period, is greater than the annual accrual of interest on the Note and any Funding Availability (the "Income Achievement Requirement"), then on request by Borrower, GECC will deliver a release and termination of Guarantors' guarantee of the Guaranteed Indebtedness under the Guarantee; E. Section 1.15 of the Guarantee provides that when GECC acknowledges to Borrower and Guarantors that Mandatory Principal Reductions are no longer required, the Asset Enhancement Guarantee under the Guarantee shall be suspended or released; and F. Borrower and Guarantors have satisfied the Income Achievement Requirement and have requested the release and termination of the guarantee of the Guaranteed Indebtedness in accordance with Section 1.14 of the Guarantee and GECC has determined that Mandatory Principal Reductions are no longer required; RELEASE AND TERMINATION NOW, THEREFORE, for the premises considered, GECC has released and terminated and does hereby release and terminate Guarantors' guarantee of the Guaranteed Indebtedness under the Guarantee and further has released and terminated and does hereby release and terminate the Asset Enhancement Guarantee under the Guarantee. EXECUTED as of the date and year first above recited. GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: Ty Albright, Project Manager EX-4 9 EXHIBIT 4.39 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is executed as of December __, 1993, by and among GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"), MXM MORTGAGE, L.P., a Delaware limited partnership ("New Borrower"), and MXM MORTGAGE CORP., a Delaware corporation ("Old Borrower"; New Borrower and Old Borrower being herein together sometimes called "Borrower"), on the following terms and conditions: RECITALS: A. Lender and Old Borrower entered into that Loan Agreement dated June 17, 1991, as amended by letter amendment dated August 22, 1991, as further amended by First Renewal, Extension and Modification Agreement (the "First Modification") dated June 17, 1992 among Lender, Old Borrower, and Maxxam Inc. and Maxxam Group Inc., and as further amended by Loan Increase, Extension and Modification Agreement (the "Increase Modification") dated December 30, 1992 among Lender, Old Borrower, Maxxam Inc. and Maxxam Group Inc. (said Loan Agreement, as amended, being herein called the "Loan Agreement"), pursuant to which Lender has agreed to make a loan to Borrower (the "Loan"), as evidenced by a $115,220,000 Promissory Note dated June 17, 1991, (the "Original Note"), and a $17,740,000 Promissory Note dated December 30, 1992 (the "Increase Note"; the Original Note and the Increase Note being herein together called the "Notes"), each of the Notes bearing interest and being payable to the order of Lender as therein provided; B. Unless otherwise defined herein, all capitalized terms in this Agreement shall have the same meanings assigned to such terms in the Loan Agreement, and, as applicable, in the First Modification and the Increase Modification; C. Taking into account releases of collateral, the indebtedness evidenced by the Original Note and the Increase Note is secured by, among other collateral, the following: (1) the following instruments styled First Deed of Trust and Security Agreement (collectively called the "First Lien Deed of Trust"): (a) that First Deed of Trust and Security Agreement of even date with the Loan Agreement, executed by Old Borrower, recorded in Volume 5091, Page 0751, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037- 12-1689 and corrected and refiled under Film Code No. 038-03-0657 of the Official Public Records of Real Property of Harris County, Texas [Spring Valley, Westminster], in Volume 727, Page 416, et seq., of the Deed of Trust Records of Midland County, Texas [Oak Ridge], and in Volume 10293, Page 1892, et seq., of the Deed of Trust Records of Tarrant County, Texas [West Lake Gardens]; (b) that First Deed of Trust and Security Agreement dated November 5, 1991, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403252 and recorded at Film Code No. 006-52-1287, et seq., of the Official Public Records of Real Property of Harris County, Texas [Richmond Square]; (c) that First Deed of Trust and Security Agreement dated February 4, 1992, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527998 and recorded at Film Code No. 014-55-1789, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westchase]; (d) that First Deed of Trust and Security Agreement dated May 5, 1992, executed by Old Borrower and recorded at Volume 5356, Page 1511, et seq., of the Official Public Records of Real Property of Bexar County, Texas [San Antonio Imaging]; and (e) that First Deed of Trust and Security Agreement dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1933, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442690 and recorded at Film Code No. 169-55-3591, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westbrook, Colonies], and recorded at Volume 11231, Page 0137, et seq., of the Deed of Trust Records of Tarrant County, Texas [Bentley Village]; each such instrument encumbering the real and other property described therein (the "Real Property"); and (2) the following instruments styled Assignment of Rents and Leases (collectively called the "Rental Assignment"): (a) that Assignment of Rents and Leases dated of even date with the Loan Agreement, executed by Old Borrower and recorded in Volume 5091, Page 0826, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza], under Film Code No. 037-12- 1762 of the Official Public Records of Real Property of Harris County, Texas [Spring Valley, Westminster], in Volume 1085, Page 176, et seq., of the Deed Records of Midland County, Texas [Oak Ridge], and in Volume 10293, Page 1967, et seq., of the Deed of Trust Records of Tarrant County, Texas [West Lake Gardens], Texas; (b) that Assignment of Rents and Leases dated November 5, 1991, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N403253 and recorded at Film Code No. 006-52-1312, et seq., of the Official Public Records of Real Property of Harris County, Texas [Richmond Square]; (c) that Assignment of Rents and Leases dated February 4, 1992, executed by Old Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. N527999 and recorded at Film Code No. 014-55-1816, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westchase]; (d) that Assignment of Rents and Leases dated May 5, 1992, executed by Old Borrower, recorded in Volume 5356, Page 1538, et seq., of the Official Public Records of Real Property of Bexar County, Texas [San Antonio Imaging]; and (e) that Assignment of Rents and Leases dated September 7, 1993, executed by Old Borrower, recorded at Volume 5792, Page 1961, et seq., of the Official Public Records of Real Property of Bexar County, Texas [Pipers Creek, Shadow Valley], filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. P442691, and recorded at Film Code No. 169-55-3618, et seq., of the Official Public Records of Real Property of Harris County, Texas [Westbrook, Colonies], and recorded at Volume 11231, Page 0179, et seq., of the Deed Records of Tarrant County, Texas [Bentley Village]; (3) that Second Deed of Trust and Security Agreement dated December 30, 1992, executed by Old Borrower and recorded in Volume 5581, Page 1347, et seq., of the Real Property Records of Bexar County, Texas [Southwest Medical, Redondo Place, Med Centre Pointe, Nacon Plaza, San Antonio Imaging], at Clerk's File No. P101069 and Film Code No. 120-51-2685, et seq., of the Real Property Records of Harris County, Texas [Spring Valley, Westminster, Richmond Square, Westchase], in Volume 778, Page 175, et seq., of the Deed of Trust Records of Midland County, Texas [Oak Ridge], and in Volume 10957, Page 2238, et seq., of the Real Property Records of Tarrant County, Texas [Westlake Gardens] (the "Second Deed of Trust"; the First Deed of Trust and the Second Deed of Trust being herein collectively called the "Deed of Trust"); and (4) that Security Agreement and Pledge of Mortgage Loans and Mortgage Loan Documents (the "Mortgage Pledge Agreement") of even date with the Loan Agreement executed by Old Borrower and Lender and pledging to Lender, as security for the Loan, certain mortgage loans (the "Mortgage Loans") [Balcones, Enfield Courts, Park North Tech, Parc Bay, Turtle Creek, Trestles]; (the Loan Agreement, the Notes, the Deed of Trust, the Rental Assignment, the Mortgage Pledge Agreement, the First Modification, the Increase Modification, and all other Security Instruments (as such term is defined in the Loan Agreement) or other documents evidencing, governing, guaranteeing, securing, or otherwise pertaining to the Loan being hereinafter collectively referred to as the "Security Instruments"); D. Lender, Old Borrower, New Borrower, Maxxam Inc. and Maxxam Group Inc. entered into that Consent and Assumption Agreement dated December 10, 1993, under which Lender consented to the transfer and conveyance of the Real Property, the Mortgage Loans, and the rights of Old Borrower under the Loan Agreement to New Borrower (and pursuant to which Old Borrower has transferred and conveyed the Real Property, the Mortgage Loans, and the rights of Old Borrower under the Loan Agreement to New Borrower), and New Borrower has assumed the obligations and liabilities of Old Borrower under the Loan and the Security Instruments; E. Section 2.1 of the Loan Agreement provides that to the extent of certain principal reductions the Loan shall be a revolving line of credit and that subject to the terms of the Loan Agreement portions of the principal sum of the Original Note may be advanced, repaid, and readvanced; F. Through application of proceeds from the sale of Assets and the payment and satisfaction of Mortgage Loans: (1) the principal balance of the Loan has been reduced to $15,000,000, and (2) the existing Funding Availability under the Loan is $6,645,819.98, of which (a) $2,224,897.08 has been approved for an Advance for renovation of the Real Property, and (b) $1,440,842.90 has been approved for an Advance for payment of Taxes, leaving an existing Funding Availability for Advances not yet approved of $2,730,080 for renovation of Real Property, and of $250,000 as a holdback for abatement and removal of environmental hazards; G. Borrower has requested that, after approved Advances of $2,224,897.08 for renovation of the Real Property and $1,440,842.90 for the payment of Taxes, Lender make available for readvances under the Loan Agreement up to $25,000,000 of principal reductions of the Loan, and Lender is agreeable to such funding availability on the terms of this Agreement and the terms of that Third Modification Agreement of even date herewith between Lender and Borrower (the "Third Modification"); AGREEMENT: NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower agree as follows: 1. Additional Re-Advances. Provided Borrower is not then in default under the Loan Documents, Lender will make available to Borrower, as Subsequent Advances to be re-advanced under the Loan, up to $25,000,000 of principal reductions of the Original Note, (a) $22,019,920 of which shall be available for general business purposes, which amount Borrower agrees to borrow and, subject to the applicable conditions to Subsequent Advances, Lender shall fund on or before March 31, 1994, (b) $2,730,080 of which shall be available for Subsequent Advances for Leasing Costs, and (c) $250,000 of which shall be available for Subsequent Advances for abatement and removal of environmental hazards. Borrower shall initiate requests for such Subsequent Advances in accordance with the application procedure set forth in Section 2.4 of the Loan Agreement and funding for such Subsequent Advances shall originate from re-advances of principal reductions of the Original Note. Borrower and Lender acknowledge and agree that the principal balance of the Loan as of the date hereof is $15,000,000, and that, in addition to the $25,000,000 which is made available for Subsequent Advances under this Amendment, Borrower has requested and Lender has approved $3,665,739.98 for Subsequent Advances under the Loan Agreement. In accordance with the foregoing, Section 2.1 of the Loan Agreement is amended and restated as follows: 2.1 Commitment of Lender; Revolving Line of Credit. Subject to the provisions of this Agreement, and provided that an Event of Default does not then exist, Lender will make Advances to Borrower subject to the conditions of this Agreement. As the first Advance hereunder, Lender shall disburse $109,864,700. Thereafter, Lender shall make Advances for, among other purposes, the Renovation of the Real Property and Leasing Costs, in accordance with Approved Budget in the amount of up to the sum of all principal reductions which actually have been paid to Lender; provided, however, (a) that the sum of all Subsequent Advances from and after December 31, 1993 shall not exceed $25,000,000 (exclusive of Subsequent Advances for Taxes under Section 2.21 of this Agreement), (b) that of said $25,000,000 which is available for Subsequent Advances after December 31, 1993, (i) $22,019,920 shall only be available to be advanced prior to March 31, 1994, but may be advanced for Borrower's general business purposes and shall not be subject to the requirements of Section 1.64 of this Agreement, regarding the purpose of Subsequent Advances, Section 2.2(c) and Subsections 2.2(d)(ii) and 2.2(d)(iii) of this Agreement in connection with renovation of the Real Property, Section 2.4, Section 2.5, and Section 2.10 of this Agreement relating to Renovation Requirements and Leasing Costs, or the use requirements of Section 2.6 of this Agreement, (ii) of the remaining $2,980,080, $2,730,080 shall be available only for Leasing Costs, and $250,000 shall be available for payment of costs of abating or removing environmental hazards affecting the Real Property; and (iii) Subsequent Advances from and after December 31, 1993 shall not under any circumstances be available, except for Borrower's general business purposes, for paying costs of renovation of the Real Property. To the extent reductions of principal are made available for Subsequent Advances under this Agreement, the Loan shall be a "revolving line of credit"; that is, subject to the terms hereof, portions of the principal sum of the Note may be advanced, repaid, and readvanced. The books and records of Lender shall be prima facie evidence of all sums due Lender under the Note and the other Security Instruments. Notwithstanding the foregoing, Borrower shall continue to be entitled to Subsequent Advances for Taxes in the amount of aggregate monthly principal reductions and in accordance with Section 2.21 of this Agreement. 2. Maximum Loan Amount. Borrower and Lender agree that from and after the date hereof the maximum amount which at any time can be outstanding under the Loan, whether evidenced by the Original Note or the Increase Note, is $43,665,739.98. 3. Release Prices. Section 8.1(b)(1) of the Loan Agreement is deleted and in lieu thereof is inserted the following: (1) an amount to be applied as a prepayment in reduction of the indebtedness evidenced by the Note equal to: (A) One hundred fifty percent (150%) of the amount allocated by Lender to the following Assets: Bentley Village Trestles (Mortgage Westbrook Place Loan) Colonies Landing Shadow Valley Pipers Creek (B) One hundred five percent (105%) of the amount allocated by Lender for the following Real Property Assets: West Lake Gardens Oak Ridge (C) One hundred twenty-five percent (125%) of the amount allocated by Lender for the following Assets: Southwest Medical Westchase Richmond Square San Antonio Imaging Westminster Spring Valley Medcentre Pointe Redondo Place Nacon Plaza Park North Tech Balcones (Mortgage (Mortgage Loan) Loan) (D) Greater of (i) GECC Loan Allocation or (ii) seventy percent (70%) of the face amount of the following Mortgage Loans: Enfield Courts Turtle Creek Parc Bay Each such amount being herein called, for the Asset to which it relates, the "Minimum Release Amount." Provided further, Exhibit AA to the Loan Agreement, as adopted in the Increase Modification, is hereby deleted and replaced with Exhibit AAA to this Amendment. 4. Security Instruments. Section 1.63 of the Loan Agreement is hereby modified to include in the definitions of Security Instruments under the Loan Agreement, this Amendment and the Third Modification. 5. Prepayment Charges. Borrower and Lender acknowledge and agree (a) that, in accordance with Section 4 of the First Modification, the prepayment of the principal of the Loan on December 15, 1993 to a remaining principal balance of $15,000,000 required a prepayment charge of $621,016.40 and (b) that Lender agreed to accept only $500,000 of the prepayment charge at that time, reserving the right to charge the remaining $121,016.40 of the prepayment charge at any time in the future. Borrower and Lender further agree that if Borrower requests and satisfies all conditions precedent for additional Subsequent Advances of $22,019,920 for general business purposes on or before March 31, 1994, and $22,019,920 of additional Subsequent Advances for general business purposes actually are made on or before March 31, 1994, Lender shall waive its right to receive any further prepayment charge as a result of the partial prepayment of the principal balance of the Loan on December 15, 1993 or any subsequent prepayment. Otherwise, on April 1, 1994, Borrower shall pay to Lender the remaining $121,016.40 portion of the prepayment charge owing as a result of the December 15, 1993 partial prepayment and the prepayment charge shall continue to be applicable to all future prepayments. 6. Mandatory Prepayment. Borrower covenants and agrees to prepay the entire principal balance of the Loan and all accrued and unpaid interest thereon if either (c) the principal amount of the Loan shall have been reduced to less than $10,000,000, or (d) the aggregate Loan allocation of those Real Property Assets comprising multi-family apartment projects, as determined in accordance with Exhibit A, shall ever be less than forty percent (40%) of the aggregate Loan allocation of all Assets, also as determined in accordance with Exhibit A. 7. Costs and Expenses. Borrower agrees to pay all costs incurred in connection with the execution and consummation of this Amendment and the Third Modification, including but not limited to, all recording costs, the premium for such endorsements to the policies of title insurance insuring the First Lien Deed of Trust and the Second Lien Deed of Trust as may be required by Lender with respect to this Amendment and the Third Modification, and the reasonable fees and actual expenses of Lender's counsel. Borrower further covenants to deliver or cause to be delivered such evidence of existence, capacity, authorization, qualification, or enforceability of its obligations as Lender may require in connection with this Amendment and the Third Modification. 8. Limitation on Interest. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency, whether by reason of acceleration of the maturity of the Notes or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to the holder of the Notes exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to the holder of the Notes in excess of the maximum lawful amount, the interest payable to the holder of the Notes shall be reduced to the maximum amount permitted by applicable law; and if from any circumstance the holder of the Notes shall ever receive anything of value deemed interest by applicable law in excess of the maximum amount allowed by law, an amount equal to any excessive interest shall be applied to the reduction of the principal amount owing under the Notes, and not to the payment of interest, or if such excessive interest exceeds such unpaid balance of principal of the Notes, such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Notes, shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Notes (including the period of any renewal or extension thereof) so that the interest on the Notes shall not exceed the maximum amount permitted by applicable law. This Section shall control all agreements between Borrower and the holder of the Notes. EXECUTED as of the date and year first above written. BORROWER: OLD BORROWER: MXM MORTGAGE CORP., a Delaware corporation By: Erik Eriksson, Jr., Vice President NEW BORROWER: MXM MORTGAGE, L.P., a Delaware limited partnership By: MXM GENERAL PARTNER, INC., a Delaware corporation, General Partner By: Erik Eriksson, Jr., Vice President LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: Ty Albright, Project Manager EX-10 10 EXHIBIT 10.45 CONSULTING AGREEMENT THIS AGREEMENT is made as of the 19th day of November, 1993, by and between Kaiser Aluminum & Chemical Corporation, a Delaware corporation (the "Company"), and A. Stephens Hutchcraft, Jr. (the "Consultant"). In consideration of the mutual promises contained in this Agreement, the Company and Consultant hereby agree as follows: 1. TERM The term of this Consulting Agreement shall commence on January 1, 1994, and shall continue through December 31, 1994; provided, however, that the term of this Agreement may be extended for additional one-year periods, or such shorter periods as the parties hereto may agree upon, in the event that the parties hereto mutually agree, in writing, to any such extension prior to the expiration of the term hereof. 2. CONSULTATION SERVICES (a) The Company hereby contracts for the services of Consultant and the Consultant hereby agrees to advise and consult with the Company and certain of its affiliates in such positions and activities as the President and Chief Executive Officer of the Company shall direct. Consultant shall provide consulting services to the Company hereunder during such times and at such place or places as shall be mutually agreed upon by the Company and Consultant. (b) As an independent contractor, Consultant agrees to provide such consulting advice and assistance to the Company during an average fifty percent (50%) of the customary business hours in any given month during the term of this Agreement. (c) Consultant shall have the right to designate periods of time during which he will be unavailable (such as periods of vacation and for other desired absences), provided Consultant has informed the President and Chief Executive Officer of the Company in advance of any periods during which he will be unavailable for more than two consecutive weeks. (d) In the event Consultant is temporarily unable by reason of disability to perform consulting services, such performance shall be excused during such period of disability, provided that Consultant's physician advises the Company that the Consultant's recovery is likely to occur within the remaining term of this Consulting Agreement. (e) To the extent consistent with Section 2(f) and Section 5 hereof, Consultant shall be free to engage in business activity of his choice when not providing consulting services to the Company hereunder. (f) Consultant acknowledges receipt of a copy and agrees during the term hereof to comply with the terms and conditions of the MAXXAM Inc. "Code of Business Conduct" insofar as said Code applies to Consultant providing services to the Company and certain of its affiliates. 3. COMPENSATION (a) During the term of this Agreement, the Company shall pay to Consultant for the services rendered by Consultant a total fee of $225,000, payable in installments of $9,375.00 on the 15th and on the final day of each month. (b) The Company shall reimburse Consultant for all reasonable out-of-pocket business expenses incurred by him relating to consulting services provided by Consultant under this Consulting Agreement. Consultant shall furnish such evidence or documentation to support his requests for reimbursement of expenses as is customarily provided by executives of the Company in connection with reimbursement of expenses. (c) The Company shall provide Consultant with an office, secretarial services and an automobile of such make and model as shall be agreed upon between the Company and Consultant, including costs of fuel and maintenance, and the Company shall also provide credit cards for payment of expenses that are otherwise reimbursable under this Agreement. 4. INDEPENDENT CONTRACTOR STATUS (a) The Consultant shall act in the capacity of an independent contractor with respect to the Company. The Consultant shall not be, nor represent himself as being, an agent of the Company, and he shall not be, nor represent himself as being, authorized to bind the Company. (b) Nothing contained herein shall be deemed to create an employer/employee relationship between the Company and Consultant, and in all respects Consultant shall be an independent contractor with respect to all of his activities on behalf of the Company hereunder. The Company shall not treat Consultant as an employee for purposes of employment taxes, income tax withholding or employee benefits. Consultant acknowledges that he is responsible for payment of all Federal and State self-employment and income taxes. (c) consultant understand that no employee benefits provided by the Company for its employees, including, but not limited to the Kaiser Retirement Plan, Plan B, Severance Pay, Life Insurance and Medical or Dental insurance, unemployment insurance, compensation for holidays or illness, pension benefits, or health and welfare benefits shall be available to Consultant as a result of his services under this Agreement. However, nothing herein shall affect benefits accrued or to which Consultant is otherwise entitled by virtue of his prior employment by the Company. 5. NON-COMPETITION Throughout the term hereof, the Consultant shall not, directly or indirectly, engage in any business or activity in which the Company is engaged ("Competitive Business") nor be employed by, render services of any kind to, advise or receive compensation in any form from, any entity or person which directly or indirectly engages in a Competitive Business without first advising the Company in writing of the nature of the services contemplated and the party for whom they are to be performed. 6. INDEMNIFICATION The Company shall indemnify and hold harmless Consultant from and against any and all expenses, costs, or liabilities (including court costs and reasonable attorneys' fees) actually incurred by Consultant arising out of any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative by reason of the performance of consulting services by Consultant under this Agreement, except to the extent that (a) such liabilities were caused by Consultant's gross negligence or bad faith, or (b) such indemnification is prohibited by law, whether by statute, court decision or otherwise. 7. PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION (a) All analyses, reports, photographs, data and other information prepared by Consultant in connection with this Agreement or disclosed to Consultant by or on behalf of the Company in connection with the services hereunder shall, as between Consultant and the Company, become or remain as the case may be, the property of the Company; and, except as authorized in writing, no such information shall be disclosed by Consultant to any other person, firm or corporation or be used by Consultant for any other purpose than the performance of the services hereunder. All such material shall be delivered to the Company by Consultant upon request. (b) The Consultant shall not at any time, either during the term of this Agreement or thereafter, directly or indirectly use, disseminate or disclose to any person or entity any information, trade secrets, customer lists or other customer information, technical data or know-how relating to the products, developments, inventions, services, processes, methods, designs, equipment or business practices of the Company, whether acquired in the performance of services under this Agreement or in any other capacity. 8. SUCCESSORS AND ASSIGNS This Agreement shall not be assigned by either party without the prior written consent of the other party, except that the Company may, without consent, assign this agreement to any successor to all or substantially all of the assets of the Company. Except as so limited, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. Nothing herein expressed or implied is intended to confer upon any person, other than the parties hereto or their respective successors, assigns, heirs or legal representatives, any rights, remedies, obligations, or any liabilities under or by reason of this Agreement. 9. AMENDMENTS This Agreement may be changed, amended or modified only by an agreement in writing signed by each of the parties. 10. TERMINATION This Agreement may be terminated by the Company prior to its expiration date for cause should Consultant be convicted of any crime involving moral turpitude. 11. NOTICES All notices provided for in this Agreement shall be sent to the parties addressed as follows: TO THE COMPANY: Kaiser Aluminum & Chemical Corporation Attention: Anthony R. Pierno 5847 San Felipe, Suite 2600 Houston, Texas 77057 TO CONSULTANT: A. Stephens Hutchcraft, Jr. 15 Hillside Drive Danville, California 94526 All notices shall be deemed to have been given when personally delivered or five (5) days after being sent by certified or registered first-class mail, return receipt requested, postage prepaid and properly addressed to the designated address of the party to whom the notice is directed. 12. WAIVER OF BREACH The waiver by any party of any breach by the other party of any term or condition of this Agreement shall not be deemed to constitute the waiver by such first party of any other breach by the other party of the same or any other term or condition. 13. ARBITRATION OF DISPUTES Any dispute under this Agreement shall be resolved by binding arbitration in San Francisco, California, pursuant to the rules of the American Arbitration Association in effect at the time of the arbitration or such other rules as to which the parties may mutually agree. 14. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California. 15. ENTIRE AGREEMENT: SURVIVAL OF OBLIGATIONS This Agreement, as to the matters herein set forth, supersedes any contrary or inconsistent provisions of any prior agreement between Consultant and the Company. The parties acknowledge that the Consultant's employment agreement with the Company dated October 1, 1992, is for a term ending on December 31, 1993, and that Consultant will thereupon be retiring from his long term employment with the Company. This Agreement contains the entire agreement between the parties concerning the subject matters herein set forth and supersedes all prior agreements and understandings concerning such subject matters. The obligations of Consultant under paragraph 7 shall survive the expiration or termination of this Agreement, and nothing herein contained shall limit or impair Consultant's rights under the aforesaid employment agreement including but not limited to his right thereunder to any amounts payable after the conclusion of the term of that agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of November 19, 1993. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same Agreement for all purposes. KAISER ALUMINUM & CHEMICAL CORPORATION By: CONSULTANT A. Stephens Hutchcraft, Jr. EX-10 11 EXHIBIT 10.50 COMMERCIAL GUARANTY
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials 62 24 SSJ15 References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: Anthony R. Pierno Lender: Charter National Bank-Houston (SSN: ###-##-####) Westheimer 5374 Tilbury Drive P.O. Box 4525 Houston, TX 77056 Houston, TX 77210-4525 Guarantor: MAXXAM, INC. 2600 SAN FELIPE HOUSTON, TX 77057
AMOUNT OF GUARANTY. This is a guaranty of payment of the Note, including without limitation the principal Note amount of One Hundred Fifty Thousand & 00/100 Dollars ($150,000.00). GUARANTY. For good and valuable consideration, MAXXAM, INC. ("Guarantor") absolutely and unconditionally guarantees and promises to pay to Charter National Bank-Houston ("Lender") or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of Anthony R. Pierno ("Borrower") to Lender on the terms and conditions set forth in this Guaranty. DEFINITIONS. The following words shall have the following meanings when used in this Guaranty: Borrower: The word "Borrower" means Anthony R. Pierno. Guarantor: The word "Guarantor" means MAXXAM, INC. Guaranty: The word "Guaranty" means this Guaranty made by Guarantor for the benefit of Lender dated January 28, 1994. Indebtedness. The word "Indebtedness" means the Note, including (a) all principal, (b) all interest, (c) all late charges, (d) all loan fees and loan changes, and (e) all collection costs and expenses relating to the Note or to any collateral for the Note. Collection costs and expenses include without limitation all of Lender's attorneys' fees and Lender's legal expenses, whether or not suit is instituted, and attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender. The word "Lender" means Charter National Bank-Houston, its successors and assigns. Note. The word "Note" means the promissory note or credit agreement dated January 28, 1994, in the original principal amount of $150,000.00 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancing of, consolidations of, and substitutions for the promissory note or agreement. Notice to Guarantor: The Note evidences a revolving line of credit from Lender to Borrower. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, execution in connection with the Indebtedness. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the amount of the Indebtedness described above, plus all costs and expenses of (a) enforcement of this Guaranty and (b) collection and sale of any collateral securing this Guaranty. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, the rights of Lender under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. The liability of Guarantor will be the aggregate liability of Guarantor under the terms of this Guaranty and any such other unterminated guaranties. NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance and prompt payment when due, whether at maturity or earlier by reasons of acceleration or otherwise, of all Indebtedness within the limits set forth in the preceding section of this Guaranty. This Guaranty covers a revolving line of credit and guarantor understands and agrees that this guarantee shall be open and continuous until the line of credit is terminated and the Indebtedness is paid in full, as provided below. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness shall have been fully and finally paid and satisfied and all other obligations of Guarantor under this Guaranty shall have been performed in full. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation receivable by Lender from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. This Guaranty covers a revolving line of credit and it is specifically anticipated that fluctuations will occur in the aggregate amount of Indebtedness owing from Borrower to Lender. Grantor specifically acknowledges and agrees that fluctuations in the amount of Indebtedness, even to zero dollars ($0.00), shall not constitute a termination of this Guaranty. Guarantor's liability under this Guaranty shall terminate only upon (a) termination in writing by Borrower and Lender of the line of credit, (b) payment of the Indebtedness in full in legal tender, and (c) payment in full in legal tender of all other obligations of Guarantor under this Guaranty. GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, without notice or demand and without lessening or otherwise affecting Guarantor's liability under this Guaranty, from time to time: (a) to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, fall or decide not to perfect; and release any such security, with or without the substitution of new collateral; (d) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (g) to sell, transfer, assign, or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (a) no representation or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) this Guaranty is executed at Borrower's request and not at the request of Lender; (c) Guarantor has not and will not, without the prior written consent of Lender, sell lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets*, or any interest therein; (d) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; (e) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender**, and all such financial information provided to Lender is true and correct in all material respects and fairly presents the financial condition of Guarantor as of the dates thereof, and no material adverse change has occurred in the financial condition of Guarantor since the date of the financial statements; and (f) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (a) to continue lending money or to extend other credit to Borrower; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (c) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (d) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender's power; or (g) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever. If now or hereafter (a) Borrower shall be or become insolvent, and (b) the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor of Lender and Borrower, and their respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. Guarantor waives all rights of Guarantor under Chapter 34 of the Texas Business and Commerce Code. Guarantor also waives any and all rights or defenses arising by reason of (a) any "one action" or "anti-deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale; (b) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (c) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness; (e) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced there is outstanding Indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations; or (f) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness. If payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of enforcement of this Guaranty. Guaranty further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the moneys, securities or other property of Guarantor given to Lender by law, Lender shall have, with respect to Guarantor's obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding however all IRA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender or by any neglect to exercise such right of setoff or to enforce such security interest or by any delay in so doing. Every right of setoff and security interest shall continue in full force and effect until such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be prior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Guaranty has been delivered to Lender and accepted by Lender in the State of Texas. If there is a lawsuit, and if the transaction evidenced by this Guaranty occurred in Harris County, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Harris County, State of Texas. This Guaranty shall be governed by and construed in accordance with the laws of the State of Texas and applicable Federal laws. Attorneys' Fees. In addition to the amount of this Guaranty set forth above, Lender may hire an attorney to help enforce this Guaranty if Guarantor does not pay, and Guarantor will pay all of Lender's attorneys' fees assessed by the court. Guarantor also will pay Lender all other amounts actually incurred by Lender as court costs, lawful fees for filing, recording, or releasing to any public office any instrument securing this Guaranty; the reasonable cost actually expended for repossessing, storing, preparing for sale, and selling any security; and fees for noting a lien on or transferring a certificate of title to any motor vehicle offered as security for this Guaranty. Notices. All notices required to be given by either party to the other under this Guaranty shall be in writing and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier, or when deposited in the United States mail, first class postage prepaid, addressed to the party to whom the notice is to be given at the address shown above or to such other addresses as either party may designate to the other in writing. If there is more than one Guarantor, notice to any Guarantor will constitute notice to all Guarantors. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address. Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. If a court of competent jurisdiction finds any provision of this Guaranty to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances, and all provisions of this Guaranty in all other respects shall remain valid and enforceable. If any one or more of Borrower or Guarantor are corporations or partnerships, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, or agents acting or purporting to act on their behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. Waiver. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. *Except to an affiliate or to another assignee or transferee which agrees to become substitute Guarantor of this Guaranty and to assume all of the obligations of Guarantor set forth in this Guaranty. **It is recognized that Guarantor is a corporation with securities traded on a national securities exchange and, as such, is governed by the Securities Exchange Act of 1934 as amended (the "Act"). It is agreed that financial information as filed by the Guarantor pursuant to the Act is deemed to be (i) adequate information and (ii) in a form acceptable to Lender for the purposes of this provision. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED JANUARY 28, 1994. GUARANTOR: MAXXAM, INC. By:/s/ Charles Hurwitz CHARLES HURWITZ PRESIDENT AND CHIEF EXECUTIVE OFFICER January 28, 1994 Charter National Bank-Houston P. O. Box 4525 Houston, Texas 772104525 RE: Collateral assignment of certain contract rights. Gentlemen: Concurrently with the execution of this letter agreement, Charter National Bank-Houston (the "Bank") has extended by renewal a personal line of credit (the "Line of Credit") to Anthony R. Pierno ("Pierno") in the principal amount of $150,000.00 pursuant to that certain promissory note of even date herewith (the "Note" which term as used herein shall include any and all renewals, extensions and modifications of the Note, if any). To secure payment of the Note, and any and all indebtedness, obligations liabilities Pierno arising in connection therewith, Pierno has granted, assigned and conveyed to the Bank a first lien and security interest in and to any bonus or similar payments which are to be paid to Pierno (the "Bonus") by MAXXAM, Inc. ("MAXXAM") at any time there is any indebtedness outstanding on the Note pursuant to that certain Employment Agreement dated May 23, 1990, by and between MAXXAM and Pierno (the "Employment Agreement" a copy of which is attached hereto as Exhibit A). The Bank's first lien and security interest in the Bonus shall include any bonus and/or severance payments (as defined herein below) that may be made to Pierno in the event of termination of Pierno's employment in accordance with Section 8 of the Employment Agreement. If Pierno's employment is terminated, Pierno agrees that if any bonus and/or severance payments to which he may be entitled under the Employment Agreement are less than the Payoff Amount, the entire amount of such payments shall be paid to the Bank in partial satisfaction of the Note. MAXXAM hereby acknowledges that the Bank has been granted a first lien and security interest in and to the Bonus. Prior to payment of the Bonus to Pierno, MAXXAM shall contact the Bank to determine the amount necessary to satisfy and discharge the Note in full (the "Payoff Amount"). In accordance with the Bank's instructions, Pierno hereby authorizes and instructs MAXXAM, and MAXXAM agrees, to deduct the Payoff Amount from the Bonus and to remit such Payoff Amount in immediately available funds directly to the Bank. The payment may be accomplished in such other manner as may be mutually agreeable between Pierno and the Bank, for example, by MAXXAM making a direct deposit of the full bonus amount to Pierno's account with the Bank when assured by the Bank that Bank holds Pierno's check or other instrument satisfactory to the Bank drawn against the account in the Payoff Amount. Upon payment of the Payoff Amount and discharge of the Note, the Line of Credit shall terminate and the Note shall be returned to Pierno marked "Paid in Full." Pierno and MAXXAM jointly and severally represent and warrant to the Bank that, as of the date hereof, (i) the base salary payable to Pierno under the Employment Agreement for the calendar year of 1994 is $331,511,00; (ii) the total directorship fees, if any, to paid to Pierno for calendar year of 1994 do not exceed $75,000.00; (iii) to the best of our knowledge, there is no event that warrants, or the passage of the time will warrant, termination of Pierno's employment; and (iv) there has been no amendment or modification, either oral or written, to the terms and provisions of the Employment Agreement. This letter agreement shall be and remain in full force and effect until all of Pierno's obligations under the Note and all documents have been satisfied. Anthony R. Pierno MAXXAM Inc. By: Name: Charles E. Hurwitz Title: Chairman of the Board, President and Chief Executive Officer AGREED TO AND ACCEPTED this ____ day of January, 1994 CHARTER NATIONAL BANK-HOUSTON By:___________ Name:_________ Title:________
NOTICE OF FINAL AGREEMENT Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $150,000.00 01-28-1994 01-28-1995 54656-003 62 24 SSJ15 ReferencesintheshadedareaareforLender'suseonlyanddonotlimittheapplicabilityofthisdocumenttoanyparticular loan or item.
Borrower: Anthony R.Pierno Lender: Charter National Bank-Houston (SSN: ###-##-####) 5374 Tilbury Drive P.O. Box 4525 Houston, TX 77056 Houston, TX 77210
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. As used in this Notice, the following terms have the following meanings: Loan: The term "Loan" means the following described loan: a Chapter 4 non-precomputed Variable Rate (2.000% over Charter National Bank - Houston Base, with an interest rate ceiling of 18.000%, making an initial rate of 9.250%), Nondisclosable Revolving Line of Credit Loan to an individual for $150,000.00 due on January 28, 1995. This is a secured renewal of the following described indebtedness: PROMISSORY NOTE DATED JANUARY 28, 1993 IN THE PRINCIPAL AMOUNT OF $150,000.00 EXECUTED BY ANTHONY R. PIERNO PAYABLE TO THE ORDER OF CHARTER NATIONAL BANK HOUSTON. Parties. The term "Parties" means Charter National Bank-Houston and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following: Borrower: Anthony R. Pierno Guarantor: MAXXAM Inc. Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following: Corporate Res. to Guarantee/Grant Coll. Promissory Note / Change in Terms Agr. Commercial Guaranty Security Agreement Assignment of Life Insurance UCC - 1 Disbursement Request and Authorization Notice of Final Agreement Insurance Policy Verification This Notice of Final Agreement is given by Charter National Bank-Houston pursuant to Section 26.02 of the Texas Business and Commerce Code. Each Party who signs below, other than Charter National Bank- Houston, acknowledges, represents, and warrants to Charter National Bank-Houston that it has received, read and understood this Notice of Final Agreement. This Notice is dated January 28, 1994. BORROWER: Anthony R. Pierno GUARANTOR: MAXXAM, INC. By:________ CHARLES HURWITZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER LENDER: Charter National Bank-Houston By:________ Authorized Officer EX-10 12 EXHIBIT 10.59 PROMISSORY NOTE Houston, Texas July 20, 1993 For value received, the undersigned (hereinafter called "Employee"), together with the undersigned Co-Borrower hereby promises(s) to pay to MAXXAM Inc., a Delaware corporation, or order at the principal offices of MAXXAM Inc., the sum of Fifty Thousand Dollars ($50,000), together with interest on the unpaid principal balance at the rate of six percent (6%) per annum. Interest shall be payable monthly in arrears on the twentieth day of each month. This note shall be payable in full, without presentment, grace, demand or notice upon the earliest to occur of: (i) July 20, 1998, or (ii) immediately upon employee's separation from Employment with MAXXAM Inc. Should default be made in payment of any sum due hereunder the whole sum of principal and accrued interest shall become immediately due and payable. After default, interest shall accrue on all unpaid amounts due at the highest rate then lawful in the State of Texas. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, the undersigned agree to pay such sums as a court of competent jurisdiction may fix as reasonable attorney's fees. EMPLOYEE Byron L. Wade CO-BORROWER Carol Wade EX-10 13 EXHIBIT 10.63 August 20, 1993 Mr. Robert E. Cole Vice President, Government Affairs 900 17th Street, N.W. Washington, D.C. 20006 Dear Bob: In order to help assure your retention and to provide a measure of compensation that is competitive with the marketplace, Management has agreed that it is in the best interest of Kaiser Aluminum & Chemical Corp. ("the Company") to enter into the following agreement with you. It is our purpose hereby to reinforce and encourage your continued attention and dedication to your assigned duties. To that end we have agreed as follows: 1. The Company will, immediately following execution of this agreement, pay you a special payment of $33,000.00 and, provided you remain in the employ of the Company until each of said dates, make separate special payments to you of like amounts on or about August 1, 1994, August 1, 1995, and August 1, 1996. 2. If you remain in the employ of the Company through a date three years from the date of this letter (the "Qualification Date") and you hereby confirm that it is your present intention to do so, in addition to your base salary and the above special payments during this period, the Company will pay to you the aggregate of the amounts set aside as retention payments in 1993, 1994 and 1995, to wit, on August 1 of each respective year, $33,000; $25,000; and $25,000, or a total of $83,000, provided you are a full-time employee of the Company on the Qualification Date. This retention payment will be made 30 days after the Qualification Date, and both it and the special payments will be subject to standard payroll tax deductions and withholding, and will be in addition to and have no effect upon any other bonus or benefit plans for which you may be eligible. Such payments are not and will not be made a part of your base salary. Nothing contained herein is intended to impair the Company's right to terminate your employment, either before or after the Qualification Date, for any of the reasons set forth in the termination policy of the Company including, without limitation, your inability to perform your duties, nor to impair your right to resign at any time. Should you resign, be discharged for serious cause, be discharged for failure to accept another suitable position with the Company, or retire voluntarily prior to the Qualification Date, no part of the retention payment shall be payable to you. However, should you be terminated prior to the Qualification Date under any other circumstances, including by reason of death or permanent disability prior to the Qualification Date, you or your estate will receive any retention payment credited up to the date of termination and in addition such payment shall include a proration of the retention payment for any partial year elapsed between the last previous retention credit and the date of termination. Your signature below signifies that you are in agreement with the terms of this letter. Sincerely, A. Stephens Hutchcraft Chairman of the Board & Chief Executive Officer /kl Agreed to this 30th day of August, 1993. Robert E. Cole -----END PRIVACY-ENHANCED MESSAGE-----