-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CRtk7m5R2EsN1jT/kn2Y77mvi2j1GRnubtMdp4/wFY6DfS3dfNOcVkPQD8KllY46 R60nc0Pz6FzykfgaLHOs1w== 0000900421-96-000018.txt : 19960329 0000900421-96-000018.hdr.sgml : 19960329 ACCESSION NUMBER: 0000900421-96-000018 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: AMEX SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03924 FILM NUMBER: 96540257 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-K405 1 FORM 10-K OF MAXXAM INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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 77057 HOUSTON, TEXAS (Zip Code) (Address of Principal 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 Title of each class exchange on which registered [S] [C] 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 Number of shares of common stock outstanding at March 1, 1996: 8,707,847 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 1, 1996 American Stock Exchange closing price of $44.375 per share, the aggregate market value of the Registrant's outstanding voting stock held by non-affiliates was approximately $267.8 million. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of Registrant's annual report to stockholders for the fiscal year ended December 31, 1995 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. 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 62% 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 (a) real estate investment and development, managed through MAXXAM Property Company (and its subsidiaries), MCO Properties Inc., Palmas del Mar Properties, Inc. ("Palmas"), and various other wholly owned subsidiaries, and (b) other commercial operations through subsidiaries, including a Class 1 thoroughbred and quarter horse racing facility located in the greater Houston metropolitan area. See "--Real Estate and Other Operations." See Note 11 to the Consolidated Financial Statements (contained in the Company's Annual Report to Stockholders--see Item 8) for certain financial information by industry segment and geographic area. ALUMINUM OPERATIONS INDUSTRY OVERVIEW Primary aluminum is produced by the refining of bauxite into alumina and the reduction of alumina into primary aluminum. Approximately two pounds of bauxite are required to produce one pound of alumina, and approximately two pounds of alumina are required to produce one pound of primary aluminum. Aluminum's valuable physical properties include its light weight, corrosion resistance, thermal and electrical conductivity, and high tensile strength. Demand The packaging, transportation and construction industries are the principal consumers of aluminum in the United States, Japan, and Western Europe. In the packaging industry, which accounted for approximately 20% of aluminum consumption in 1994, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. Nearly all beer cans and soft drink cans manufactured for the United States market are made of aluminum. Kaiser believes that growth in the packaging area is likely to continue through the 1990s due to general population increase and to further penetration of the beverage container market in Asia and Latin America, where aluminum cans are a substantially lower percentage of the total beverage container market than in the United States. Kaiser believes that growth in demand for can sheet in the United States will follow the growth in population, offset in part by the effects of the use of lighter gauge aluminum for can sheet and of plastic container production from newly installed capacity. In the transportation industry, which accounted for approximately 28% of aluminum consumption in the United States, Japan and Western Europe in 1994, automotive manufacturers use aluminum instead of steel, ductile iron or copper for an increasing number of components, including radiators, wheels, suspension components and engines, in order to meet more stringent environmental, safety, and fuel efficiency requirements. Kaiser believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. In addition, Kaiser believes that consumption of aluminum in the construction industry will follow the cyclical growth pattern of that industry, and will benefit from higher growth in Asian and Latin American economies. Supply As of year-end 1995, Western world aluminum capacity from 107 smelting facilities was approximately 16.6 million tons(1) per year. Western world production of primary aluminum for 1995 increased approximately 1.8% compared to 1994. Net exports of aluminum from the former Sino Soviet bloc increased approximately 250% from 1990 levels during the period from 1991 through 1994 to approximately 2.2 million tons per year. These exports contributed to a significant increase in London Metal Exchange ("LME") stocks of primary aluminum which peaked in June 1994 at 2.7 million tons. By the end of 1995, LME stocks of primary aluminum had declined 2.1 million tons from this peak level and 1.1 million tons from the beginning of 1995. See "--Recent Industry Trends." Based upon information currently available, the Company believes that moderate additions will be made during 1996 - 1998 to Western world alumina and primary aluminum production capacity. The increases in alumina capacity during 1996 - 1998 are expected to come from one new refinery which began operations in 1995 and incremental expansions of existing refineries. In addition, Kaiser believes that there is currently approximately 0.9 million tons of curtailed smelting capacity that could be restarted by aluminum producers. The increases in primary aluminum capacity during 1996-1998 are expected to come from one new smelter which began operations in 1995 and is expected to reach its rated capacity of approximately 466,000 tons per year in 1996, and the remainder principally from incremental expansions of existing smelters. Recent Industry Trends Market fundamentals for aluminum improved significantly in 1994 as aluminum producers worldwide curtailed primary aluminum production. Western world consumption of aluminum grew strongly, and customers replenished inventories, particularly in the United States. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in LME inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. The Midwest U.S. transaction price for primary aluminum in 1995 averaged approximately 86 cents per pound, compared to a 1994 annual average of approximately 72 cents per pound. The Midwest U.S. transaction price for primary aluminum averaged approximately 79 cents per pound in December 1995. Western world demand for alumina, and the price of alumina, declined in 1994 in response to the curtailment of Western world smelter production of primary aluminum, partially offset by increased usage of Western world alumina by smelters in the Commonwealth of Independent States (the "CIS") and in the People's Republic of China (the "PRC"). Increased Western world production of primary aluminum, as well as continued imports of Western world alumina by the CIS and the PRC, during 1995 resulted in higher demand for Western world alumina and significantly stronger alumina pricing. United States shipments of domestic fabricated aluminum products in 1995 were approximately at 1994 levels, although in 1995 demand for can sheet in the United States softened relative to 1994. Overall, Kaiser believes that the market fundamentals for aluminum will be good for the near future, barring prolonged economic recession, and that demand is likely to continue growing at levels sufficient to absorb the output from restarts of industry smelter capacity and from the limited additions of new supply under construction. - --------------- (1)All references to tons in this Report refer to metric tons of 2,204.6 pounds. THE COMPANY General Kaiser is a direct subsidiary of MAXXAM and, through KACC, 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 KACC in its operations, KACC sells significant amounts of alumina and primary aluminum in domestic and international markets. In 1995, KACC produced approximately 2,838,000 tons of alumina, of which approximately 72% was sold to third parties, and produced 413,600 tons of primary aluminum, of which approximately 66% was sold to third parties. KACC is also a major domestic supplier of fabricated aluminum products. In 1995, KACC shipped approximately 368,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic shipments. A majority of KACC's fabricated products are sold to distributors or used by customers as components in the manufacture and assembly of finished end-use products. See Note 11 of the Notes to the Consolidated Financial Statements. The following table sets forth total shipments and intracompany transfers of KACC's alumina, primary aluminum, and fabricated aluminum operations:
Years Ended December 31, ----------------------------------- 1995 1994 1993 ---------- ---------- ---------- (in thousands of tons) ALUMINA: Shipments to Third Parties 2040.1 2086.7 1997.5 Intracompany Transfers 800.6 820.9 807.5 PRIMARY ALUMINUM: Shipments to Third Parties 271.7 224 242.5 Intracompany Transfers 217.4 225.1 233.6 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties 368.2 399 373.2
Sensitivity to Prices and Hedging Programs Kaiser's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold and on KACC's hedging strategies. Fabricated aluminum prices, which vary considerably among products, are influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to six months. Changes in the market price of primary aluminum also affect Kaiser's production costs of fabricated products because they influence the price of aluminum scrap purchased by Kaiser and Kaiser's labor costs, to the extent such costs are indexed to primary aluminum prices. Through its variable cost structures, forward sales, and hedging programs, KACC has attempted to mitigate its exposure to possible declines in the market prices of alumina, primary aluminum and fabricated aluminum products while retaining the ability to participate in favorable pricing environments that may materialize. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Trends-- Aluminum Operations--Sensitivity to Prices and Hedging Programs" and Note 10 of the Notes to Consolidated Financial Statements. Production Operations The Company's operations are conducted through KACC's 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 1995. During 1995, KACC third party shipments of bauxite represented approximately 21% of bauxite mined. In addition, KACC third party shipments of alumina represented approximately 72% of alumina produced. KACC's share of total Western world alumina capacity was approximately 7% in 1995. - The primary aluminum products business unit operates two domestic smelters wholly owned by KACC and two foreign smelters in which KACC holds significant ownership interests. During 1995, KACC third party shipments of primary aluminum represented approximately 66% of primary aluminum production. KACC's share of total Western world primary aluminum capacity was approximately 3% in 1995. - Fabricated aluminum products are manufactured by three business units--flat-rolled products, extruded products and engineered components. The products include body, lid, and tab stock for beverage containers, sheet and plate products, heat-treated products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters, engine manifolds and other castings, forgings and extruded products, which are manufactured at plants located in principal marketing areas of the United States and Canada. The aluminum utilized in KACC's fabricated products operations is comprised of primary aluminum, obtained both internally and from third parties, and scrap metal purchased from third parties. Alumina The following table lists KACC's bauxite mining and alumina refining facilities as of December 31, 1995:
Annual Production Total Capacity Annual Company Available to Production Activity Facility Location Ownership the Company 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 KACC owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has the right to receive all of such entity's output. (2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at the Alpart refinery.
Bauxite mined in Jamaica by KJBC is refined into alumina at KACC's plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of Jamaica granted KACC a mining lease for the mining of bauxite sufficient to supply KACC's then-existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the Gramercy plant is sold to third parties. Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina plant located in Jamaica. KACC owns 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. The Government of Jamaica has granted Alpart a mining lease and has entered into other agreements with Alpart designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery as it may be expanded to a capacity of 2,000,000 tons per year through the year 2024. Alpart has entered into an agreement for the supply of substantially all of its fuel oil through 1996. The balance of Alpart's fuel oil requirements through 1996 will be purchased in the spot market. KACC owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns the largest and one of the most efficient alumina refineries in the world, located in Queensland, Australia. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its stockholders under long-term tolling contracts. The stockholders, including KACC, purchase bauxite from another QAL stockholder under long-term supply contracts. KACC has contracted with QAL to take approximately 792,000 tons per year of capacity or pay standby charges. KACC is unconditionally obligated to pay amounts calculated to service its share ($88.9 million at December 31, 1995) 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. KACC's principal customers for bauxite and alumina consist of large and small domestic and international aluminum producers that purchase bauxite and reduction-grade alumina for use in their internal refining and smelting operations, trading intermediaries who resell raw materials to end-users, and users of chemical-grade alumina. In 1995, KACC sold all of its bauxite to two customers, the largest of which accounted for approximately 74% of such sales. KACC also sold alumina to nine customers, the largest and top five of which accounted for approximately 23% and 90% of such sales, respectively. See "--Competition." Kaiser believes that among alumina producers it is now the world's second largest seller of alumina to third parties. KACC's strategy is to sell a substantial portion of the bauxite and alumina available to it in excess of its internal refining and smelting requirements under multi-year sales contracts. Primary Aluminum Products The following table lists KACC's primary aluminum smelting facilities as of December 31, 1995:
Annual Rated Total Capacity Annual 1995 Company Available to Rated Operating Location Facility Ownership the Company Capacity Rate - ---------------------------- --------------- --------------- --------------- --------------- --------------- (tons) (tons) Domestic Washington Mead 100% 200,000 200,000 82% Washington Tacoma 100% 73,000 73,000 82% --------------- --------------- Subtotal 273,000 273,000 --------------- --------------- International Ghana Valco 90% 180,000 200,000 68% Wales, United Kingdom Anglesey 49% 55,000 112,000 119% --------------- --------------- Subtotal 235,000 312,000 --------------- --------------- Total 508,000 585,000 =============== ===============
KACC owns two smelters located at Mead and Tacoma, Washington, where alumina is processed into primary aluminum. The Mead facility uses pre-bake technology and produces primary aluminum. Approximately 71% of Mead's 1995 production was used at KACC's Trentwood fabricating facility and the balance was sold to third parties. The Tacoma plant uses Soderberg technology and produces primary aluminum and high-grade, continuous-cast, redraw rod, which currently commands a premium price in excess of the price of primary aluminum. Both smelters have achieved significant production efficiencies in recent years through retrofit technology, cost controls, and semi-variable wage and power contracts, leading to increases in production volume and enhancing their ability to compete with newer smelters. At the Mead plant, KACC has converted to welded anode assemblies to increase energy efficiency, extended the anode life-cycle in the smelting process, changed from pencil to liquid pitch to produce carbon anodes which achieved environmental and operating savings, and engaged in efforts to increase production through the use of improved, higher- efficiency reduction cells. Electric power represents an important production cost for KACC at its aluminum smelters. In 1995, electric power purchase agreements for KACC's facilities in the Pacific Northwest were successfully restructured, which Kaiser anticipates will result in significantly lower electric power costs in 1996 and beyond for the Mead and Tacoma, Washington, smelters and the Trentwood, Washington, rolling mill compared to 1995 electric power costs. From 1981 until 1995, electric power for KACC's Mead and Tacoma smelters was purchased exclusively from the Bonneville Power Administration (the "BPA") by KACC under a contract which expires in 2001. In April 1995, the BPA agreed to allow each of its direct service industrial customers (the "DSIs"), which include KACC, to purchase a portion of its requirement for electric power from sources other than the BPA beginning October 1, 1995. In June 1995, KACC entered into an agreement with The Washington Water Power Company (the "WWP") to purchase up to 50 megawatts of electric power for its Pacific Northwest facilities for a five-year term beginning October 1, 1995. KACC is receiving power under that contract, which power displaces a portion of KACC's interruptible power from the BPA. In addition, in 1995 KACC entered into a new power purchase contract with the BPA, which amends the existing BPA power contract and which contemplates reductions during 1996 in the amount of power which KACC is obligated to purchase from the BPA and which the BPA is obligated to sell to KACC, and the replacement of such power with power to be purchased from other suppliers. KACC is negotiating power purchase agreements for such power with suppliers other than the BPA. Contracts for the purchase of all power required by KACC's Mead and Tacoma smelters and Trentwood rolling mill for 1996, and for approximately one-half of such power for the period 1997 - 2000, have been finalized. Two lawsuits were filed in December 1995 against the BPA by various parties, one of which petitions for a review of the BPA's "Record of Decision on Direct Service Industrial Customer Requirements Power Sales Contract" issued on September 28, 1995, and one of which petitions for review of, and to set aside, suspend, or modify the action of the BPA to decide to offer five-year "block" power sales to the DSIs. The effect of such lawsuits, if any, on KACC's new power purchase contract with the BPA is not known. Certain of the DSIs, including KACC, have intervened in the two lawsuits. In 1995, KACC also entered into agreements with the BPA and with the WWP, with terms ending in 2001, under which the BPA and the WWP would provide to KACC transmission services for power purchased from sources other than the BPA. The term of the transmission services agreement with the BPA was subsequently extended for an additional fifteen years, which extension has been challenged. Four lawsuits have been filed against the BPA by various parties, which lawsuits either challenge the BPA's record of decision offering such an extension agreement to the DSIs or challenge the BPA's Business Plan Environmental Impact Statement record of decision in connection therewith. Certain of the DSIs, including KACC, have intervened in the four lawsuits. KACC began operating its Mead and Tacoma smelters in Washington at approximately 75% of their full capacity in January 1993, when three reduction potlines were removed from production (two at Mead and one at Tacoma) in response to a power reduction imposed by the BPA. In March 1995, the BPA offered to its industrial customers, including KACC, surplus firm power at a discounted rate for the period April 1, 1995, through July 31, 1995, to enable such customers to restart idle industrial loads. In April 1995, KACC and the BPA entered into a contract for an amount of such power, and thereafter KACC restarted one-half of an idle potline (approximately 9,000 tons of annual capacity) at its Tacoma, Washington, smelter. The Tacoma smelter was returned to full production in October 1995. In 1995, KACC entered into a one-year power supply contract with the BPA, for a term ending September 30, 1996, in connection with the restart of idled capacity at its Mead smelter. The Mead smelter returned to full production in December 1995. KACC manages, and owns a 90% interest in, the Volta Aluminium Company Limited ("Valco") aluminum smelter in Ghana. The Valco smelter uses pre-bake 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 2017. The agreement indexes two-thirds of the price of the contract quantity of power to the market price of primary aluminum. The agreement also provides for a review and adjustment of the base power rate and the price index every five years. The most recent review was completed in April 1994 for the 1994 - 1998 period. Valco has entered into an agreement with the government of Ghana under which Valco has been assured (except in cases of force majeure) that it will receive sufficient electric power to operate at its current level of three and one-half potlines through December 31, 1996. Kaiser believes that assuming normal rainfall during 1996, Valco should have available sufficient electric power to operate at its current level through 1996. KACC owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. 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. KACC has developed and installed proprietary retrofit and control technology in all of its smelters, as well as at third party locations. This technology--which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved feed systems that add alumina to the cells, and a computerized system that controls energy flow in the cells--enhances KACC's ability to compete more effectively with the industry's newer smelters. KACC 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 KACC's technical and managerial knowledge. See "--Research and Development." KACC's principal primary aluminum customers consist of large trading intermediaries and metal brokers, who resell primary aluminum to fabricated product manufacturers, and large and small international aluminum fabricators. In 1995, KACC sold its primary aluminum production not utilized for internal purposes to approximately 35 customers, the largest and top five of which accounted for approximately 25% and 62% of such sales, respectively. See "--Competition." Marketing and sales efforts are conducted by a small staff located at the business unit's headquarters in Pleasanton, California, and by senior executives of KACC 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 Aluminum Products KACC manufactures and markets fabricated aluminum products for the packaging, transportation, construction, and consumer durables markets in the United States and abroad. Sales in these markets are made directly and through distributors to a large number of customers. In 1995, four domestic beverage container manufacturers were among the leading customers for KACC's fabricated products and accounted for approximately 12% of Kaiser's sales revenue. KACC's fabricated products compete with those of numerous domestic and foreign producers and with products made of steel, copper, glass, plastic, and other materials. Product quality, price, and availability are the principal competitive factors in the market for fabricated aluminum products. KACC has focused its fabricated products operations on selected products in which KACC has production expertise, high-quality capability, and geographic and other competitive advantages. Flat-Rolled Products. The flat-rolled products business unit, the largest of KACC's fabricated products businesses, operates the Trentwood sheet and plate mill at Spokane, Washington. The Trentwood facility is KACC's largest fabricating plant and accounted for approximately 64% of its 1995 fabricated aluminum 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. During 1995, KACC successfully completed the two year restructuring of its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs by at least $50.0 million. KACC's flat-rolled products are sold primarily to beverage container manufacturers located in the western United States and in the Asian Pacific Rim countries where the Trentwood plant's location provides KACC with a transportation advantage. Quality of products for the beverage container industry and timeliness of delivery are the primary bases on which KACC competes. Kaiser believes that capital improvements at Trentwood have enhanced the quality of KACC's products for the beverage container industry and the capacity and efficiency of KACC's manufacturing operations, and that KACC is one of the highest quality producers of aluminum beverage can stock in the world. In 1995, the flat-rolled products business unit had 31 domestic and foreign can stock customers, including the five major domestic beverage can manufacturers. The largest and top five of such customers accounted for approximately 14% and 41%, respectively, of the business unit's revenue. See "--Competition." In 1995, the business unit shipped products to approximately 150 customers in the aerospace, transportation, and industrial ("ATI") markets, most of which were distributors who sell to a variety of industrial end-users. The top five customers in the ATI markets for flat-rolled products accounted for approximately 13% of the business unit's revenue. The marketing staff for the flat-rolled products business unit is located at the Trentwood facility and in Pleasanton, California. Sales are made directly to customers (including distributors) from eight sales offices located throughout the United States. International customers are served by sales offices in the Netherlands and Japan and by independent sales agents in Asia and Latin America. Extruded Products. The extruded products business unit is headquartered in Dallas, Texas, and operates soft-alloy extrusion facilities in Los Angeles, California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario, Canada; a cathodic protection business located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium; rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging stock, and billet; and a facility in Richland, Washington, which produces seamless tubing in both hard and soft alloys for the automotive, other transportation, export, recreation, agriculture, and other industrial markets. Each of the soft- alloy extrusion facilities has fabricating capabilities and provides finishing services. The extruded products business unit's major markets are in the transportation industry, to which it provides extruded shapes for automobiles, trucks, trailers, cabs, and shipping containers, and in the distribution, durable goods, defense, building and construction, ordnance and electrical markets. In 1995, the extruded products business unit had approximately 825 customers for its products, the largest and top five of which accounted for approximately 6% and 20%, respectively, of its revenue. See "--Competition." Sales are made directly from plants as well as marketing locations across the United States. Engineered Components. The engineered components business unit operates forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood, South Carolina; a machine shop at Greenwood, South Carolina; and a casting facility in Canton, Ohio. The engineered components business unit is one of the largest producers of aluminum forgings in the United States and is a major supplier of high-quality forged parts to customers in the automotive, commercial vehicle and ordnance markets. The high strength-to-weight properties of forged and cast aluminum make it particularly well-suited for automotive applications. The business unit's casting facility manufactures aluminum engine manifolds for the automobile, truck and marine markets. In 1995, the engineered components business unit had approximately 250 customers, the largest and top five of which accounted for approximately 34% and 77%, respectively, of the business unit's revenue. See "--Competition." The engineered components business unit's headquarters is located in Erie, Pennsylvania, and there is a sales and engineering office located in Detroit, Michigan, which works with car makers and other customers, the Center for Technology (see "--Research and Development") and plant personnel to create new automotive component designs and improve existing products. Competition Aluminum competes in many markets with steel, copper, glass, plastic, and numerous other materials. In recent years, plastic containers have increased and glass containers have decreased their respective shares of the soft drink sector of the beverage container market. In the United States, beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene ("PET") container capacity is brought on line by plastics manufacturers. Within the aluminum business, KACC competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. Many of KACC's competitors have greater financial resources than KACC. KACC's principal competitors in the sale of alumina include Alcoa Alumina and Chemicals LLC, Billiton Marketing and Trading BV, and Alcan Aluminium Limited. KACC competes with most aluminum producers in the sale of primary aluminum. 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. KACC 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. KACC concentrates its fabricating operations on selected products in which KACC has production expertise, high-quality capability, and geographic and other competitive advantages. Kaiser believes that, assuming the current relationship between worldwide supply and demand for alumina and primary aluminum does not change materially, the loss of any one of KACC's customers, including intermediaries, would not have a material adverse effect on Kaiser's financial condition or results of operations. Research and Development KACC conducts research and development activities principally at three facilities--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, which supports Kaiser Alumina Technical Services ("KATS") and the facilities of the alumina business unit. Net expenditures for Company-sponsored research and development activities were $18.5 million in 1995, $16.7 million in 1994, and $18.5 million in 1993. KACC's research staff totaled 157 at December 31, 1995. KACC estimates that research and development net expenditures will be approximately $22.5 million in 1996. CFT performs research and development across a range of aluminum process and product technologies to support KACC's business units and new business opportunities. It also selectively offers technical services to third parties. Significant efforts are directed at product and process technology for the can stock, aircraft and automotive markets, and aluminum reduction cell models which are applied to improving cell designs and operating conditions. The largest and most notable single project being developed at CFT is a strip-casting micromill process for producing can sheet. The conversion and capital costs of these micromills are expected to be significantly lower than conventional rolling mills and to result in improved economics compared with historical manufacturing and transportation costs for can stock. A pilot facility has been constructed and operated at CFT. The first micromill is being constructed in Nevada as a demonstration production facility, and KACC expects operational startup of the facility at the end of 1996. KACC currently intends to finance the cost of the construction of the Nevada micromill, estimated to be approximately $45.0 million, from general corporate funds, including possible borrowings under the 1994 Credit Agreement (defined below), although KACC is in discussions with third parties which might provide some or all of such funding. DTC maintains specialized laboratories and a miniature carbon plant where experiments with new anode and cathode technology are performed. DTC supports KACC's primary aluminum smelters, and concentrates on the development of cost-effective technical innovations such as equipment and process improvements. KATS provides improved alumina process technology to KACC's facilities and technical support to new business ventures in cooperation with KACC's international business development group. KACC is actively engaged in efforts to license its technology and sell technical and managerial assistance to other producers worldwide. KACC's technology has been installed in alumina refineries, aluminum smelters and rolling mills located in the United States, Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New Zealand, Ghana, United Arab Emirates, and the United Kingdom. KACC's revenue from technology sales and technical assistance to third parties was $5.7 million in 1995, $10.0 million in 1994, and $12.8 million in 1993. KACC has entered into agreements with respect to the Krasnoyarsk smelter in Russia under which KACC has licensed certain of its technology for use in such facility and agreed to provide purchasing services in obtaining Western-sourced technology and equipment to be used in such facility. These agreements were entered into in November 1990, and the services under them are expected to be completed in 1996. In addition, in 1993 KACC entered into agreements with respect to the Nadvoitsy smelter in Russia and the Korba smelter of the Bharat Aluminum Co. Ltd., in India, under which KACC has licensed certain of its technology for use in such facilities. Services under the Nadvoitsy agreement were completed in 1995, and KACC expects that services under the Korba agreement will be completed in 1996. Operations in China In 1994, KACC commenced efforts to increase its activities in certain countries that are expected to be important suppliers of aluminum and large customers for aluminum and alumina. KACC intends to use its technical skills, together with capital investments, to form joint ventures or acquire equity in facilities in such countries. In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of the Company, was formed to participate in the privatization, modernization, expansion, and operation of aluminum smelting facilities in the PRC. KYRIL has entered into a Joint Venture Agreement and related agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the China National Nonferrous Metals Industry Corporation relating to the formation and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise organized under PRC law (the "Joint Venture"). The Joint Venture constitutes the first large-scale privatization in the Chinese aluminum smelting industry. The Joint Venture's assets and operations are located primarily in the industrial city of Lanzhou, the capital of Gansu Province in northwestern China, and in nearby Lianhai, a special economic zone also in Gansu Province. The smelter at Lanzhou is the fifth largest aluminum smelter in the PRC and produces approximately 55,000 tons of primary aluminum per year. The smelter at Lianhai produces approximately 30,000 tons of primary aluminum per year. LAS's capital contribution to the Joint Venture consisted primarily of the Lanzhou and Lianhai smelters. The Joint Venture Agreements include provisions for KYRIL to contribute up to $59.7 million to the Joint Venture in exchange for up to a 49% interest in the Joint Venture (the "Capital Contribution") and contemplate that such capital may be used to expand the annual production capacity of LAS from 85,000 to 115,000 tons, construct a dry Soderberg paste plant, install and upgrade pollution control equipment, and provide for general corporate purposes, including working capital. KYRIL contributed $9.0 million as a contribution to the capital of the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the amount, timing and other conditions relating to KYRIL's additional contributions to the Joint Venture. Governmental approval in the PRC will be necessary in order to implement any arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. KACC, through its extruded products business unit, has entered into contracts to form two small joint venture companies in the PRC. KACC will indirectly acquire equity interests of approximately 45% and 49%, respectively, in these two companies which will manufacture aluminum extrusions, in exchange for the contribution to those companies of certain used equipment, technology, services and cash. The majority equity interests in the two companies will be owned by affiliates of Guizhou Guang Da Construction Company. Employees During 1995, KACC employed an average of approximately 9,550 persons, compared with an average of 9,740 employees in 1994, and 10,220 employees in 1993. At December 31, 1995, KACC's work force was approximately 9,620, including a domestic work force of approximately 5,950, of whom approximately 4,010 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 74% of such employees are covered by a master agreement (the "Labor Contract") with the United Steelworkers of America ("USWA") expiring September 30, 1998. The Labor Contract covers KACC's plants in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract replaced a contract that expired October 31, 1994, and was reached after an eight-day work stoppage by the USWA at these plants in February 1995. The Labor Contract provides for base wages at all covered plants. In addition, workers covered by the Labor Contract may receive quarterly bonus payments based on various indices of profitability, productivity, efficiency, and other aspects of specific plant performance, as well as, in certain cases, the price of alumina or primary aluminum. Pursuant to the Labor Contract, base wage rates were raised effective January 2, 1995, were raised again effective November 6, 1995, and will be raised an additional amount effective November 3, 1997, and an amount in respect of the cost of living adjustment under the previous master agreement will be phased into base wages during the term of the Labor Contract. In the second quarter of 1995, KACC acquired up to $2,000 of preference stock held in a stock plan for the benefit of each of approximately 82% of the employees covered by the Labor Contract and in the first half of 1998 will acquire up to an additional $4,000 of such preference stock held in such plan for the benefit of substantially the same employees. In addition, a profitability test was satisfied and, therefore, KACC will acquire during 1996 up to an additional $1,000 of such preference stock held in such plan for the benefit of substantially the same employees. KACC made and will make comparable acquisitions of preference stock held for the benefit of each of certain salaried employees. In February 1995, Alpart's employees engaged in a six-day work stoppage by its National Workers Union, which was settled by a new contract. Kaiser considers KACC's employee relations to be satisfactory. Environmental Matters Kaiser and KACC are subject to a wide variety of international, federal, state and local environmental laws and regulations (the "Environmental Laws"). From time to time the Environmental Laws are amended and new ones are adopted. The Environmental Laws regulate, among other things, air and water emissions and discharges; the generation, storage, treatment, transportation, and disposal of solid and hazardous waste; the release of hazardous or toxic substances, pollutants and contaminants into the environment; and, in certain instances, the environmental condition of industrial property prior to transfer or sale. In addition, Kaiser and KACC are subject to various federal, state, and local workplace health and safety laws and regulations ("Health Laws"). From time to time, KACC 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 KACC. See Item 3. " Legal Proceedings--Kaiser Litigation--Environmental Litigation." KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). KACC, along with certain 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. KACC's Mead, Washington, facility has been listed on the National Priorities List under CERCLA. In addition, in connection with certain of its asset sales, KACC has agreed to indemnify the purchasers with respect to certain liabilities (and associated expenses) resulting from acts or omissions arising prior to such dispositions, including environmental liabilities. While uncertainties are inherent in the final outcome of these matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, Kaiser believes that the resolution of such uncertainties should not have a material adverse effect on KACC's liquidity, consolidated financial position or results of operations. Environmental capital spending was $9.2 million in 1995, $11.9 million in 1994, and $12.6 million in 1993. Annual operating costs for pollution control, not including corporate overhead or depreciation, were approximately $26.0 million in 1995, $23.1 million in 1994, and $22.4 million in 1993. Legislative, regulatory, and economic uncertainties make it difficult to project future spending for these purposes. However, Kaiser currently anticipates that in the 1996 - 1997 period, environmental capital spending will be within the range of $27.0 - $33.0 million per year, and operating costs for pollution control will be within the range of $28.0 - $29.0 million per year. In addition, $4.5 million in cash expenditures in 1995, $3.6 million in 1994, and $7.2 million in 1993 were charged to previously established reserves relating to environmental costs. Approximately $8.4 million is expected to be charged to such reserves in 1996. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Financial Condition and Investing and Financing Activities--Aluminum Operations" and Note 9 of the Notes to Consolidated Financial Statements. Other See "--Kaiser" above for a description of the locations and general character of the principal plants, mines, and other materially important physical properties relating to KACC's operations. KACC owns in fee or leases all the real estate and facilities used in connection with its business. Plants and equipment and other facilities are generally in good condition and suitable for their intended uses, subject to changing environmental requirements. Although KACC's domestic aluminum smelters and alumina facility were initially designed early in KACC's history, they have been modified frequently over the years to incorporate technological advances in order to improve efficiency, increase capacity, and achieve energy savings. KACC believes that KACC's domestic plants are cost competitive on an international basis. Due to KACC's variable cost structure, the plants' operating costs are relatively lower in periods of low primary aluminum prices and relatively higher in periods of high primary aluminum prices. KACC's obligations under its 1994 Credit Agreement are secured by, among other things, mortgages on Kaiser's major domestic plants (other than the Gramercy alumina plant). FOREST PRODUCTS OPERATIONS GENERAL The Company also engages in forest products operations through MGI and its wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber, which has been in continuous operation for over 125 years, engages in several principal aspects of the lumber industry--the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value- added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (which cannot efficiently process them in its own mills). PACIFIC LUMBER OPERATIONS Timberlands Pacific Lumber owns and manages approximately 192,000 acres of commercial timberlands. These timberlands are located in Humboldt County along the northern California coast which has very favorable soil and climate conditions. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located in close proximity to its sawmills and contains an extensive (1,100 mile) network of roads. These factors greatly facilitate Pacific Lumber's operations and forest management techniques. The extensive roads throughout Pacific Lumber's timberlands facilitate log hauling, serve as fire breaks and allow Pacific Lumber's foresters access to employ forest stewardship techniques which protect the trees from forest fires, erosion, insects and other damage. Approximately 179,000 acres of Pacific Lumber's timberlands are owned by Scotia Pacific Holding Company (the "Scotia Pacific Timberlands"), a special purpose Delaware corporation and wholly owned subsidiary of Pacific Lumber ("Scotia Pacific"). Pacific Lumber has the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non- contiguous acres of the Scotia Pacific Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the Scotia Pacific Timberlands. Substantially all of Scotia Pacific's assets, including the Scotia Pacific Timberlands and the GIS (defined below), are pledged as security for Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). Pacific Lumber harvests and purchases from Scotia Pacific all of the logs harvested from the Scotia Pacific Timberlands. See "--Relationships With Scotia Pacific and Britt" for a description of this and other relationships among Pacific Lumber, Scotia Pacific and Britt. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been partially harvested in the past. Pacific Lumber has engaged in extensive efforts to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Pacific Lumber is required to comply with California forestry regulations regarding reforestation, which generally require that an area be reforested to specified standards within an established period of time. Pacific Lumber also actively engages in efforts to establish timberlands from open areas such as pasture land. During 1995, Pacific Lumber planted approximately 676,000 redwood and Douglas-fir seedlings. Regeneration of redwood timber generally is accomplished through the natural growth of new redwood sprouts from the stump remaining after a redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on existing mature root systems. In addition, Pacific Lumber supplements natural redwood regeneration by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. 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 developed by registered professional foresters and must be filed with, and approved by, the California Department of Forestry ("CDF") prior to the harvesting of timber. Each THP is designed to comply with applicable environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. See "--Regulatory and Environmental Factors" for information regarding proposed critical habitat designation, sustained yield regulations and related matters. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base and conducting field studies, Pacific Lumber's foresters are able to develop detailed THPs addressing the various regulatory requirements. Pacific Lumber also utilizes a Global Positioning System ("GPS") which allows precise location of geographic features through satellite positioning. Use of the GPS greatly enhances the quality and efficiency of GIS data. Pacific Lumber employs a variety of well-accepted methods of selecting trees for harvest. These methods, which are designed to achieve optimal regeneration, are referred to as "silvicultural systems" in the forestry profession. Silvicultural systems range from very light thinnings aimed at enhancing the growth rate of retained trees to clear cutting which results in the harvest of all trees in an area and replacement with a new forest stand. In between are a number of varying levels of partial harvests which can be employed. Pacific Lumber's foresters select the appropriate silvicultural system for any given site based upon the specific conditions of that site. Pacific Lumber customarily employs silvicultural systems that involve thinnings followed by a variety of partial cuttings to achieve a high degree of natural regeneration. Partial harvesting allows the remaining trees to obtain more light, nutrients and water, thereby promoting faster growth rates. Pacific Lumber uses a variety of factors, including the size and density of the remaining trees, to determine when to again submit a THP with respect to a given area. Clear cutting is only used under specific circumstances where it is advisable due to specific site conditions (such as undesirable tree species composition for natural regeneration, topographic difficulties which preclude partial cuttings or the need to create more diverse wildlife habitats within watersheds as recommended by Pacific Lumber's wildlife biologists). Due to the magnitude of its timberlands and conservative application of silvicultural systems that retain substantial numbers of trees on areas that are harvested, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. PRODUCTION FACILITIES Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances which have increased the operating efficiency of its production facilities and the recovery of finished products from its timber. Over the past three years, Pacific Lumber's annual lumber production has averaged approximately 268 million board feet, with approximately 290, 286, and 228 million board feet produced in 1995, 1994 and 1993, respectively. The Fortuna sawmill, built by Pacific Lumber in 1972, produces primarily common grade lumber. During 1995, the Fortuna mill produced approximately 94 million board feet of lumber. The Carlotta sawmill was acquired in 1986 and produces both common and upper grade redwood lumber. During 1995, the Carlotta mill produced approximately 67 million board feet of lumber. Sawmill "A," located in Scotia, was remodeled in 1983 and processes Douglas-fir logs while Sawmill "B," also located in Scotia, primarily processes large diameter redwood logs. During 1995, Sawmills "A" and "B" produced 79 and 51 million board feet of lumber, 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 assembling knot-free pieces of narrower and shorter lumber into wider or longer pieces in its 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 its milling and finishing operations. This power plant generates substantially all of the energy requirements of Scotia, California, the town adjacent to Pacific Lumber's timberlands where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1995, the sale of surplus power accounted for approximately 1% of Pacific Lumber's total revenues. PRODUCTS The following table sets forth the distribution of Pacific Lumber's lumber production (on a net board foot basis) and revenues by product line:
Year Ended December 31, 1995 Year Ended December 31, 1994 ------------------------------------ ------------------------------------ % of Total % of Total Lumber % of Total Lumber % of Total Production Lumber % of Total Production Lumber % of Total Volume Revenues Revenues Volume Revenues Revenues Product ---------- ---------- ---------- ---------- ---------- ---------- Upper grade redwood lumber 17% 38% 31% 17% 41% 33% Common grade redwood lumber 54% 40% 32% 58% 36% 30% ---------- ---------- ---------- ---------- ---------- ---------- Total redwood lumber 71% 78% 63% 75% 77% 63% ---------- ---------- ---------- ---------- ---------- ---------- Upper grade Douglas-fir lumber 3% 5% 4% 3% 7% 5% Common grade Douglas-fir lumber 23% 14% 11% 20% 13% 10% ---------- ---------- ---------- ---------- ---------- ---------- Total Douglas-fir lumber 26% 19% 15% 23% 20% 15% ---------- ---------- ---------- ---------- ---------- ---------- Other grades of lumber 3% 3% 4% 2% 3% 4% ---------- ---------- ---------- ---------- ---------- ---------- Total lumber 100% 100% 82% 100% 100% 82% ========== ========== ========== ========== ========== ========== Logs 7% 9% ========== ========== Hardwood chips 4% 4% Softwood chips 5% 4% ---------- ---------- Total wood chips 9% 8% ========== ==========
Lumber Pacific Lumber primarily produces and markets lumber. In 1995, Pacific Lumber sold approximately 277 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. Redwood is commercially grown only along the northern coast of California and possesses certain unique characteristics which permit it to be sold at a premium to many other wood products. Such characteristics include its natural beauty, superior ability to retain paint and other finishes, dimensional stability and innate resistance to decay, insects and chemicals. Typical applications include exterior siding, trim and fascia for both residential and commercial construction, outdoor furniture, decks, planters, retaining walls and other specialty applications. Redwood also has a variety of industrial applications because of its chemical resistance and because it does not impart any taste or odor to liquids or solids. Upper grade redwood lumber, which is derived primarily from old growth trees and is characterized by an absence of knots and other defects and a very fine grain, is used primarily in more costly and distinctive interior and exterior applications. The overall supply of upper grade lumber has been diminishing due to increasing environmental and regulatory restrictions and other factors. While Pacific Lumber's competitive position with respect to upper grade lumber has been improving due to the quality of its timberlands, Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Forest Products Operations." Common grade redwood lumber, Pacific Lumber's largest volume product, has many of the same aesthetic and structural qualities of redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is commonly used for construction purposes, including outdoor structures such as decks, hot tubs and fencing. Douglas-fir lumber is used primarily for new construction and some decorative purposes and is widely recognized for its strength, hard surface and attractive appearance. Douglas-fir is grown commercially along the west coast of North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is derived primarily from old growth Douglas-fir timber and is used principally in finished carpentry applications. Common grade Douglas-fir lumber is used for a variety of general construction purposes and is largely interchangeable with common grades of other whitewood lumber. Logs Pacific Lumber currently sells certain logs that, due to their size or quality, cannot be efficiently processed by its mills into lumber. The purchasers of these logs are largely Britt, and surrounding mills which do not own sufficient timberlands to support their mill operations. See "- - -Relationships With Scotia Pacific and Britt" below. Except for the agreement with Britt described below, Pacific Lumber does not have any significant contractual relationships with any third parties relating to the purchase of logs. Pacific Lumber has historically not purchased significant quantities of logs from third parties; however, Pacific Lumber may from time to time purchase logs from third parties for processing in its mills or for resale to third parties if, in the opinion of management, economic factors are advantageous to Pacific Lumber. Wood Chips Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood trees which would otherwise be left as waste. These chips are sold to third parties primarily for the production of facsimile and other specialty papers. Pacific Lumber also produces softwood chips from the wood residue and waste from its milling and finishing operations. These chips are sold to third parties for the production of wood pulp and paper products. BACKLOG AND SEASONALITY Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was approximately $11.5 million and $11.9 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Pacific Lumber has historically experienced lower first quarter sales due largely to the general decline in construction-related activity during the winter months. As a result, Pacific Lumber's results in any one quarter are not necessarily indicative of results to be expected for the full year. MARKETING The housing, construction and remodeling markets are the primary markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a wide distribution of its products both geographically and in terms of the number of customers. Pacific Lumber sells its lumber products throughout the country to a variety of accounts, the large majority of which are wholesalers, followed by retailers, industrial users, exporters and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold throughout the entire United States, as well as to export markets. Common grades of redwood lumber are sold principally west of the Mississippi River, with California accounting for approximately 63% of these sales in 1995. Common grades of Douglas-fir lumber are sold primarily in California. In 1995, no single customer accounted for more than 4% of Pacific Lumber's total revenues. Exports of lumber accounted for approximately 4% of Pacific Lumber's total revenues in 1995. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of product. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes that it has a strong degree of customer loyalty. COMPETITION Pacific Lumber's lumber is sold in highly competitive markets. Competition is generally based upon a combination of price, service, product availability and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. 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, 1996, Pacific Lumber had approximately 1,600 employees, none of whom are covered by a collective bargaining agreement. RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT In March 1993, Pacific Lumber consummated its offering of $235 million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and Scotia Pacific consummated its offering of $385 million of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia Pacific and Britt entered into a variety of agreements. Pacific Lumber and Scotia Pacific entered into a Services Agreement (the "Services Agreement") and an Additional Services Agreement (the "Additional Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber provides operational, management and related services with respect to the Scotia Pacific Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia Pacific's own employees. Such services include the furnishing of all equipment, personnel and expertise not within Scotia Pacific's possession and reasonably necessary for the operation and maintenance of the Scotia Pacific Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is required to regenerate Scotia Pacific Timber, prevent and control loss of Scotia Pacific Timber by fires, maintain a system of roads throughout the Scotia Pacific Timberlands, take measures to control the spread of disease and insect infestation affecting Scotia Pacific Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber is also required (to the extent necessary) to assist Scotia Pacific personnel in updating the GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and motions and otherwise diligently pursue appeals of any denial of any THP and related matters. As compensation for these and the other services to be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted on January 1 of each year based on a specified government index relating to wood products. The fee was approximately $115,100 per month in 1995 and is expected to be approximately $112,100 per month in 1996. Pursuant to the Additional Services Agreement, Scotia Pacific provides Pacific Lumber with a variety of services, including (a) assisting Pacific Lumber to operate, maintain and harvest its own timber properties, (b) updating and providing access to the GIS with respect to information concerning Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays Scotia Pacific a fee for such services equal to the actual cost of providing such services, as determined in accordance with generally accepted accounting principles. Pacific Lumber and Scotia Pacific also entered into a Master Purchase Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the Scotia Pacific Timber covered by an approved THP. Each log purchase agreement generally constitutes an exclusive agreement with respect to the timber covered thereby, subject to certain limited exceptions. The purchase price must be at least equal to the SBE Price (as defined below). The Master Purchase Agreement provides that if the purchase price equals or exceeds (i) the price for such species and category thereof set forth on the structuring schedule applicable to the Timber Notes and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The Master Purchase Agreement defines the "SBE Price," for any species and category of timber, as the stumpage price for such species and category as set forth in the most recent "Harvest Value Schedule" published by the California State Board of Equalization ("SBE") applicable to the timber sold during the period covered by such Harvest Value Schedule. Such Harvest Value Schedules are published for purposes of computing yield taxes and generally are released every six months. As Pacific Lumber purchases logs from Scotia Pacific pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing Scotia Pacific Timber covered by approved THPs and, thus, the purchase price thereof is based upon "stumpage prices." Title to the harvested logs does not pass to Pacific Lumber until the logs are transported to Pacific Lumber's log decks and measured. Substantially all of Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. Pacific Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek," a wholly owned subsidiary of Pacific Lumber) also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, Pacific Lumber entered into an Environmental Indemnification Agreement with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia Pacific from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the Scotia Pacific Timberlands. Pacific Lumber entered into an agreement with Britt (the "Britt Agreement") which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from 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 11 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a variety of different diameter and different length logs from various timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" x 6" fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing products in 6 through 12 foot lengths. Britt's purchases of logs from third parties are generally consummated pursuant to short-term contracts of twelve months or less. See "--Pacific Lumber Operations--Relationships With Scotia Pacific and Britt" for a description of Britt's log purchases from Pacific Lumber. Marketing In 1995, Britt sold approximately 78 million board feet of lumber products to approximately 100 different customers. Over one-half of its lumber sales were in northern California. The remainder of its 1995 sales were in southern California and ten other western states. The largest and top five of such customers accounted for approximately 33% and 72%, respectively, of such 1995 sales. Britt markets its products through its own salesmen to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers and is expanding its market eastward. Britt's backlog of sales orders at December 31, 1995 and 1994 was approximately $3.2 million and $3.6 million, respectively, the substantial portion of which was delivered in the first quarter of the next fiscal year. Facilities and Employees Britt's manufacturing operations are conducted on 12 acres of land, 10 acres of which are leased on a long-term fixed-price basis from an unrelated third party. Fence production is conducted in a 46,000 square foot mill. An 18 acre log sorting and storage yard is located one quarter of a mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made periodically. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 35.5 million board feet of fencing products per year. As of March 1, 1996, Britt employed approximately 110 people, none of whom are covered by a collective bargaining agreement. Competition Management estimates that Britt accounted for approximately one- third of the redwood fence market in 1995 in competition with the northern California mills of Louisiana Pacific, Georgia Pacific and Eel River. REGULATORY AND ENVIRONMENTAL FACTORS Regulatory and environmental issues play a significant role in Pacific Lumber's forest products operations. Pacific Lumber's forest products operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. These laws include the California Forest Practice Act (the "Forest Practice Act"), which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the California Board of Forestry (the "BOF"). The federal Endangered Species Act (the "ESA") and California Endangered Species Act (the "CESA") provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. The California Environmental Quality Act ("CEQA") provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future liquidity, consolidated operating results or financial position; however, these laws and regulations are modified from time to time and there can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions would not materially adversely affect the Company (see below). In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require timber companies to project the average annual growth they will have on their timberlands during the last decade of a 100-year planning period ("Projected Annual Growth"). During any rolling ten-year period, the average annual harvest over such ten-year period may not exceed Projected Annual Growth. The first ten-year period began in May 1994. Pacific Lumber is required to submit, by October 1996, a plan setting forth, among other things, its Projected Annual Growth. Pacific Lumber has not completed its analysis of the projected productivity of its timberlands and is therefore unable to predict the impact that these regulations will have on its future timber harvesting practices; however, the final results of this analysis could require Pacific Lumber to reduce (or permit it to increase) its timber harvest in future years from the average annual harvest that it has experienced in recent years. Pacific Lumber believes that it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and by increasing the productivity of its timberlands. In March 1992, the marbled murrelet was approved for listing as endangered under the CESA. In October 1992, the United States Fish and Wildlife Service ("USFWS") issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. Pacific Lumber has incorporated, and will continue to incorporate as required, mitigation measures into its THPs to protect and maintain habitat for the marbled murrelet on its timberlands. The BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide certain site specific mitigations in connection with THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during a portion of the murrelet's nesting and breeding season, which extends from April through mid-September. Accordingly, such surveys are expected to delay the review and approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys to date (based upon current survey protocols) have indicated that Pacific Lumber has approximately 6,000 acres of occupied marbled murrelet habitat. A substantial portion of this land contains virgin and residual old growth timber and the bulk of it falls within the areas proposed to be designated as critical habitat for the marbled murrelet (see below). Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In January 1994, the USFWS proposed designation of critical habitat for the marbled murrelet under the ESA (which proposed designation did not include any of Pacific Lumber's timberlands). In July 1995, in a case entitled Marbled Murrelet v. Babbitt (Case No. C-91-522R), a U.S. District Court in Seattle ordered the USFWS to make its final designation of critical habitat for the marbled murrelet by January 29, 1996 and to issue its proposed final designation of critical habitat by August 1, 1995. On August 10, 1995, the USFWS published its proposed final designation of critical habitat for the marbled murrelet (the "Proposed Designation"), seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed Designation was subject to a 60-day comment period and Pacific Lumber filed comments vigorously opposing the Proposed Designation. In February 1996, the Court extended until May 15, 1996 the deadline for final designation of critical habitat for the marbled murrelet. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. Pacific Lumber is unable to predict when or if it would be able to harvest on any acreage finally designated as critical habitat. Furthermore, it is impossible to determine the future adverse impact of such designation on the Company's liquidity, consolidated financial position or results of operations until such time as the Proposed Designation is finalized and related regulatory and legal issues are fully resolved. However, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on the Company's liquidity, consolidated financial condition and results of operations. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a taking. Pacific Lumber's wildlife biologists are conducting research concerning the marbled murrelet on its timberlands and are currently developing a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). The Murrelet HCP, which is designed to mitigate the impact of the Proposed Designation, has been submitted to the USFWS. Pacific Lumber is working with the USFWS and other government agencies on the Murrelet HCP. It is uncertain when the Murrelet HCP review process will be completed or what the outcome will be of the review process or its effect upon the Company's liquidity, consolidated financial position or results of operations. There also continue to be other regulatory actions and lawsuits seeking to have various other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. It is uncertain what effect any such other listings and/or designations of critical habitat would have on the Company's liquidity, consolidated financial position or results of operations. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs, and Pacific Lumber 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 and other harvesting operations. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth timber on its property (and to a lesser extent, its residual old growth timber). To date, challenges with respect to Pacific Lumber's THPs relating to young growth and residual old growth timber have been limited; however, no assurance can be given as to the extent of such challenges in the future. Pacific Lumber believes that environmentally focused challenges to its THPs are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's liquidity, consolidated 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 liquidity, consolidated operating results or financial position of the Company. See also Item 3. "Legal Proceedings--Pacific Lumber Litigation" for a description of the pending Marbled Murrelet action. In June 1990, the USFWS designated the northern spotted owl as threatened under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations (and related California regulations) generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the USFWS has given its full concurrence to a comprehensive wildlife management plan for the northern spotted owl (the "Owl Plan"). The Owl Plan was recently updated through 1999 and the USFWS expressed its agreement that operations consistent with the Owl Plan would not result in the take of any owls. By incorporating the Owl Plan into each THP filed with the CDF, Pacific Lumber is able to expedite the approval time with respect to its THPs. 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. The plaintiffs in the Marbled Murrelet action have requested injunctive relief with respect to the Owl Plan. See Item 3. "Legal Proceedings--Pacific Lumber Litigation." Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection, air and water quality, and the restriction, regulation and administration of timber harvesting practices. For example, a bill has been introduced in the California legislature which would, among other things, initiate negotiations by the California Resources Agency for the public acquisition of approximately 4,700 acres of Pacific Lumber's timberlands, 3,000 acres of which is a contiguous block of virgin old growth redwood forest often referred to as the "Headwaters Forest." In addition, the U.S. Congressman from the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, authorize public acquisition of the Headwaters Forest and up to 1,700 contiguous acres. The bill would authorize the Secretary of the Interior to exchange government-owned timberlands and other property for the appraised fair market value of the Headwaters Forest and any contiguous acreage to be acquired. Because such 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 future liquidity, consolidated financial position or operating results of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future liquidity, consolidated financial position or operating results of the Company. REAL ESTATE AND OTHER OPERATIONS REAL ESTATE AND RESORT OPERATIONS General The Company, principally through its wholly owned subsidiaries, is also engaged in the business of residential and commercial real estate investment and development, primarily in Arizona, California, Texas and Puerto Rico. At December 31, 1995, the Company had approximately $23.1 million of outstanding receivables derived from the financing of real estate sales in its developments and may continue to finance such real estate sales in the future. As of December 31, 1995, these receivables had a weighted average interest rate of approximately 9.4%, a weighted average maturity of less than four years and average borrower equity of approximately 45%. As of December 31, 1995, the Company also held $8.4 million of other receivables as a portion of the RTC Portfolio (defined below). Principal Properties Texas. In June 1991, a wholly owned subsidiary of the Company purchased from the RTC at an auction, for approximately $122.3 million, 27 parcels of income producing real property and 28 loans secured by real property, fifteen of which have subsequently been converted to income- producing real property through either foreclosure or contractual agreement with the borrower (the "RTC Portfolio"). Substantially all of the real property was located in Texas, with the largest concentration in the vicinity of San Antonio, Houston, Austin and Dallas. From 1992 to December 31, 1995, an aggregate of approximately $28.7 million in loans (which represented nine loans) were sold or paid off and thirty-one properties were sold for aggregate consideration of approximately $157.5 million. These transactions resulted in aggregate gains of $77.3 million. As of December 31, 1995, the Company held six loans (including two resulting from property sales) and eleven properties (including five acquired via foreclosures), which had an aggregate net book value of $32.1 million. All of the remaining assets are being managed (and marketed for sale or disposition as appropriate) by the Company. Palmas del Mar. Palmas del Mar, a time-sharing and land development and sales business with resort amenities, located on the southeastern coast of Puerto Rico near Humacao, was acquired in 1984. Palmas del Mar consists of approximately 1,919 acres of undeveloped land, 100 condominiums utilized in its time-sharing program (comprising 5,300 time-share intervals of which approximately 1,036 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 marina. Certain stores and restaurants and the equestrian center are operated by third parties. Approximately 1,300 private residences and a marina are owned by third parties. A number of these private residences are made available to Palmas del Mar by their owners throughout the year for rental to vacationers. Since 1985, the Company has been actively engaged in the development and sale of condominiums, estate lots and villas. During 1995, Palmas sold 31 condominium units and 65 time-share intervals. Additionally, Palmas completed a sale and leaseback transaction on July 14, 1995 of 33 furnished condominium units for approximately $8.4 million. As of December 31, 1995, the net book value of Palmas' assets was approximately $16.2 million 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 December 31, 1995, Fountain Hills had approximately 3,910 acres of undeveloped residential land, 101 developed commercial and industrial lots, 121 acres of undeveloped commercial and industrial land and 102 developed residential lots available for sale. The population of Fountain Hills is approximately 13,000. The Company is planning the development of certain of the remaining acreage at Fountain Hills. Future sales are expected to consist mainly of undeveloped acreage, semi-developed parcels and fully-developed lots, although the Company may engage in limited construction and direct sale of residential units. During 1995, approximately 115 residential lots, 22 commercial parcels and 103 acres were sold for an aggregate of $14.5 million. Additionally, in 1994 a subsidiary of the Company entered into a venture to develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The development of SunRidge Canyon contemplates a residential golf- oriented, upscale master-planned community. The project includes 950 acres, of which 185 have been developed into a championship-quality, public golf course which opened for play in November 1995. The remaining 765 acres are being developed into approximately 860 single family lots. Sales of the individual lots began in November 1995. The development is being undertaken by SunRidge Canyon L.L.C., an Arizona limited liability company organized by a subsidiary of the Company and SunCor Development Company. A subsidiary of the Company holds a 50% equity interest in the venture. The Company intends to continue development of its remaining acreage at Fountain Hills in a manner that will allow it to maintain recent sales levels, although there can be no assurance that it will be able to do so. Lake Havasu City. In 1963, a subsidiary of 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 the remaining 145 acres. Rancho Mirage. In 1991, a subsidiary of the Company acquired Mirada, a 195-acre luxury resort-residential project located in Rancho Mirage, California. Mirada is a master planned community built into the Santa Rosa Mountains, 650 feet above the Coachella Valley floor. Two of the five parcels have been developed, one of which is a custom lot subdivision of 46 estate lots with home prices ranging from $1.5 million to $3.0 million. The other parcel was developed by Ritz-Carlton hotels and an affiliate of the Company as the Ritz-Carlton Rancho Mirage, a hotel with views of the Palm Springs area. The three remaining parcels encompass nearly 150 acres with entitlements allowing a variety of residential options. The Company is currently marketing the project's 23 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. Most notably, in June 1995 the Company sold approximately 6,000 acres at its Waterwood National Resort and Country Club project in Texas, for an aggregate of $4.1 million. 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 investment and development business. Sales and payments on real estate sales obligations depend, in part, on available financing and disposable income and, therefore, are affected by changes in general economic conditions and other factors. The real estate development business and commercial real estate business are subject to other risks such as shifts in population, fluctuations in the real estate market, and unpredictable changes in the desirability of residential, commercial and industrial areas. The resort and time-sharing business of Palmas competes with similar businesses in the Caribbean, Florida and other locations. 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 the 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. Employees As of March 1, 1996, the Company's real estate operations had approximately 800 employees, of which approximately 720 were employed by Palmas. On July 20, 1995, a majority of the employees of Palmas voted to have a local union represent them for collective bargaining purposes. The Company and the union are engaged in collective bargaining negotiations. Until the collective bargaining process is completed, the Company is unable to estimate the impact, if any, the union representation of its employees may have on its resort operations at Palmas. The union is encouraging a 24-hour work stoppage. The Company is uncertain if a work stoppage will occur; however, Palmas is taking steps to ensure an adequate employment force if a work stoppage does take place. SAM HOUSTON RACE PARK General In July 1993, the Company, through subsidiaries, acquired various interests in Sam Houston Race Park, Ltd., a Texas limited partnership ("SHRP, Ltd.") which owns and operates Sam Houston Race Park (the "Race Park"), a Texas Class 1 horse racing facility located within the greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on its 11-3/4% Senior Secured Notes. On April 17, 1995, SHRP, Ltd. and two affiliated entities (collectively, the "Debtors") filed voluntary petitions, each seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy cases were consolidated and transferred to the United States Bankruptcy Court (the "Bankruptcy Court") for the Southern District of Texas, Houston Division (Case No. 95-43739-H3-11). On September 22, 1995, the Bankruptcy Court confirmed the Debtors's plan of reorganization and on October 6, 1995, the transactions called for by the plan of reorganization (the "Plan") were completed. The Plan provided for, among other things, a significant modification of SHRP, Ltd.'s 11-3/4% Senior Secured Notes (the "Original Notes" and, as modified, the "Extendible Notes"), an additional capital infusion and a reorganization of SHRP, Ltd. The Extendible Notes have an aggregate initial principal amount of $37.5 million, mature on September 1, 2001 and bear interest at the rate 11% per annum. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) during the 2001 legislative session. Interest on the Extendible Notes will accrue in-kind and will not be payable in cash until a certain level of cash flow from operations has been achieved. Once cash interest payments commence, interest payments may not thereafter be paid in-kind. The indenture governing the Extendible Notes provides additional latitude for SHRP, Ltd. to incur indebtedness and make investments in gaming, entertainment and other ventures. A new investor group (the "New SHRP Investor Group") made a capital contribution of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of the Company contributed $5.8 million). Additionally, a wholly owned subsidiary of the Company contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of land (having a fair market value of $2.3 million). A wholly owned subsidiary of the Company is the new managing general partner of SHRP, Ltd. Each member of the New SHRP Investor Group provided its pro rata share of a $1.7 million line of credit, should the initial cash contributed to SHRP, Ltd. prove insufficient to fund the future operating and working capital requirements of SHRP, Ltd. The Company has guaranteed its subsidiaries' share of the line of credit, which totaled $1.6 million. On October 20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3 million, $14.6 million of the Extendible Notes and the corresponding shares of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which one noteholder was entitled. Such shares of common stock represent approximately 39.0% of the shares of common stock of SHRP Equity, Inc. After giving effect to these transactions, wholly owned subsidiaries of the Company hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd. The Race Park has sustained substantial operating losses since it began operations in April 1994. The cash contribution made by the New SHRP Investor Group was intended to provide sufficient capital to enable the Race Park to meet is obligations for a three-year period. During such period the Race Park must develop a market for horse racing and compete with other forms of entertainment in the greater Houston metropolitian area. The only continuing obligation the Company has with respect to the Race Park is limited to its $1.6 million commitment under the line of credit agreement, as previously described. Accordingly, the ability of the Race Park to continue in existence is largely dependent upon its ability to achieve a level of cash flow from operations sufficient to enable it to meet its operating and financing obligations as they become due. In this regard, management has undertaken a number of steps designed to improve the Race Park's operations. These steps include but are not limited to: (i) the reorganization of SHRP, Ltd. which provided new equity capital and a reduction and restructuring of its principal indebtedness, (ii) renegotiating contracts with vendors, (iii) reducing staffing and other administrative costs, and (iv) strengthening management with experienced race track personnel. However, there can be no assurance that the operating changes and the capital infusion (together with the $1.7 million line of credit) will be sufficient to enable the Race Park to achieve the level of cash flow from operations necessary to enable it to meet its long- term operating and financing obligations as they become due. Should the Race Park be unable to achieve sufficient levels of cash flows from its operations, it will be required to seek additional capital, which may or may not be available. Racing Operations and Race Park Facilities The Race Park offers pari-mutuel wagering on live thoroughbred or quarter horse racing or simulcast racing generally seven days a week throughout the year. Simulcasting is the process by which live races held at one facility are broadcast simultaneously to other locations at which additional wagers are placed on the race being broadcast. The Race Park's principal sources of revenue are its statutory and contractual share of total wagering on live and simulcast racing. The Race Park also derives revenues from admission fees, food services, club memberships, luxury suites, advertising sales and other sources. The Race Park is located on approximately 300 acres of land in northwest Harris County approximately 18 miles from the Houston central business district and approximately 15 miles from Houston Intercontinental Airport. Regulation of Racing Operations The ownership and operation of horse racetracks in Texas are subject to significant regulation by the Texas Racing Commission (the "Racing Commission") under the Texas Racing Act and related regulations (collectively, the "Racing Act"). The Racing Act provides, among other things, for how wagering proceeds are to be allocated among betting participants, horsemen's purses, racetracks, the State of Texas and for other purposes, and empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. The Racing Commission must approve the number of live race days that may be offered at the Race Park each year, as well as all simulcast agreements. Class 1 racetracks in Texas are entitled to conduct at least seventeen weeks of live racing for each breed of horses (thoroughbreds and quarter horses). Marketing and Competition The Race Park believes that the majority of the patrons for the Race Park reside within a 50-mile radius of the Race Park, which includes the greater Houston metropolitan area, and that a secondary market of occasional patrons can be developed outside the 50-mile radius but within a 100-mile radius of the Race Park. The Race Park uses a number of marketing strategies in an attempt to reach these people and make them more frequent visitors to the Race Park. The Race Park competes with other forms of entertainment, including casinos located approximately 125 to 150 miles from Houston, a greyhound racetrack located 60 miles from the Race Park and a wide range of sporting events and other entertainment activities in the Houston area. The Race Park could in the future also compete with other forms of gambling in Texas, including casino gambling on Indian reservations or otherwise. While the Race Park believes that the location of the Race Park is a competitive advantage over the other more distant gaming ventures mentioned above, the most significant challenge for the Race Park is to develop and educate new racing fans in a market where pari- mutuel wagering has been absent since the 1930's. Other competitive factors faced by the Race Park include the allocation of sufficient live race days by the Racing Commission and attraction of sufficient race horses to run at the Race Park. The Race Park has been able to obtain sufficient number of live race days (102) for 1996. The Race Park believes that it will be able to attract sufficient horses to conduct its live racing during 1996. EMPLOYEES At March 1, 1996, the Company and its subsidiaries employed approximately 2,500 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 GENERAL The following describes certain legal proceedings in which the Company or its subsidiaries are involved. The Company and certain of its subsidiaries are also involved in various claims, lawsuits and other proceedings not discussed herein which relate to a wide variety of matters. Uncertainties are inherent in the final outcome of those and the below- described matters and it is presently impossible to determine the actual costs that ultimately may be incurred. Nevertheless, the Company believes (unless otherwise indicated below) that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. Certain present and former directors and officers of the Company are defendants in certain of the actions described below. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can under certain circumstances include amounts other than defense costs, including judgments and settlements. USAT MATTERS In October 1994, the Company learned that the United States Department of Treasury's Office of Thrift Supervision ("OTS") had commenced an investigation into United Financial Group, Inc. ("UFG") and the insolvency of its wholly owned subsidiary, United Savings Association of Texas ("USAT"). In December 1988, the Federal Home Loan Bank Board ("FHLBB") placed USAT into receivership and appointed the Federal Savings & Loan Insurance Corp. ("FSLIC") as receiver. At the time of the receivership, the Company owned approximately 13% of the voting stock of UFG. The OTS, successor to the FHLBB for some purposes, subsequently requested certain documents from the Company which the Company has been working to provide. The OTS also has deposed certain current and former officers and/or directors of the Company. On December 26, 1995, the OTS initiated formal administrative proceedings (the "OTS action") against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges misconduct by the Company, Federated Development Company ("Federated"), Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of USAT. Mr. Hurwitz is the Chairman of the Board, Chief Executive Officer and President of the Company. Mr. Hurwitz is also the Chairman of the Board and Chief Executive Officer of Federated, a New York business trust wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. Mr. Hurwitz and a wholly owned subsidiary of Federated collectively own approximately 60.7% of the aggregate voting power of the Company. The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. ("Drexel"). The OTS, among other things, seeks unspecified damages in excess of $138.0 million from the Company and Federated, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. On February 20, 1996, the respondents filed their responses to the Notice. The administrative law judge has set this matter for hearing on January 21, 1997. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on the Company's liquidity, consolidated financial position or results of operations. In a separate but related matter, on December 7, 1995, the Company filed a petition for review in the U.S. Fifth Circuit Court of Appeals alleging various statutory violations by certain predecessor agencies to the OTS and seeking to modify, terminate or set aside the December 30, 1988 order awarding the bid to acquire USAT to a bidder other than the Company, whose bid was lower than the Company's bid (i.e. more costly to the government and taxpayers). The action is entitled MAXXAM Inc. v. Office of Thrift Supervision, Department of the Treasury (No. 95-60753) (the "MAXXAM v. OTS action"). The bidder that was awarded USAT subsequently filed a motion to intervene in this action and on March 6, 1996, the Court granted the motion. In another separate but related matter, on February 21, 1996, the Company filed an action, pursuant to the Freedom of Information Act, entitled MAXXAM Inc. v. FDIC (No. H-96-6041) (the "MAXXAM v. FDIC action") in the U.S. District Court for the Southern District of Texas seeking to compel the Federal Deposit Insurance Corporation ("FDIC") to produce certain documents concerning the bidding process for and award of USAT. On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern District of Texas. This action did not name the Company as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On October 24, 1995, Mr. Hurwitz filed a motion to dismiss this action. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. The Company and certain other respondents in the OTS action subsequently filed motions to intervene in this action; the Company conditioned its motion on the Court joining the OTS to this action. The Company filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting the Company's bid for USAT. The FDIC is opposing the motion to join the OTS and the intervention motions and is seeking to stay this action pending the outcome of the OTS action or proceed in this case only against Mr. Hurwitz. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on the Company's liquidity, consolidated financial position or results of operations. In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al. was filed in the U.S. District Court for the Northern District of California (No. C950322) and names as defendants the Company, Mr. Hurwitz, MGI, Federated, UFG and a former director of the Company. This action is purportedly brought by plaintiff on behalf of the U.S. government; however, the U.S. government has declined to participate in the suit. The suit alleges that defendants made false statements and claims in violation of the Federal False Claims Act in connection with USAT. Plaintiff alleges, among other things, that defendants used the federally insured assets of USAT to acquire junk bonds from Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel arranged financing for defendants' various business ventures, including the acquisition of Pacific Lumber. Plaintiff alleges that USAT became insolvent in 1988 and that defendants should be required to pay $1.6 billion (subject to trebling) to cover USAT's losses. The Company's alleged portion of such damages has not been specified. Plaintiff seeks, among other things, that the Court impose a constructive trust upon the fruits of the alleged improper use of USAT funds. On March 22, 1996, the Court granted defendants' motion to have this case transferred to the U.S. District Court for the Southern District of Texas. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against the Company, MGI, MAXXAM Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, 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 to a Put and Call Agreement entered into between MPI and Mr. Hurwitz, as well as a predecessor agreement (the "Prior Agreement"). Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase from MPI certain notes (or the Company's common stock 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) (the "Progressive United action") was filed in the Court of Chancery, State of Delaware against the Company, Federated, MCO Properties Inc., a wholly owned subsidiary of the Company ("MCOP"), 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 later assigned by MCOP to the Company), and (b) grant an additional $11.0 million of consideration to Federated, in exchange for certain real estate assets valued at approximately $42.9 million in Rancho Mirage, California, held by Federated (the "Mirada transactions"). Plaintiff seeks, among other things, an accounting under the loan agreements, repayment of any losses or damages suffered by the Company or MCOP, costs and attorneys fees. The following six additional lawsuits, similar to the Progressive United action, were filed in 1991 and 1992 in Delaware Chancery Court challenging the Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al. (No. 12353); 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; and the Thistlethwaite action has been stayed pending the outcome of the consolidated actions. In January 1994, a derivative action entitled NL Industries, Inc., et al. v. Federated Development Company, et al. (No. 94-00630) was filed in the District Court of Dallas County, Texas, against 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. The parties have agreed to stay this action in light of the In re MAXXAM Inc./Federated Development Shareholders Litigation. With respect to the In re MAXXAM Inc./Federated Development Shareholders Litigation, on February 10, 1995, the Court issued its decision disapproving a previously announced proposed settlement and on June 23, 1995, the Court denied defendants' motion to dismiss certain of plaintiffs' claims. This matter was tried before the Court commencing January 29, 1996. The Court has scheduled a hearing for April 2, 1996 on various trial-related matters, including defendants' motion to dismiss the claims relating to the 1987 loan transactions. KAISER LITIGATION ENVIRONMENTAL LITIGATION Aberdeen Pesticide Dumps Site Matter The Aberdeen Pesticide Dumps Site, listed on the Superfund National Priorities List, is composed of five separate sites around the town of Aberdeen, North Carolina (collectively, the"Sites"). The Sites are of concern to the United States Environmental Protection Agency (the"EPA") because of their past use as either pesticide formulation facilities or pesticide disposal areas from approximately the mid-1930's through the late-1980's. The United States filed a cost recovery complaint (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, as amended, seeks reimbursement for past and future response costs and a determination of liability of the defendants under Section 107 of CERCLA. The EPA has performed a Remedial Investigation/Feasibility Study and issued a Record of Decision ("ROD") for the Sites in September 1991. The estimated cost of the major soil remediation remedy selected for the Sites is approximately $32 million. Other possible remedies described in the ROD would have estimated costs of approximately $53 million and $222 million, respectively. The EPA has stated that it has incurred past costs at the Sites in the range of $7.5 - $8.0 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 soil 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 a PRP Participation Agreement with certain of the respondents (the "Aberdeen Site PRP Group" or the "Group") to participate jointly in responding to the Administrative Orders dated May 20, 1993, regarding soil remediation, to share costs incurred on an interim basis, and to seek to reach a final allocation of costs through agreement or to allow such final allocation and determination of liability to be made by the United States District Court. By letter dated July 6, 1993, KACC has notified the EPA of its ongoing participation with 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 of other companies, undertake or agree to finance groundwater remediation at certain of the Sites. The ROD-selected remedy for the groundwater remediation selected by EPA includes a variety of techniques. The EPA has estimated the total present worth cost, including thirty years of operation and maintenance, at approximately $11.8 million. On June 22, 1994, the EPA issued two unilateral Administrative Orders under Section 106(a) of CERCLA ordering the respondents, including KACC, to undertake the groundwater remediation at three of the Sites. A PRP Participation Agreement with respect to groundwater remediation has been entered into by certain of the respondents, including KACC. By letter dated March 6, 1996, KACC gave notice of withdrawal from the Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation Agreement. KACC advised the Group and the EPA that even if it were liable for cleanup at the Sites, which is expressly denies, it had already contributed far more than its allocable potential share of response costs. KACC has advised the Group and the EPA that it has fully complied with the Unilateral Orders and that should additional evidence be presented which demonstrates KACC's liability in excess of the amount contributed to date, KACC would be willing to discuss the matter further at that time. United States of America v. Kaiser Aluminum & Chemical Corporation In February 1989, a civil action was filed by the United States Department of Justice (the "DOJ") at the request of the EPA against KACC in the United States District Court for the Eastern District of Washington, Case No. C-89-106-CLQ. The complaint alleged that emissions from certain stacks at KACC's Trentwood facility in Spokane, Washington intermittently violated the opacity standard contained in the Washington State Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air Act. The complaint sought injunctive relief, including an order that KACC take all necessary action to achieve compliance with the SIP opacity limit and the assessment of civil penalties of not more than $25,000 per day. KACC and the EPA, without adjudication of any issue of fact or law, and without any admission of the violations alleged in the underlying complaint, have entered into a Consent Decree, which was approved by a Consent Order entered by United States District Court for the Eastern District of Washington in January 1996. As approved, the Consent Decree settles the underlying disputes and requires KACC to (i) pay a $.5 million civil penalty (which penalty has been paid), (ii) complete a program of plant improvements and operational changes that began in 1990 at its Trentwood facility, including the installation of an emission control system to capture particulate emissions from certain furnaces, and (iii) achieve and maintain furnace compliance with the opacity standard in the SIP by no later than February 28, 1997. Kaiser anticipates that capital expenditures for the environmental upgrade of the furnace operation at its Trentwood facility, including the improvements and changes required by the Consent Decree, will be approximately $20.0 million. Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc. In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a Second Amended Complaint for Damages and Declaratory Relief against the United States, Catellus Development Corporation ("Catellus") and other defendants (collectively, the "Defendants") alleging, among other things, that the Defendants caused or allowed hazardous substances, pollutants, contaminants, debris and other solid wastes to be discharged, deposited, disposed of or released on certain property located in Richmond, California (the "Property") formerly owned by Catellus and leased to KACC for the purpose of shipbuilding activities conducted by KACC on behalf of the United States during World War II. The Plaintiffs sought recovery of response costs and natural resource damages under CERCLA. Certain of the Plaintiffs alleged they had incurred or expected to incur costs and damages of approximately $49 million. Catellus subsequently filed a third party complaint (the "Third Party Complaint") against KACC in the United States District Court for the Northern District of California, Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC, Case No C-92-4176. The Plaintiffs settled their CERCLA and tort claims against the United States for $3.5 million plus thirty-five percent (35%) of future response costs. The trial involving this case commenced in March 1995. During the trial, the Plaintiffs settled their claims against Catellus in exchange for payment of approximately $3.25 million. Subsequently, on June 2, 1995, the United States District Court for the Northern District of California issued an order on the remaining claims in that action. On December 7, 1995, the District Court issued the Final Judgment on those claims concluding that KACC is liable for various costs and interest, aggregating approximately $2.2 million, fifty percent (50%) of the future costs of cleaning up certain parts of the Property and certain fees and costs associated specifically with the claim by Catellus against KACC. In January 1996, Catellus filed a notice of appeal with respect to its indemnity judgment against KACC. KACC has since filed a notice of cross appeal as to the Court's decision adjudicating that KACC is obligated to indemnify Catellus. In February 1996, the Plaintiffs filed motions, which KACC intends to contest, seeking reimbursement of fees and costs from KACC in the aggregate amount of $2.76 million. Waste Inc. Superfund Site On December 8, 1995, the EPA issued a unilateral Administrative Order for Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other respondents for remedial design and action at the Waste Inc. Superfund Site at Michigan City, Indiana. This site was operated as a landfill from 1965 to 1982. KACC is alleged to have arranged for the disposal of waste from its formerly-owned plant at Wanatah, Indiana, during the period from 1964 to 1972. In its Record of Decision, the EPA estimated the cost of the work to be performed to have a present value of $15.7 million. KACC's share of the total waste sent to the site is unknown. A consultant retained by a group of PRPs estimated that KACC contributed 2.0% of the waste sent to the site by the forty-one largest contributors. KACC's ultimate exposure will depend on the number of PRPs that participate and the volume of waste properly allocable to KACC. Based on the EPA's cost estimate, KACC believes that its financial exposure for remedial design and remedial action at this site is less than $.5 million. A PRP participation agreement is under negotiation. Asbestos-Related Litigation KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least fifteen years. At December 31, 1995, the number of such claims pending was approximately 59,700, as compared with 25,200 at December 31, 1994. In 1995, approximately 41,700 of such claims were received and 7,200 settled or dismissed. KACC has been advised by its regional counsel that, although there can be no assurance, the recent increase in pending claims may be attributable in part to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to September 1, 1995. For additional information, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Investing and Financing Activities--Aluminum Operations" for additional information. See also Note 9 to the Company's Consolidated Financial Statements under the heading "Asbestos Contingencies." OTHER KAISER PROCEEDINGS Recapitalization Litigation On September 11, 1995, Kaiser announced that it had appointed an independent committee of its Board of Directors to consider a possible recapitalization transaction. On February 5, 1996, Kaiser publicly announced that it had filed a preliminary proxy statement with the Securities and Exchange Commission relating to a proposed recapitalization. A special shareholders' meeting to consider the recapitalization was subsequently scheduled for April 10, 1996 and the definitive proxy statement was mailed to shareholders commencing on March 20, 1996. See Note 7 to the Consolidated Financial Statements of the Company under Item 8 for a description of the proposed recapitalization. On March 19, 1996, a lawsuit was filed against the Company, Kaiser and Kaiser's directors challenging and seeking to enjoin the recapitalization and the April 10, 1996 special shareholders' meeting. The suit, which is entitled Matheson et. al. v. Kaiser Aluminum Corporation et. al. (No. 14900) and was filed in the Delaware Court of Chancery, purports to be a class action by persons who as of March 18, 1996 (the record date for the April 10, 1996 meeting) owned Kaiser's outstanding common stock and 8.255% PRIDES, Convertible Preferred Stock ("PRIDES"). Plaintiffs allege, among other things, breaches of fiduciary duties by certain defendants and that the proposed recapitalization violates Delaware law and the certificate of designation for the PRIDES. Plaintiffs seek injunctive relief, rescission, rescissory damages and other relief. A hearing on the motion for injunctive relief is presently scheduled for April 8, 1996. Hammons Action On March 5, 1996, a class action complaint was filed in California against the Company, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc. Reynolds Metal Company, the Aluminum Association and others in the Superior Court of California for the County of Los Angeles, Case No. BC145612. The complaint claims that the defendants conspired, in violation of state antitrust laws, to raise, stabilize and maintain the price of primary aluminum and aluminum products through cuts in production allegedly in connection with the ratification of a Memorandum of Understanding in 1994 by representatives of the authorities of Australia, Canada, the European Union, Norway, the Russian Federation and the United States. The complaint seeks certification of a class consisting of persons who at any time between January 1, 1994, and the date of the complaint purchased aluminum or aluminum products manufactured by one or more of the defendants and estimates damages sustained by the class to be $4.4 billion, before trebling. DOJ Investigation On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356 ("CID No. 11356") requesting information from Kaiser regarding (i) its production, capacity to produce, and sales of primary aluminum from January 1, 1991, to the date of the response; (ii) any actual or contemplated reduction in its production of primary aluminum during that period; and (iii) any communications with others regarding any actual, contemplated, possible or desired reductions in primary aluminum production by Kaiser or any of its competitors during that period. Management believes that Kaiser's actions have at all times been appropriate, and Kaiser has submitted documents and interrogatory answers to the DOJ responding to CID No. 11356. On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503 ("CID No. 12503"), as part of an industry-wide investigation, requesting information from KACC regarding (i) any actual or contemplated changes in its method of pricing can stock from January 1, 1994, through March 31, 1995; (ii) the percentage of aluminum scrap and primary aluminum ingot used by KACC to produce can stock and the manner in which KACC's cost of acquiring aluminum scrap is factored into its can stock prices; and (iii) any communications with others regarding any actual or contemplated changes in its method of pricing can stock from January 1, 1994, through March 31, 1995. Kaiser believes that KACC's actions have at all times been appropriate, and KACC has submitted documents and interrogatory answers to the DOJ responding to CID No. 12503. PACIFIC LUMBER LITIGATION In September 1989, seven past and present employees of Pacific Lumber brought an action against Pacific Lumber, the Company, MGI, and certain current and former directors and officers of the Company, Pacific Lumber and MGI, in the United States District Court, Northern District of California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) (the "Kayes action"). 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 Executive Life and selecting Executive Life 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) (the "Miller action") on April 26, 1993. The Miller action was dismissed on May 14, 1993. On October 22, 1994, the President signed the Pension Annuitants' Protection Act of 1994, which is intended, in part, to overturn the District Court's dismissal of the Miller action and to make available certain remedies not previously provided under ERISA. On April 10, 1995, the U.S. Ninth Circuit Court of Appeals reversed the dismissal of the Miller action. On August 7, 1995, the defendants requested the U.S. Supreme Court to review the case by filing a petition for writ of certiorari. The U.S. Supreme Court denied defendants' petition for writ of certiorari. 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) (the "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. On December 8, 1995, the parties in the Kayes/Miller actions and DOL civil action reached an agreement in principle to settle these matters (for an amount which would not result in any additional charge to the Company's results of operations). The proposed settlement is subject to execution of a definitive agreement and other contingencies. A status conference is scheduled for April 12, 1996 in the Kayes/Miller action and the DOL civil action. A special committee of the Board of Directors of the Company has been appointed to review the proposed settlement and a related derivative action. The Company believes the settlement of this litigation will not have a material adverse effect on the Company's liquidity, consolidated financial position or results of operations. On September 15, 1995, an action entitled Marbled Murrelet, et al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") was filed in the U.S. District Court for the Northern District of California. This action relates to exemptions for forest health which Pacific Lumber and its subsidiaries had previously filed covering their entire timberlands. As amended, the complaint alleges, among other things, violations of the ESA, the National Environmental Protection Act ("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among other things, that the timber harvesting operations pursuant to the forest health exemptions will contribute to the destruction of habitat for the marbled murrelet and the northern spotted owl. Following a hearing on September 28, 1995, the Court dissolved a temporary restraining order ("TRO") and issued a preliminary injunction enjoining Pacific Lumber and its subsidiaries from conducting timber harvesting operations under portions of the forest health exemptions until a trial on the merits of the case. The majority of the timberlands which are subject to the injunction are timberlands which have been proposed as critical habitat for the marbled murrelet. In October 1995, Pacific Lumber appealed the issuance of the preliminary injunction to the U.S. Ninth Circuit Court of Appeals; oral argument in the appeal was held March 14, 1996. On March 6, 1996, the plaintiffs asked for leave to amend their pleadings to add additional claims and seek additional injunctive relief concerning, among other things, Pacific Lumber's Owl Plan and up to eight other THPs (only two of which are presently approved). The eight THPs cover approximately 1,360 acres of the Company's timberlands and represent a substantial portion of the volume Pacific Lumber and its subsidiaries are planning to utilize in their operations for 1996. On March 15, 1996, the Court granted plaintiffs' motion to file an amended complaint and issued a TRO enjoining Pacific Lumber and its subsidiaries from harvesting pursuant to the eight THPs. On March 20, 1996, the Court held a hearing on plaintiffs' motion for preliminary injunction and extended the TRO for ten additional days while it considers the motion. In view of the recent developments in the Marbled Murrelet action, the Company is uncertain as to whether or not this matter will have a material adverse effect on the liquidity, results of operations, or financial position of Pacific Lumber. Judicial or regulatory actions adverse to Pacific Lumber, increased regulatory delays and inclement weather in northern California, independently or collectively, could impair Pacific Lumber's ability to maintain adequate log inventories and force Pacific Lumber to temporarily idle or curtail operations at certain of its lumber mills from time to time. OTHER LITIGATION MATTERS The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's liquidity, 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 1995 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 1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8): The Consolidated Financial Statements and the Report of Independent Public Accountants are included on pages 39 to 72 of the Annual Report which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES: PAGE
Report of Independent Public Accountants on Financial Statement Schedule 40 Schedule I - Condensed Financial Information of Registrant at December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 41-44
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 46), 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 1995 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 16, 1996. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index on page 39 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED)
December 31, ----------------------- 1995 1994 ---------- ---------- (In millions of dollars) ASSETS Current assets: Cash and cash equivalents $ 20.4 $ 15.5 Marketable securities 9.3 20.8 Other current assets 1.8 4.4 ---------- ---------- Total current assets 31.5 40.7 Deferred income taxes 64.2 68.4 Other assets 3.7 4.6 ---------- ---------- $ 99.4 $ 113.7 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 7.4 $ 10.5 Long-term debt, current maturities .2 2.4 ---------- ---------- Total current liabilities 7.6 12.9 Long-term debt, less current maturities 41.6 44.6 Losses recognized in excess of investment in subsidiaries 12.4 198.9 Notes payable to subsidiaries, net of notes receivable and advances 18.8 12.2 Other noncurrent liabilities 102.8 120.4 ---------- ---------- Total liabilities 183.2 389.0 ---------- ---------- Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1995 - 669,701 and 1994 - 669,957 .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 5.0 5.0 Additional capital 155.0 53.2 Accumulated deficit (208.5) (302.9) Pension liability adjustment (16.1) (11.4) Treasury stock, at cost (shares held: preferred - 845; common: 1995 - 1,355,512 and 1994 - 1,355,768) (19.5) (19.5) ---------- ---------- Total stockholders' deficit (83.8) (275.3) ---------- ---------- $ 99.4 $ 113.7 ========== ==========
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In millions of dollars) Investment, interest and other income $ 5.6 $ 12.6 $ 3.0 Interest expense (6.2) (11.7) (13.7) General and administrative expenses (18.9) (11.0) (15.4) Equity in earnings (losses) of subsidiaries 43.6 (132.0) (615.5) ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of changes in accounting principles 24.1 (142.1) (641.6) Credit (provision) for income taxes 33.4 20.0 (3.1) ---------- ---------- ---------- Income (loss) before cumulative effect of changes in accounting principles 57.5 (122.1) (644.7) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit for income taxes of $.2 - - (.4) Accounting for income taxes - - 44.9 ---------- ---------- ---------- Net income (loss) $ 57.5 $ (122.1) $ (600.2) ========== ========== ==========
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 57.5 $ (122.1) $ (600.2) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Equity in losses (earnings) of subsidiaries (43.6) 132.0 615.5 Net sales of marketable securities 14.5 6.8 18.3 Amortization of deferred financing costs and discounts on long-term debt .3 .3 .5 Cumulative effect of changes in accounting principles, net - - (44.5) Decrease in receivables .6 1.1 .8 Increase in accrued and deferred income taxes (18.9) (7.9) (13.1) Increase (decrease) in accounts payable and other liabilities (14.5) (5.3) 24.3 Other 2.3 (.2) 2.6 ---------- ---------- ---------- Net cash provided by (used for) operating activities (1.8) 4.7 4.2 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of Kaiser Depositary Shares 7.6 10.3 - Dividends received from subsidiaries 4.8 7.5 66.1 Investments in and net advances from (to) subsidiaries .4 (27.5) (22.2) Capital expenditures (.2) (.4) (.3) ---------- ---------- ---------- Net cash provided by (used for) investing activities 12.6 (10.1) 43.6 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption, repurchase of and principal payments on long-term debt (5.9) (5.8) (24.3) ---------- ---------- ---------- Net cash used for financing activities (5.9) (5.8) (24.3) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4.9 (11.2) 23.5 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15.5 26.7 3.2 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20.4 $ 15.5 $ 26.7 ========== ========== ========== SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reduction of stockholders' deficit due to redemption of Kaiser preferred stock $ 136.2 $ - $ - Distribution received from subsidiary of the Company's payable 8.0 132.0 - Assumption by the Company of subsidiary's payables to the Company and affiliates - (63.1) - Net assets transferred (to) from subsidiary (14.5) - 30.5 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 6.0 $ 7.0 $ 6.8 Income taxes paid (refunded) (.3) 1.1 (.5)
NOTES TO FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS) A. DEFERRED INCOME TAXES The deferred income tax assets and liabilities reported in the accompanying unconsolidated balance sheet are determined by computing such amounts on a consolidated basis, for the Company and members of its consolidated federal income tax return group, and then reducing such consolidated amounts by the amounts recorded by the Company's subsidiaries pursuant to their respective tax allocation agreements with the Company. The Company's net deferred income tax assets relate primarily to the excess of the tax basis over financial statement basis with respect to timber and timberlands and real estate held for sale by various subsidiaries. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. B. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- 14% Senior Subordinated Reset Notes due May 20, 2000 $ 25.0 $ 25.0 12-1/2% Subordinated Debentures due December 15, 1999, net of discount of $1.1 and $1.7 at December 31, 1995 and 1994, respectively 16.5 20.9 Other .3 1.1 ---------- ---------- 41.8 47.0 Less: current maturities (.2) (2.4) ---------- ---------- $ 41.6 $ 44.6 ========== ==========
Scheduled maturities of long-term debt outstanding at December 31, 1995 are as follows: years ending December 31, 1996 - $.2; 1997 - $3.3; 1998 - $3.3; 1999 - $11.1; 2000 - $25.0. C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES At December 31, 1995, the Company's indebtedness to its subsidiaries, which includes accrued interest, consists of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- Unsecured note payable, interest at 6% $ 18.3 $ 60.9 Unsecured notes payable, interest at 7% 13.7 12.9 Secured notes receivable, interest at 12% on first $15.0, at prime plus 1% to 2% on remainder - (43.6) Net advances (13.2) (18.0) ---------- ---------- $ 18.8 $ 12.2 ========== ==========
In August 1995, the notes receivable reflected above were canceled to reduce the 6% unsecured note payable by $45.5 ($43.6 plus accrued interest). 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, who has signed this report on behalf of the Registrant and as the chief financial officer of the Registrant. MAXXAM INC. Date: March 28, 1996 By: PAUL N. SCHWARTZ Paul N. Schwartz Executive Vice President and Chief Financial Officer (Principal Financial 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 28, 1996 By: CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President and Chief Executive Officer Date: March 28, 1996 By: ROBERT J. CRUIKSHANK Robert J. Cruikshank Director Date: March 28, 1996 By: EZRA G. LEVIN Ezra G. Levin Director Date: March 28, 1996 By: STANLEY D. ROSENBERG Stanley D. Rosenberg Director Date: March 28, 1996 By: TERRY L. FREEMAN Terry L. Freeman Assistant Controller (Principal Accounting Officer) 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 Certificate of Designations of Class A $.05 Non- Cumulative Participating Convertible Preferred Stock of the Company, dated July 6, 1994 (incorporated herein by reference to Exhibit 4(c) to the Registration Statement of the Company on Form S-8, Registration No. 33-54479) 3.4 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 between the Company and The Bank of New York, Trustee, 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 Chemical Bank, 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 Loan and Pledge Agreement, dated as of October 10, 1994, between Custodial Trust Company and the Company (incorporated herein by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.4 Indenture, dated as of August 4, 1993, 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 year ended December 31, 1993, File No. 1-8857; the "MGI 1993 Form 10-K") 4.5 Indenture, dated as of February 1, 1993, among Kaiser Aluminum & Chemical Corporation ("KACC"), certain related corporations and State Street Bank and Trust Company (as successor trustee to The First National Bank of Boston; "State Street"), regarding KACC's 12-3/4% Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Note Indenture") (incorporated herein by reference to Exhibit 4.1 to KACC's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-3605) 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 Second Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and State Street, Trustee, regarding KACC's 12-3/4% Senior Subordinated Notes due 2003 (incorporated here in by reference to Exhibit 4.3 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447) 4.8 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 year ended December 31, 1993, File No. 1-3605; the "KACC 1993 Form 10-K") 4.9 First Supplemental Indenture, dated as of February 1, 1996, among KACC, certain related corporations and First Trust National Association, Trustee, regarding KACC's 9-7/8% Senior Notes due 2002 (incorporated hereby by reference to Exhibit 4.5 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447) 4.10 Credit Agreement, dated as of February 17, 1994 (the "Kaiser Credit Agreement"), among Kaiser Aluminum Corporation ("Kaiser"), KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to the KACC 1993 Form 10-K) 4.11 First Amendment, dated July 21, 1994, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Kaiser for the quarter ended June 30, 1994, File No. 1-9447) 4.12 Second Amendment, dated March 10, 1995, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.6 to the Annual Report on Form 10-K of Kaiser for the year ended December 31, 1994, File No. 1-9447) 4.13 Third Amendment, dated as of July 20, 1995, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 1-9447) 4.14 Fourth Amendment, dated as of October 17, 1995, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-9447) 4.15 Fifth Amendment, dated December 11, 1995, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.11 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447) 4.16 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") 4.17 Certificate of Retirement of Kaiser, dated October 24, 1995, and filed in the state of Delaware Office of the Secretary of State on October 25, 1995 (incorporated herein by reference to Exhibit 3.2 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-9447) 4.18 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) 4.19 Certificate of Designation of 8.255% Preferred Redeemable Increased Dividend Equity Securities of Kaiser, dated February 17, 1994 (incorporated herein by reference to Exhibit 4.21 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9447; the "Kaiser 1993 Form 10-K") 4.20 Indenture, dated as of March 23, 1993, between The Pacific Lumber Company ("Pacific Lumber") and State Street (as successor trustee to The First National Bank of Boston) regarding Pacific Lumber's 10-1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-9204) 4.21 Indenture, dated as of March 23, 1993, between Scotia Pacific Holding Company ("Scotia Pacific") and State Street, as Trustee, regarding Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to Scotia Pacific's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 33-55538; the "Scotia Pacific 1993 Form 10-K") 4.22 Form of Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment, dated as of March 23, 1993, among Scotia Pacific, State Street, as Trustee, and State Street, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K) 4.23 Amended and Restated Credit Agreement of Pacific Lumber, dated November 10, 1995 (the "Pacific Lumber Credit Agreement") (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-9204) 4.24 Form of Deed of Trust, Assignment of Rents, Grant of Easement and Fixture Filing with respect to the Pacific Lumber Credit Agreement (incorporated herein by reference to Exhibit 4.2 to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-9204) *4.25 Second Amended and Restated Credit and Security Agreement, dated July 15, 1995, among the First National Bank of Boston, MCO Properties, Inc., Westcliff Development Corporation, Horizon Corporation, Horizon Properties Corporation and MCO Properties L.P. 4.26 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 MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300; the "MGI 1991 Registration Statement") 4.27 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) 4.28 Loan Increase, Extension and Modification Agreement, dated as of December 30, 1992, among GECC, MXM Mortgage Corp. and the Company (incorporated herein by reference to Exhibit 4.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 4.29 Consent and Assumption Agreement, dated as of December 10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage L.P., the Company and MGI (incorporated herein by reference to Exhibit 4.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993; the "Company 1993 Form 10-K") 4.30 Third Modification Agreement, dated as of December 30, 1993, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. (incorporated herein by reference to Exhibit 4.37 to the Company 1993 Form 10-K) 4.31 Fourth Amendment to Loan Agreement, dated as of December 30, 1993, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. (incorporated herein by reference to Exhibit 4.39 to the Company 1993 Form 10-K) 4.32 Fourth Modification Agreement, dated as of March 31, 1994, by and among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. (incorporated herein by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994; the "Company 1994 Second Quarter Form 10-Q") 4.33 Fifth Modification Agreement, dated as of January 13, 1995, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. (incorporated herein by reference to Exhibit 4.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.34 Sixth Amendment to Loan Agreement, dated as of January 13, 1995, among GECC, MXM Mortgage Corp. and MXM Mortgage L.P. (incorporated herein by reference to Exhibit 4.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) *4.35 Eighth Amendment to Loan Agreement, dated October 21, 1995, among GECC, MXM Mortgage, L.P. and MXM Mortgage Corp. 4.36 Amended and Restated Indenture dated October 6, 1995 by and among Sam Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of SHRP for the quarter ended June 30, 1995; the "SHRP 1995 Second Quarter Form 10-Q" 4.37 Amended and Restated Deed of Trust, Assignment, Security Agreement and Financing Statement, dated October 6, 1995, among SHRP, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.2 to the SHRP 1995 Second Quarter Form 10-Q) 4.38 Deed of Trust, Assignment, Security Agreement and Financing Statement, dated October 6, 1995, among SHRP, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.3 to the SHRP 1995 Second Quarter Form 10-Q) 4.39 Amended and Restated License Negative Pledge, dated October 6, 1995, executed by SHRP in favor of Trustee (incorporated herein by reference to Exhibit 4.4 to the SHRP 1995 Second Quarter Form 10-Q) 4.40 Senior Subordinated Intercompany Note between KACC and the Company, dated as of January 14, 1993 (incorporated herein by reference to Exhibit 4.13 to Amendment No. 5 to the Form S-1 on Form S-2 Registration Statement of KACC, Registration No. 33- 48260 4.41 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) 4.42 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) 4.43 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) 4.44 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. 2 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 Amendment No. 2 to the Form S-2 Registration Statement of MGI, Registration No. 33-56332 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 year ended December 31, 1988, File No. 1-9204) 10.5 Tax Allocation Agreement among Pacific Lumber, Scotia Pacific, Salmon Creek Corporation and the Company, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of Scotia Pacific, Registration No. 33-55538 10.6 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 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) 10.8 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) 10.9 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) 10.10 Form of Master Purchase Agreement between Pacific Lumber and Scotia Pacific, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K) 10.11 Form of Services Agreement between Pacific Lumber and Scotia Pacific, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.2 to the Scotia Pacific 1993 Form 10-K) 10.12 Form of Additional Services Agreement between Pacific Lumber and Scotia Pacific, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K) 10.13 Form of Reciprocal Rights Agreement among Pacific Lumber, Scotia Pacific and Salmon Creek Corporation, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.4 to the Scotia Pacific 1993 Form 10-K) 10.14 Form of Environmental Indemnification Agreement between Pacific Lumber and Scotia Pacific, dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.5 to the Scotia Pacific 1993 Form 10-K) 10.15 Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc., dated as of March 23, 1993 (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber, Registration Statement No. 33-56332 10.16 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) 10.17 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) 10.18 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) 10.19 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) 10.20 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) 10.21 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) 10.22 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) 10.23 Third Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd., dated as of October 6, 1995 (incorporated herein by reference to Exhibit 3.1 to the SHRP 1995 Second Quarter 10-Q) Executive Compensation Plans and Arrangements 10.24 MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 99 to the Company's Proxy Statement dated April 29, 1994; the "Company 1994 Proxy Statement") 10.25 Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.26 MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 99 to the Company 1994 Proxy Statement) 10.27 Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.28 Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994) 10.29 MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to Exhibit 99 to the Company 1994 Proxy Statement) 10.30 MAXXAM Revised Capital Accumulation Plan of 1988, as amended December 12, 1988 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995) 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; the "Company 1990 Form 10-K") 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 1990 Form 10-K) 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 Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(jj) to the 1991 MGI Registration Statement) *10.35 Form of Company Deferred Compensation Agreement 10.36 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) 10.37 Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.38 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) 10.39 Kaiser 1995 Employee Incentive Compensation Program (incorporated herein by reference to Exhibit 10.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; the "Kaiser 1995 First Quarter Form 10-Q") 10.40 Kaiser 1995 Executive Incentive Compensation Program (incorporated herein by reference to Exhibit 99 to Kaiser's Proxy Statement dated April 26, 1995) 10.41 Promissory Note dated February 1, 1989 by Anthony R. Pierno and Beverly J. Pierno to the Company (the "1989 Pierno Note") (incorporated herein by reference to Exhibit 10.30 to the Company 1990 Form 10-K) 10.42 Letter amendment, dated February 28, 1995, to the 1989 Pierno Note (incorporated herein by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.43 Promissory Note dated July 19, 1990 by Anthony R. Pierno to the Company (the "1990 Pierno Note") (incorporated herein by reference to Exhibit 10.31 to the Company 1990 Form 10-K) 10.44 Letter amendment, dated February 28, 1995, to the 1990 Pierno Note (incorporated herein by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.45 Real Estate Lien Note dated July 3, 1990 by Paul N. Schwartz and Barbara M. Schwartz, Trustee, to the Company (the "Schwartz Note") and related Deed of Trust and Letter Agreement (incorporated herein by reference to Exhibit 10.35 to the Company 1990 Form 10-K) 10.46 Amendment to the Schwartz Note, dated January 25, 1995 (incorporated herein by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.47 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 1990 Form 10-K) 10.48 Promissory Note, dated July 20, 1993, between the Company and Byron L. Wade (incorporated herein by reference to Exhibit 10.59 to the Company 1993 Form 10-K) 10.49 Promissory Note dated October 4, 1990 by Robert W. Irelan and Barbara M. Irelan to KACC (incorporated herein by reference to Exhibit 10.54 to the Company 1990 Form 10-K) 10.50 Employment Agreement, dated August 20, 1993 between KACC and Robert E. Cole (incorporated herein by reference to Exhibit 10.63 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.51 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 1990 Form 10-K) 10.52 Commercial Guaranty, dated February 22, 1993, executed by the Company 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 year ended December 31, 1992, File No. 1-9447) 10.53 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 (incorporated herein by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.54 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 1990 Form 10-K) 10.55 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 1990 Form 10-K) 10.56 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 1990 Form 10-K) *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, 1995 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 year ended December 31, 1995, File No. 1- 3605) *21 List of the Company's Subsidiaries *23 Consent of Independent Public Accountants by Arthur Andersen LLP *27 Financial Data Schedule - --------------- * Included with this filing. EX-11 2 EXHIBIT 11 TO MAXXAM INC. 10-K 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, ------------------------------------- 1995 1994 1993 ----------- ---------- ---------- Weighted average common and common equivalent shares outstanding during each year 9,376,703 9,376,703 9,376,703 Common equivalent shares attributable to stock options and convertible securities 82,590 71,175 80,380 ----------- ---------- ---------- Total common and common equivalent shares 9,459,293 9,447,878 9,457,083 =========== ========== ========== Income (loss) before extraordinary item and cumulative effect of changes in accounting principles $ 57.5 $ (116.7) $ (131.9) Extraordinary item - (5.4) (50.6) Cumulative effect of changes in accounting principles - - (417.7) ----------- ---------- ---------- Net income (loss) $ 57.5 $ (122.1) $ (600.2) =========== ========== ========== Per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles $ 6.08 $ (12.35) $ (13.95) Extraordinary item - (.57) (5.35) Cumulative effect of changes in accounting principles - - (44.17) ----------- ---------- ---------- Net income (loss) $ 6.08 $ (12.92) $ (63.47) =========== ========== ==========
EX-21 3 EXHIBIT 21 TO MAXXAM INC. 10-K EXHIBIT 21 MAXXAM INC. PRINCIPAL 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 International, Inc. Delaware Kaiser Aluminum & Chemical Corporation Delaware Kaiser Aluminum & Chemical of Canada Limited Ontario Kaiser Bauxite Company Nevada Kaiser Finance Corporation Delaware Kaiser Jamaica Bauxite Company (partnership) Jamaica Kaiser Jamaica Corporation Delaware Queensland Alumina Limited Queensland Volta Aluminium Company Limited Ghana FOREST PRODUCTS OPERATIONS Britt Lumber Co., Inc. California MAXXAM Group Inc. Delaware MAXXAM Properties Inc. Delaware Salmon Creek Corporation Delaware Scotia Pacific Holding Company Delaware The Pacific Lumber Company Delaware REAL ESTATE OPERATIONS Horizon Corporation Delaware MAXXAM Property Company Delaware MCO Properties Inc. Delaware MCO Properties L.P. (limited partnership) Delaware MXM General Partner, Inc. Delaware MXM Mortgage L.P. (limited partnership) Delaware Palmas del Mar Properties, Inc. Delaware RACE PARK OPERATIONS New SHRP Acquisition, Inc. Delaware SHRP General Partner, Inc. Delaware Sam Houston Entertainment Corp. Texas Sam Houston Race Park, Ltd. (limited partnership) Texas
EX-23 4 EXHIBIT 23 TO MAXXAM INC. 10-K EXHIBIT 23 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 LLP Houston, Texas March 28, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such consolidated financial statements together with the related footnotes thereto. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 104,200 45,900 251,700 5,500 606,800 1,231,700 1,910,000 678,100 3,832,300 684,900 1,610,200 5,000 0 300 (69,600) 3,832,300 2,565,200 2,565,200 1,990,900 1,990,900 316,700 0 181,300 94,500 14,800 57,500 0 0 0 57,500 6.08 6.08
EX-4.25 6 EX 4.25 TO MAXXAM INC. 10-K SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT By and Among MCO PROPERTIES INC. WESTCLIFF DEVELOPMENT CORPORATION, HORIZON CORPORATION, HORIZON PROPERTIES CORPORATION, MCO PROPERTIES, L.P. and THE FIRST NATIONAL BANK OF BOSTON July 15, 1995 TABLE OF CONTENTS Section Page 1 DEFINITIONS AND RULES OF INTERPRETATION 1.1. Definitions 1.2. Rules of Interpretation 2.1. REVOLVING CREDIT LOANS Sub-Part A - Loans to the Borrower 2.1.1. Commitment to Lend 2.1.2. The Borrower Revolving Credit Note Sub-Part B - Loans to the L.P. 2.1.3. Commitment to Lend 2.1.4. The LP Revolving Credit Note Sub-Part C - Applicable to All Revolving Credit Loans 2.1.5. Collateral Note(s) 2.1.6. Interest on Revolving Credit Loans 2.1.7. Requests for Revolving Credit Loans 2.1.8. Conversion Options 2.2. REPAYMENT OF THE REVOLVING CREDIT LOANS 2.2.1. Maturity 2.2.2. Mandatory Repayments of Revolving Credit Loans 2.2.3. Optional Repayments of Revolving Credit Loans 2.2.4. Periodic Payments of Revolving Credit Loans 2.3. LETTERS OF CREDIT 2.3.1. Issuance of Letters of Credit 2.3.2. Interest on Letters of Credit 2.3.3. Effects of Drawing 3. FEES 3.1. Facility Fee 3.2. Administration Fee 3.3. L/C Fee 4. CERTAIN GENERAL PROVISIONS 4.1. Funds for Payments 4.2. Computations 4.3. Inability to Determine Eurodollar Rate 4.4. Illegality 4.5. Additional Costs, Etc. . 4.6. Capital Adequacy 4.7. Indemnity 4.8. Certificate 4.9. Interest on Overdue Amounts 4.10. Late Charge 5. COLLATERAL SECURITY 5.1. Grant of Security Interest 5.2. Warranty of Title 5.3. Pro Rata Security 6. REPRESENTATIONS AND WARRANTIES 6.1. Corporate Authority; Etc. 6.2. Governmental Approvals 6.3. Title to Properties; Leases 6.4. No Material Changes, Etc. 6.5. Franchises, Patents, Copyrights, Etc. 6.6. Litigation 6.7. No Material Adverse Contracts, Etc. 6.8. Compliance With Other Instruments, Laws, Etc. 6.9. Tax Status 6.10. No Suspension Event or Event of Default 6.11. Holding Company and Investment Company Acts 6.12. Absence of UCC Financing Statements, Etc. 6.13. Setoff, Etc. 6.14. Certain Transactions 6.15. Employee Benefit Plans; Multiemployer Plans; Guaranteed Pension Plans 6.16. Regulations U and X 6.17. Environmental Compliance 6.18. Subsidiaries 6.19. Material Lease Summaries 6.20. Loan Documents 6.21. Mortgaged Property 6.22. Existing Notes Receivable Value 6.23. Existing Lots and Undeveloped Acres 6.24. Non-Underwriting Criteria Loans 6.25. Amended and Restated Credit and Security Agreement 6.26 LP Partners 6.27 LP Assets and Liabilities 7. AFFIRMATIVE COVENANTS OF THE BORROWER 7.1. Punctual Payment 7.2. Maintenance of Office 7.3. Records and Accounts 7.4. Financial Statements, Certificates and Information 7.5. Notices 7.6. Existence; Maintenance of Properties 7.7. Insurance 7.8. Taxes 7.9. Inspection of Properties and Books 7.10. Compliance with Laws, Contracts, Licenses, and Permits 7.11. Use of Availability 7.12. Further Assurances 7.13. Appraisals 7.14. Notification Letters 7.15. Hazardous Substance Remedial Action 8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER 8.1. Restrictions on Indebtedness 8.2. Restrictions on Liens, Etc. 8.3. Restrictions on Investments 8.4. Merger, Consolidation 8.5. Sale and Leaseback 8.6. Compliance with Environmental Laws 8.7. Distributions 8.8 Cash Transactions with Affiliated Entities 8.9. Material Leases 8.10. Restrictions on Compromise of Notes Receivable 8.11. Subsidiaries 8.12 Change in Ownership 9. FINANCIAL COVENANTS OF THE BORROWER 10. CLOSING CONDITIONS 10.1. Loan Documents 10.2. Certified Copies of Organization Documents 10.3. By-laws; Resolutions 10.4. Incumbency Certificate 10.5. Validity of Liens 10.6. Survey and Taxes 10.7. Title Insurance; Title Exception Documents 10.8. Leases and Service Contracts 10.9. Certificates of Insurance 10.10. Hazardous Substance Assessments 10.11. Environmental Indemnity 10.12. Opinions of Counsel Concerning Organization and Loan Documents 10.13. Financial Information 10.14. Payment of Fees 10.15. Zoning, Environmental and Land Use Compliance Opinion of Counsel 10.16. Borrowing Base Report 10.17. Guaranties 10.18. Lock Box Account 10.19. Subordination 10.20. Commercial Finance Exam 10.21. Evidence of Licenses, Permits, Utilities, Etc. 10.22. Additional Matters 11. CONDITIONS TO ALL BORROWINGS 11.1. Representations True; No Event of Default 11.2. No Legal Impediment 11.3. Governmental Regulation 11.4. Proceedings and Documents 12. EVENTS OF DEFAULT; ACCELERATION; ETC. 12.1. Events of Default and Acceleration 12.2. Termination of Commitment 12.3. Remedies 12.4. Distribution of Collateral Proceeds 13. SETOFF 14. EXPENSES 15. INDEMNIFICATION 16. SURVIVAL OF COVENANTS, ETC. 17. PERMITTED SALES/RELEASE OF LIEN 17.1 Permitted Sales 17.2 Release of Collateral 18. ASSIGNMENT; PARTICIPATION; ETC. 18.1. Assignment by the Bank 18.2. Participations 18.3. Disclosure 18.4. Pledge by Bank 18.5. No Assignment by Borrower 19. AGENTS, ATTORNEYS, TRUSTEES 20. NOTICES, ETC. 21. PUBLICITY 22. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE 23. HEADINGS 24. COUNTERPARTS 25. ENTIRE AGREEMENT, ETC. 26. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS 27. CONSENTS, AMENDMENTS, WAIVERS, ETC. 28. SEVERABILITY EXHIBITS A. Form of Borrower Revolving Credit Note B. Form of LP Revolving Credit Note C. Form of Loan Request D. Form of Material Lease Summaries E. Form of Reimbursement Agreement F. Borrowing Base Report SCHEDULES 1.1(a) "Letters of Credit" 1.1(b) "Non-Strategic Projects" 1.1(c) "Strategic Projects" 1.1(d) "Title Insurance Company" 1.1(e) "Underwriting Criteria for Notes Receivable" 1.1(f) LP Assets 1.1(g) Acceptable Existing Notes Receivable 5.1 Collateral Exclusions 5.2(iii) Exception to Notes Receivable 5.2(iv) Patents and Trademarks 5.2(vi) Warranty of Title 6.3 Title to Properties; Leases 6.4 Material Changes 6.6 Litigation 6.7 Adverse Contracts, Etc. 6.15 Employee Benefit Plans, Etc. 6.17 Environmental Compliance 6.18 Subsidiaries 6,21 Leases 6.21(c) Notice of Adverse Zoning, etc. 6.21(e) Real Property Taxes; Special Assessments 6.21(h) Agreements Relating to the Mortgaged Property 6.21(i) Service Agreements 6.21(j) Other Material Real Property Agreements 6.23 Existing Lots and Undeveloped Acres 7.14 Notification Letter 8.1 Outstanding Indebtedness 8.2 Outstanding Liens 8.3 Outstanding Investments 8.7 Form of Letter 10.10 Environmentally Deficient Developed Lots 17 Affidavit 18.3 Confidentiality Agreement SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT is made as of the 15th day of July, 1995, by and among: MCO Properties Inc., a Delaware corporation, with its principal executive office located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 (the "Borrower"), Westcliff Development Corporation, a Texas corporation with its principal executive office located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 ("Westcliff" ), Horizon Corporation, a Delaware corporation with its principal executive office located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 ("Horizon"), Horizon Properties Corporation, a Delaware corporation with its principal executive office located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 ("HPC"), MCO Properties, L.P., a Delaware limited partnership with its principal executive office located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 ("LP"); and THE FIRST NATIONAL BANK OF BOSTON, a national banking association with its principal executive offices located at 100 Federal Street, Boston, Massachusetts (the "Bank"). This Second Amended and Restated Credit and Security Agreement is intended to amend, restate and replace certain terms and conditions set forth in a certain Amended and Restated Credit and Security Agreement dated as of December 29, 1992 by and among the Borrower, Westcliff, Horizon, HPC and the Bank, as amended pursuant to instruments dated June 30, 1993 and December 29, 1993 (the "1992 Agreement"), provided, however, each and all of the terms and conditions set forth in 5 of the 1992 Agreement and 6 of the 1988 Agreement (as defined in the 1992 Agreement) shall remain in full force and effect (except as the Collateral described therein has been previously released). 1.1 Definitions. The following terms shall have the meanings set forth in this 1 or elsewhere in the provisions of this Agreement referred to below: Acceptable Contracts. A contract or agreement which is in form substantially the same as the form which has been approved by the Bank, entered into by and between any Party and a Person with respect to any Amenity Sales Contracts, Retail Lot Contracts, Bulk Land Sales Contracts and Home Mortgages which contracts or agreements give rise to Notes Receivable, which Notes Receivable may, subject to the terms and conditions set forth herein, create Availability. Acceptable Existing Notes Receivable. (a) Such of each of the Party's Existing Notes Receivable for each of the Strategic Projects and the Non- Strategic Projects (subject, however, to the limitations set forth in subsection (b), below), which have been earned by performance and are owed to any of the Parties by the Note Obligors, and in each instance (A) as have arisen in the ordinary course of such Party's business, and (B) have been endorsed (in form and substance satisfactory to the Bank and the Bank's Counsel), delivered and collaterally assigned to the Bank, (C) in which the Bank has been granted valid and first perfected security inter- ests and (D) for which the Bank has received a collateral assignment (in form and substance satisfactory to the Bank and the Bank's counsel) of the mortgage or deed of trust and other collateral documents securing such Existing Notes Receivable. (b) The following is a listing of those types of Notes Receivable which are not Acceptable Existing Notes Receivables: (i) Any which is more than sixty (60) days past due as shown on the Borrowing Base Report; (ii) Any which is owed by any individual Party to any of the other Parties, or any which is owed by any affiliated or related entity of any of the Parties; (iii) Any as to which the Note Obligor holds or is entitled to any claim, counterclaim, set off, or chargeback; (iv) Any Existing Note Receivable arising out of an In- stallment Sales Contract, except: (A) where Borrower's, Westcliff's, Horizon's, HPC's or the LP's performance thereunder consists solely of deeding the subject premises to the Note Obligor upon payment of all installment payments under any such Installment Sales Contract, or (B) as to any Installment Sales Contract which the Bank, in its sole and absolute discretion, deems acceptable; (v) Any which is owed by any person employed by, or a salesperson of any of the Parties. (c) Set forth on Schedule 1.1(g) to this Agreement is a listing as of the date hereof of Acceptable Existing Notes Receivable. Acceptable New Notes Receivable. Such of the Parties' New Notes Receivable arising out of Acceptable Contracts having a term of not more than ten (10) years from the date of closing of the transaction giving rise to the Note Receivable, for each of the Strategic Projects and the Non- Strategic Projects (subject, however, to the limitations set forth in subsection (b), below), and in each instance (A) as arise in the ordinary course of the Parties' business, (B) have been endorsed (in form and substance satisfactory to the Bank and Bank's counsel), delivered and collaterally assigned to the Bank, (C) in which the Bank has been granted valid and first perfected security interest (D) for which the Bank has received a collateral assignment (in form and substance satisfactory to the Bank and the Bank's counsel) of the mortgage or deed of trust and other collateral documents securing each of said New Notes Receivable, and (E) (i) with respect to such New Notes Receivables realized on account of Bulk Land Sales Contracts and Amenity Contracts, such of the Parties' New Notes Receivable meeting the Underwriting Criteria for such Notes Receivable, and (ii) with respect to such New Notes Receivables realized on account of Retail Lot Contracts, and Home Mortgages, such of the Parties' New Notes Receivable meeting the Underwriting Criteria for such Notes Receivable. (b) The following is a listing of those types of New Notes Receivable which are not Acceptable New Notes Receivables: (i) Any which is more than sixty (60) days past due as shown on the Borrowing Base Report; (ii) Any which is owed by any Note Obligor (as defined below) arising out of any sale involving a downpayment of less than: (A) twenty percent (20%) of the purchase price established under Retail Lot Contracts and Home Mortgages, or (B) ten percent (10%) of the purchase price established under Bulk Sales Land Contracts and Amenity Sales Contracts; (iii) Any which is owed by any individual Party to any of the other Parties, or any which is owned by any affiliated or related entity of any of the Parties; (iv) Any as to which the Note Obligor holds or is entitled to any claim, counterclaim, set off, or chargeback; (v) Any New Note Receivable arising out of an Installment Sales Contract; (vi) Any which is owed by any person employed by, or a salesperson of any of the Parties. Administration Fee. See 3.2. Agency Agreement. See 2.2.4. Agreement. This Second Amended and Restated Credit and Security Agreement, including the Schedules and Exhibits hereto. Agreements Relating to the Mortgaged Property shall mean service agreements, whether written or oral, relating to the operation, maintenance, security, finance or insurance of any of the Mortgaged Property. Amenity Sales Contracts. Such contracts and agreements entered into by and between any of the Parties and any Person relating to the sale of land at any of the Strategic Projects: (i) sold for the purpose of development(s) of certain amenities to be constructed on any of the Strategic Projects, or (ii) already developed as an amenity on any of the Strategic Projects, which purpose of such amenities include, without limitation, swimming pools, tennis courts, clubhouse facilities and other amenities appurtenant to the construction or development of any of the Strategic Projects. Appraisals. Appraisals of the value of the Mortgaged Property, performed by an independent appraiser selected by the Bank who is not employed by the Parties or the Bank, the form of such appraisal and the identity and qualifications of the appraiser to be acceptable to the Bank in its sole and absolute discretion. Appraised Value. The Fair Market Value of the Mortgaged Property determined by the most recent Appraisal obtained pursuant to 7.13. Availability. The aggregate of Borrower Availability and LP Availability. Balance Sheet Date. December 31, 1994. Bank. The First National Bank of Boston, and its successors and assigns. Base Rate. The annual rate of interest announced from time to time by the Bank at its head office in Boston, Massachusetts as its "base rate". Book Value. The value ascribed to each asset, as set forth on the balance sheet of the Parties, as determined in accordance with generally accepted accounting principles consistently applied. Borrower. As defined in the preamble hereto. Borrower Availability. Borrower Availability refers at any time to the lesser of (i) or (ii), below: (i) up to (A) Fourteen Million Dollars ($14,000,000.00), inclusive of the Letter of Credit Amount, minus (B) the aggregate amounts then undrawn on all outstanding Letters of Credit, acceptances, or any other accommodations issued or incurred by the Bank in connection with the Loan, minus (C) the aggregate amounts of Letters of Credit, acceptances, or any other accommodations paid by the Bank in connection with the Loan and for which the Bank has not received reimbursement from the Borrower or any other Party; minus (D) the aggregate amount of then Outstanding Revolving Credit Loans to the LP; or (ii) up to (A) seventy-five percent (75%) of (I) the then outstanding principal balance of each of the Acceptable New Notes Receivables of the Borrower, Westcliff, Horizon and/or HPC derived from Retail Lot Contracts and Home Mortgages, and (II) the then outstanding principal balances of each of the Acceptable Existing Notes Receivable of the Borrower, Westcliff, Horizon and/or HPC derived from Retail Lot Contracts and Home Mortgages, plus (B) up to the lesser of: (I) Six Million Dollars ($6,000,000.00), or (II) up to fifty percent (50%) of the aggregate of (a) the then outstanding principal balance of Acceptable New Notes Receivable of the Borrower, Westcliff, Horizon and/or HPC derived from Bulk Land Sales Contracts, and (b) the then outstanding principal balance of Acceptable Existing Notes Receivables of the Borrower, Westcliff, Horizon and/or HPC derived from Bulk Land Sales Contracts, plus (C) up to the lesser of: (I) fifty percent (50%) of the Book Value of Developed Lots of the Borrower, Westcliff, Horizon and/or HPC, or (II) Three Million Dollars ($3,000,000.00); minus (D) the aggregate amounts then undrawn on all outstanding Letters of Credit, acceptances, or any other accommodations issued or incurred by the Bank in connection with the Loan, minus (E) the aggregate amounts of Letters of Credit, acceptances, or any other accommodations paid by the Bank in connection with the Loan and for which the Bank has not received reimbursement from the Borrower or any other Party. Borrower's Revolving Credit Note. See Section 2.1.2 Borrowing Base Report. A report with respect to the Availability in the form attached hereto as Exhibit F. Building. The buildings, structures and improvements now or hereafter located on any of the Mortgaged Property. Bulk Land Sales Contracts. Such contract or agreement entered into by and between any Party and any Person for the sale of: (i) any portion of the Strategic Projects and/or Non-Strategic Projects which exceeds five (5) acres, unless such portion of the Strategic Projects and/or Non-Strategic Projects is zoned for the construction of no more than one commercial establishment, or no more than two residences, and the minimum price is less than the amount set forth in (ii), below, or (ii) any portion of the Strategic Projects and/or Non-Strategic Projects, the gross purchase price of which exceeds $350,000.00, provided, however, until such time as (i) the Mirada Action is resolved to the satisfaction of the Bank (in its sole and absolute discretion), or (ii) the Borrower furnishes the Bank with such evidence or assurances (each satisfactory to the Bank in its sole and absolute discretion) that the Mirada Action will not, in any way, affect or impair the Borrower's title to, or the Bank's first perfected security interest in, or ability to realize upon, the MCO California Collateral and/or any Notes Receivable arising on account of the MCO California Collateral (hereinafter (i) and (ii) collectively referred to as the "Mirada Preconditions"), none of the Notes Receivable derived from Bulk Land Sales Contracts entered into by and between the Borrower and any Person relating to the sale of land at the Strategic Project known as Rancho Mirage/Mirada, California shall constitute Acceptable New Notes Receivable. Business Day. Any day on which banking institutions in Boston, Massachusetts, are open for the transaction of banking business and, in the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business Day. Cash Equivalents: Any of the following: (1) U.S. Government Obligations; (2) Any certificate of deposit or banker's acceptance, in each case, maturing not more than 180 days after the date of acquisition, issued by, or, in the case of bankers' acceptances, accepted by, or time deposit of, any bank or trust company organized under the laws of the United States of America or any state thereof or the District of Columbia or any United States branch office or agency of any foreign depository institution; (3) Repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" (or higher) by S&P and "A2" (or higher) by Moody's, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" (or higher) by S&P and "P-2" (or higher) by Moody's, pursuant to written agreement with respect to any obligation described in clauses (1), (2) or (4) of this definition of Cash Equivalents; (4) Commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than 180 days after the date of acquisition), issued by a corporation organized and existing under the laws of the United States of America with a rating, at the time as of which any investment thereof is made, of "P-2" (or higher) according to Moody's or "A-2" (or higher) according to S&P; (5) Adjustable rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (6) Taxable or non-taxable auction rate securities which have interest rates reset on periodic short-term intervals (typically each 7, 14, 21, 28 or 49 days via a Dutch auction process) and which at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P, or (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; (7) Money Market deposit accounts issued or offered by any bank or trust company organized under the laws of the United States of America or any state thereof or the District of Columbia, in each case having capital and surplus in excess of $500 million; (8) Non-taxable securities, maturing not later than one year after the date of acquisition, issued by any state or municipality and having ratings of at least "A" if rated by S&P and "A-2" if rated by Moody's; and (9) Any investments which are substantially comparable to those described above and which are approved by the Bank. CERCLA. See 6.17(a). Certificate. See 4.8. Certificate of Compliance. The Parties' certifications by each of their respective chief financial officer, treasurer, controller or other authorized financial officer designated by the Parties and approved by the Bank setting forth the calculations necessary to indicate the Borrower's and the LP's compliance with 8.1, 8.7 and 9, and indicating that there is then existing no Suspension Event or Event of Default. Closing Date. The first date on which the conditions set forth in 10 and 11 have been satisfied and any Revolving Credit Loans are to be made. Code. The Internal Revenue Code of 1986, as amended. Collateral. See 5. Collateral Note. See 2.1.5. Commercial Finance Exam. See 7.4(d). Commitment. Subject to Availability, $14,000,000.00. Consolidated or consolidated. With reference to any term defined herein, shall mean that term as applied to the accounts of each of the Parties and their respective Subsidiaries, consolidated in accordance with generally accepted accounting principles. Conversion Request. A notice given by the Borrower or the LP to the Bank of its election to convert or continue a Loan in accordance with 2.1.8. Creditor(s). See definition of Subordination Agreement. Default Rate. The per annum sum of four percent (4.0%) above the Domestic Rate. Depository. See 2.2.4. Developed Lots. A subdivided lot and the improvements thereon at any of the Strategic Projects and Non-Strategic Projects (and which is not otherwise subject to an Acceptable Contract), and with respect to which all infrastructure improvements necessary for the sale of such lot thereon have been completed, and with respect to which all permits and approvals, and evidence of access to utilities necessary for the sale of such lot have been obtained all as evidenced by such approvals, certificates, or permits executed by the appropriate duly authorized federal, state and/or local official for the applicable Strategic Project or Non-Strategic Project, provided, however, (a) until satisfaction of the Mirada Preconditions, none of the property located at the Strategic Project known as Rancho Mirage Mirada, California shall qualify as a Developed Lot and shall not be included as Developed Lots under Subsection (ii)(C) of the defined term Borrower Availability set forth in 1, herein, and (b) the Developed Lots listed on Schedule 10.10, annexed hereto shall not be deemed to be Developed Lots. Distribution. The declaration or payment of any dividend on or in respect of any shares of any class of capital stock of the Parties, or any other distribution on or in respect of any shares of any class of capital stock of the Parties (other than On-Loans permitted pursuant to Section 7- 11 (b) hereof); or the return of capital, or payment of any amount, to the holders of, or on account of, any partnership interest in the LP (other than On-Loans permitted pursuant to Section 7-11 (b) hereof). Dollars or $. Dollars in lawful currency of the United States of America. Domestic Rate. The sum of one half of one percent (0.50%) plus the Base Rate. Domestic Rate Loans. Those Revolving Credit Loans bearing interest calculated by reference to the Domestic Rate. Drawdown Date. The date on which any Revolving Credit Loan is made or is to be made, and the date on which any Revolving Credit Loan is converted or continued in accordance with 2.1.8. Employee Benefit Plan. Any employee benefit plan within the meaning of 3(3) of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate, other than a Multiemployer Plan. Environmental Indemnity Agreements. The Environmental Indemnity Agreements executed individually by each of the Parties and MAXXAM in favor of the Bank, as required pursuant to 10.11. Environmental Laws. See 6.17(a). ERISA. The Employee Retirement Income Security Act of 1974, as amended and in effect from time to time. ERISA Affiliate. Any Person which is treated as a single employer with the Borrower under 414 of the Code. Eurodollar Business Day. Any day on which commercial banks are open for international business (including dealings in Dollar deposits) in London or such other eurodollar interbank market as may be selected by the Bank in its sole discretion acting in good faith. Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate Loan, the aggregate of: (a) two and three-quarters percent (2.75%), plus (b) the rate per annum equal to the rate at which the Bank is offered Dollar deposits two Eurodollar Business Days prior to the beginning of such Interest Period in an interbank eurodollar market where the eurodollar and foreign currency and exchange operations of the Bank are customarily conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of the Eurodollar Rate Loan to which such Interest Period applies. Eurodollar Rate Loans. Revolving Credit Loans bearing interest calculated by reference to the Eurodollar Rate. Event of Default. See 12.1. Existing Notes Receivable. Such of each of the Parties' Notes Receivable in existence as of the date hereof, as set forth on the Schedule annexed to the initial monthly Borrowing Base Report. Facility Fee. See 3.1. Fair Market Value. A value that is within the range of prices that could reasonably be paid for the property sold in an arms-length transaction conducted in the competitive open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably and in view of the market conditions prevailing at the time of such determination. Implied in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated; (b) both parties are well informed or well advised, and each acting in what they consider their own best interest; (c) payment is made in cash or its equivalent; and (d) financing, if any, is on terms generally available in the community and typical for the property type in its locale. Generally accepted accounting principles. (a) When used herein, whether directly or indirectly through reference to a capitalized term used herein, means (i) principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, in effect for the fiscal year ended on the Balance Sheet Date and (ii) to the extent consistent with such principles, the accounting practices of each of the Parties reflected in their respective financial statements for the year ended on the Balance Sheet Date and (b) when used in general, other than as provided above, means principles that are consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, or such successor organ- ization recognized by the American Institute of Certified Public Accoun- tants as in effect from time to time; provided that in each case referred to in this definition of "generally accepted accounting principles" a certified public accountant would, insofar as the use of such accounting principles is pertinent, be in a position to deliver an unqualified opinion (other than a qualification regarding changes in generally accepted accounting principles) as to financial statements in which such principles have been properly applied. Guaranteed Pension Plan. Any employee pension benefit plan within the meaning of 3(2) of ERISA maintained or contributed to by the Borrower, the LP or any ERISA Affiliate the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer Plan. Guaranties. Individually and collectively, the Unconditional Guaranties of Payment and Performance, dated December 29, 1992 and/or December 29, 1993, made by each of the Guarantors in favor of the Bank pursuant to which each of the Guarantors guarantee to the Bank the payment and performance of the Obligations, such Guaranties to be in form and substance satisfactory to the Bank. Guarantor(s) shall mean (jointly and severally) with respect to the Obligations of both the Borrower and the LP, each of Westcliff, Horizon, HPC and MAXXAM; with respect to the Obligations of the Borrower only, the term "Guarantor" shall also mean the LP; and with respect to the Obligations of the LP only, the term "Guarantor" shall also mean the Borrower. HPC. As defined in the preamble hereto. Hazardous Substances. See 6.17(b). Home Mortgages. Such contracts and agreements entered into by and between any of the Parties and any Person relating to the sale of a Building at either any of the Strategic Projects or any of the Non- Strategic Projects and in all circumstances not otherwise constituting a Bulk Land Sales Contract, provided, however, until satisfaction of the Mirada Preconditions, none of the Notes Receivable derived from Home Mortgages entered into by and between the Borrower and any Person relating to the sale of land at the Strategic Project known as Rancho Mirage/Mirada, California shall constitute Acceptable New Notes Receivable. Horizon. As defined in the preamble hereto. Indebtedness. All obligations, contingent and otherwise, that in accordance with generally accepted accounting principles should be classified on the Party's respective balance sheets as liabilities, or to which reference should be made by footnotes thereto, including in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (c) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. Installment Sales Contract. Any contract or agreement in which any of the Parties continue to remain liable for the performance of conditions. Insured Projects. The Strategic Projects and Non-Strategic Projects for which Title Policies are required, as specifically set forth in the within 1.1, under the defined term "Title Policy." Interest Payment Date. As to any Revolving Credit Loan (exclusive of any drawing under any Letters of Credit), interest shall be payable monthly in arrears on the first day of each month during the term of the Loan. Interest Period. With respect to each Revolving Credit Loan, (a) initially, the period commencing on the Drawdown Date of such Revolving Credit Loan and ending on the last day of one of the periods set forth below, as selected by the Borrower and/or the LP, as applicable, in a Loan Request (i) for any Domestic Rate Loan, the last day of the calendar month; (ii) for any Eurodollar Rate Loan, 3, 6, 9, or 12 months; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Revolving Credit Loan and ending on the last day of one of the periods set forth above, as selected by the Borrower and/or the LP, as applicable, in a Conversion Request, or as provided for in Subsection (C), below; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (A) if any Interest Period with respect to a Eurodollar Rate Loan would otherwise end on a day that is not a Eurodollar Business Day, that Interest Period shall be extended to the next succeeding Eurodollar Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day; (B) if any Interest Period with respect to a Domestic Rate Loan would end on a day that is not a Business Day, that Interest Period shall end on the next succeeding Business Day; (C) if the Borrower and/or the LP shall fail to give notice as provided in 2.1.8, the Borrower and the LP shall be deemed to have re quested a conversion of the affected Eurodollar Rate Loan to a Domestic Rate Loan on the last day of the then current Interest Period with respect thereto; (D) any Interest Period relating to any Eurodollar Rate Loan that begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (E) any Interest Period relating to any Eurodollar Rate Loan that would otherwise extend beyond the Revolving Credit Loan Maturity Date shall end on the Revolving Credit Loan Maturity Date. (F) in no event shall there be more than four (4) Interest Periods in the aggregate in effect at any one time for the Borrower and the LP. (G) after the occurrence of an Event of Default, at the Bank's option, interest on the Revolving Credit Loans and all other amounts payable hereunder and under the other Loan Documents shall bear interest at the Default Rate, compounded daily (to the extent permitted by law), to accrue from the due date thereof until the obligation of the Borrower and/or the LP with respect to the payment thereof shall be discharged, whether before or after judgment. Interstate Land Sales Act. See 6.8(b). Investments. All expenditures made and all liabilities incurred (contingently or otherwise) for the acquisition of stock or Indebtedness (excluding the Existing Notes Receivable and the New Notes Receivable incurred or acquired in the ordinary course of business) of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. In determining the aggregate amount of Investments outstanding at any particular time: (a) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (b) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (c) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (d) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the forego- ing clause (b) may be deducted when paid; and (e) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. Leases. Leases, licenses and agreements whether written or oral, relating to the use or occupation of any of the Mortgaged Property by persons other than the Parties, including but not limited to the leases and parking agreements listed on Schedule 6.21. Letters of Credit. Standby Letters of Credit issued by the Bank for the account of the Parties subsequent to the Closing Date, and any extension or renewal of any Standby Letters of Credit issued prior to the Closing Date by the Bank for the account of the Parties or MAXXAM, as set forth on the Schedule entitled "Letters of Credit". Letter of Credit Amount. Eight Million Five Hundred Thousand Dollars ($8,500,000.00). Letter of Credit Interest Rate. The sum of four percent (4.0%) above the Domestic Rate. L/C Fee. See 3.3. Loan Account. See 2.1.7(c). Loan Documents. Any and all documents, instruments and/or agreements (including all amendments, modifications, substitutions, replacements or extensions) previously (unless such document, instrument and/or agreement has been replaced in the entirety), now or hereafter executed and/or delivered by any of the Parties, any of their respective Subsidiaries, and/or MAXXAM, in connection with the Obligations, including, without limitation, this Agreement, the Note, the Collateral Note, the Subor- dination Agreements, the Security Documents and the Guaranties. Loan Request. See 2.1.7. Loan(s). Collectively, the Revolving Credit Loans, all undrawn Letters of Credit, and all drawings made under any of the Letters of Credit. Lock Box Account. See 2.2.4. LP. MCO Properties L.P., a Delaware limited partnership, whose general partner is the Borrower. LP Assets. The real estate located in Fountain Hills, Arizona and Lake Havasu, Arizona and Paradise Hills, New Mexico owned by the LP, the LP's equity interest in SunRidge Canyon LLC, as well as all Notes Receivable now or hereafter owned by the LP and the other personal property specified in Schedule 1.1(f) to this Agreement. LP Availability. LP Availability refers at any time to the lesser of (i) or (ii), below: (i) up to (A) Fourteen Million Dollars ($14,000,000.00), inclusive of the Letter of Credit Amount, minus (B) the aggregate amounts then undrawn on all outstanding Letters of Credit, acceptances, or any other accommodations issued or incurred by the Bank in connection with the Loan, minus (C) the aggregate amounts of Letters of Credit, acceptances, or any other accommodations paid by the Bank in connection with the Loan and for which the Bank has not received reimbursement from the LP or any other Party; minus (D) the aggregate amount of then Outstanding Revolving Credit Loans to the Borrower; or (ii) up to (A) seventy-five percent (75%) of (I) the then outstanding principal balance of each of the Acceptable New Notes Receivables of the LP derived from Retail Lot Contracts and Home Mortgages, and (II) the then outstanding principal balance of each of the Acceptable Existing Notes Receivable of the LP derived from Retail Lot Contracts and Home Mortgages, plus (B) up to the lesser of: (I) Six Million Dollars ($6,000,000.00), or (II) up to fifty percent (50%) of the aggregate of (a) the then outstanding principal balance of Acceptable New Notes Receivable of the LP derived from Bulk Land Sales Contracts, and (b) the then outstanding principal balance of Acceptable Existing Notes Receivables of the LP derived from Bulk Land Sales Contracts, plus (C) up to the lesser of: (I) fifty percent (50%) of the Book Value of Developed Lots of the LP, or (II) Three Million Dollars ($3,000,000.00); minus (D) the aggregate amounts then undrawn on all outstanding Letters of Credit, acceptances, or any other accommodations issued or incurred by the Bank in connection with the Loan, minus (E) the aggregate amounts of Letters of Credit, acceptances, or any other accommodations paid by the Bank in connection with the Loan and for which the Bank has not received reimbursement from the LP or any other Party. LP Revolving Credit Note. See Section 2.1.4. Material Leases. Any Lease and other agreements affecting more than five (5) acres of any of the Strategic Projects, 25,000 square feet of any of the Strategic Projects, or generating gross income of more than $50,000.00 per annum with respect to any of the Strategic Projects. Material Lease Summaries. Summaries of the material terms of the Material Leases. Such Material Lease Summaries shall contain the information described on Exhibit D and any other material terms of Material Leases relating to the Mortgaged Property. Maturity Date. The Revolving Credit Maturity Date. MAXXAM. MAXXAM Inc., a Delaware corporation with its principal place of business located at 5847 San Felipe, Suite 2600, P.O. Box 572887, Houston, Texas 77057 MAXXAM Guaranty. See 12.1(k). MAXXAM Pledge Agreement. See 12.1(k). MCO California Collateral. See 5.1. Minimum Capital. See 9 Mirada Action. Individually and collectively (i) Con. C.A. No. 12111, filed with the Court of Chancery of the State of Delaware and entitled In re: MAXXAM Inc./Federated Development Shareholders' Litigation and (ii) NL Industries Inc. and Harold C. Simmons in his capacity as Trustee of The Combined Master Retirement Trust v. MAXXAM Inc., MCO Properties Inc., Federated Development Company, Charles F. Hurwitz, Ezra G. Levin, Barry Munitz, John B. Connally, John M. Seidl, William C. Leone, Stanley D. Rosenberg and C.V. Wood, Jr., CA 12353, Court of Chancery, State of Delaware. Mortgaged Property. Individually and collectively, the Strategic Projects and the Non-Strategic Projects. Multiemployer Plan. Any multiemployer plan within the meaning of 3(37) of ERISA maintained or contributed to by the Borrower, the LP or any ERISA Affiliate. Notification Letters. See 7.14. Net Proceeds. The difference between gross sales price, less reasonable closing costs. Net Worth. Shareholder's Equity, plus, as long as MCO Limited Partner, Inc. remains an affiliate of the Borrower, the entire amount of partners' equity in the LP owned by MCO Limited Partner, Inc., which is categorized as a minority interest on the consolidated balance sheet of the Borrower. New Notes Receivable. Such of a Party's Notes Receivable arising subsequent to the date of this Agreement. Non-Strategic Projects. Each of the properties listed on the Schedule 1-1(b) annexed hereto entitled "Non-Strategic Projects," including, without limitation, those properties located in, or known as, Pueblo West, Colora- do, Westcliff, Texas, Waterwood, Texas, Rio Communities, New Mexico, Vail Valley Ranch, Arizona, Paradise Hills, New Mexico, Arizona Sunsites, Arizona, Tucson Day Ranch, Arizona, Ina/LaCholla, Arizona. Note. Shall mean individually and collectively the Borrower Revolving Credit Note and the LP Revolving Credit Note. Note Obligors. An unaffiliated third party individual(s) or entity liable to any of the Parties on account of any Notes Receivable. Notes Receivable. Negotiable instruments: (i) not subject to any de- fenses, and (ii) representing an unconditional order to pay for credit extended to any Note Obligor, whether or not yet earned by performance. On-Loan. See 7.11. Obligations. All indebtedness, obligations and liabilities of the Parties, and each of them, jointly and severally, to the Bank, whether existing on or prior to the date of this Agreement or arising or incurred hereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law of otherwise, including, without limitation those arising under this Agreement, the Guaranties, the Security Documents or any of the other Loan Documents or in respect of any of the Loans or other instruments at any time evidencing any thereof. Outstanding. With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. PBGC. The Pension Benefit Guaranty Corporation created by 4002 of ERISA and any successor entity or entities having similar responsibilities. Parties. Jointly and severally, the Borrower, the LP, Westcliff, Horizon and HPC. Permitted Distributions. Distributions and/or payments permitted pursuant to 8.7. Permitted Liens. Liens, security interests and other encumbrances permitted by 8.2. Person. Any individual, corporation, partnership, trust, unincorporated association, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. Real Estate. All real property owned or leased (as lessee or sublessee) by any of the Parties, or any of their respective Subsidiaries, including any real property owned with other Persons as a partner, joint venturer, or otherwise (as, for example, SunRidge Canyon, L.L.C.). Record. The grid attached to the Note, or the continuation of such grid, or any other similar record, including computer records, maintained by the Bank with respect to any Revolving Credit Loan. Reimbursement Agreement. The applications made and agreements entered into between the Bank and the Parties relating to the Letters of Credit, in substantially the form annexed hereto as Exhibit E, as the same may be amended and in effect from time to time. Release. See 6.17(c)(iii). Retail Lot Contracts. Such contracts and agreements entered by and between any of the Parties and any Person for the sale of any subdivided lot that is part of the Mortgaged Property, and not otherwise constituting a Bulk Sales Land Contract, provided, however, until satisfaction of the Mirada Preconditions, none of the Notes Receivable derived from Retail Lot Contracts entered into by and between the Borrower and any Person relating to the sale of land at the Strategic Project known as Rancho Mirage/Mirada, California shall constitute Acceptable New Notes Receivable. Revolving Credit Loans. Revolving credit loans (inclusive of all undrawn Letters of Credit) made or to be made by the Bank to the Borrower and/or the LP pursuant to 2. Revolving Credit Maturity Date. May 15, 1998, or such earlier date on which the Revolving Credit Loans shall become due and payable pursuant to the terms hereof. Revolving Credit Note. Shall mean individually and collectively the Borrower Revolving Credit Note and the LP Revolving Credit Note. Revolving Credit Note Record. A Record with respect to the Revolving Credit Note. Security Documents. All documents, instruments and/or agreements executed and/or delivered by any of the Parties, evidencing all collateral security granted, pledged, assigned or delivered by any of the Parties as collateral security for the payment and performance of the Obligations, all as more particularly described in 5. Service Agreements shall mean service agreements, whether written or oral, relating to the maintenance, security, finance or insurance of the Notes Receivable. Shareholder's Equity shall mean shareholder's equity (or deficit) of the Borrower determined in accordance with Generally accepted accounting principles, consistently applied. Strategic Projects. Individually and collectively, the properties located in, or known as, Fountain Hills, Arizona, Lake Havasu City, Arizona and Rancho Mirage, sometimes referred to as Mirada, California (as more particularly described on a current real estate inventory and receivable summary annexed hereto as Schedule 1-1(c) entitled "Strategic Projects"). Subordination Agreement. The Subordination Agreements, dated December 29, 1992, December 29, 1993 and to be dated on or prior to the Closing Date (if any), among the Bank, the Guarantors, or any of their respective affiliates or subsidiaries (collectively, the "Creditors"), the Borrower and the LP in form and substance satisfactory to the Bank, pursuant to which the rights of the Creditors against the Borrower and/or the LP with reference to indebtedness of the Borrower and/or the LP to such Creditors are subordinated to the rights of the Bank against the Borrower with reference to the Borrower's and the LP's Indebtedness to the Bank. Subsidiary. Any corporation, association, partnership, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes or controlling interests) of the outstanding Voting Interests. Survey shall mean an instrument survey (or plans), including any date- down survey, or engineer's certification, sufficient to continue the deletion (if presently existing) of the survey exception from any existing Title Policy for which any update or endorsement shall be issued with respect to any of the Strategic Projects, or to remove the survey exception from any new Title Policy to be issued in connection with the Loan with respect to any of the Strategic Projects, except for (i) any additional Developed Lots at the Strategic Project known as Fountain Hills, Arizona, and (ii) until satisfaction of the Mirada Preconditions, any Developed Lots at the Strategic Project known as Mirada/Rancho Mirage located in California, which, if necessary to delete, or continue the deletion of the survey exception, shall show the location of all buildings, structures, easements and utility lines on the Mortgaged Property, shall show that all buildings and structures are within the lot lines of the Mortgaged Property, shall not show any encroachments by others, shall show the zoning district or districts in which the Mortgaged Property is located and shall show whether or not the Mortgaged Property is located in a flood hazard district as established by the Federal Emergency Management Agency or any successor agency or is located in any flood plain, flood hazard or wetland protection district established under federal, state or local law. Surveyor Certificate shall mean a certificate executed by the surveyor who prepared the Survey, or the engineer who prepared the certification, dated as of a recent date and containing such information relating to the Mortgaged Property as the Bank, its counsel or the Title Insurance Company may require (and as customarily furnished within the professional capacities of the surveyor or engineer), such certificate to be satisfactory to the Bank and its counsel, in form and substance. Suspension Event. The occurrence of any event which, solely with the passage of time or the giving of notice (or both), would be, an Event of Default. Title Insurance Company. See Schedule 1-1(d) annexed hereto entitled "Title Insurance Company." Title Policy shall mean ALTA standard form title insurance policies issued by the Title Insurance Companies acceptable to the Bank, and in each instance (with such reinsurance or co-insurance as the Bank may require, any such reinsurance to be with direct access endorsements), equal to the corresponding amount for the following projects (the "Insured Projects"): Insured Projects Amount Fountain Hills, Arizona Arizona - Simultaneous Issue with Lake Havasu City Arizona (and including separate Fountain Hills Developed Lots Coverage in the amount of $2,000,000.00) $27,000,000.00 Lake Havasu, Arizona - Simultaneous with Fountain Hills, Arizona $25,000,000.00 Rancho Mirage/Mirada, California $ 2,000,000.00 Ina/LaCholla, Arizona $ 100,000.00 Vail Valley/Tuscon Day Ranch, Arizona $ 900,000.00 Waterwood, Texas $ 1,000,000.00 each insuring the priority of the Security Documents (relevant to the Insured Projects), and that each of the Parties (where applicable) hold marketable or insurable (as applicable in each state of issuance) fee simple title to the Insured Projects, subject only to the encumbrances permitted by the Security Documents (relevant to the Insured Projects) and which shall not contain exceptions for mechanics liens, persons in occupancy or matters which would be shown by a survey (if applicable), shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to the Bank in its sole discretion, and shall contain such endorsements and affirmative insurance as the Bank in its discretion may require (as is available in each state of issuance), including but not limited to (a) comprehensive endorsement, (b) variable rate of interest endorsement, (c) usury endorsement, (d) revolving credit endorsement, (e) doing business endorsement and (f) ALTA form 3.1 zoning endorsement. Title Update Letter shall mean a title certification letter addressed to the Bank (in form and substance satisfactory to the Bank), pursuant to which a Title Insurance Company (acceptable to the Bank) shall certify as to the status of title to the property that is the subject of such Title Update Letter. Type. As to any Revolving Credit Loan its nature as a Domestic Rate Loan or a Eurodollar Rate Loan. Underwriting Criteria. See Schedule 1-1(e) annexed hereto entitled Underwriting Criteria for Notes Receivable. Voting Interests. Stock or similar ownership interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, (a) to vote for the election of a majority of the directors (or persons performing similar functions) of the corporation, association, partnership, trust or other business entity involved, or (b) to control, manage or conduct the business of the corporation, partnership, association, trust or other business entity involved. Westcliff. As defined in the preamble hereto. 1.2. Rules of Interpretation. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by Generally accepted accounting principles applied on a consistent basis by the accounting entity to which they refer. (f) The words "include", "includes" and "including" are not limiting. (g) All terms not specifically defined herein or by generally accepted accounting principles, which terms are defined in the Uniform Commercial Code as in effect in Massachusetts, have the meanings assigned to them therein. (h) Reference to a particular "" refers to that section of this Agreement unless otherwise indicated. (i) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Agreement as a whole and not to any particular section or subdivision of this Agreement. 2. THE REVOLVING CREDIT FACILITY. 2.1. Revolving Credit Loans. Sub-Part A - Loans to the Borrower 2.1.1. Commitment to Lend and Borrower's Promise to Pay. (a) Subject to the terms and conditions set forth in this Agreement, and provided there is then existing no Suspension Event or Event of Default, the Bank agrees to lend to the Borrower and the Borrower may borrow, repay, and reborrow from time to time between the Closing Date and the Revolving Credit Maturity Date upon notice by the Borrower to the Bank given in accordance with 2.1.7, such sums as are outstanding as of the Closing Date and as may thereafter be requested by the Borrower, provided, however, the maximum principal amount of Revolving Credit Loans made to the Borrower (after giving effect to all amounts requested) shall not, at any one time, exceed the Borrower Availability. Each request for a Revolving Credit Loan here- under shall constitute a representation and warranty by Borrower on behalf of itself and each of the Parties that the conditions set forth in 10 and 11, in the case of the initial Revolving Credit Loan, and 11, in the case of all other Revolving Credit Loans, have been satisfied on the date of such request. (b) Except as provided for in 2.2.2, and in 2.2.4, herein, and provided there is no Event of Default pursuant to which the Obligations are deemed to be accelerated (as provided for herein), or the Bank accelerates the Obligations, the Revolving Credit Loans shall mature and be due and payable, in full, on the Revolving Credit Maturity Date. 2.1.2. The Borrower Revolving Credit Note. The Borrower's Revolving Credit Loans shall be evidenced by an amended and restated promissory note of the Borrower in substantially the form of Exhibit A hereto (the "Borrower Revolving Credit Note"), dated as of the Closing Date and completed with appropriate insertions. The Borrower Revolving Credit Note shall be payable to the order of the Bank in the principal amount equal to the Commitment or, if less, the outstanding amount of all Revolving Credit Loans made by the Bank to the Borrower, plus interest accrued thereon, as set forth below. The Borrower irrevocably authorizes the Bank to make or cause to be made, at or about the time of the Drawdown Date of any Revolving Credit Loan to the Borrower, or at the time of receipt of any payment of principal on the Borrower's Revolving Credit Note, an appro- priate notation on the Record reflecting the making of such Revolving Credit Loan to the Borrower, or (as the case may be) the receipt of such payment. The outstanding amount of the Revolving Credit Loans made to the Borrower set forth on the Record shall be prima facie evidence of the principal amount thereof owing and unpaid to the Bank, but the failure to record, or any error in so recording, any such amount on the Record shall not limit or otherwise affect the obligations of the Borrower hereunder or under the Borrower Revolving Credit Note to make payments of principal of, or interest on, the Borrower Revolving Credit Note when due. Sub-Part B - Loans to the LP 2.1.3. Commitment to Lend and the LP's Promise to Pay. (a) Subject to the terms and conditions set forth in this Agreement, and provided there is then existing no Suspension Event or Event of Default, the Bank agrees to lend to the LP and the LP may borrow, repay, and reborrow from time to time between the Closing Date and the Revolving Credit Maturity Date upon notice by the LP to the Bank given in accordance with 2.1.7, such sums as are outstanding on the Closing Date and as thereafter may be requested by the LP, provided, however, the maximum principal amount of Revolving Credit Loans made to the LP (after giving effect to all amounts requested) shall not, at any one time, exceed the LP Availability. Each request for a Revolving Credit Loan to the LP hereunder shall constitute a representation and warranty by the LP on behalf of itself and each of the Parties that the conditions set forth in 10 and 11, in the case of the initial Revolving Credit Loan made to the LP, and 11, in the case of all other Revolving Credit Loans made to the LP, have been satisfied on the date of such request. (b) Except as provided for in 2.2.2, and in 2.2.4, herein, and provided there is no Event of Default pursuant to which the Obligations are deemed to be accelerated (as provided for herein), or the Bank accelerates the Obligations, the Revolving Credit Loans made to the LP shall mature and be due and payable, in full, on the Revolving Credit Maturity Date. 2.1.4. The LP's Revolving Credit Note. The LP's Revolving Credit Loans shall be evidenced by an amended and restated promissory note of the LP in substantially the form of Exhibit B hereto (the "LP Revolving Credit Note"), dated as of December 29, 1993 and completed with appropriate insertions. The LP's Revolving Credit Note shall be payable to the order of the Bank in the principal amount equal to the Commitment or, if less, the outstanding amount of all Revolving Credit Loans made to the LP made by the Bank, plus interest accrued thereon, as set forth below. The LP irrevocably authorizes the Bank to make or cause to be made, at or about the time of the Drawdown Date of any Revolving Credit Loan made to the LP or at the time of receipt of any payment of principal on the LP Revolving Credit Note, an appropriate notation on the Record reflecting the making of such Revolving Credit Loan to the LP or (as the case may be) the receipt of such payment. The outstanding amount of the Revolving Credit Loans made to the LP set forth on the Record shall be prima facie evidence of the principal amount thereof owing and unpaid to the Bank, but the failure to record, or any error in so recording, any such amount on the Record shall not limit or otherwise affect the obligations of the LP hereunder or under the LP Revolving Credit Note to make payments of principal of, or interest on, the LP Revolving Credit Note when due. Sub-Part C - Applicable to All Revolving Credit Loans 2.1.5. Collateral Note. In addition to the Revolving Credit Note, to the extent the Bank or its counsel deem it necessary or advisable to perfect and/or enforce its rights and remedies against the Parties in each or any of the jurisdiction where any of the Strategic Projects or Non- Strategic Projects are located, the Parties shall execute and deliver to the Bank, a note and/or an amendment and restatement to any existing note(s) (hereinafter, individually and collectively, the "Collateral Note") evidencing all or any portion of the Obligations to the Bank, or to any beneficiary under any Deed(s) of Trust. The Collateral Note shall not constitute an obligation in addition to the Revolving Credit Notes, but rather, the outstanding principal balance of any such Collateral Note shall constitute a portion of the Revolving Credit Notes. Additionally, interest shall accrue and be payable, together with the outstanding principal balance of the Collateral Note, in accordance with the terms and conditions of the Revolving Credit Notes. 2.1.6. Interest on Revolving Credit Loans. (a) Each Domestic Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the Domestic Rate. (b) (i) Each Eurodollar Rate Loan shall bear interest for the period commencing with the Drawdown Date thereof and ending on the last day of the Interest Period with respect thereto at the Eurodollar Rate determined for such Interest Period. (ii) In accordance with 2.1.8, herein, until the occurrence of an Event of Default or Suspension Event, the Borrower and/or the LP may select interest periods of three, six, nine or twelve months with respect to the Eurodollar Rate Loans, provided that no interest period shall end after the Revolving Credit Maturity Date and in no event shall there be more than four (4) Interest Periods in the aggregate in effect at any one time. (c) The Borrower and the LP shall each pay interest on each Revolving Credit Loan made to the Borrower or the LP, respectively, in arrears on each Interest Payment Date with respect thereto. 2.1.7. Requests for Revolving Credit Loans. (a) The Borrower and the LP may request in the aggregate up to four (4) advances each month. The first request for an advance during each month must be made concurrent with the Borrower's and the LP's submittance of the Borrowing Base Report for the subject month. Each subsequent request for an advance must be in the form of Exhibit C hereto. The Borrower and the LP shall give to the Bank written notice in the form of Exhibit C hereto of each Revolving Credit Loan requested hereunder (a "Loan Request") (a) no less than three (3) Business Days prior to the Drawdown Date for the first Domestic Rate Loan requested by the Borrower or the LP in any month, (b)(i) on the same Business Day as the proposed Drawdown Date for any Domestic Rate Loan requested by the Borrower or the LP after the first advance during any month if such request for a subsequent advance is received by the Bank by 11:00 a.m. Boston time; in the event that any such requests for subsequent advances are not received by 11:00 a.m. Boston time, one (1) Business Day prior to the Drawdown Date, and (c) no less than three (3) Eurodollar Business Days prior to the proposed Drawdown Date of any Eurodollar Rate Loan. Each such notice shall be irrevocable and binding on the Borrower and the LP and shall obligate the Borrower and/or the LP to accept the Revolving Credit Loan requested from the Bank on the proposed Drawdown Date. (b) Provided there is then existing no Suspension Event or Event of Default, the Borrower and/or the LP may, from time to time, request that the Bank make loans and advances against Notes Receivable arising out of Amenity Sales Contracts, provided, however, (i) nothing contained herein shall in any way constitute a commitment by the Bank to make any loans or advances against Notes Receivable arising out of Amenity Sales Contracts, (ii) all loans or advances against Notes Receivable arising out of Amenity Sales Contracts shall be subject to Borrower Availability and LP Availability, as applicable, (iii) the making of any such loan or advance on any one occasion shall not, in any way, constitute a commitment by the Bank to make any additional loans or advances on any other occasion, and (iv) any loans and advances so made by the Bank against Notes Receivable arising out of any Amenity Sales contracts shall be upon such terms and conditions as the Bank may determine in its sole and absolute discretion. In the event that any such loans or advances are so made by the Bank, each such loan or advance shall constitute a Loan. (c) The Borrower and the LP shall each open and maintain at the Bank an account (hereinafter, each, a "Loan Account"), into which Loan Account the Bank may (at the Bank's discretion and without notice in each instance) deposit the proceeds of any loans or advances under the Revolving Credit Loan. The payment of principal, interest, Facility Fees, Administrative Fees, L/C Fees, closing fees and any other amounts due hereunder or under any of the other Loan Documents may (at the Bank's discretion, and without notice, in each instance), be automatically debited by the Bank from the Loan Account. The Bank shall endeavor to furnish the Borrower and the LP with notice of any deposit into, or withdrawal of funds from, the Loan Account, provided, however, the Bank shall not, in any way, be liable to the Borrower, the LP or any of the other Parties as a result of its failure to furnish such notice. 2.1.8. Conversion Options. (a) The Borrower and/or the LP may elect from time to time to convert any outstanding Revolving Credit Loan to a Revolving Credit Loan of another Type, provided that (i) with respect to any such conversion of a Eurodollar Rate Loan into a Domestic Rate Loan, such conversion shall only be made on the last day of the Interest Period with respect thereto; (ii) with respect to any such conversion of a Domestic Rate Loan to a Eurodollar Rate Loan, the Borrower and/or the LP, as applicable, shall give the Bank at least three (3) Eurodollar Business Days' prior written notice of such election and (iv) no Loan may be converted into a Eurodollar Rate Loan when any Suspension Event or Event of Default has occurred. All or any part of outstanding Revolving Credit Loans of any Type may be converted as provided herein, provided that partial conversions shall be in an aggregate principal amount of $50,000 or an integral multiple of $50,000 in excess thereof. Each Conversion Request relating to the conversion of a Domestic Rate Loan to a Eurodollar Rate Loan shall be irrevocable by the Borrower and/or the LP. (b) Any Revolving Credit Loans of any Type may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Borrower and/or the LP, as applicable, with the notice provisions contained in 2.1.8(a); provided that when any Suspension Event or Event of Default has occurred, any or all Eurodollar Rate Loans may, at the option of the Bank (in its sole and absolute discretion), be automati- cally converted to Domestic Rate Loans bearing interest at the Default Rate either immediately upon such occurrence or on the last day of the Interest Period relating thereto. (c) In the event that the Borrower or the LP does not notify the Bank of its election hereunder with respect to any Revolving Credit Loan, such Revolving Credit Loan shall be automatically converted to a Domestic Rate Loan at the end of the applicable Interest Period. (d) Any conversion to or from Eurodollar Rate Loans shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of all Eurodollar Rate Loans having the same Interest Period shall not be less than $1,000,000 or an integral multiple of $100,000 in excess thereof. 2.2. REPAYMENT OF THE REVOLVING CREDIT LOANS. 2.2.1. Maturity. (a) The Borrower and the LP each promises to pay on the Revolving Credit Maturity Date, and there shall become absolutely due and payable on the Revolving Credit Maturity Date, all of their respective Revolving Credit Loans outstanding on such date, together with any and all accrued and unpaid interest thereon. (b) On the Revolving Credit Maturity Date, the Borrower and the LP shall each cause to be returned to the Bank all undrawn Letters of Credit. 2.2.2. Mandatory Repayments of Revolving Credit Loans. If at any time the sum of the outstanding amount of the Revolving Credit Loans exceed the Borrower Availability or the LP Availability, as applicable, then the Borrower or the LP, as applicable, shall immediately pay the amount of such excess to the Bank for application to the Revolving Credit Loans made to the Borrower or the LP, as applicable. 2.2.3. Optional Repayments of Revolving Credit Loans. The Borrower and/or the LP, in addition to the payments to be made pursuant to 2.2.4, below, shall have the right, at its election, to repay the outstanding amount of the Revolving Credit Loans, as a whole or in part, at any time without penalty or premium, subject, however, to the terms and conditions set forth in 4.8, below; provided that the full or partial prepayment of the outstanding amount of any Eurodollar Rate Loans pursuant to this 2.2.3 may be made only on the last day of the Interest Period relating thereto. Except with respect to the payments to be made pursuant to 2.2.4, below, the Borrower and/or the LP shall give the Bank, no later than 10:00 a.m., Boston time, at least three (3) Eurodollar Business Days' prior written notice of any proposed repayment pursuant to this 2.2.3 of Eurodollar Rate Loans, specifying the proposed date of payment of Revolving Credit Loans and the principal amount to be paid. Each such partial prepayment of the Eurodollar Rate Loans (other than payments to be made pursuant to 2.2.4, below) shall be in an integral multiple of $10,000, and shall be accompa- nied by the payment of accrued interest on the principal repaid to the date of payment. In the absence of instruction by the Borrower or the LP, partial prepayments of outstanding Revolving Credit Loans shall be applied first to the principal of Domestic Rate Loans and then to the principal of Eurodollar Rate Loans. 2.2.4. Periodic Payments of Revolving Credit Loans. (a) (i) Whether or not there is then existing a Suspension Event or an Event of Default, each of the Parties shall cause all payments, checks, drafts, letters of credit, and other items which represent payment on account of the Notes Receivables, and any proceeds and collections of the Notes Receivable to be delivered by the Note Obligors and/or any other Person directly to a lock box/blocked account or accounts (the "Lock Box Account") at Bank One, Arizona, or its successors (the "Depository"), or similar recipient. (ii) Until the within Agreement is terminated by a duly authorized officer of the Bank, and provided there is then existing no Suspension Event or Event of Default, weekly (on Tuesday of each week), the Borrower and the LP shall, pursuant to the terms and conditions of the Agency Agreement (hereinafter, the "Agency Agreement") entered into by and among the Borrower, the LP, the Bank and the Depository, instruct the Depository to transfer all available (collected) funds in the Lock Box Account to the Bank in the manner provided for in the Agency Agreement. The Borrower and the LP each acknowledges and agrees that except with respect to its (and/or its servicing agent's) ability to instruct the Depository to transfer funds to the Bank, and its (and/or its servicing agent's) ability to monitor the status of the Lock Box Account by virtue of its (and/or its servicing agent's) on-line computer networking with the Depository, neither the Borrower, the LP nor their respective servicing agents shall have any right to control, manage or otherwise direct the Depository to take any action with respect to, the Lock Box Account. (b) To the extent that any payments, checks, drafts, payments or the proceeds of any drawing of any letters of credit, and other items representing payment on account of the Notes Receivable are received by any of the Parties, each of the Parties shall deliver to the Lock Box Account, in the same form as so received, all of such payments, checks, drafts, payments or the proceeds of any drawing of any letters of credit issued for the benefit of any of the Parties, and other items which represent payments on account of the Notes Receivable and any proceeds and collections of the Notes Receivable, each of which payments, checks, drafts, payments or the proceeds of any drawing of any letters of credit, and other items shall be endorsed (in form and substance satisfactory to the Bank and the Bank's counsel) in favor of, and delivered to the Lock Box. (c) (i) Payments on account of the outstanding amount of the Revolving Credit Loans shall be paid, from time to time, by application by the Bank of payments received by the Bank from the Depository on account of the Notes Receivable. (ii) All items received in payment toward the Borrower's or the LP's Obligations prior to 3:00 p.m. Boston Time on the date of receipt shall be credited against the Obligations on the date of receipt, provided, however, all items received in payment towards the Obligations after 3:00 p.m. Boston Time on the date of receipt shall not be credited against such Obligations until the next Business Day, and all such credits shall be subject to collectability by the Bank of each such item. All payments may be applied to the Borrower's Revolving Credit Note, the LP's Revolving Credit Note and the other Obligations in such order and manner as the Bank in its reasonable discretion determines. (d) Notwithstanding the application of payments described herein, the Borrower and the LP shall be responsible for all required payments whether or not payments are received by the Bank on account of the Notes Receivable. 2.3. Letters of Credit. 2.3.1. Issuance of Letters of Credit. (a) Subject to the terms and conditions set forth in this Agreement and the applicable Reimbursement Agreement, upon the written request to the Bank by the Borrower or the LP (with respect to new Letters of Credit), or by the Borrower, the LP or MAXXAM (with respect to the extension or renewal of any existing Letter of Credit), the Bank agrees to: (a) issue, for the account of the Parties, on any Business Day after the date hereof but prior to the Revolving Credit Maturity Date (provided, however, no Letters of Credit to be issued shall have an expiry date that is later in time than the Revolving Credit Maturity Date), one or more irrevocable stand-by Letters of Credit, and (b) extend or renew, for the account of the Parties or MAXXAM, any outstanding Letter of Credit issued for the account of the Parties or MAXXAM prior to the date hereof, the aggregate of which ((a) and (b)) shall not exceed the Letter of Credit Amount. Any Letters of Credit previously issued for the account of the Parties or MAXXAM prior to the date hereof that remain outstanding as of the date hereof may remain outstanding or be extended or renewed (subject to the Letter of Credit Amount) provided, however, no new Letters of Credit will be issued for the account of MAXXAM (or any affili- ated entity of MAXXAM which is not also a Party), subsequent to the date hereof. Each written request (including a completed application on the Bank's form) for the issuance (in favor of the Parties), or the extension or renewal (on behalf of the Parties or MAXXAM) of a Letter of Credit hereunder shall be received by the Bank at least three Business Days prior to the proposed date of issuance. The expiry dates, amounts and bene- ficiaries of the Letters of Credit will be as agreed by the Borrower, the LP, or MAXXAM (where applicable) and the Bank (in its reasonable discretion), and each Letter of Credit shall be in a form acceptable to the Bank in its discretion. Each Letter of Credit issued subsequent to the date hereof shall be issued pursuant to a Reimbursement Agreement to be entered into between the Borrower and/or the LP and the Bank; provided, however, that to the extent that the terms and conditions of any Reimbursement Agreement are in conflict with or are inconsistent with the terms and conditions of this Agreement, the obligations of the Bank, the Borrower and/or the LP with respect to Letters of Credit shall be governed by the terms and conditions of this Agreement. (b) (i) The Borrower and the LP each acknowledges that notwithstanding anything to the contrary contained herein in any Reimburse- ment Agreement, and/or on any of the other Loan Documents, the Borrower and the LP shall each be primarily obligated to the Bank for the prompt, punctual and faithful payment and performance of any drawings under any Letter of Credit, L/C Fees (as defined herein) and any other costs and expenses incurred by the Bank in connection with any Letter of Credit, whether or not such Letter of Credit is issued for the account of the Borrower, the LP or for the account of MAXXAM or any of the other Parties. (ii) The Borrower and the LP each hereby agrees that the Bank may at any time, and from time to time, without thereby releasing the Borrower or the LP from any liability on account of the matters referred to in Subsection (i), above, and without notice to or further consent from the Borrower or the LP, either with or without consideration: release or surrender any lien or other security of any kind or nature whatsoever held by it or by any person, firm or corporation on its behalf or for its account, securing any of the Obligations; substitute for any collateral so held by it, other collateral of like kind, or of any kind; modify the terms of any Letter of Credit issued for the account of MAXXAM or any of the Parties or any instrument, document, or agreement relating to such Letter of Credit between the Bank and MAXXAM or any such Party; extend or renew the Obligations for any period; grant releases, compromises and indulgences with respect to the Obligations or the Loan Documents and to any persons or entities now or hereafter liable thereunder or hereunder; release MAXXAM or any Party, surety, endorser or accommodation party of the Obligations, the Security Documents or any other Loan Documents; or take or fail to take any action permitted or required pursuant to the Loan Documents. 2.3.2. Interest on Letters of Credit. Notwithstanding anything to the contrary contained herein, any drawing under any Letters of Credit shall bear interest at the Letter of Credit Interest Rate, compounded daily (to the extent permitted by law) and shall be payable ON DEMAND. 2.3.3. Effects of Drawings. Each drawing under a Letter of Credit shall be payable ON DEMAND. The liability of the Borrower and the LP under this Agreement to repay the Bank in respect of drawings under Letters of Credit shall be Obligations secured pursuant to the Security Documents and such liability shall rank pari passu with the Obligations of the Parties to repay all other Loans hereunder. 3. FEES. 3.1. Facility Fee. The Borrower and/or the LP shall pay the Bank, monthly in arrears for each month hereafter until the Revolving Credit Maturity Date, a facility fee equal to (i) the difference between (A) Fourteen Million Dollars ($14,000,000.00) and (B) the average outstanding balance owed by the Borrower and the LP in the aggregate to the Bank for borrowings made under the Revolving Credit Loan during the subject month, (ii) multiplied by 0.375, (iii) divided by twelve (12). 3.2. Administration Fee. In order to compensate the Bank for its administration of the Revolving Credit Loan, the Borrower and/or the LP shall pay to the Bank, a quarterly administration fee (the "Administration Fee") in the amount equal to the product of (a) the Commitment and (b) one quarter of one-half percent (e.g. based on a $14,000,000.00 Commitment, the quarterly Administration Fee would be $17,500.00). The quarterly Admin- istration Fee shall be deemed fully earned on the first day of each quarter that any Revolving Credit Loan is in effect and shall be nonrefundable even if all Revolving Credit Loans are paid in full during any such quarter. The Administration Fee shall be paid in consecutive quarterly payments on the first day of every April, July, October and January of each calendar year during the term of this Agreement. Notwithstanding anything to the contrary contained herein, in the event that the Obligations are paid in full and the within Agreement is terminated by a duly authorized officer of the Bank on the Revolving Credit Maturity Date, the Administration Fee due and owing for the last quarterly period covered by the Agreement that is less than a full quarterly period shall be prorated for the number of days of the subject quarter on a quarterly per diem basis. 3.3. L/C Fee. (a) The Borrower and/or the LP shall pay to the Bank a fee (hereinafter, the "L/C Fee") with respect to the Letters of Credit equal to two percent (2.0%) per annum of the face amount of any outstanding Letters of Credit, the L/C Fee being determined and payable as follows: (b) The L/C Fee shall be determined based upon a 360 day year over actual number of days elapsed. (c) (i) For all Letters of Credit to be issued or renewed by the Bank (including, without limitation, for any renewal of any existing Letters of Credit), the entire L/C Fee shall be paid in advance. (ii) Provided there is then existing no Suspension Event or Event of Default, for any Letter of Credit, the face amount of which is reduced, or for any Letter of Credit returned (undrawn) to the Bank prior to the expiry date, the Bank agrees (subject to the terms and conditions set forth herein) to refund (on a pro-rata basis) that portion of the L/C Fee equal to: (x) the difference between (A) the number of days for which the Letter of Credit was initially issued, less (B) the number of days for which the Letter of Credit remained outstanding prior to return or reduction, (y) divided by the number of days of the initial term of the Letter of Credit, (z) (i) in the event of any returned Letter of Credit, multiplied by the L/C Fee, and (ii) in the event of a reduction of any Letter of Credit, multiplied by the amount by which the face amount of such Letter of Credit was reduced, divided by the original face amount of such Letter of Credit and multiplied by the L/C Fee, provided, however, with respect to any new Letter of Credit (other than the renewal of any Letters of Credit) returned (undrawn) to the Bank prior to the expiry date, or reduced from the initial amount, the L/C Fee to be paid (as provided for herein) shall not, in any event, be less than an L/C Fee based upon an entire Letter of Credit outstanding for a six (6) month period. (iii) Except as provided for herein, there shall be no refund of any portion of the L/C Fee in the event of the expiration, termination or other modification of, or drawing under, any Letter of Credit during any month. 4. CERTAIN GENERAL PROVISIONS. 4.1. Funds for Payments. (a) Unless otherwise agreed to by the Bank, all payments of principal, interest, Facility Fees, Administrative Fees, L/C Fees, closing fees and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Bank at its head office at 100 Federal Street, Boston, Massachusetts 02110, or at such other location in the Boston, Massachusetts area that the Bank may from time to time designate, in each case in immediately available funds, provided, however, the payment of principal, interest, Facility Fees, Administrative Fees, L/C Fees, closing fees and any other amounts due hereunder or under any of the other Loan Documents may be automatically debited by the Bank from the Loan Account (or any subsequent or replacement account maintained by the Borrower at the Bank). (b) All payments by any of the Parties hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless any of the Parties are compelled by law to make such deduction or withholding. If any such obligation is imposed upon any of the Parties with respect to any amount payable by it hereunder or under any of the other Loan Documents, each of the Parties will pay to the Bank, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Bank to receive the same net amount which the Bank would have received on such due date had no such obligation been imposed upon any of the Parties. Each of the Parties will deliver promptly to the Bank certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Document. Except as otherwise provided for in the within Agreement, nothing contained in the within Section shall be deemed to impose any liability or obligation upon the Parties for the payment of any such obligation incurred by the Bank for ordinary income taxes generally paid by the Bank on account of the Bank's income or profit. 4.2. Computations. All computations of interest on the Loans, the Facility Fees, L/C Fees and Administration Fees to the extent applicable shall be based on a 360-day year and actual number of days elapsed. Except as otherwise provided in the definition of the term "Interest Period" with respect to Eurodollar Rate Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. The outstanding amount of the Loans as reflected on the Revolving Credit Note Record from time to time shall be considered correct and binding on the Borrower and/or the LP unless within thirty (30) Business Days after receipt of any notice by the Borrower or the LP of such outstanding amount, the Borrower or the LP shall notify the Bank to the contrary. The Bank will endeavor to furnish the Borrower or the LP with notice of any discrepancy or inconsistency between the Bank's records and information furnished by the Borrower or the LP to the Bank provided, however, the Bank shall be under no obligation to furnish the Borrower or the LP with notice of any such inconsistency or discrepancy and shall have no liability on account of its failure to furnish such notice to the Borrower or the LP. 4.3. Inability to Determine Eurodollar Rate. In the event, prior to the commencement of any Interest Period relating to any Eurodollar Rate Loan, the Bank shall determine that adequate and reasonable methods do not exist for ascertaining the Eurodollar Rate that would otherwise determine the rate of interest to be applicable to any Eurodollar Rate Loan during any Interest Period, the Bank shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower and the LP) to the Borrower and the LP. In such event (a) any Loan Request with respect to Eurodollar Rate Loans shall be automatically withdrawn and shall be deemed a request for Domestic Rate Loans, (b) each Eurodollar Rate Loan will automatically, on the last day of the then current Interest Period thereof, become a Domestic Rate Loan, and (c) the obligations of the Bank to make Eurodollar Rate Loans shall be suspended until the Bank determines that the circumstances giving rise to such suspension no longer exist, whereupon the Bank shall so notify the Borrower and the LP. 4.4. Illegality. Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or in the interpretation or application thereof shall make it unlawful for the Bank to make or maintain Eurodollar Rate Loans, the Bank shall forthwith give notice of such circumstances to the Borrower and the LP and thereupon (a) the commitment of the Bank to make Eurodollar Rate Loans or convert Loans of another Type to Eurodollar Rate Loans shall forthwith be suspended and (b) the Eurodollar Rate Loans then outstanding shall be converted auto- matically to Domestic Rate Loans on the last day of each Interest Period applicable to such Eurodollar Rate Loans or within such earlier period as may be required by law. The Borrower and the LP each hereby agrees to pay the Bank, upon receipt of the Certificate (or any subsequent Certificates) provided for in 4.8, herein, any additional amounts necessary to compensate the Bank for any costs incurred by the Bank in making any conversion in accordance with this 4.4, including any interest or fees payable by the Bank to lenders of funds obtained by it in order to make or maintain its Eurodollar Loans hereunder. 4.5. Additional Costs, Etc. If any present or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to the Bank by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (a) subject the Bank to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the other Loan Documents, the Commitment or the Loans (other than taxes based upon or measured by the income or profits of the Bank), or (b) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to the Bank of the principal of or the interest on any Loans or any other amounts payable to the Bank under this Agreement or the other Loan Documents, or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or commitments of an office of the Bank, or (d) impose on the Bank any other conditions or requirements with respect to this Agreement, the other Loan Documents, the Loans, the Commitment, or any class of loans or commitments of which any of the Loans or the Commitment forms a part; and the result of any of the foregoing is (i) to increase the cost to the Bank of making, funding, issuing, renewing, extending or maintaining any of the Loans or the Commitment, or (ii) to reduce the amount of principal, interest or other amount payable to the Bank hereunder on account of the Commitment or any of the Loans, or (iii) to require the Bank to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by the Bank from the Borrower hereunder, then, and in each such case, upon receipt of the Certificate (or any subsequent Certificates) provided for in 4.8, herein, the Borrower and the LP each will, from time to time, pay to the Bank such additional amounts set forth in the Certificate, which will be sufficient to compensate the Bank for such additional cost, reduction, payment or foregone interest or other sum. 4.6. Capital Adequacy. If any present or future law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and the Bank determines that the amount of capital required to be maintained by it is increased by or based upon the existence of the Loans made or deemed to be made pursuant hereto, then the Borrower and the LP each shall upon its receipt of the Certificate (or any subsequent Certificates) provided for in 4.8, herein, pay to the Bank, from time to time, as an additional fee payable hereunder, such amount as set forth in such Certificate or Certificates, which amount(s) will adequately compensate the Bank in light of these circumstances for its increased costs of maintaining such capital. The Bank shall allocate such cost increases among its customers in good faith and on an equitable basis. 4.7. Indemnity. If, due to payments or Conversion Requests or due to acceleration of the maturity of the Revolving Credit Loans pursuant to the Note or due to any other reason, including without limitation the occur- rence of an Event of Default, the Bank receives payments of principal of, or is subject to a conversion of a Eurodollar Rate Loan into another Type of Revolving Credit Loan other than on the last day of an Interest Period relating thereto, the Borrower and/or the LP shall, upon its receipt of the Certificate (or any subsequent Certificates) provided for in 4.8, pay to the Bank any amounts required to compensate the Bank for any losses, costs or expenses which it may reasonably incur as a result of such payment or conversion, including, without limitation, any loss, costs or expenses incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain such Revolving Credit Loans. Such compensation, and any additional compensation provided for in the Note shall include, without limitation, an amount calculated as follows: (i) First, the Bank shall determine the amount by which (A) the total amount of interest which would have otherwise accrued hereunder on each installment of principal so paid or not borrowed, during the period beginning on the date of such payment or failure to borrow (after having been given proper notice with a Loan Request or Conversion Request and ending on the date such installment would have been due (the "Reemployment Period"), exceeds (B) the total amount of interest which would accrue, during the Reemployment Period, on any readily marketable bond or other obligation of the United States of America designated by the Bank in its sole discretion at or about the time of such payment, such bond or other obligation of the United States of America to be in an amount equal (as nearly as may be) to the amount of principal so paid or not borrowed and to have a maturity comparable to the Reemployment Period, and the -interest to accrue thereon to take account of amortization of any discount from par or accretion of premium above par at which the same is selling at the time of designation. Each such amount is hereafter referred to as an "Installment Amount". (ii) Second, each Installment Amount shall be treated as payable as of the date on which the related principal installment would have been payable by the Borrower or the LP, as applicable, had such principal installment not been prepaid or not borrowed. (iii) Third, the amount to be paid on each such date shall be the present value of the Installment Amount determined by discounting the amount thereof from the date on which such Installment Amount is to be treated as payable, at the same annual interest rate as that payable upon the bond or other obligation of the United States of America designated as aforesaid by the Bank. 4.8. Certificate. A certificate (hereinafter, the "Certificate") setting forth the calculation of any additional amounts payable pursuant to 4.4, 4.5, 4.6, 4.7 or 14 and a brief explanation of the circumstances giving rise to such amounts which are due, submitted by the Bank to the Borrower or the LP, shall be prima facie evidence that such amounts are due and owing. 4.9. Interest on Overdue Amounts. After the occurrence of an Event of Default, all principal and (to the extent permitted by applicable law) accrued and unpaid interest on the Revolving Credit Loans and all other amounts due and payable hereunder or under any of the other Loan Documents shall, at the Bank's option, bear interest at the Default Rate, compounded daily (to the extent permitted by law), until such amount shall be paid in full (after as well as before judgment). 4.10. Late Charge. Without derogating from the right of Bank to accelerate the maturity of the Obligations upon the occurrence of an Event of Default, if any payment due hereunder is not received by Bank within thirty (30) days of the date such payment is due, the Borrower shall pay to the Bank on demand a late charge equal to three percent (3%) of the amount of such payment. 5. COLLATERAL. 5.1. Grant of Collateral. Except with respect to any of the Borrower's Collateral (as defined below) located in the State of California (hereinafter, the "MCO California Collateral"), whether now existing or hereafter arising, which MCO California Collateral shall only be granted to the Bank to secure the payment and performance of the Obligations due and owing to the Bank, the payment and performance of the Obligations (including, without limitation, the payment and performance of the Guaran- ties), shall be secured by (where applicable as indicated below), a first mortgage interest in and to each of the Party's Mortgaged Property, a continuing security interest in and lien on (or an assignment of rights for collateral purposes, as appropriate) each of the Party's respective properties, assets and rights of every kind and nature, wherever located, whether now owned or hereafter acquired or arising (other than the properties and assets listed on Schedule 5.1 annexed hereto, or as otherwise provided for in Subsection (xiii), below), including, without limitation, a pledge of all of the Parties' Notes Receivable (except as set forth on Schedule 5.2(iii) annexed hereto), and an assignment of all mortgages or deeds of trust or other collateral granted by any Note Obligor and held by a Party to secure the payment of such Notes Receivable, and an assignment of certain rights of each of the Parties with respect to each of the Mortgaged Property, and all proceeds and products thereof, subject only to Permitted Liens, including, without limiting the generality of the foregoing, the following properties, assets and rights of each of the Parties: (i) all Notes Receivable, together with all collateral security granted by all Note Obligors as collateral security for the payment of all Notes Receivable; (ii) the Mortgaged Property including all Buildings; (iii) all building materials, supplies, furniture, furnishings, fixtures, equipment, contract rights, inventory, accounts, plans and specifications, trade names and other articles of personal property relating to, located on or used solely in connection with the construction, use, occupancy, operation or maintenance of any of the Mortgaged Property; (iv) the architect's contracts, the general contractor's contracts, agreements with soils, mechanical or structural engineers, if any, all subcontracts, all warranties, and all other rights, licenses, permits, approvals and agreements in any way relating to the construction of any of the Mortgaged Property, the Buildings or the use, occupancy, operation or maintenance of any of the Mortgaged Property; (v) all Leases for use or occupancy of any of the Mortgaged Property and of all rents, issues and profits of any of the Mortgaged Property; (vi) Service Agreements for the Notes Receivable; (vii) all of the issued and outstanding common stock of the Borrower; (viii) all goods, cash, bank accounts (including, without limitation, the Loan Account and the Lock Box Account), receivables and contract rights, under any contract for the sale of any of its properties to any Person and under all instruments, security agreements and other documents related thereto; (ix) all rights to the payment of money, including tax refund claims (other than tax refunds payable to MAXXAM), insurance proceeds and tort claims; (x) all chattel paper, documents, instruments (including intercompany promissory notes) and securities, together with all income therefrom, increases therein and proceeds thereof; (xi) all general intangibles, patents, trademarks, trade names, including without limitation, all right, title and interest in and to the trademarks, service marks, registrations of trademarks and servicemarks, patents and applications for patents set forth on the attached Schedule 5.2(iv) (collectively, the "Patents and Trademarks"), together with all right, title and interest of each of the Parties, in and to all patents and trademarks which it may hereinafter acquire, the right to file and prosecute applications for patents and trademarks, including the Patents and Trademarks, and similar intellectual property anywhere in the world and the good will of the business connected with the use of and symbolized by the Patents and Trademarks, together with all assets which uniquely reflect the good will of the business of each of the Parties, including but not limited to, its trade names, customer lists, trade secrets, corporate and other business records, license rights, advertising materials, operating manuals, methods, processes, know- how, sales literature, drawings, specifications, descriptions, inventions, name plates, catalogues, copyrights, dealer contracts, supplier contracts, distribution agreements, proprietary information, consulting agreements, engineering contracts and engineering drawings; (xii) all furniture, fixtures, equipment, inventory, raw materials, work in progress, books and records; (xiii) except with respect to the properties and assets listed on Schedule 5.1, annexed hereto, all interests and rights in, on or over real property pursuant to the terms of each of the mortgages, deeds of trust, assignments of rents, security agreements and the financing statements, collateral assignments of leases and rents, and such other documents as may be permitted or required in order to effect or exercise an interest or right in real property in the jurisdictions in which such property is located (collectively, the "Mortgages" ) granted by each of the Parties, (a) prior to the date hereof, with respect to any of the Strategic Projects and/or Non- Strategic Projects, and (b) with respect to all real property hereafter acquired by each of the Parties, as and when such hereafter acquired property which has not theretofore been pledged to the Bank aggregates an amount in excess of $500,000 in form and substance satisfactory to the Bank; (xiv) all of the partnership interests of the general partner(s) and limited partner(s) in the L.P.; and (xv) all right, title, and interest in and to SunRidge Canyon L.L.C., a limited liability company organized under the laws of the State of Arizona, including all proceeds, interest, dividends, rights to payment, allocations of profit and losses and other distributions arising out of, related to, or in connection with such company. All such assets subject to such Security Documents are collectively referred to herein as the "Collateral". Each of the Parties shall execute or deliver or cause to be executed or delivered to the Bank any and all documents, instruments and/or agreements, including, mortgages and/or deeds of trust, security agreements, assignments, and amendments to any existing collateral security documents, as Bank's counsel shall prepare in order to create the collateral security interests in and to the above described Collateral, together with such financing statements and other documents as are required to comply with and create and perfect a security interest under the Uniform Commercial Code. The Bank, and its counsel, shall, where permissible (as determined by the Bank and its counsel), endeavor to prepare amendment documents in order to effectuate documentation of the Loan. 5.2. Warranty of Title. Each of the Parties each represent and warrant to the Bank, effective as of the date of the execution of this Agreement and effective as of the Closing Date, as follows: (i) Except for Permitted Liens, each of the Parties is the owner of the Collateral free and clear of all security interests, liens, defects, irregularities, encumbrances, easements, rights of way and clouds on title and has validly and effectively granted to the Bank a security interest in and lien upon such Collateral. (ii) Except as described on Schedule 5.1, none of the Parties has equity or ownership rights of any nature in any real property or fixtures attached to real property other than the real property and fixtures described in the Security Documents; (iii) Except as described on Schedule 5.1, none of the Parties has rights as the lessee of real estate or fixtures attached to real estate under any form of tenancy other than, and with respect to, such rights under those leases described in the Security Documents; (iv) None of the Parties has ownership rights of any name or nature in and to any patent, copyright, trademark, service mark or trade name (or any applications with respect to the foregoing) other than those patents, copyrights, trademarks, service marks and trade names (and applications) listed in Schedule 5.2(iv) annexed hereto; and (v) Collateral consisting of tangible personal property (including without limitation, all machinery, equipment, goods and inventory) is maintained (except for the use of motor vehicles in the conduct of each of the Party's businesses and the occasional temporary removal of any items of Collateral in connection with repairs) only at the Strategic Projects, the Non-Strategic Projects and its offices at 5847 San Felipe, Houston, Texas. (vi) Except as described on the Schedule entitled Existing Notes Receivable, and on Schedule 5.2(vi), none of the Parties have any interest in any Notes Receivable. 5.3. Pro Rata Security. All amounts owing with respect to the Obligations shall be secured pro rata by the Collateral without distinction as to whether some Obligations are then due and payable and other Obligations are not then due and payable, provided that all costs and expenses as provided in 14 hereof shall first be paid before any proceeds are applied to any other Obligations. 6. REPRESENTATIONS AND WARRANTIES. Each of the Parties each repre- sent and warrant to the Bank as follows. 6.1. Corporate Authority; Etc. (a) Incorporation; Good Standing. The Borrower is a Delaware corporation; Westcliff is a Texas corporation; Horizon is a Delaware corporation; HPC is a Delaware corporation and the LP is a limited partnership duly organized under the laws of the State of Delaware. Each are validly existing and in good standing under the laws of their respective states of incorporation or organization, as applicable, and have all requisite power to own property and conduct their respective businesses as now conducted and as presently contemplated, and are in good standing as foreign entities and are duly authorized to do business in the respective jurisdictions where any of its Mortgaged Property is located and in each other jurisdiction where such qualification is necessary except where a failure to be so qualified in such other jurisdiction would not have a materially adverse effect on the business, assets or financial condition of the Parties. (b) Authorization. The execution, delivery and performance of this Agreement, the Security Documents and the other Loan Documents to which any of the Parties, is to become a party and the transactions contemplated hereby and thereby (i) are within the authority of each of the Parties, (ii) have been duly authorized by all necessary proceedings on the part of each such Person, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regula- tion to which any of the Parties, is subject or any judgment, order, writ, injunction, license or permit applicable to any of the Parties, and (iv) do not conflict with any provision of any of the Parties' respective Articles of Organization, Certificates of Incorporation, By-Laws, partnership agreements, or other charter documents or bylaws of, or any agreement or other instrument binding upon, any of the Parties. (c) Enforceability. The execution and delivery of this Agreement, the Security Documents, and the other Loan Documents to which any of the Parties, is or is to become a party will result in valid and legally binding obligations of each of the Parties, enforceable against each of them in accordance with the respective terms and provisions hereof and thereof. 6.2. Governmental Approvals. The execution, delivery and performance by each of the Parties, of this Agreement, the Security Documents, and the other Loan Documents to which any of the Parties, is or is to become a party and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing with, any governmental agency or authority, except with respect to the recording and filing of the Security Documents and related financing statements in the appropriate records office with respect thereto. 6.3. Title to Properties; Leases. Except as indicated on Schedule 6.3 hereto, each of the Parties own all of the assets reflected in the consolidated balance sheet of the Parties as of the Balance Sheet Date or acquired since that date (except property and assets sold or otherwise disposed of in the ordinary course of business since that date), subject to no rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances except Permitted Liens as described in Section 8.2, annexed hereto. 6.4. No Material Changes, Etc. Except as stated on Schedule 6.4, since the Balance Sheet Date, there has occurred no materially adverse change in the financial condition or business of any of the Parties, or any of their respective Subsidiaries as shown on or reflected in the consol- idated balance sheet of each of the Parties, as of the Balance Sheet Date, or the consolidated statement of income for the fiscal year then ended, other than changes in the ordinary course of business that have not had any materially adverse effect either individually or in the aggregate on the business or financial condition of the Parties. 6.5. Franchises, Patents, Copyrights, Etc. Each of the Parties possess all franchises, patents, copyrights, trademarks, trade names, li- censes and permits, and rights in respect of the foregoing, adequate for the conduct of its business substantially as now conducted without known conflict with any rights of others. 6.6. Litigation. Except as stated on Schedule 6.6 there are no actions, suits, proceedings or investigations of any kind pending or threatened against any of the Parties, or any of their respective Subsid- iaries before any court, tribunal or administrative agency or board that, if adversely determined, might, in any case materially adversely affect the properties, assets, financial condition or business of the Parties, or materially impair the right of any of the Parties, and their respective Subsidiaries to carry on business substantially as now conducted by each of them, or result in any substantial liability not adequately covered by insurance, or for which adequate reserves are not maintained on the balance sheet of each of the Parties, or which question the validity of this Agreement, the Security Documents or any of the other Loan Documents, or any action taken or to be taken pursuant hereto or thereto. 6.7. No Materially Adverse Contracts, Etc. Except as set forth on Schedule 6.7, annexed hereto, none of the Parties, nor any of their respective Subsidiaries are subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation that has or is expected in the future to have a materially adverse effect on the business, assets or financial condition of any of the Parties. None of the Parties, nor any of their respective Subsidiaries are a party to any contract or agreement that has or is expected, in the judgment of each of the Party's officers, to have any materially adverse effect on the business of any of the Parties, or their respective Subsidiaries. 6.8. Compliance With Other Instruments, Laws, Etc. (a) None of the Parties, nor any of their respective Subsidiaries is in violation of any provision of its respective charter or other organization documents, by- laws, or any agreement or instrument to which they may be subject or by which they or any of their properties may be bound or any decree, order, judgment, statute, license, rule or regulation, in any of the foregoing cases in a manner that could result in the imposition of substantial penal- ties or materially and adversely affect the financial condition, properties or business of any of the Parties, or any of their respective Subsidiaries. (b) Except as disclosed on Schedule 6.6, none of the Parties, any of their respective subsidiaries, or any of their respective directors, officers, agents or employees is or at any time in the past has been advised by any governmental agency having jurisdiction that it was (unless otherwise cured, satisfied or released), or is, in violation of (i) the Interstate Land Sales Full Disclosure Act (the "Interstate Land Sales Act") or similar laws pertaining to land sales in any state in which any of the Parties, or any of their respective subsidiaries, owns, sells, transfers, manages, operates, develops or otherwise disposes of real property (ii) any federal or state securities law, (iii) the federal Truth in Lending Act (including regulations written under such Act by the Board of Governors of the Federal Reserve System) or any similar state statute, (iv) the federal Equal Credit Opportunity Act (including regulations written under such Act by the Board of Governors of the Federal Reserve System) or any similar state statute, or (v) any judgment, decree, order, law, license, rule or regulation arising under such statutes or with respect to the matters covered thereby. 6.9. Tax Status. Except as provided for in 7.8, herein, each of the Parties (a) have made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which they are subject, (b) have paid all taxes and other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and by appropriate proceedings and (c) have set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. Except as provided for in 7.8, herein, there are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of any of the Parties know of no basis for any such claim. 6.10. No Suspension Event or Event of Default. No Suspension Event or Event of Default has occurred and is continuing. 6.11. Holding Company and Investment Company Acts. None of the Parties nor any of their respective Subsidiaries are a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935; nor are any of them an "investment company", or an "affiliated company" or a "principal underwriter" of an "investment company", as such terms are defined in the Investment Company Act of 1940. 6.12. Absence of UCC Financing Statements, Etc. Except with respect to Permitted Liens, there is no financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry, or other public office, that purports to cover, affect or give notice of any present or possible future lien on, or security interest in, any Collateral, or rights thereunder. 6.13. Setoff, Etc. The Collateral and the Bank's rights with respect to the Collateral are not subject to any setoff, claims, withholdings or other defenses. 6.14. Certain Transactions. None of the officers, trustees, directors, or employees of any of the Parties, or any of their respective Subsidiaries are presently a party to any transaction with the other, or any of their respective Subsidiaries (other than for services and benefits as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, trustee, director or such employee or, to the knowledge of the Parties, any corporation, partnership, trust or other entity in which any officer, trustee, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 6.15. Employee Benefit Plans; Multiemployer Plans; Guaranteed Pension Plans. Except as set forth on Schedule 6.15 annexed hereto, none of the Parties, nor any ERISA Affiliate maintains or contributes to any Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan. 6.16. Regulations U and X. No portion of any Loan is to be used for the purpose of purchasing or carrying any "margin security" or "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. 6.17. Environmental Compliance. Each of the Parties, have taken all reasonable steps to investigate the past and present condition and usage of the Real Estate and the operations conducted thereon and, based upon such diligent investigation, make the following representations and warranties: (a) Except as set forth on Schedule 6.17, with respect to any of the Mortgaged Property, and any other Real Estate, none of the Parties, nor any of their respective Subsidiaries or any operator of the Real Estate, or any operations thereon is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Superfund Amend ments and Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state or local statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter "Environmental Laws"), which violation involves any of the Mortgaged Property or involves other Real Estate which would have a material adverse effect on the environment or the business, assets or financial condition of any of the Parties. (b) Except as set forth on Schedule 6.17, annexed hereto, none of the Parties, nor any of their respective Subsidiaries have received notice from any federal, state or local governmental authority, (i) that it has been identified by the United States Environmental Protection Agency ("EPA) as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste, as defined by 42 U.S.C. 9601(5), any hazardous substances as defined by 42 U.S.C. 9601(14), any pollutant or contaminant as defined by 42 U.S.C. 9601(33) or any toxic substances, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which it has generated, transported or disposed of have been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that any of the Parties, or any of their respective Subsidiaries conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that any of them are or shall be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding (in each case, contingent or otherwise) arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances. (c) With respect to any of the Mortgaged Property, and any other Real Estate, except as set forth on Schedule 6.17 attached hereto: (i) no portion of the Real Estate has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on any portion of the Mortgaged Property; (ii) in the course of any activities conducted by any of the Parties, or any of their respective Subsidiaries or to the best of their knowledge the opera tors of the Real Estate, no Hazardous Substances have been generated or are being used on the Real Estate except in accordance with applicable Environmental Laws; (iii) there has been no release i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping (a "Release") or threatened Release of Hazardous Substances on, upon, into or from the Mortgaged Property, or, on upon, into or from the other properties of any of the Parties, or any of their respective Subsidiaries, which Release would in the case of such other properties have a material adverse effect on the value of any of the Real Estate or adjacent properties or the environment; (iv) there have been no Releases on, upon, from or into any real property in the vicinity of any of the Real Estate which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the Real Estate; and (v) any Hazardous Substances that have been generated on any of the Real Estate have been transported off-site only by carriers having an identification number issued by the EPA, and to the best of each of the Parties knowledge, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are, to the best of each of the Party's knowledge, operating in compliance with such permits and applicable Environmental Laws. (d) Except as set forth on Schedule 6.17, annexed hereto, none of the Parties, nor any of the Mortgaged Property is subject to any applicable Environmental Law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances, or the giving of notice to any governmental agency or the recording or delivery to other Persons of an environmental disclosure document or statement by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the recording of the Security Documents or to the effec tiveness of any other transactions contemplated hereby. 6.18. Subsidiaries. Schedule 6.18 sets forth all of the Subsidiaries of each of the Parties. 6.19. Material Lease Summaries. Each of the Parties, has delivered to the Bank Material Lease Summaries dated as of the date hereof relating to the Material Leases. Such Material Lease Summaries are true, accurate and complete summaries and representations of the material terms of all Material Leases relating to the Mortgaged Property as of the date thereof. 6.20. Loan Documents. All of the representations and warranties of each of the Parties, made in the other Loan Documents or any document or instrument delivered to the Bank pursuant to or in connection with any of the Loans are true and correct in all material respects. 6.21. Mortgaged Property. Each of the Parties, make the following representations and warranties concerning all of the Mortgaged Property: (a) Off-Site Utilities. Only with respect to the Developed Lots, all water, sewer, electric, gas, telephone and other utilities are adequate to service the Developed Lots in full compliance with applicable law. (b) Access; Etc. The streets abutting each of the Mortgaged Property (based upon the outside perimeter of each of the Mortgaged Property), are public roads, to which the Mortgaged Property has direct access by trucks and other motor vehicles and by foot, or are private ways (with direct access by trucks and other motor vehicles and by foot to public roads) to which the Mortgaged Property (based upon the outside perimeter of each of the Mortgaged Property), has direct access without charge or liability for maintenance or repair. (c) No Required Real Property Consents, Permits, Etc. (i) None of the Parties, has received any notices of, or has any knowledge of, any approvals, consents, licenses, permits, utility installations and connections (including, without limitation, drainage facilities), curb cuts and street openings, for the Developed Lots, which have not or will not be granted, effected, or performed and completed (as the case may be) or any fees or charges therefor which have not been fully paid. No such approvals, consents, permits or licenses, (including, without limitation, any railway siding agreements) will terminate, or become void or voidable or terminable on any foreclosure sale of the Developed Lots pursuant to the Security Documents. (ii) Except as set forth on Schedule 6.21(c), annexed hereto, there are no outstanding notices, suits, orders, decrees or judgments relating to adverse zoning, building use and occupancy, fire, health, sanitation, or other violations affecting, against, or with respect to, the Mortgaged Property or any part thereof that, if adversely determined, might materially adversely affect the use of the Mortgaged Property, the ability of any of the Parties, and their respective Subsidiaries, to carry on business substantially as now conducted by each of them, or the ability of any of the Parties, and their respective Subsidiaries to comply with any of the terms of the within Agreement. (d) Insurance. None of the Parties, has received any notices from any insurer or its agent requiring performance of any work with respect to the Mortgaged Property or cancelling or threatening to cancel any policy of insurance, and the Mortgaged Property complies with the requirements of all insurance carriers. (e) Real Property Taxes; Special Assessments. There are no unpaid or outstanding real estate or other taxes or assessments, or other governmental charges on or against the Mortgaged Property or any part thereof which are payable by any of the Parties other than (i) real estate taxes not yet due and payable); (ii) real estate taxes, the validity or amount of which are currently being contested in good faith by appropriate proceedings, and in which payment is not required prior to contesting the validity or amount of such real estate taxes, and in which the Parties, or any of their respective Subsidiaries have set aside on their books adequate reserves with respect thereto; and (iii) miscellaneous real estate taxes not exceeding Two Hundred Fifty Thousand Dollars ($250,000.00) for property not essential to the continued use or operation of the Mortgaged Property. The Parties and each Subsidiary of any of the Parties will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. Except as set forth on Schedule 6.21(e), annexed hereto, no abatement proceedings are pending with reference to any real estate taxes assessed against the Mortgaged Property. Except as set forth on the Title Insurance Policies, there are no betterment assessments or other special assessments presently pending with respect to any portion of the Mortgaged Property, and none of the Parties has received any notice of any such special assessment being contemplated. (f) Historic Status. The Mortgaged Property is not located within any historic district pursuant to any federal, state or local law or governmental regulation. (g) Eminent Domain. There are no pending eminent domain proceedings against any of the Mortgaged Property or any part thereof, and, to each of the Party's knowledge, no such proceedings are presently threatened or contemplated by any taking authority. (h) Agreements Relating to the Mortgaged Property. Except with respect to agreements for which payments thereunder do not exceed Four Thousand Dollars ($4,000.00) per month, there are no agreements relating to the operation and maintenance of the Mortgaged Property, or any portion thereof, except as listed on Schedule 6.21(h). To the best of each of the Party's knowledge, there are no adverse claims or any basis for adverse claims in respect of the Mortgaged Property or its operation, by any party to any Agreements Relating to the Mortgaged Property. (i) Service Agreements. Except as listed on Schedule 6.21(i), there are no Service Agreements relating to servicing rights relevant to the servicing of any of the Notes Receivable. To the best of each of the Party's knowledge, there are no adverse claims or any basis for adverse claims in respect of servicing rights relevant to the Notes Receivable. (j) Other Material Real Property Agreements; No Options. Except as set forth on Schedule 6.21(j), and except for any existing Amenity Sales Contracts, Bulk Land Sales Contracts, Retail Lot Contracts, and Home Mortgages, there are no material agreements pertaining to the Mortgaged Property or the operation or maintenance thereof other than as described in this Agreement (including the Schedules hereto) or otherwise disclosed in writing to the Bank by any of the Parties; and no person or entity has any right or option to acquire the Mortgaged Property or any portion thereof or interest therein. 6.22. Existing Notes Receivable Value. Each of the Parties represent and warrant that as of May 31, 1995, the total aggregate balance of the Existing Notes Receivable is at least equal to $21,500,000.00. 6.23. Existing Lots and Undeveloped Acres. As set forth on Schedule 6.23 entitled Existing Lots and Undeveloped Acres, each of the Parties represent and warrant that as of May 31, 1995, the aggregate total of lots owned by the Parties exceeds nine thousand lots (9,000), and the aggregate total of undeveloped acres owned by the Parties exceeds eighteen thousand (18,000) acres. 6.24. Non-Underwriting Criteria Loans. The Borrower and the LP may enter into any loan arrangements, or otherwise extend credit to any Person in the ordinary course of the Borrower's or the LP's business, provided, however, the Bank shall be under no obligation to deem any Note Receivable not satisfying the Underwriting Criteria as an Acceptable New Note Receivable or an Acceptable Existing Note Receivable. 6.25. Amended and Restated Credit and Security Agreement Dated December 29, 1992. Each of the Parties acknowledge, confirm and agree that the within Agreement is intended to amend, restate and replace certain terms and conditions set forth in a certain Amended and Restated Revolving Credit Loan and Security Agreement dated December 29, 1992, as amended, by and among the Bank, MCO Properties, Inc., MCO Properties L.P., Westcliff Development Corporation, Horizon Properties and Horizon Properties Corporation, as previously amended. 6.26. LP Partners. The sole general partner of the LP is, and shall remain, the Borrower. The sole limited partner of LP is, and shall remain, MCOP Limited Partner, Inc. 6.27. LP Assets and Liabilities. (A) The only assets of the LP as of the date hereof are the LP Assets. All Notes Receivable of the LP are set forth on Schedule 1.1(g) annexed hereto. No LP Assets are subject to any rights of others, including any mortgages, leases, conditional sales agreements, title retention agreements, liens or other encumbrances, except in favor of the Bank or liens permitted pursuant to Section 8.2. (B) The LP has no Indebtedness as of the date hereof other than Indebtedness in favor of the Bank or indebtedness permitted pursuant to Section 8.1. 7. AFFIRMATIVE COVENANTS OF THE PARTIES. Each of the Parties covenant and agree that, so long as any Loan or Note is outstanding or the Bank has any obligation to make any Loans: 7.1. Punctual Payment. Each of the Parties will duly and punctually pay or cause to be paid the principal and interest on the Loans and all interest and fees provided for in this Agreement, all in accordance with the terms of this Agreement, the Note and the Guaranties, as well as all other sums owing pursuant to the Loan Documents. 7.2. Maintenance of Office. Each of the Parties will maintain their respective chief executive offices in the locations set forth in the Pre- amble of this Agreement, or at such other place in the United States of America as the Parties, shall designate upon thirty (30) days prior written notice to the Bank, where notices, presentations and demands to or upon the Parties, in respect of the Loan Documents may be given or made. 7.3. Records and Accounts. Each of the Parties will (a) keep, and cause each of its Subsidiaries to keep, true and accurate records and books of account in which full, true and correct entries will be made in accordance with generally accepted accounting principles and (b) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation and amortization of its properties and the properties of its Subsidiaries, contingencies, and other reserves. 7.4. Financial Statements, Certificates and Information. (a) Each of the Parties will deliver to the Bank: (i) Monthly, within thirty (30) days following the end of each month, (A) the Borrowing Base Report (whether or not the Borrower or the LP intends to request a loan or advance under the Loan) setting forth the information necessary to calculate the Borrower Availability and the LP Availability as of the last day of the preceding calendar month and setting forth information necessary to reconcile to the most recent Borrowing Base Report submitted to the Bank; (B) internally prepared financial statements of: (x) the Borrower's financial condition at, and the results of operations for, the period ending with the end of the subject month, which shall include, at a minimum, a balance sheet and a cash flow and income statement and the Borrower's monthly management report which sets forth cash flow and earnings information, for each of the Strategic Projects and the Non- Strategic Projects; and (y) cash flow statements for each of the Strategic Projects and the Non-Strategic Projects, and in connection with the statements, reports and information to be furnished pursuant to (x) and (y), herein, a comparison of same against each of the Party's financial projections set forth in the Borrower's business plans previously prepared and delivered to the Bank for the subject monthly period; (ii) Quarterly, within forty-five (45) days following the end of the Borrower's fiscal quarter, internally prepared (consolidated and consolidating) financial statements (prepared in accordance with generally accepted accounting principals consistently applied) of the Borrower's financial condition at, and the results of the Borrower's operations for the year-to-date period ending with the end of the subject quarter, which statements shall include, at a minimum, a balance sheet and a cash flow and income statement, together with a Certificate of Compliance executed by the Parties. (iii) Annually, within ninety (90) days following the end of the Borrower's fiscal year, original signed counterparts of (A) the Borrower's consolidated annual audited financial statements, which statements shall have been prepared by Borrower and bear the unqualified opinions of, the Borrower's independent certified public accountants (which accountants shall be subject to the Bank's approval), and (B) the Borrower's Certificate of Compliance; and (C) the Borrower's consolidating annual financial statements, which statements shall have been prepared by the Borrower. (iv) quarterly, within forty-five (45) days after the end of each of the fiscal quarters of each of the Parties, and promptly after execution of a new Material Lease or the amendment of any Material Lease, updated Material Lease Summaries with respect to any of the Mortgaged Property. (b) In addition to the foregoing, each of the Parties and MAXXAM shall furnish the Bank with such other financial information as may be reasonably requested by the Bank, including, without limitation, additional financial information pertaining to the Borrower, the LP, any of the Guarantors and/or any of the Strategic Projects and Non-Strategic Projects. (c) None of the Parties or MAXXAM will change their respective fiscal years (which each of the Parties acknowledge and agree is from January 1 to December 31 of each calendar year) without prior written notice to the Bank. (d) (i) Annually, the Bank may conduct a Commercial Finance Exam (hereinafter, the "Commercial Finance Exam") of each or any of the Parties, the Strategic Projects or the Non-Strategic Projects, the Notes Receivable and/or any other matters determined by the Bank (in its sole and absolute discretion) to be necessary in connection with the Loan, the reasonable out-of-pocket costs of which shall be borne by the Borrower and/or the other Parties (jointly and severally) and paid to the Bank on Demand. (ii) Each of the Parties agree to assist the Bank, or any other independent contractor conducting such exams, in connection with the conducting of such Commercial Finance Exam, and in connection therewith shall make each of the Party's and the Strategic Projects and Non-Strategic Projects books and records available to the Bank or any other independent contractor for review. (e) Except with respect to the financial information and reports set forth in 7.4(a)(i), above, all financial information and/or reports to be furnished by the Parties and MAXXAM to the Bank shall each be prepared in accordance with generally accepted accounting principles consistently applied. 7.5. Notices. (a) Defaults. The Borrower or the applicable Party will promptly notify the Bank in writing of the occurrence of any Suspension Event or Event of Default. In addition, if any Person shall give any notice or take any other action in respect of a claimed default (whether or not constituting an Event of Default) under this Agreement or under any note, evidence of indebtedness, indenture or other obligation to which or with respect to which any of the Parties, or any of their respective Sub- sidiaries are a party or obligor, whether as principal or surety, and such default would permit the holder of such note or obligation or other evidence of indebtedness to accelerate the maturity thereof, which acceleration would have a material adverse effect on any of the Parties, each of the Parties, shall forthwith give written notice thereof to the Bank, describing the notice or action and the nature of the claimed default. (b) Environmental Events. Each of the Parties will promptly give notice to the Bank (i) of any violation of any Environmental Law that the Parties or any of their respective Subsidiaries reports in writing or is reportable by such Person in writing (or for which any written report supplemental to any oral report is made) to any federal, state or local environmental agency and (ii) upon becoming aware thereof by a notice from any public agency of any inquiry, proceeding, investigation, or other action, of potential environmental liability, or any federal, state or local environmental agency or board, that in either case involves the Real Estate or has the potential to materially affect the assets, liabilities, financial conditions or operations of each of the Parties or the Bank's security interests pursuant to the Security Documents. (c) Notification of Claims against Collateral. Each of the Parties will, immediately upon becoming aware thereof, notify the Bank in writing of any setoff, claims (including, with respect to the Mortgaged Property, environmental claims), withholdings or other defenses to which any of the Collateral, or the Bank's rights with respect to the Collateral, are or may be subject. (d) Notice of Litigation and Judgments. Each of the Parties will, or will cause each of their respective Subsidiaries to, give notice to the Bank in writing within twenty (20) days of becoming aware of any litigation or proceedings threatened in writing or any pending litigation and proceedings affecting any of the Parties, or any of their respective Subsidiaries or to which any of the Parties, or any of their respective Subsidiaries are or are to become a party involving an uninsured claim against any of the Parties, or any of their respective Subsidiaries that could reasonably be expected to have a materially adverse effect on any of the Parties and stating the nature and status of such litigation or proceedings. Each of the Parties will, and will cause each of its Subsidiaries to, give notice to the Bank, in writing, in form and detail satisfactory to the Bank, within ten (10) days of any judgment not covered by insurance, final or otherwise, against any of the Parties, or any of their respective Subsidiaries in an amount in excess of $250,000.00. 7.6. Existence; Maintenance of Properties. Each of the Parties will do or cause to be done all things necessary to preserve and keep in full force and effect their existence as corporations in the states of incor- poration indicated in the Preamble of this Agreement. Each of the Parties will do or cause to be done all things necessary to preserve and keep in full force all of their respective rights and franchises and those of their Subsidiaries. Each of the Parties (a) will cause all of their respective properties and those of their respective Subsidiaries used or useful in the conduct of their respective business or the business of their respective Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, (b) will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Parties may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and (c) will, and will cause each of their respective Subsidiaries to, continue to engage primarily in the businesses now conducted by each of them and in related businesses. 7.7. Insurance. Each of the Parties: (a) will obtain and maintain with respect to the Strategic Projects and the Non-Strategic Projects, such insurance as the Bank may reasonably require, including: (i) "all risks" property insurance written on a builder's risk, completed value, non-re- porting form, in connection with the construction of any improvements, including, without limitation, the construction of any Building on the Mortgaged Property; (ii) flood insurance, if the Strategic Projects or the Non-Strategic Projects are located in any federally designated "special hazard area"; (iii) commercial general liability insurance and owner's contingent or protective liability insurance; (iv) employer's liability insurance; (v) umbrella liability insurance; and (vi) workmen's compensation insurance. The insurance provided for in clauses (i) and (ii) shall name the Bank as mortgagee and loss payee and shall be first payable in case of loss to the Bank pursuant to standard non-contributory mortgage clauses and lender's loss payable endorsements. The insurance provided for in clauses (iii) and (v) shall name the Bank as an additional insured. (b) will require its general contractor to obtain and maintain at all times the insurance customarily required by a general contractor's contract. (c) will require its architect, engineer and any other design professional providing design or engineering services to obtain and maintain professional liability insurance customarily required by an architect's, engineer's or other design professional's contract. (d) All insurance referred to in this paragraph 7.7 shall be in such amounts and form, shall include such coverages, endorsements and deductibles, and shall be issued by such insurers as shall be approved by the Bank, and shall contain the written agreement of the insurer to give the Bank thirty (30) days prior written notice of cancellation, non- renewal, modification or expiration. 7.8. Taxes. Each of the Parties will pay taxes, assessments and other governmental charges against the Mortgaged Property and will duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges imposed upon it and its other real properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies that if unpaid might by law become a lien or charge upon any of its property; provided that any such tax, assessment, charge, levy or claim need not be paid if: (a) the aggregate of any taxes for any part of the Mortgaged Property not essential to the continued current use and operation of the Mortgaged Property does not exceed Two Hundred Fifty Thousand Dollars ($250,000.00), or (b) the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if any of the Parties, or any of their respective Subsidiaries shall have set aside on its books adequate reserves with respect thereto; and provided further that the Parties and each Subsidiary of any of the Parties will pay all such taxes, assessments, charges, levies or claims forthwith upon the commencement of proceedings to foreclose any lien that may have attached as security therefor. 7.9. Inspection of Properties and Books. Each of the Parties shall permit the Bank at the Bank's expense prior to the occurrence of any Suspension Event or Event of Default, but thereafter at the Party's expense, to visit and inspect any of the properties of any of the Parties, or any of their respective Subsidiaries to examine the books of account of each of the Parties and each of their respective Subsidiaries (and to make copies thereof and extracts therefrom) and to discuss the affairs, finances and accounts of each of the Parties and their respective Subsidiaries with, and to be advised as to the same by, its officers, all at such reasonable times and intervals as the Bank may reasonably request, provided, however, nothing contained herein shall in any way affect the Borrower's or the LP's obligation to reimburse the Bank for the Bank's reasonable out-of-pocket costs incurred in connection with the Commercial Finance Exams to be conducted by the Bank, as provided for in 7.4(d), herein. 7.10. Compliance with Laws, Contracts, Licenses, and Permits. Each of the Parties will comply with, and will cause each of their respective Subsidiaries to comply with (a) all applicable laws and regulations now or hereafter in effect wherever its business is conducted, including all Environmental Laws, (b) the provisions of its corporate charter, and other charter documents and by-laws, (c) all agreements and instruments to which it is a party or by which it or any of its properties may be bound and (d) all applicable decrees, orders, and judgments. If at any time while any Loan or Note is outstanding or the Bank has any obligation to make Loans hereunder, any authorization, consent, approval, permit or license from any officer, agency or instrumentality of any government shall become necessary or required in order that any of the Parties, may fulfill any of their obligations hereunder, each of the Parties will immediately take or cause to be taken all reasonable steps within the power of each of the Parties, to obtain such authorization, consent, approval, permit or license and furnish the Bank with evidence thereof. 7.11. Use of Availability. (a) (i) The proceeds of the Loans shall be used: (x) subject to the limitations contained herein and in the Loan Documents, for general business purposes of the Parties; (y) to assist in financing the construction of certain infrastructure improvements and resi- dential development at the Strategic Projects or Non-Strategic Projects; (z) to assist in financing certain carrying costs of the Strategic Projects and the Non-Strategic Projects; (ii) Availability under the Loan may be used for the issuance (up to the Letter of Credit Amount) by the Bank of Letters of Credit for the account of the Parties subsequent to the date hereof, and/or for the extension or renewal of any Letters of Credit issued for the account of the Parties or MAXXAM prior to the date hereof. (b) (i) Each of the Parties shall be permitted to make, and each of the Parties shall be entitled to receive, loans (individually and collectively, the "On-Loan") to be utilized for payments due and owing on account of the liabilities of the Parties; provided, however, the aggregate amount of any such On-Loans to each of the Parties shall not, at any time, exceed the Book Value of all collateral security individually granted by any of the Parties to the Bank as collateral security for the payment and performance of each of their respective Guaranties, as provided for herein, and in each instance, each On-Loan shall be evidenced by an instrument of indebtedness (in form and substance satisfactory to the Bank, in its sole and absolute discretion), endorsed (in form and substance satisfactory to the Bank and the Bank's counsel), delivered and collaterally assigned to the Bank, and subordinate to the Obligations. To the extent that any collateral security is granted by any of the Parties (other than the Borrower or the LP) to the Borrower or the LP to secure the payment and performance of such On-Loan( s), all such collateral security shall be collaterally assigned to the Bank. (ii) Each of the Parties acknowledge, confirm and agree that each shall be liable (jointly and severally) to the Bank for the payment of the Obligations, whether or not any On-Loan is made by the Parties to another Party. (c) (i) Each of the Parties acknowledge, confirm and agree that the Bank may (without any request for a loan or advance by the Borrower), except as otherwise provided herein, use the proceeds of the Revolving Credit Loans to pay for any and all reasonable costs and expenses incurred by the Bank in connection with the matters set forth in the within Agreement, including, without limitation, costs and expenses associated with attorneys' fees, appraisals and Commercial Finance Exams. Without limiting the Bank's rights set forth in the within subsection, the Bank will endeavor to furnish the Parties with notice of such use of the proceeds but shall be under no obligation to furnish such notice. (ii) Each of the Parties acknowledge, confirm and agree that interest on any advance made by the Bank pursuant to Subsection (c)(i), above, shall accrue and be payable at the Domestic Rate. 7.12. Further Assurances. Each of the Parties will cooperate with, and will cause each of its Subsidiaries to cooperate with the Bank and execute such further instruments and documents as the Bank shall reasonably request to carry out to its satisfaction the transactions contemplated by this Agreement and the other Loan Documents. 7.13. Appraisals. (a) (i) The Bank at its option, shall have the right to obtain updated Appraisals of the Strategic Projects and/or the Non-Strategic Projects at any time during the term of the Loan. (ii) The costs of such Appraisals for any of the Non-Strategic Projects shall be borne by the Bank. (iii) Without limiting the terms of Subsections (b) and (c), below, the Borrower and the LP each acknowledges, confirms and agrees that upon the occurrence of a Suspension Event or an Event of Default, all costs and expenses incurred by the Bank with respect to Appraisals for any of the Strategic Projects shall be borne by the Borrower and the LP, as applicable, if, such additional Appraisals for any of the Strategic Projects were ordered by the Bank during the period of a Suspension Event not otherwise cured or after the occurrence of an Event of Default. (b) To the extent that any Revolving Credit Loans are made under the Loan based upon Availability created by Developed Lots at either of the Lake Havasu City, Arizona, or Rancho Mirage/Mirada, California properties, the Borrower or the LP, as applicable, shall pay all costs and expenses incurred by the Bank in connection with the Bank's procurement of an ap- praisal for such Developed Lots giving rise to Availability under the Loan. (c) The Bank has received an Appraisal prepared by an appraiser designated by the Bank stating that the Fountain Hills, Arizona property, with improvements located thereon, which has a fair value that is satisfactory to the Bank, in the Bank's reasonable discretion. Provided that so long as no Suspension Event or Event of Default shall have occurred (and not been cured) under the Loan, the LP shall not be obligated to pay for the expenses associated with any additional appraisal for the Fountain Hills, Arizona, property prior to the Revolving Credit Maturity Date. 7.14. Notification Letters. At closing, each of the Parties shall execute and deliver to the Bank notification letters (hereinafter, the "Notification Letters"), substantially in the form of Schedule 7.14, advising each Note Obligor to make payment on account of all Note Receivables to the Bank. At the time any of the Parties enter into any additional Amenity Sales Contracts, Retail Lot Contracts, Bulk Land Sales Contracts and/or Home Mortgages, concurrent with the delivery of the Bank of Note Receivable generated on account thereof, the Parties shall deliver to the Bank a Notification Letter for each such Note Receivable. As provided for herein, the Bank may only forward the Notification Letters to each Note Obligor directing them to make payment on account of all Notes Receivable to the Bank after the occurrence of an Event of Default. 7.15. Hazardous Substance Remedial Action. Each of the Parties shall, at the Bank's (or its engineer's) request, take all additional action as may be recommended by any Phase I environmental assessment report furnished to the Bank pursuant to 10.10, below, including, without limitation, take all remedial action as may be recommended therein. 8. CERTAIN NEGATIVE COVENANTS OF THE PARTIES. Each of the Parties covenant and agree that, so long as any Loan or Note is outstanding or the Bank has any obligation to make any Loans: 8.1. Restrictions on Indebtedness. (a) Each of the Parties will not, and will not permit any of its Subsidiaries to, create, incur, assume, guarantee or be or remain liable, contingently or otherwise, with respect to any Indebtedness other than: (i) Indebtedness to the Bank arising under any of the Loan Documents; (ii) Indebtedness created or incurred on account of any On- Loan; (iii) current liabilities of the Parties, or their respective Subsidiaries incurred in the ordinary course of business but not incurred through (i) the borrowing of money, or (ii) the obtaining of credit except for credit on an open account basis customarily extended and in fact extended in connection with normal purchases of goods and services; (iv) Indebtedness in respect of taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of 7.8; (v) endorsements for collection, deposit or negotiation and warranties of products or services, in each case incurred in the ordinary course of business; (vi) Indebtedness existing on the date of this Agreement and listed and described on Schedule 8.1 hereto, including any refinancing of any debt listed on Schedule 8.1 hereto, so long as such refinancing is not for an amount in excess of 100% of the fair market value of the asset being refinanced; (vii) Indebtedness of the Parties in respect of obli- gations to complete subdivision improvements; and (viii) Indebtedness approved or previously approved by the Bank in its sole and absolute discretion. (b)(i) Notwithstanding anything to the contrary herein contained, the aggregate amount of the Borrower's (including its Subsidiaries and the LP) recourse Indebtedness on a consolidated basis (exclusive of Indebtedness, the repayment of which is subordinated to the Bank pursuant to the Subordination Agreement and also exclusive of accounts payable, accrued liabilities, estimated obligations for lot improvements, deferred taxes, and other liabilities not commonly characterized as third- party debt, but inclusive of the amount set forth in 8.2(ix), below) (collectively, the "Other Liabilities")), shall not, at any time, exceed the aggregate of the then outstanding principal balance of the Loans, plus $13,900,000.00. (ii) Notwithstanding anything to the contrary herein contained, the aggregate amount of the Borrower's (including its Subsidiaries and the LP) recourse Indebtedness (other than on account of the Loans, Indebtedness due to affiliates of the Borrower and subordinated to the Bank, and the Other Liabilities) on a consolidated basis with respect to the Strategic Projects and Non-Strategic Projects (other than the Fountain Hills, Arizona Project) shall not, at any time, exceed $7,500,000.00. 8.2. Restrictions on Liens, Etc. Each of the Parties will not, and will not permit any of its Subsidiaries to, (a) create or incur or suffer to be created or incurred or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or other security interest of any kind upon any of its property or assets of any character whether now owned or hereafter acquired, or upon the income or profits therefrom; (b) transfer any of its property or assets or the income or profits therefrom for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors; (c) acquire, or agree or have an option to acquire, any property or assets upon conditional sale or other title retention or purchase money security agreement, device or arrangement; (d) suffer to exist for a period of more than thirty (30) days after the same shall have been incurred any Indebted- ness or claim or demand against it that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over its general creditors; or (e) sell, assign, pledge or otherwise transfer any accounts, contract rights, general intangibles, chattel paper or instruments, with or without recourse; provided that each of the Parties and any Subsidiary of any of the Parties may create or incur or suffer to be created or incurred or to exist: (i) liens in favor of any of the Parties, on all or part of their respective Subsidiaries securing Indebtedness owing by Subsidiaries to any of the Parties, or by any of Westcliff, Horizon, HPC or MAXXAM to the Borrower or to the LP on account of the On-Loans; (ii) liens on properties other than the Mortgaged Property to secure taxes, assessments and other government charges or claims for labor, material or supplies in respect of obligations not overdue; (iii) deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security obligations; (iv) liens on properties other than the Mortgaged Property in respect of judgments or awards, the Indebtedness with respect to which is permitted by 8.1(iv); (v) liens of carriers, warehousemen, mechanics and materialmen and other like liens and liens imposed by law, created in the ordinary course of business, for amounts not yet due or which are being contested in good faith by appropriate proceedings in accordance with applicable law and as to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (vi) pledges or deposits made in connection with workmen's compensation, employee benefit plans, unemployment or other insurance, old age pensions, or other Social Security benefits; (vii) encumbrances on properties consisting of easements, rights of way, zoning restrictions, restrictions on the use of real property and defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which any of the Parties is a party, and other minor liens or encumbrances none of which interferes materially with the use of the property affected in the ordinary conduct of the business of each of the Parties, which defects do not individually or in the aggregate have a materially adverse effect on the business of any of the Parties, or any of their respective Subsidiaries on a consolidated basis. (viii) presently outstanding liens listed on Schedule 8.2 hereto; (ix) purchase money security interests in or purchase money mortgages not exceeding $500,000 on real or personal property acquired after the date hereof to secure purchase money indebtedness incurred in connection with the acquisition of such property, which security interests or mortgages cover only the real or personal property so acquired; (x) liens in favor of the Bank under the Loan Documents; (xi) other liens and encumbrances expressly permitted under the terms of the Security Documents; and (xii) other liens and encumbrances approved or previously approved by the Bank in its sole and absolute discretion. 8.3. Restrictions on Investments. Each of the Parties will not, and will not permit any of their respective Subsidiaries to, make or permit to exist or to remain outstanding any Investment except Investments in: (a) Cash Equivalents; (b) SunRidge Canyon L.L.C., a limited liability company organized under the laws of the State of Arizona in an amount not to exceed $5,000,000.00. (c) Investments existing on the date hereof and listed on Schedule 8.3 hereto; and (d) any other Investments made in the ordinary course of each of the Party's businesses in a manner consistent with past practice, provided that the aggregate value of all Investments under this subsection (d), on a consolidated basis, shall not exceed at any time $10,000,000. 8.4. Merger, Consolidation. (a) Each of the Parties will not, and will not permit any of its Subsidiaries to, become a party to any merger or consolidation, or agree to or effect any asset acquisition or stock acquisition or disposition (other than the acquisition or disposition of assets other than the Mortgaged Property in the ordinary course of business consistent with past practices). (b) Notwithstanding the foregoing (i) the merger, acquisition or consolidation of any of the assets or stock of MAXXAM (other than any merger, acquisition or consolidation with the Borrower or any of the Guarantors) shall be permitted provided Charles E. Hurwitz continues to maintain a controlling interest in MAXXAM, and (ii) mergers, acquisitions or consolidations of the assets or stock of (i) the Borrower into any of its Subsidiaries, (ii) any of the Borrower's Subsidiaries into the Borrower, (iii) any of the Borrower's Subsidiaries into another of the Borrower's Subsidiaries and (iv) any of the Parties into any of the other Parties, shall be permitted subject, however, to any lien or encumbrance in favor of the Bank, and only after execution of any documents reasonably requested by the Bank, or the Bank's counsel in connection therewith. 8.5. Sale and Leaseback. Without the prior written approval of the Bank (which approval shall not be unreasonably withheld), none of the Parties will enter into any arrangement, directly or indirectly, whereby the Parties shall sell or transfer any property owned by it in order then or thereafter to lease such property or lease other property that the Parties intend to use for substantially the same purpose as the property being sold or transferred; notwithstanding the foregoing restrictions, the Borrower shall be entitled to sell and leaseback up to three (3) model homes per year, provided however, that no such property shall have a Fair Market Value greater than Three Hundred Thousand Dollars ($300,000.00) (other than properties at Mirada which shall not have a Fair Market Value greater than $2,500,000.00). 8.6. Compliance with Environmental Laws. Each of the Parties will not, and will not permit any of their respective Subsidiaries to, do any of the following (except in compliance with all applicable environmental laws, regulations or statutes, and provided the allowance of any of the following does not change the current use of the Real Estate): (a) use any of the Real Estate or any portion thereof as a facility for the handling, processing, storage or disposal of Hazardous Substances, (b) cause or permit to be located on any of the Real Estate any underground tank or other underground storage receptacle for Hazardous Substances except in full compliance with Environmental Laws, (c) generate any Hazardous Substances on any of the Real Estate except in full compliance with Environmental Laws, or (d) conduct any activity at any Real Estate or use any Real Estate in any manner so as to cause a Release. 8.7. Distributions. (a) Except as set forth herein, neither the Borrower nor the LP shall pay any Distributions to Westcliff, Horizon, HPC or MAXXAM or any affiliated or related entity of the Borrower. (b) Provided no Suspension Event or Event of Default has oc- curred (and not been cured), the Borrower and the LP shall be entitled to make Distributions to MAXXAM so that the cumulative amount of cash Distributions made to MAXXAM after July 1, 1995 shall not exceed the amounts shown below as of the dates shown below: December 31, 1995 $16,500,000 December 31, 1996 $22,500,000 December 31, 1997 $36,000,000 May 15, 1998 $45,000,000 (c) Provided no Suspension Event or Event of Default has occurred (and not been cured), the Borrower shall be entitled to pay dividends to the shareholder(s) of its Class A 7% Cumulative Exchangeable Preferred Stock. (d) At the time of the payment of any of the amounts referred to in 8.7(b), above, the Borrower and the LP shall deliver to the Bank, a letter (substantially in the form of Schedule 8.7) setting forth the total amount paid to MAXXAM during such fiscal year and that there is then existing no Suspension Event or Event of Default. 8.8 Cash Transactions with Affiliated Entities. (a) The Borrower, its Subsidiaries and the LP shall not make cash payments with respect to transactions with affiliated entities, except in accordance with the provisions of Section 7-11(b), and, provided no Suspension Event or Event of Default has occurred (and not been cured), the Borrower, its Subsidiaries or the LP may make cash payments: (i) with respect to transactions permitted by Section 8.7; (ii) with respect to amounts which may be due and owing under tax sharing agreements by and between MAXXAM, on the one hand, and the Borrower and its Subsidiaries, on the other hand; and (iii) to reimburse MAXXAM or MAXXAM Property Co. for expenses incurred on behalf of the Borrower and its Subsidiaries and/or with respect to an allocation of overhead from MAXXAM or MAXXAM Property Co. to Borrower; and (iv) with respect to goods and services actually purchased from such affiliated entity for a price which shall not differ in a material adverse manner from that which would have been charged in an arms length transaction. (b) Borrower may receive reimbursement from non-subsidiary real estate affiliated entities equal to a portion of the amount, if any, included in the Borrower's allocation of overhead from MAXXAM and MAXXAM Property Co. for such affiliated entities. 8.9. Material Leases. No Material Leases shall be entered into by any of the Parties, without the approval of Bank nor shall any such approved Material Lease, be modified or amended without such approval by the Bank. 8.10. Restrictions on Compromise of Notes Receivable. Each of the Parties may reduce, compromise, or otherwise discount the amounts due and owing by any Note Obligor under any of the Notes Receivable, provided, however, (i) the amount of such reduction, compromise or discount shall not exceed the dollar equivalent of the product of: (x) the then outstanding principal amount of the Note Receivable, multiplied by (y) the difference between (A) one hundred percent (100%), less (B) the percentage that is equal to the advance rate (as such advance rates are set forth in 1.1 under the defined term "Availability") applicable to such Note Receivable, (ii) each such Note Receivable that is the subject of any reduction, compromise, or other discount shall, contemporaneous with any reduction, compromise or discount, be paid in full, and (iii) the Borrower shall furnish the Bank with prompt written notice of any discount, compromise or reduction, together with copies of any documents, instruments or agreements evidencing such discount, compromise or reduction and the payment in full of the Note Receivable effected by any such discount, compromise or reduction. 8.11. Subsidiaries. The Parties will not permit any of their respective Subsidiaries to take, and the Parties' respective Subsidiaries will not take, any action that might materially adversely affect the use or value of the Mortgaged Property, the ability of any of the Parties to carry on business substantially as now conducted by each of them, the financial condition of the Parties, or any of their respective Subsidiaries, or the ability of any of the Parties, and each of their respective Subsidiaries, to comply with each and all of the terms of the within Agreement. 8.12. Change in Ownership. Except as provided in Section 8.4, none of the Parties shall permit any direct or indirect change in the ownership of such Person from that existing as of the date hereof. Without limiting the generality of the foregoing, except as provided in Section 8.4, none of the Parties shall permit any Person not a stockholder or a partner as of the date hereof to become such a stockholder or partner. 9. FINANCIAL COVENANTS OF THE BORROWER. The Borrower and the LP covenant and agree that, so long as any Loan or Note is outstanding or the Bank has any obligation to make any Loans, the Borrower and the LP shall, on a combined basis, maintain Minimum Capital (to be tested quarterly, commencing as of June 30, 1995) in an amount equal to at least Thirty Million Dollars ($30,000,000.00). As used herein, the term Minimum Capital shall mean, all as determined on a consolidated basis and in accordance with generally accepted accounting principles: the Borrower's Net Worth, plus without duplication (A) the aggregate of (i) Indebtedness of the Borrower that is subordinated to the Indebtedness of the Borrower to the Bank (upon terms and conditions satisfactory to the Bank) and (ii) deferred income tax liabilities of the Borrower, if any; less without duplication (B) the aggregate of (i) all of the Borrower's receivables and other amounts due and owing from MAXXAM and (ii) all of the Borrower's deferred income tax assets. 10. CLOSING CONDITIONS. The obligation of the Bank to make the initial Revolving Credit Loans, or to issue any Letters of Credit, shall be subject to the satisfaction of the following conditions precedent on or prior to the Closing Date: 10.1. Loan Documents. (a) Each of the Loan Documents shall have been duly executed and delivered by the respective parties thereto and, shall be in full force and effect and shall be in form and substance satisfactory to the Bank. The Bank shall have received a fully executed copy of each such document. (b) The Bank shall have received from each of the Parties, the Notification Letters. 10.2. Certified Copies of Organization Documents. The Bank shall have received from each of the Parties copies, certified by the appropriate officer of the State in which each of the Parties, is organized, and/or in the State in which any of the Parties conduct their respective businesses, to be true and complete, of the corporate charter, partnership agreement, and any other organization documents of Parties, as in effect on such date of certification, including, without limitation, Certificates of Legal Existence and Certificates of Qualification To Do Business. In addition, the Bank shall have received the information described above with respect to SunRidge Canyon L.L.C. 10.3. By-laws; Resolutions. All action on the part of each of the Parties, necessary for the valid execution, delivery and performance by each of the Parties, of this Agreement and the other Loan Documents to which they are or shall become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Bank shall have been provided to the Bank. The Bank shall have received from each of the Parties, true copies of their respective by-laws and certificates of the resolutions adopted by their partners, shareholders and boards of directors authorizing the transactions described herein, each certified by their respective clerks of the Parties as of a recent date to be true and com- plete. 10.4. Incumbency Certificate; Authorized Signers. The Bank shall have received from each of the Parties incumbency certificates, dated as of the Closing Date, signed by duly authorized officers of each of the Parties and giving the name and bearing a specimen signature of each individual who shall be authorized: (a) to sign, in the name and on behalf of each of the Parties, each of the Loan Documents to which each of the Parties, is or is to become a party; (b) to make Loan and Conversion Requests; and (c) to give notices and to take other action on behalf of each of the Parties, under the Loan Documents. 10.5. Validity of Liens. The Security Documents shall be effective to create in favor of the Bank a legal, valid and enforceable first (except for Permitted Liens entitled to priority under applicable law) mortgage and security interest in the Collateral. All filings, recordings, deliveries of instruments and other actions necessary or desirable in the opinion of the Bank to protect and preserve such security interests shall have been duly effected. The Bank shall have received evidence thereof in form and substance satisfactory to the Bank. 10.6. Survey and Taxes. (a) To the extent necessary to continue the deletion (if presently existing) of the survey exception from any existing Title Policy for which any update or endorsement shall be issued with respect to any of the Strategic Projects, or to remove the survey exception from any new Title Insurance Policy to be issued in connection with the Loan with respect to any of the Strategic Projects except for (i) any addi- tional Developed Lots at the Strategic Project known as Fountain Hills, Arizona, and (ii) until satisfaction of the Mirada Preconditions, any Developed Lots of the Strategic Project known as Mirada/Rancho Mirage, California, up-to-date instrument surveys or plans or engineer's certificates, including, date-down surveys, for each of the Strategic Projects, each satisfactory to the Bank, its counsel and the Title Insurance Company, which surveys shall be certified to the Title Insurance Company and to the Bank, such certificates to be satisfactory to the Bank, its counsel and the Title Insurance Company. The surveys shall be prepared by registered land surveyors or engineers in accordance with the Bank's survey requirements and shall, to the extent necessary to continue the deletion of the survey exception (as provided for herein), show dimensions and locations of any improvements, easements, rights of way, adjoining sites, encroachments and the extent thereof, established building lines and street lines, the distance to, and names of, the nearest intersecting streets and such other details as the Bank may require. (b) Evidence of payment of all real estate taxes and other municipal charges on the Strategic Projects and the Non-Strategic Projects and any existing improvements thereon which are due and payable prior to the Closing Date, as provided herein. 10.7. Title Insurance; Title Exception Documents; UCC Searches. (a) The Bank shall have received (i) the Title Policies for each of the Insured Projects, each issued by Title Insurance Companies approved by the Bank (with such reinsurance or co-insurance as the Bank may require, any such reinsurance to be with direct access endorsements), each in the amounts set forth in Section 1.1, herein, each insuring the Bank that each of the Parties (as applicable) hold marketable or insurable (as applicable in each state in which any of the Insured Projects are situated) fee simple title to the Insured Projects and that the Security Documents (relevant to the Insured Projects) create valid, enforceable and first priority liens on each of Party's title to the Insured Projects, subject only to such excep- tions as the Bank may approve in writing, and which shall contain no exceptions for mechanic's liens, or (except as provided for in 10.6, herein) other matters which would be shown by a survey, shall not insure over any matter except to the extent that any such affirmative insurance is acceptable to Bank in its sole discretion, and shall contain a pending disbursements clause or endorsement and such other endorsements and affirmative insurance as the Bank in its reasonable discretion may require. (ii) Title Update Letters for the Rio Communities and Paradise Hills, New Mexico projects. (b) Uniform Commercial Code lien searches disclosing no conditional sales agreements, security agreements, chattel mortgages, leases of personalty, financing statements or title retention agreements with respect to any Collateral granted to secure the Obligations, except as same may be reasonably acceptable to the Bank. 10.8. Leases and Service Contracts. The Bank shall have received from each of the Parties true copies of all Material Leases and all agreements (reflected on Schedule 6.21(h)), together with Material Lease Summaries. 10.9. Certificates of Insurance. The Bank shall have received (a) a certificate of insurance as to the insurance maintained by each of the Parties, on the Mortgaged Property (including flood insurance if necessary) from the insurer or an independent insurance broker dated as of the Closing Date, identifying insurers, types of insurance, insurance limits, and policy terms; (b) copies of all policies evidencing such insurance (or certificates therefor signed by the insurer or an agent authorized to bind the insurer), and if requested by the Bank, certified copies of all policies evidencing such insurance; and (c) such further information and certificates from each of the Parties, its insurers and insurance brokers as the Bank may request. 10.10. Hazardous Substance Assessments. The Bank shall have received current Phase I environmental site assessment reports for those Developed Lots at the Strategic Projects which are included in the calculation of the Borrower's Availability, and any existing improvements thereon, which is complete and free of qualification, prepared by qualified and reputable civil or environmental engineers acceptable to the Bank, all at Borrower's expense indicating that the Developed Lots (except for the Developed Lots listed on Schedule 10.10, annexed hereto) are free and clear of Hazardous Substances. Such reports will be reviewed by an independent professional engineering firm designated by the Bank, the costs of such review to be borne by each of the Parties. 10.11. Environmental Indemnity. The Bank shall have received individual Environmental Indemnity Agreements from each of the Parties, pursuant to which each of the Parties agree to indemnify and hold harmless the Bank with respect to the release or threatened release of any hazardous materials and noncompliance with environmental laws at the Strategic Projects and the Non-Strategic Projects, which agreement shall survive termination of this Agreement, and/or the repayment of the Loans and the exercise by the Bank of any of its rights and remedies under the Security Documents. 10.12. Opinions of Counsel Concerning Organization and Loan Documents. The Bank shall have received: Opinions of counsel for each of the Parties satisfactory to the Bank and the Bank's counsel (i) stating that all Loan Documents have been duly authorized, executed and delivered by each of the Parties and are valid, binding and enforceable against each of the Parties, including, without limitation, the choice of law provisions of the Loan Documents, (ii) indicating the due organization, legal existence and good standing of each of the Parties, in its state of organization and also in the state where the Strategic Projects and Non- Strategic Projects are located, (iii) stating that the Loans are not usurious under applicable laws and regulations (without resort to any "usury savings" clause in the Loan Documents), (iv) indicating that the Loan Documents create in favor of the Bank legal, valid and enforceable first priority liens and security interests in and to the Collateral to secure the Obligations, and all filings and recordings necessary to perfect such liens and security interests have been duly affected, and (v) stating that there is no action, suit or proceeding pending or to the best of the Parties' knowledge threatened against or affecting any of the Parties, or the Strategic Projects or the Non-Strategic Projects, before any court, administrative agency, arbitrator or governmental authority, except as will be fully disclosed by each of the Parties in the Loan documents or such Opinion and approved by the Bank. 10.13. Financial Information. The Bank shall have received current financial statements of the Borrower and MAXXAM as of December 31, 1994, prepared or reviewed and approved by a certified public accountant satisfactory to the Bank, and other appropriate evidence to establish at Loan closing that there has been no adverse change in the business, assets, conditions (financial or otherwise), operations or prospects of the Borrower or MAXXAM from that which was originally presented to the Bank, and if none has been presented to the Bank, then such statements shall be subject to the Bank's determination that such conditions are satisfactory. 10.14. Payment of Fees. The Borrower and the LP shall have paid to the Bank all fees due and owing pursuant to 3. 10.15. Zoning, Environmental and Land Use Compliance. The Bank shall have received the agreements listed on Schedule 6.21(j), annexed hereto, to which each of the Parties, is a party, which agreements materially affect or materially relate to the use, operation, development, construction or management of the Strategic Projects and Non-Strategic Projects. 10.16. Borrowing Base Report. The Borrower and the LP shall each have furnished the Bank with an initial Borrowing Base Report. 10.17. Guaranties. The Guaranties shall have been duly executed and delivered to the Bank. 10.18. Lock Box Account(s). The Lock Box Account(s) shall have been established. 10.19. Subordination. Each of Westcliff, Horizon, HPC and MAXXAM, and any affiliated or related entity of the Borrower, or the LP, pursuant to the Subordination Agreement (which shall be duly executed and delivered to the Bank) shall subordinate all indebtedness of Borrower and the LP now or hereafter owing to any of Westcliff, Horizon, HPC and MAXXAM and/or any affiliated or related entity of the Borrower to all Obligations of Borrower and/or the LP to Bank. 10.20. Commercial Finance Exam. The Bank shall have received a satisfactory (in the Bank's sole and absolute discretion) Commercial Finance Exam to be conducted by the Bank (prior to the Closing Date), with respect to each of the Parties, the Strategic Projects and/or the Non- Strategic Projects, the Notes Receivable and/or any other matters deter- mined by the Bank (in its sole and absolute discretion) to be necessary in connection with the establishment of the Loan, the reasonable out-of-pocket costs of which shall be borne by the Borrower and the LP. 10.21. Evidence of Licenses, Permits, Utilities, Etc. Evidence (in form and substance satisfactory to the Bank and/or the Bank's counsel) from the Parties, and/or the Party's counsel indicating the issuance of all licenses, permits, approvals and utilities, including, without limitation, all water, electric and sanitary sewer facilities, for sale of each of the Developed Lots at the Strategic Projects. 10.22. Additional Matters. Each of the Parties shall furnish the Bank with such additional information (financial or otherwise) as may be reasonably requested by the Bank, and shall execute and/or deliver any and all additional documents, instruments and/or agreements requested by the Bank in order to effectuate the matters set forth herein. 11. CONDITIONS TO ALL BORROWINGS. The obligations of the Bank to make any Revolving Credit Loan and/or to issue any Letters of Credit, whether on or after the Closing Date, shall be subject to satisfaction of the conditions set forth in 10, and shall also be subject to the satis- faction of the following conditions precedent: 11.1. Representations True; No Event of Default. Each of the representations and warranties of each of the Parties contained in this Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Agreement shall be true as of the date as of which they were made and shall also be true at and as of the time of the making of any Loan, with the same effect as if made at and as of that time (except to the extent of changes resulting from trans- actions contemplated or permitted by this Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and except to the extent that such representations and warranties relate expressly to an earlier date) and no Suspension Event or Event of Default shall have occurred and be continuing. The Bank shall have received a certificate from each of the Parties signed by an authorized officer of each of the Parties to such effect. 11.2. No Legal Impediment. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of the Bank would make it illegal for the Bank to make any Loan. 11.3. Governmental Regulation. The Bank shall have received such statements in substance and form reasonably satisfactory to the Bank as the Bank shall require for the purpose of compliance with any applicable regulations of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System. 11.4. Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Agreement, the other Loan Documents and all other documents incident thereto shall be satisfactory in substance and in form to the Bank and its counsel, and the Bank and such counsel shall have received all information and such counterpart originals or certified or other copies of such documents as the Bank may reasonably re- quest. 12. EVENTS OF DEFAULT; ACCELERATION; ETC. 12.1 Events of Default and Acceleration. If any of the following events ("Events of Default") shall occur: (a) the Borrower or the LP shall fail to pay any principal of the Loans, or interest due thereon, when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) the Borrower or the LP shall fail to pay any other sums due hereunder or under any of the other Loan Documents, within ten (10) days of when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (c) (i) any of the Parties, or any of their respective Subsidiaries (where applicable), shall fail to comply with any of its covenants contained in 7.1, 7.2, 7.3, 7.4(a)(i)(A), 7.4(c), 7.4(d)(i) and (ii), 7.4(e), 7.7, 7.9, 7.11, 7.12, 7.13, 7.14, 8.1, 8.2, 8.3, 8.4, 8.5, 8.7, 8.8, 8.9, 8.10 or 8.12; and (ii) any of the Parties, or any of their respective Subsidiaries (where applicable), shall fail to comply with any of its covenants contained in 7.4(a)(i)(B), 7.4(a)(ii), 7.4(a)(iii), 7.4(a)(iv), 7.4(b), or 9 within ten (10) days of when due, or when to be performed; and (iii) any of the Parties, or any of their respective Subsidiaries (where applicable), shall fail to perform any other term, covenant or agreement contained herein or in any of the other Loan Documents (other than those specified elsewhere in this 12, or in such other Loan Documents) for thirty (30) days after written notice of such failure has been given to the Borrower by the Bank; (d) any representation or warranty of any of the Parties in this Agreement or any of the other Loan Documents or in any other document or instrument delivered pursuant to or in connection with this Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated; (e) any of the Parties shall fail to pay at maturity, or within any applicable period of grace, any obligation for borrowed money or credit received in an amount greater than $500,000, or fail to observe or perform any material term, covenant or agreement contained in any agreement by which they are bound, evidencing or securing borrowed money or credit received (in an amount greater than $500,000) for such period of time as would permit (assuming the giving of appropriate notice if required) the holder or holders thereof, including, without limitation, the Bank, or of any obligations issued thereunder, to accelerate the maturity thereof; (f) any of the Parties shall make an assignment for the benefit of creditors, or admit in writing their inability to pay or generally fail to pay their debts as they mature or become due, or shall petition or apply for the appointment of a trustee or other custodian, liquidator or receiver of any of the Parties of any substantial part of the assets of any of the Parties or shall commence any case or other proceeding relating to any of the Parties under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law of any jurisdiction, now or hereafter in effect, or shall take any action to authorize or in furtherance of any of the foregoing, or if any such peti- tion or application shall be filed or any such case or other proceeding shall be commenced against any of the Parties and any of the Parties or shall indicate its approval thereof, consent thereto or acquiescence therein; (g) a decree or order is entered appointing any such trustee, custodian, liquidator or receiver or adjudicating any of the Parties bankrupt or insolvent, or approving a petition in any such case or other proceeding, or a decree or order for relief is entered in respect of any of the Parties in an involuntary case under federal bankruptcy laws as now or hereafter constituted; (h) there shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty (30) days, any uninsured final judgment against any of the Parties, or any of their respective Subsidiaries that, with other outstanding uninsured final judgments, undischarged, against any of the Parties, or any of their respective Subsidiaries exceeds in the aggregate $250,000; (i) if any of the Loan Documents shall be cancelled, terminated, revoked or rescinded otherwise than in accordance with the terms thereof or with the express prior written agreement, consent or approval of the Bank, or any action at law, suit or in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of any of the Parties, or any of their respective Subsidiaries or any of their respective holders of Voting Interests, or any court or any other governmental or regulatory authority or agency of competent jurisdic- tion shall make a determination that, or issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; (j) any of the Parties, any of their respective officers, or any of their respective Subsidiaries shall be indicted for a federal crime, a punishment for which could include the forfeiture of any assets of any of the Parties, or of such Subsidiaries; or (k) The occurrence of any event of default under any document, instrument and/or agreement between MAXXAM and the Bank, including, without limitation, certain Unconditional Guaranties of Payment and Performance (hereinafter, individually and collectively, the "MAXXAM Guaranty") dated December 29, 1992 (as amended) and December 29, 1993, and/or a certain Pledge Agreement (hereinafter, the "MAXXAM Pledge Agreement") executed and delivered by MAXXAM to the Bank, or under any document, instrument and/or agreement executed and/or delivered by MAXXAM to the Bank, whether such document, instrument and/or agreement now exists or hereafter arises (notwithstanding that the Bank may not have exercised its rights upon default under any such document, instrument and/or agreement), then, and in any such event, so long as the same may be continuing, the Bank may by notice in writing to the Parties declare all amounts owing with respect to this Agreement, the Note and the other Loan Documents to be, and they shall thereupon forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by each of the Parties; provided that in the event of any Event of Default specified in 12(g) or 12(h), all such amounts shall become immediately due and payable automatically and without any re- quirement of notice from the Bank. (l) Any direct or indirect change in the ownership of MAXXAM Property Company or MCOP Limited Partners, Inc. from that existing as of the date hereof. 12.2 Termination of Commitment. If any one or more Events of Default specified in 12(f) or 12(g) shall occur, any unused portion of the credit hereunder shall forthwith terminate and the Bank shall be relieved of all obligations to make Loans to the Borrower and the LP. If any other Event of Default shall have occurred and be continuing, or if on any Drawdown Date the conditions precedent to the making of the Loans to be made on such Drawdown Date are not satisfied, the Bank may by notice to the Borrower and the LP, terminate the unused portion of the credit hereunder, and upon such notice being given such unused portion of the credit hereunder shall terminate immediately and the Bank shall be relieved of all further obligations to make Loans. So long as there continues to remain outstanding Loans, no termination of the credit hereunder shall relieve any of the Parties of any of the Obligations or any of its existing obligations to the Bank arising under other agreements or instruments. 12.3 Remedies. (a) In case any one or more of the Events of Default shall have occurred and be continuing beyond any applicable grace period uncured, and whether or not the Bank shall have accelerated the maturity of the Revolving Credit Loans pursuant to 12.1, the Bank, if owed any amount with respect to the Loans, may proceed to protect and enforce its rights and remedies under this Agreement, the Security Documents, the Note, the Collateral Note, or any of the other Loan Documents by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement, the Security Documents and the other Loan Documents or any instrument pursuant to which the Obligations are evidenced, including to the full extent permitted by applicable law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Bank, including, without limitation, the forwarding of the Notification Letters to the Note Obligors. No remedy herein con- ferred upon the Bank or the holder of any Note and/or Collateral Note is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. (b) In addition to the remedies provided for herein in subsection (a), above, upon the occurrence of a Suspension Event or an Event of Default, the Bank may hold any Collateral (or any cash proceeds derived therefrom) and retain same as collateral security for the payment and performance of any outstanding Letters of Credit. 12.4 Distribution of Collateral Proceeds. In the event that, following the occurrence or during the continuance of any Suspension Event or Event of Default, the Bank receives any monies in connection with the enforcement of any of the Security Documents, or otherwise with respect to the realization upon any of the Collateral, such monies shall be distributed for application as follows: (a) First, to the payment of, or (as the case may be) the reimbursement of the Bank for or in respect of all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Bank in connection with the collection of such monies by the Bank, for the exercise, protection or enforcement by the Bank of all or any of the rights, remedies, powers and privileges of the Bank under this Agreement or any of the other Loan Documents or in respect of the Collat- eral or in support of any provision of adequate indemnity to the Bank against any taxes or liens which by law shall have, or may have, priority over the rights of the Bank to such monies; (b) Second, to all other Obligations in such order or preference as the Bank may determine; provided, however, that the Bank may in its discretion make proper allowance to take into account any Obligations not then due and payable; (c) Third, upon payment and satisfaction in full or other provisions for payment in full satisfaction to the Bank of all of the Obligations, to the payment of any obligations required to be paid pursuant to 9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of Massachusetts; and (d) Fourth, the excess, if any, shall be returned to the Borrower or to such other Persons as are entitled thereto. 13. SETOFF. Regardless of the adequacy of any collateral, during the continuance of any Event of Default, any deposits (general or specific, time or demand, provisional or final), regardless of currency, maturity, or the branch of the Bank where such deposits are held, or other sums credited by or due from the Bank to any of the Parties and any securities or other property of any of the Parties in the possession of the Bank may be applied to or set off against the payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of any of the Parties to the Bank. 14. EXPENSES. Except as otherwise provided for herein, and (where applicable), upon presentation of the Certificate provided for in 4.8, herein, the Borrower and the LP jointly and severally agree to pay (a) the reasonable costs of producing and reproducing this Agreement, the other Loan Documents and the other agreements and instruments mentioned herein, (b) any taxes (including any interest and penalties in respect thereto) payable by the Bank (other than ordinary taxes based upon the Bank's net income), including any recording, mortgage, documentary or intangibles taxes in connection with the Security Deed and other Loan Documents, or other taxes payable on or with respect to the transactions contemplated by this Agreement, including any taxes payable by the Bank after the Closing Date (the Borrower and the LP each hereby agreeing to indemnify the Bank with respect thereto), (c) all title insurance premiums, appraisal fees, engineer's fees, and the reasonable fees, expenses and disbursements of the Bank's counsel or any local counsel to the Bank incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, each closing hereunder, and amendments, modifications, approvals, consents or waivers hereto or hereunder, (d) the reasonable fees, expenses and disbursements of the Bank incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, (e) all reasonable out-of-pocket expenses (including reasonable attorneys' fees and costs, which attorneys may be employees of the Bank) and the fees and costs of appraisers, engineers, investment bankers or other experts retained by the Bank in connection with any such enforcement proceedings incurred by the Bank in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against any of the Parties, or any of their respective Subsidiaries or the administration thereof, and (ii) any litiga- tion, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Bank's relationship with any of the Parties, or any of their respective Subsidiaries, unless, in either instance, the Bank is not the successful party under any such enforcement proceedings, and (f) all reasonable fees, expenses and disbursements of the Bank incurred in connec- tion with UCC searches, UCC filings or mortgage recordings. The covenants of this 14 shall survive payment or satisfaction of payment of amounts owing with respect to the Note. 15. INDEMNIFICATION. Each of the Parties, agree to indemnify and hold harmless the Bank from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Agreement or any of the other Loan Documents or the transactions contemplated hereby including, without limitation, (a) any actual or proposed use by any of the Parties, or any of their respective Subsidiaries of the proceeds of any of the Loans, (b) any actual or alleged infringement of any patent, copyright, trademark, service mark or similar right of any of the Parties, or any of their Subsidiaries comprised in the Collateral, (c) any of the Parties or any of their respective Subsidiaries entering into or performing this Agreement or any of the other Loan Documents or (d) with respect to any of the Parties and their respective Subsidiaries and their respective properties and assets, the violation of any Environmental Law, the Release or threatened Release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to claims with respect to wrongful death, personal injury or damage to property), in each case including, without limitation, the reasonable fees and disbursements of counsel and allocated costs of internal counsel incurred in connection with any such investigation, litigation or other proceeding. In litigation, or the preparation therefor, the Bank shall be entitled to select its own counsel and, in addition to the foregoing indemnity, each of the Parties agree to pay promptly the reasonable fees and expenses of such counsel. If, and to the extent that the obligations of each of the Parties under this 15 are unenforceable for any reason, each of the Parties hereby agree to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. The provisions of this 15 shall survive the repayment of the Loan and the termination of the obligations of the Bank hereunder. 16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein, the 1992 Agreement (as amended), the 1988 Agreement, in the Note, any of the other Loan Documents or in any documents or other papers delivered by or on behalf of each of the Parties, or any of their respective Subsidiaries (other than such covenants, agreements, representations and warranties which have been replaced in their entirety pursuant to the within Agreement, and/or any other documents, instruments or agreement to be executed and/or delivered in connection herewith) pursuant hereto shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Bank of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Agreement or the Note or any of the other Loan Documents remains outstanding or the Bank has any obligation to make any Loans. The indemnification obligations of each of the Parties provided herein and the other Loan Documents shall survive the full repayment of amounts due and the termination of the obligations of the Bank hereunder and thereunder to the extent provided herein and therein. All statements contained in any certificate or other paper delivered to the Bank at any time by or on behalf of each of the Parties or MAXXAM pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by each of the Parties. 17. PERMITTED SALES/RELEASE OF LIEN. 17.1. Permitted Sales. (a) If: (i) an intended sale or disposition of any lot(s) comprising any part of any of the Strategic Projects is for a purchase price in excess of $350,000.00; (ii) is evidenced by a bona-fide Agreement to an unaffiliated third-party acquiror; (iii) is for adequate consideration (as determined by the Bank in its reasonable discretion); and (iv) provided there is then existing no Suspension Event or Event of Default, such sale or disposition shall not constitute an Event of Default under the Loan, and the Bank agrees to release its lien against the subject property upon payment to the Bank (for credit against the Obligations of the Borrower and/or the LP under this Agreement) of all Net Proceeds realized on account of any such sale or disposition. The provisions of this Section shall not apply, however, to one of a series of sales to a single purchaser and/or such purchaser's affiliates. (b) If: (i) an intended sale or disposition of any lot(s) comprising part of any of the Strategic Projects is for a purchase price less than $350,000.00; (ii) is evidenced by a bona-fide Agreement to an unaffiliated third-party acquiror; (iii) is for adequate consideration (as determined by the Bank in its reasonable discretion); and (iv) provided there is then existing no Suspension Event or Event of Default, such sale or disposition shall not constitute an Event of Default under the Loan, and the Bank agrees to release its lien against the subject property upon presentation to the Bank of an Affidavit substantially in the form of Schedule 17, annexed hereto. The provisions of this Section shall not apply, however, to one of a series of sales to a single purchaser and/or such purchaser's affiliates. (c) If: (i) an intended sale or disposition of any lot(s) comprising part of any of the Non-Strategic Projects is for a purchase price in excess of $1,000,000.00; (ii) is evidenced by a bona-fide Agreement to an unaffiliated third-party acquiror; (iii) is for adequate consideration (as determined by the Bank in its reasonable discretion); and (iv) provided there is then existing no Suspension Event or Event of Default, such sale or disposition shall not constitute an Event of Default under the Loan, and the Bank agrees to release its lien against the subject property upon payment to the Bank (for credit against the Obligations of the Borrower and/or the LP under this Agreement) of all Net Proceeds realized on account of any such sale or disposition. The provisions of this Section shall not apply, however, to one of a series of sales to a single purchaser and/or such purchaser's affiliates. (d) If: (i) an intended sale or disposition of any lot(s) comprising any part of any of the Non-Strategic Projects is for a purchase price less than $1,000,000.00; (ii) is evidenced by a bona-fide Agreement to an unaffiliated third-party acquiror; (iii) is for adequate consideration (as determined by the Bank in its reasonable discretion); and (iv) provided there is then existing no Suspension Event or Event of Default, such sale or disposition shall not constitute an Event of Default under the Loan, and the Bank agrees to release its lien against the subject property upon presentation to the Bank of an Affidavit substantially in the form of Schedule 17, annexed hereto. The provisions of this Section shall not apply, however, to one of a series of sales to a single purchaser and/or such purchaser's affiliates. (e) Notwithstanding anything to the contrary set forth in Subsections (a) and (c), above, if a sale or distribution complies with the foregoing terms and conditions, upon written request by the Borrower or the LP to the Bank, and subject to the terms and conditions set forth in 8.7, herein, the Net Proceeds of such sale or distribution may be used to make payment on account of any Permitted Distribution. 17.2. Release of Collateral. Provided there is no existing Suspension Event or Event of Default, upon Borrower's or LP's request, the Bank agrees to consider, from time to time, the release of its lien against portions of the Collateral not included in the determination of Borrower Availability or LP Availability. Any such release shall not require the payment of any consideration in connection therewith. Nothing contained herein shall constitute the Bank's legal obligation to so release its liens and any determination to release Collateral shall be in the Bank's sole and absolute discretion; rather the foregoing is intended to reflect the Bank's willingness to consider such a request in good faith and not to unreasonably withhold its consent to any such request. 18. ASSIGNMENT; PARTICIPATIONS; ETC. 18.1. Assignment by the Bank. The Bank may assign all or a portion of its rights under this Agreement and the same portion of its Commitment, the Loans at the time owing to it, provided that such assignment is in writing (the "Assignment"). Upon execution and delivery of the Assignment the assignee thereunder shall be a party hereto and, to the extent provided in such assignment, shall have the rights and obligations of the Bank hereunder and under the Loan Documents. Upon the effective date of such Assignment the commitment of the Bank shall be reduced and the Bank shall be relieved from its obligations hereunder to the extent assigned to the assignee pursuant to the Assignment. Each of the Parties shall, on request of the Bank, execute such further documents and instruments as may be necessary to carry out the purposes of the Assignment. 18.2. Participations. The Bank may sell participations to one or more banks or other entities in all or a portion of the Bank's rights and obligations under this Agreement and the other Loan Documents; provided that (a) any such sale or participation shall not affect the rights and duties of the Bank hereunder to any of the Parties and (b) the only rights granted to the participant pursuant to such participation arrangements with respect to waivers, amendments or modifications of the Loan Documents shall be the rights to approve waivers, amendments or modifications that would reduce the principal of or the interest rate on any Loans, or extend any regularly scheduled payment date for principal or interest. 18.3. Disclosure. Each of the Parties agree that in addition to disclosures made in accordance with standard banking practices the Bank may disclose information obtained by the Bank pursuant to this Agreement to assignees or participants and potential assignees or participants hereunder, subject, however, to reasonable confidentiality agreements to be executed by such prospective purchaser(s), the form of which confidential- ity agreements shall be substantially in the form of Schedule 18.3, annexed hereto. 18.4. Pledge by Bank. The Bank may at any time pledge all or any portion of its interest and rights under this Agreement (including all or any portion of the Note) to any of the twelve Federal Reserve Banks organized under 4 of the Federal Reserve Act, 12 U.S.C. 341. No such pledge or the enforcement thereof shall release the Bank from its obligations hereunder or under any of the other Loan Documents. 18.5. No Assignment by Parties. None of the Parties shall assign or transfer any of their rights or obligations under any of the Loan Documents without the prior written consent of the Bank. 19. AGENTS, ATTORNEYS, TRUSTEES. (a) The Bank shall have full power and authority to appoint such agents, attorneys and trustees as it may from time to time designate to act for it under this Agreement, in such capacities and with such powers as the Bank may specify. The Bank, in its sole discretion, shall have authority to revoke any such appointment and shall have authority to designate a new agent, attorney or trustee for itself any time, such action to be taken by an instrument in writing addressed to such agent, attorney or trustee, counterparts of which shall be sent to the Borrower or the LP. Such agent, attorney or Trustee shall not have any authority to act for the Bank in any capacity except as expressly set forth in any agreement to which the Bank is a party. Furthermore, as more specifically set forth in 15, herein, each of the Parties agree to save and hold the Bank, and each such agent, attorney or trustee harmless from any action or nonaction of such agent, attorney or trustee. (b) Each of the Parties acknowledge, confirm and agree that they will recognize and fully cooperate with any such agent, attorney or trustee so appointed by the Bank. 20. NOTICES, ETC. Except as otherwise expressly provided in this Agreement, all notices and other communications made or required to be given pursuant to this Agreement or the Note shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telegraph, telecopy, telefax or telex and confirmed by delivery via courier or postal service, addressed as follows: (a) 5847 San Felipe, Houston, Texas, Attention: Treasurer, with a copy to the Parties (at the address set forth herein), Attention: General Counsel, or at such other address for notice as the Borrower shall last have furnished in writing to the Bank; and (b) if to the Bank, at 100 Federal Street, Boston, Massachusetts 02110, USA, Attention: Real Estate Department, or such other address for notice as the Bank shall last have furnished in writing to the Borrower, and (except for Borrowing Base Reports and other financial reports), with a copy to David S. Berman, Esquire, Riemer & Braunstein, Three Center Plaza, Boston, Massachusetts 02108. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 21. PUBLICITY. Each of the Parties will permit the Bank to obtain publicity in connection with the making of the Loan through press releases, tombstones, and participation in such events as ground breaking and opening ceremonies subject to Borrower's or LP's reasonable approval. 22. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE. THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SUCH COMMONWEALTH (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH OF THE PARTIES AGREE THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENT TO THE NON- EXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON EACH OF THE PARTIES BY MAIL AT THE ADDRESS SPECIFIED IN 20. EACH OF THE PARTIES HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. 23. HEADINGS. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 24. COUNTERPARTS. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 25. ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in 27. 26. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS. EACH OF THE PARTIES AND THE BANK HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW, EACH OF THE PARTIES HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH OF THE PARTIES (A) CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANK HAD REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGA- TION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGE THAT THE BANK HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A OBLIGOR BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. 27. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly provided in this Agreement, any consent or approval required or permitted by this Agreement may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by each of the Parties of any terms of this Agreement or such other instrument or the continuance of any Suspension Event or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Bank. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of the Bank in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances. 28. SEVERABILITY. The provisions of this Agreement are severable, and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a sealed instrument as of the date first set forth above. MCO PROPERTIES INC. By: /s/ James D. Noteware Name: James D. Noteware Title: President WESTCLIFF DEVELOPMENT CORPORATION By: /s/ James D. Noteware Name: James D. Noteware Title: President HORIZON CORPORATION By: /s/ James D. Noteware Name: James D. Noteware Title: President HORIZON PROPERTIES CORPORATION By: /s/ James D. Noteware Name: James D. Noteware Title: President MCO PROPERTIES, L.P. By: Its General Partner MCO PROPERTIES, INC. By: /s/ James D. Noteware Name: James D. Noteware Title: President THE FIRST NATIONAL BANK OF BOSTON By: /s/ Jared H. Ward Name: Jared H. Ward Title: Vice President EX-4.39 7 EXHIBIT 4.39 EIGHTH AMENDMENT TO LOAN AGREEMENT THIS EIGHTH AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT") is executed as of October 21, 1995, 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., 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., as further amended by Fourth Amendment to Loan Agreement (the "FOURTH AMENDMENT") dated as of December 30, 1993, among Lender, Old Borrower, and New Borrower, as further amended by Fifth Amendment to Loan Agreement (the "FIFTH AMENDMENT") dated as of March 31, 1994, among Lender, Old Borrower, and New Borrower, as further amended by that Sixth Amendment to Loan Agreement (the "SIXTH AMENDMENT") dated as of January 13, 1995 among Lender, Old Borrower and New Borrower, and as further amended by that Seventh Amendment to Loan Agreement (the "SEVENTH AMENDMENT") dated as of March 31, 1995 among Lender, Old Borrower, and New Borrower (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, the Increase Modification, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, and the Seventh Amendment; 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]; (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. 403252 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 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 [Colonies], and recorded at Volume 11231, Page 0137, et seq., of the Deed of Trust Records of Tarrant County, Texas [Bentley Village]; and (e) that First Deed of Trust and Security Agreement dated March 7, 1995, executed by New Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. R303497 and recorded at Film Code No. ###-##-####, et seq., of the Official Public Records of Real Property of Harris County, Texas [Park North Tech]; 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. ###-##-#### of the Official Public Records of Real Property of Harris County, Texas [Spring Valley, Westminster]; (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 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 [Colonies], and recorded at Volume 11231, Page 0179, et seq., of the Deed Records of Tarrant County, Texas [Bentley Village]; and (e) that Assignment of Rents and Leases dated March 7, 1995, executed by New Borrower, filed for recording in the Office of the County Clerk of Harris County, Texas under Clerk's File No. R303498 and recorded at Film Code No. 503-07-0124, et seq., of the Official Public Records of Real Property of Harris County, Texas [Park North Tech] (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], at Clerk's File No. P101069 and Film Code No. ###-##-####, et seq., of the Real Property Records of Harris County, Texas [Spring Valley, Westminster, Richmond Square, Westchase] (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]; (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. After application of proceeds from the sale of Assets and the payment and satisfaction of Mortgage Loans, the principal balance of the Loan is $8,000,000 as of the date hereof; G. Under the Fifth Amendment, Lender and Borrower extended to December 31, 1994 the period during which the amount available to be advanced under the Loan for general business purposes (the "GENERAL FUNDING AVAILABILITY AMOUNT") may be readvanced under the Loan Agreement; H. Under the Sixth Amendment, Lender and Borrower further extended to March 31, 1995 the period during which the General Funding Availability Amount may be readvanced under the Loan Agreement; I. Under the Seventh Amendment, Lender and Borrower further extended to September 30, 1995 the period during which the General Funding Availability Amount may be readvanced under the Loan Agreement and such date was extended to October 21, 1995 by letter agreement dated October 2, 1995 between Lender and Borrower; and J. Borrower has requested that Lender further extend the period during which the General Funding Availability Amount may be readvanced under the Loan Agreement and Lender is agreeable to further extending such period on the terms of this Agreement; AGREEMENT: NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, including the payment by Borrower to Lender of the Funding Extension Fee (as hereinafter defined), 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 $17,317,050.08 of principal reductions of the Original Note. (a) $16,234,281.46 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, 1996, and (b) $1,082,768.62 of which shall be available for Subsequent Advances for payment of Taxes. 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 is $8,000,000. 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 October 21, 1995 shall not exceed $16,234,281.46 (exclusive of Subsequent Advances for Taxes under Section 2.21 of this Agreement), (b) that said $16,234,281.46 shall only be available to be advanced prior to March 31, 1996, 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, and (ii) Subsequent Advances from and after October 21, 1995, other than the General Funding Availability Amount, shall not be available. 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. 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. 3. FUNDING EXTENSION FEE. In consideration for Lender's extension of the period during which the General Funding Availability Amount may be readvanced under the Loan Agreement, and as a condition precedent to the effectiveness of this Amendment, Borrower shall pay to Lender a funding extension fee of $100,000 (the "FUNDING EXTENSION FEE"). 4. COSTS AND EXPENSES. Borrower agrees to pay all costs incurred in connection with the execution and consummation of this Amendment, 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 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. 5. 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 an amount 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. 6. FULL FORCE AND EFFECT. As previously modified in the First Modification, the Increase Modification, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, and the Seventh Amendment and as further modified by this Amendment, the Loan Agreement remains in full force and effect. EXECUTED as of the date and year first above written. BORROWER: OLD BORROWER: MXM MORTGAGE CORP., a Delaware corporation By: ERIK ERIKSSON, JR. 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. Erik Eriksson, Jr., Vice President LENDER: GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation By: LAURA D. OWEN Laura D. Owen, Investment Manager EX-10.35 8 EXHIBIT 10.35 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT, dated as of ____________________________, is by and between MAXXAM INC., a Delaware corporation (the "Company"), and _______________________ (the "Employee"), currently residing at _________________________________________________________________. WITNESSETH: WHEREAS, the Employee currently serves as a[n] __________________ of the Company and receives compensation from the Company in that capacity; and WHEREAS, the Employee desires to enter into an arrangement providing for the deferral of salary and/or bonus compensation; and WHEREAS, the Company is agreeable to such an arrangement; NOW, THEREFORE, it is agreed as follows: 1. The Employee irrevocably elects to defer receipt, subject to the provisions of this Agreement, of [select A or B]: A. _____ percent of gross salary per pay period otherwise payable to the Employee during calendar year ________, not to exceed $_________ for the year [may not exceed 20%]; and B. _____ percent of any bonus which may otherwise become payable to the Employee for the calendar year _____, not to exceed $___________ for the year [may not exceed 20%]; and which relate to services performed in a calendar year that commences after the date hereof. Such election shall continue in effect with respect to any salary and/or bonus which may otherwise become payable to the Employee for any calendar year subsequent to the dates of this election unless, prior to January 1 of such year, the Employee shall have delivered to the Vice President - Chief Personnel Officer a written revocation of such election with respect to salary and/or bonus for services performed in a calendar year that commences after the date of such revocation. Until such time as the election made under this paragraph is revoked, the percentages specified above shall apply on each occasion on which salary or bonus would otherwise be paid to the Employee. Salary and/or bonus amount with respect to which the Employee shall have elected to defer receipt are hereinafter referred to as "Deferred Compensation." 2. The Company shall credit the amount of Deferred Compensation to a book account (the "Deferred Compensation Account") as of the date such salary or bonus amount would have been paid to the Employee had this Agreement not been in effect. 3. Earnings shall be credited to the Deferred Compensation Account as follows: The balance credited to the Deferred Compensation Account as of the last business day of each quarter shall be increased by an amount reflecting interest on such balance for such quarter calculated using one-quarter of (i) the sum of the Prime Rate plus (ii) 2 percent on the first day of such quarter. For this purpose the "Prime Rate" shall mean the highest prime rate (or base rate) reported for such date in the Money Rates column or section of The Wall Street Journal as the rate in effect for corporate loans at large U.S. money center commercial banks (whether or not such rate has actually been charged by any such bank) as of such date. In the event The Wall Street Journal ceases publication of such rate, the "Prime Rate" shall mean the prime rate (or base rate) reported for such date in such other publication that publishes such prime rate information as the Company may choose to rely upon. 4. The Company shall provide an annual statement to the Employee showing such information as is appropriate, including the Deferred Compensation, earnings and aggregate amount credited to the Deferred Compensation Account, as of a reasonably current date. If amounts which are a part of the Deferred Compensation Account which, prior to payment of such account to the Employee, are determined to be taxable to the Employee, such taxable amounts shall be immediately paid to the Employee less required withholding taxes. 5. The Company's obligation to make payments from the Deferred Compensation Account shall be a general obligation of the Company and such payments shall be made from the Company's general assets. The Employee's relationship to the Company under this Agreement shall be only that of a general unsecured creditor, and this Agreement (including any action taken pursuant hereto) shall not, in and of itself, create or be construed to create a trust or fiduciary relationship of any kind between the Company and the Employee, his or her designated beneficiary or any other person, or a security interest of any kind in any property of the Company in favor of the Employee or any other person. The arrangement created by this Agreement is intended to be unfunded and no trust, security, escrow, or similar account shall be required to be established for the purposes of payment hereunder. However, the Company may in its discretion establish a "rabbi trust" (or other arrangement having equivalent taxation characteristics under the Internal Revenue Code or applicable regulations or rulings) to hold assets, subject to the claims of the Company's creditors in the event of insolvency, for the purpose of making payments hereunder. If the Company establishes such a trust, amounts paid therefrom shall discharge the obligations of the Company hereunder to the extent of the payments so made. 6. Deferred Compensation, including all earnings credited to the Deferred Compensation Account pursuant to paragraph 3, shall be paid in cash to the Employee or his or her designated beneficiary as soon as practicable following the date the Employee ceases for any reason to be an Employee of the Company. Payments shall be made: / / in a lump sum; or / / in ____________________ annual installments (not to exceed 10). Each annual installment payment shall be made as of March 31 and shall be an amount equal to the balance credited to the Deferred Compensation Account as of that date divided by the number of installments (including the one then due) remaining to be paid. Amounts credited to the Deferred Compensation Account during the period in which installments are paid shall be adjusted to reflect the crediting of earnings in accordance with paragraph 3. 7. Payments hereunder shall be made to the Employee except that: (a) in the event that the Employee shall be determined by a court of competent jurisdiction to be incapable of managing his financial affairs, and if the Company has actual notice of such determination, payment shall be made to the Employee's personal representative(s); and (b) in the event of the Employee's death, payment shall be made to the last beneficiary designated by the Employee for purposes of receiving such payment in such event in a written notice delivered to the Secretary of the Company; provided, that if such beneficiary has not survived the Employee, or no valid beneficiary designation is in effect, payment shall instead be made to the Employee's estate. The Company shall deduct from any payment hereunder any amounts required for federal and/or State and/or local withholding tax purposes. 8. Any balance credited to the Deferred Compensation Account shall not in any way be subject to the debts or other obligations of the Employee and, except as provided in paragraph 7(b), shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment or other legal or equitable process. 9. This Agreement shall not be construed to confer on the Employee any right to be or remain in the employ of the Company or to receive any, or any particular rate of, Compensation. 10. Interpretations of, and determinations related to, this Agreement, including any determinations of the amount credited to the Deferred Compensation Account, shall be made by the Compensation Committee of the Board of Directors of the Company and shall be conclusive and binding upon all parties. The Company shall incur no liability to the Employee for any such interpretation or determination so made or for any other action taken by it in connection with this Agreement in good faith. 11. This Agreement contains the entire understanding and agreement between the parties with respect to the subject matter hereof, and may not be amended, modified or supplemented in any respect except by a subsequent written agreement entered into by both parties. 12. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns and the Employee and his or her heirs, executors, administrators and personal representatives. 13. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. Any waiver by either party hereto of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver by such party of any subsequent breach thereof. 14. In the event that any provision of this Agreement is declared invalid and not binding on the parties hereto on a final decree or order issued by a court of competent jurisdiction, such declaration shall not offset the validity of the other provisions of this Agreement to which such declaration of invalidity does not relate and such other provisions shall remain in full force and effect. 15. This Agreement shall be governed and construed in accordance with the laws of the state of Texas, without regard to principles of choice of law, except to the extent preempted to the Employee Retirement Income Security Act of 1974, as amended, or other applicable federal law. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Employee has executed this Agreement, on the date first written above. ATTEST: MAXXAM INC. ____________________________ Nawasa Lafferty, Assistant By:___________________________ Secretary Byron L. Wade, Vice President, Secretary & Deputy General Counsel ______________________________ [Employee] DESIGNATION OF BENEFICIARY(IES) Dated as of ____________________________ To the Vice President - Chief Personnel Officer of MAXXAM Inc.: In accordance with the provisions of the Deferred Compensation Agreement dated as of ________________ ___, 199__, between the undersigned Employee and MAXXAM Inc., I hereby designate _____________________________ _____________________________________________________* currently residing at ______________________________________________________________________, whose Social Security number(s) is (are)____________________________, as my beneficiary(ies) to receive payments thereunder in the event of my death before payments due thereunder have been made in full. In the event that the said beneficiary(ies) predecease(s) me, I hereby designate ____________ ________________ currently residing at ___________________________________, whose Social Security number(s) is (are) ___________________, as my beneficiary(ies) thereunder. I intend that my execution and delivery of this Designation of Beneficiary(ies) form shall revoke any and all prior designation(s) of beneficiary(ies) that I may have made under the Agreement. EMPLOYEE: ______________________________ ______________________________ [Printed Name of Employee] - --------------- *If more than one beneficiary is to be designated, list the beneficiaries and specify the percentage of each payment to be received by each beneficiary. EX-13.1 9 EXHIBIT 13.1 MAXXAM INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA The following summary of consolidated financial information for each of the five years ended December 31, 1995 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) 1995 1994 1993 1992 1991 ------------ ------------ ----------- ------------ ------------- CONSOLIDATED STATEMENT OF OPERATIONS: Net sales $ 2,565.2 $ 2,115.7 $ 2,031.1 $ 2,202.6 $ 2,254.5 Operating income (loss) 257.6 7.3 (96.1) 130.8 235.5 Income (loss) before extraordinary item and cumulative effect of changes in accounting principles 57.5 (116.7) (131.9) (7.3) 57.5 Extraordinary item, net - (5.4) (50.6) - - Cumulative effect of changes in accounting principles, net - - (417.7) - - Net income (loss) 57.5 (122.1) (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 6.08 (12.35) (13.95) (0.77) 6.08 Extraordinary item, net - (.57) (5.35) - - Cumulative effect of changes in accounting principles, net - - (44.17) - - Net income (loss) 6.08 (12.92) (63.47) (0.77) 6.08 Consolidated balance sheet at end of period: Total assets 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0 Long-term debt 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9 Stockholders' equity (deficit) (83.8) (275.3) (167.9) 443.9 459.6 Stockholders' equity (deficit) per common and common equivalent share (8.94) (29.36) (17.91) 47.34 49.12 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 principal 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, principally The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate investment and development, managed through MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto which are contained elsewhere herein. ALUMINUM OPERATIONS Aluminum operations account for the substantial portion of the Company's revenues and operating results. Kaiser's operating results are sensitive to changes in prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold and on hedging strategies. Kaiser, through its principal subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates in two business segments: bauxite and alumina, and aluminum processing. The following table presents selected operational and financial information for the years ended December 31, 1995, 1994 and 1993.
Years Ended December 31, ----------------------------------- (In millions of dollars, except shipments and prices) 1995 1994 1993 ---------- ---------- ---------- Shipments: (1) Alumina 2,040.1 2,086.7 1,997.5 Aluminum products: Primary aluminum 271.7 224.0 242.5 Fabricated aluminum products 368.2 399.0 373.2 ---------- ---------- ---------- Total aluminum products 639.9 623.0 615.7 ========== ========== ========== Average realized sales price: Alumina (per ton) $ 208 $ 169 $ 169 Primary aluminum (per pound) .81 .59 .56 Net sales: Bauxite and alumina: Alumina $ 424.8 $ 352.8 $ 338.2 Other (2) (3) 89.4 79.7 85.2 ---------- ---------- ---------- Total bauxite and alumina 514.2 432.5 423.4 ---------- ---------- ---------- Aluminum processing: Primary aluminum 488.0 292.0 301.7 Fabricated aluminum products 1,218.6 1,043.0 981.4 Other (3) 17.0 14.0 12.6 ---------- ---------- ---------- Total aluminum processing 1,723.6 1,349.0 1,295.7 ---------- ---------- ---------- Total net sales $ 2,237.8 $ 1,781.5 $ 1,719.1 ========== ========== ========== Operating income (loss) $ 216.5 $ (50.3) $ (117.4) ========== ========== ========== Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $ 108.7 $ (145.8) $ (201.7) ========== ========== ========== Capital expenditures $ 79.4 $ 70.0 $ 67.7 ========== ========== ========== - --------------- (1) Shipments are expressed in thousands of metric tons. A metric ton is equivalent to 2,204.6 pounds. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries.
NET SALES Bauxite and alumina. Net sales to third parties for the bauxite and alumina segment increased 19% in 1995 compared to 1994 and increased 2% in 1994 compared to 1993. Revenue from alumina increased 20% in 1995 compared to 1994 due to higher average realized prices, partially offset by lower shipments. Revenue from alumina increased 4% in 1994 compared to 1993 because of increased shipments. The remainder of the segment's sales revenues was from sales of bauxite, which remained about the same throughout the three-year period, and the portion of sales of alumina attributable to the minority interest in Alumina Partners of Jamaica ("Alpart"). Aluminum processing. Net sales to third parties for the aluminum processing segment increased 28% in 1995 compared to 1994 and increased 4% in 1994 compared to 1993. The bulk of this segment's sales represents Kaiser's primary aluminum and fabricated aluminum products, with the remainder representing the portion of sales of primary aluminum attributable to the minority interest in Kaiser's 90%-owned Volta Aluminium Company Limited ("Valco") aluminum smelter in Ghana. Revenue from primary aluminum increased 67% in 1995 compared to 1994 due primarily to higher average realized prices and higher shipments. The higher shipments of primary aluminum were due to increased production at Kaiser's smelters in the Pacific Northwest and Valco, and reduced intracompany consumption of primary aluminum at Kaiser's fabricated products units. The increase in revenue for 1995 was partially offset by decreased shipments caused by a strike of the United Steelworkers of America (the "USWA") discussed below. In 1995, Kaiser's average realized price from sales of primary aluminum was approximately $.81 per pound, compared to the average Midwest United States transaction price of approximately $.86 per pound. Revenue from primary aluminum decreased 3% in 1994 compared to 1993 as higher average realized prices were more than offset by lower shipments. Average realized prices in 1994 reflected the defensive hedging of primary aluminum prices with respect to 1994 shipments, which was initiated prior to then-recent improvements in metal prices. Shipments in 1994 reflected production curtailments at Kaiser's smelters in the Pacific Northwest and Valco. Shipments of primary aluminum to third parties were approximately 42% of total aluminum products shipments in 1995 compared to approximately 36% in 1994 and 39% in 1993. Revenue from fabricated aluminum products increased 17% in 1995 compared to 1994 due to higher average realized prices, partially offset by lower shipments for most of these products. Revenue from fabricated aluminum products increased 6% in 1994 compared to 1993, principally due to increased shipments of most of these products. OPERATING INCOME (LOSS) Improved operating results for 1995 were partially offset by expenses related to Kaiser's smelting joint venture in China (see "-Financial Condition and Investing and Financing Activities-Aluminum Operations"), accelerated expenses on Kaiser's micromill technology, maintenance expenses as a result of an electrical lightning strike at Kaiser's Trentwood, Washington, facility, and a work slowdown at Kaiser's 49%-owned Kaiser Jamaica Bauxite Company prior to the signing of a new labor contract. The combined impact of these expenditures on the results for 1995 was approximately $6.0 million (on a pre-tax basis). Operating results for 1995 were further impacted by (i) an eight-day strike of the USWA at Kaiser's five major domestic locations, (ii) a six-day strike of the National Workers Union at Kaiser's 65%-owned Alpart alumina refinery, and (iii) a four-day disruption of alumina production at Alpart caused by a boiler failure. The combined impact of these events on the results for 1995 was approximately $17.0 million (on a pre-tax basis), principally from lower production volume and other related costs. In 1993, Kaiser recorded pre-tax charges of $35.8 million relating to the restructuring of aluminum operations (see "-Aluminum processing" below) and approximately $19.4 million in the fourth quarter of 1993 because of reductions in the carrying value of its inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated aluminum products. Kaiser's corporate general and administrative expenses of $82.3 million, $67.6 million and $72.6 million in 1995, 1994 and 1993, respectively, were allocated by 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 income for the bauxite and alumina segment was $37.2 million in 1995, compared to operating income of $5.6 million in 1994 and an operating loss of $20.1 million in 1993. In 1995 compared to 1994, operating income increased principally due to higher revenue, partially offset by the effect of the strikes and boiler failure. In 1994 compared to 1993, operating income was favorably affected by increased shipments and lower manufacturing cost. Aluminum processing. Operating income for the aluminum processing segment was $179.3 million in 1995, compared to operating losses of $55.9 million in 1994 and operating losses of $97.3 million in 1993. Operating results improved in 1995 compared to 1994, principally due to higher revenue, partially offset by the effect of the USWA strike. The decrease in operating loss in 1994 compared to 1993 was caused principally by a nonrecurring $35.8 million restructuring charge recorded in 1993, as described below, increased shipments of fabricated aluminum products, and higher average realized prices of primary aluminum, partially offset by lower shipments of primary aluminum. In October 1993, KACC announced that it was restructuring its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs by at least $50.0 million after full implementation. Additionally, KACC implemented a plan to streamline its casting operations, which included the shutdown of two facilities located in Ohio. This entire restructuring was successfully completed by the end of 1995. The pre-tax charge for this restructuring of $35.8 million included $25.2 million for pension, severance and other termination benefits at Trentwood; $8.0 million related to casting facilities; and $2.6 million for various other items. Other contributing factors to the 1993 operating results were lower production at Kaiser's smelters in the Pacific Northwest as a result of the removal of three reduction potlines from production in January 1993 in response to the reduction by the Bonneville Power Administration 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. Additionally, during 1993, Kaiser realized above-market prices for significant quantities of primary aluminum sold forward in prior periods under long-term contracts. INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES Income before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1995, as compared to the loss for 1994, resulted from the improvement in operating income previously described, partially offset by other charges, principally related to the establishment of additional litigation reserves. The decrease in the loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles in 1994 compared to 1993 resulted from the reduction in operating losses previously described. As described in Note 1 to the Consolidated Financial Statements, Kaiser's cumulative losses in the first and second quarters of 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions as described in Note 6 to 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 and all of 1994, 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 recorded 100% of Kaiser's earnings in 1995 and will continue to do so until such time as the cumulative losses recorded by the Company with respect to Kaiser's minority common stockholders are recovered. 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, Pacific Lumber and Britt. MGI's business is seasonal in that the forest products business generally experiences lower first quarter sales due largely to the general decline in construction-related activity during the winter months. The following table presents selected operational and financial information for the years ended December 31, 1995, 1994 and 1993.
Years Ended December 31, ------------------------------------ (In millions of dollars, except shipments and prices) 1995 1994 1993 --------- ---------- ---------- Shipments: Lumber: (1) Redwood upper grades 46.5 52.9 68.3 Redwood common grades 216.7 218.4 184.7 Douglas-fir upper grades 7.4 8.6 10.7 Douglas-fir common grades and other 76.0 66.3 46.4 ---------- ---------- ---------- Total lumber 346.6 346.2 310.1 ========== ========== ========== Logs (2) 12.6 17.7 18.6 ========== ========== ========== Wood chips (3) 214.0 210.3 156.8 ========== ========== ========== Average sales price: Lumber: (4) Redwood upper grades $ 1,495 $ 1,443 $ 1,275 Redwood common grades 477 460 469 Douglas-fir upper grades 1,301 1,420 1,218 Douglas-fir common grades 392 444 447 Logs (4) 440 615 704 Wood chips (5) 102 83 81 Net sales: Lumber, net of discount $ 211.3 $ 216.5 $ 202.6 Logs 5.6 10.9 13.1 Wood chips 21.7 17.4 12.7 Cogeneration power 2.5 3.5 3.8 Other 1.5 1.3 1.3 ---------- ---------- ---------- Total net sales $ 242.6 $ 249.6 $ 233.5 ========== ========== ========== Operating income $ 74.3 $ 79.1 $ 54.3 ========== ========== ========== Operating cash flow (6) $ 99.6 $ 103.8 $ 78.8 ========== ========== ========== Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $ 6.4 $ (5.2) $ (17.7) ========== ========== ========== Capital expenditures $ 9.9 $ 11.3 $ 11.1 ========== ========== ========== - --------------- (1) Lumber shipments are expressed in millions of board feet. (2) Log shipments are expressed in millions of feet, net Scribner scale. (3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4) Dollars per thousand board feet. (5) Dollars per bone dry unit. (6) Operating income before depletion and depreciation, also referred to as "EBITDA."
SHIPMENTS Lumber shipments to third parties in 1995 were essentially unchanged from 1994. Increased shipments of common grade Douglas-fir lumber were mostly offset by decreased shipments of both upper and common grades of redwood lumber. Log shipments in 1995 were 12.6 million feet (net Scribner scale), a decrease of 5.1 million feet from 1994 shipments. Lumber shipments to third parties in 1994 increased by 12% compared to 1993. Increased shipments of redwood common lumber and common grade Douglas-fir and other lumber were partially offset by decreased shipments of upper grade redwood lumber. Log shipments in 1994 were 17.7 million feet, a decrease of .9 million feet from 1993 shipments. Old growth trees constitute Pacific Lumber's principal source of upper grade redwood lumber. Due to the severe restrictions on Pacific Lumber's ability to harvest virgin old growth timber on its property (see "-Trends-Forest Products Operations"), Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. Pacific Lumber has been able to lessen the impact of these decreases by augmenting its production facilities to increase its recovery of upper grade lumber from smaller diameter logs and increasing production capacity for manufactured upper grade lumber products through its end and edge glue facility (which was expanded during 1994). However, unless Pacific Lumber is able to sustain the harvest level of old growth trees, Pacific Lumber expects that its production of premium upper grade lumber products will decline and that its manufactured lumber products will constitute a higher percentage of its shipments of upper grade lumber products. NET SALES Revenues from net sales for 1995 decreased compared to 1994. Decreased shipments of upper grade redwood lumber, lower average realized prices for common grade Douglas-fir lumber and logs, decreased shipments of logs and redwood common lumber and lower sales of electrical power were largely offset by increased shipments of common grade Douglas-fir lumber, increased sales of wood chips and higher average realized prices for both common and upper grades of redwood lumber. Revenues from net sales for 1994 increased compared to 1993. This increase was principally due to increased shipments of redwood common lumber, an increase in the average realized price of upper grade redwood lumber, increased shipments of common grade Douglas-fir and other lumber and increased sales of wood chips, partially offset by decreased shipments of upper grade redwood lumber, a decrease in the average realized price of redwood common lumber and a decrease in the average realized price of log sales. The increase in sales of wood chips reflects higher demand from pulp mills. OPERATING INCOME Operating income for 1995 decreased compared to 1994. This decrease was primarily due to lower sales of lumber, higher cost of lumber sales and lower sales of logs and electrical power, partially offset by increased sales of wood chips and higher gross margins on wood chip sales. Cost of lumber sales for 1995 was unfavorably impacted by higher purchases of logs from third parties, partially offset by improved sawmill productivity. Cost of goods sold for 1995 and 1993 was reduced by $1.5 million and $1.2 million, respectively, of business interruption insurance proceeds for the settlement of claims related to an earthquake in April 1992. Operating income for 1994 increased compared to 1993. This increase was principally due to higher sales of lumber and wood chips, lower purchases of lumber and logs from third parties, improved sawmill productivity and reduced overhead costs. Pacific Lumber arranged for the purchase of a significant number of logs early in 1993 in response to concerns regarding inclement weather conditions hindering logging activities on Pacific Lumber's timberlands during the first five months of 1993. The cost associated with the purchase of logs from third parties significantly exceeds the Company's cost to harvest its own timber. As a result of the Company's last-in, first-out ("LIFO") methodology of accounting for inventories, a substantial portion of the additional cost associated with the purchased logs was charged to cost of sales in the third quarter of 1993. 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-Forest Products Operations." During the past few years, Pacific Lumber has significantly increased its production capacity for manufactured lumber products by assembling knot-free pieces of common grade lumber into wider and longer pieces in Pacific Lumber's end and edge glue 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. Pacific Lumber 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 maximize cogeneration power revenues. 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 was $6.4 million for 1995 compared to a loss of $5.2 million in 1994. This improvement resulted from increased investment, interest and other income reported for 1995 compared to 1994, partially offset by the decrease in operating income as previously described. Investment, interest and other income for 1994 included the loss of $21.2 million for the settlement of litigation, partially offset by the receipt of a $7.2 million franchise tax refund, both of which are described further in the following paragraph and in Note 1 to the Consolidated Financial Statements. Additionally, investment, interest and other income included net gains on marketable securities of $4.9 million for 1995, an increase of $2.9 million as compared to 1994. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles decreased for 1994 as compared to 1993. This decrease resulted from the increase in operating income and decreased interest expense, partially offset by the loss on litigation settlement. In addition, investment, interest and other income (expense) for 1994 includes the receipt of a franchise tax refund of $7.2 million (the substantial portion of which represented interest) from the State of California and net gains on marketable securities of $2.0 million. The litigation settlement in the second quarter of 1994 resulted in a pre- tax loss of $21.2 million which consists of Pacific Lumber's $14.8 million cash payment to the settlement fund, a $2.0 million accrual for certain contingent claims, and $4.4 million of related legal fees. Interest expense decreased due to lower interest rates resulting from the refinancing of the long-term debt of Pacific Lumber and MGI in March and August of 1993, respectively. Investment, interest and other income for 1993 includes net gains on marketable securities of $6.7 million. REAL ESTATE AND OTHER OPERATIONS
Years Ended December 31, ------------------------------------- (In millions of dollars) 1995 1994 1993 ----------- ---------- ---------- Net sales $ 84.8 $ 84.6 $ 78.5 Operating loss (13.6) (10.0) (13.5) Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (.8) (1.5) 38.1
NET SALES Net sales includes revenues from (i) sales of developed lots, bulk acreage and real property associated with the Company's real estate developments, (ii) resort and other commercial operations conducted at certain of the Company's real estate developments, (iii) rental revenues associated with the real properties purchased from the Resolution Trust Corporation in June 1991 (the "RTC Portfolio"), and (iv) beginning in the fourth quarter of 1995, revenues from Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited partnership which owns and operates a Class 1 horse racing facility in the greater Houston metropolitan area (see "-Financial Condition and Investing and Financing Activities-Real Estate and Other Operations"). Net sales for 1995 were essentially unchanged from 1994. Revenues from SHRP, Ltd. and a bulk sale of acreage in Texas were offset by a decrease in rental revenues from the RTC Portfolio due to the sale of some of those properties. Net sales for 1994 increased as compared to 1993. This increase was primarily due to bulk acreage sales in New Mexico and increased lot sales at the Company's Fountain Hills development in Arizona, partially offset by a decrease in rental revenues resulting from the sale of sixteen apartment complexes from the RTC Portfolio in December 1993. OPERATING LOSS The operating loss for 1995 increased as compared to 1994, primarily due to a $4.0 million writedown of certain real property to its estimated net realizable value, partially offset by a bulk sale of acreage in Texas. The operating loss for 1994 decreased as compared to 1993. The operating results for 1994 were favorably impacted by the bulk acreage sales and the increased sales at Fountain Hills, offset by decreased revenues from the RTC Portfolio as a result of the sale of the sixteen apartment complexes in December 1993. The operating loss for 1993 also included a $5.9 million writedown of certain of the Company's nonstrategic real estate holdings to their estimated net realizable value. INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1995 decreased as compared to 1994. This decrease was primarily due to higher investment, interest and other income and lower interest expense, partially offset by the increased operating loss discussed above. Investment, interest and other income for 1995 includes a pre-tax gain of $10.5 million resulting from the sale of five real properties and one loan from the RTC Portfolio for $25.5 million. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1994 was $1.5 million, as compared to income of $38.1 million for 1993. The loss for 1994 reflects a decrease in investment, interest and other income, offset by a decrease in interest expense and the decreased operating loss discussed above. Investment, interest and other income for 1994 includes pre-tax gains of $7.3 million resulting from the sale of two real properties and one loan from the RTC Portfolio for $14.2 million. The decrease in interest expense for 1994 compared to 1993 resulted primarily from repayments on debt attributable to the sixteen apartment complexes sold. Investment, interest and other income for 1993 includes a pre-tax gain of $47.8 million attributable to the sale of these properties from the RTC Portfolio in December 1993 for $113.6 million. Also included in investment, interest and other income for 1993 are the sales of two other real properties and three loans from the RTC Portfolio resulting in pre-tax gains of $5.1 million. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS
Years Ended December 31, ------------------------------------- (In millions of dollars) 1995 1994 1993 ---------- --------- ----------- Operating loss $ (19.6) $ (11.5) $ (19.5) Loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (19.8) (19.3) (30.1)
OPERATING LOSS The operating losses represent corporate general and administrative expenses that are not attributable to the Company's industry segments. The operating loss for 1995 increased compared to 1994, primarily due to a $2.5 million increase in costs attributable to phantom share rights granted to certain employees and a $6.1 million charge for the cost of certain litigation. These phantom share rights, together with rights granted to certain employees of the Company's real estate subsidiaries, were exercised in 1995. See Note 8 to the Consolidated Financial Statements. The operating loss for 1994 decreased compared to 1993, primarily due to a $6.5 million charge related to litigation contingencies in 1993 and lower overhead costs. LOSS BEFORE INCOME TAXES, MINORITY INTERESTS, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles includes operating losses, investment, interest and other income (expense) and interest expense, including amortization of deferred financing costs, that are not attributable to the Company's industry segments. The loss for 1995 increased compared to 1994, primarily due to the increased operating loss, partially offset by higher investment, interest and other income. The loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for 1994 was significantly less than the loss for 1993. This decrease was primarily due to the decreased operating losses discussed above and a decrease in interest expense. The decrease in interest expense resulted primarily from the redemption in August 1993 of $20.0 million aggregate principal amount of the Company's 14% Senior Subordinated Reset Notes due May 20, 2000 (the "Reset Notes"). Investment, interest and other income (expense) for 1994 includes the equity in losses of affiliates attributable to the Company's equity interest in SHRP, Ltd., offset by net gains on marketable securities. Affiliates of the Company held an equity interest in SHRP, Ltd. of approximately 29.7% until October 1994, when, as a result of an additional capital contribution of $5.6 million, the Company's interest increased to approximately 45%. The Company obtained a majority interest in SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy proceedings on October 6, 1995. See "-Financial Condition and Investing and Financing Activities-Real Estate and Other Operations." CREDIT (PROVISION) FOR INCOME TAXES The Company's credit (provision) for income taxes differs from the federal statutory rate due principally to (i) revision of prior years' tax estimates and other changes in valuation allowances, (ii) percentage depletion, and (iii) foreign, state and local taxes, net of related federal tax benefits. The Company's provision for income taxes as reflected in its Consolidated Statement of Operations for the year ended December 31, 1995 reflects a benefit of $24.2 million relating to the revision of prior years' tax estimates and other changes in valuation allowances. MINORITY INTERESTS Minority interests represent the minority stockholders' interest in the Company's aluminum operations and, with respect to periods after October 6, 1995, minority partners' interest in SHRP, Ltd. EXTRAORDINARY ITEM The refinancing activities of Kaiser during the first quarter of 1994, as described in Note 4 to the Consolidated Financial Statements, resulted in an extraordinary loss of $5.4 million, net of benefits for income taxes of $2.9 million. The extraordinary loss consists primarily of the write-off of unamortized deferred financing costs on Kaiser's previous credit agreement (the "1989 KACC Credit Agreement"). 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 Pacific Lumber's retired 12% Series A Senior Notes, 12.2% Series B Senior Notes and 12-1/2% Senior Subordinated Debentures, MGI's retired 12-3/4% Notes and KACC's retired 14-1/4% Senior Subordinated Notes. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES As of January 1, 1993, 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 1993 results of operations by $26.6 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced 1993 results of operations by $437.9 million, net of related benefits for minority interests of $63.6 million and income taxes of $236.8 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 reduced 1993 results of operations by $6.4 million, net of related benefits for minority interests of $1.0 million and income taxes of $3.4 million. The new accounting methods have no effect on the Company's cash outlays for postretirement and postemployment benefits, nor does the cumulative effect of the changes in accounting principles affect the Company's compliance with its existing debt covenants. Postretirement benefits other than pensions are generally provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. 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 Since 1993, subsidiaries of the Company's aluminum operations and forest products operations have completed a number of transactions designed to enhance their liquidity, significantly extend their debt maturities and lower their interest costs. Collectively, these transactions included public offerings for approximately $1.4 billion of debt securities, approximately $220.0 million of additional equity capital and the replacement of revolving credit facilities. The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. THE 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, 1995, the indebtedness of the subsidiaries and the minority interests reflected on the Company's Consolidated Balance Sheet were $1,568.6 million and $223.2 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 amended, the "1994 KACC Credit Agreement") 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 Senior Subordinated Notes" and, together with the KACC Senior Notes, 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. Pursuant to the terms of the 1994 KACC Credit Agreement, Kaiser is precluded from paying any dividends with respect to its common stock. The indenture governing 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. On September 29, 1995, MGI paid dividends of $4.8 million. As of December 31, 1995, an additional $1.9 million of dividends could be paid by MGI, of which $1.6 million was paid in January 1996. Under the most restrictive covenants governing debt of the Company's real estate and other subsidiaries, approximately $23.5 million of dividends could be paid as of December 31, 1995. During 1994, the Company sold 1,239,400 of Kaiser's Depositary Shares (as defined in "Aluminum Operations" below) for aggregate net proceeds of $10.3 million. The Company sold its remaining 893,550 of Depositary Shares during the first six months of 1995 for aggregate net proceeds of $7.6 million. See Note 7 to the Consolidated Financial Statements. On October 10, 1994, the Company entered into a demand loan and pledge agreement (the "Custodial Trust Agreement") with Custodial Trust Company providing for up to $25.0 million in borrowings. Any amounts drawn would be payable upon demand and be secured by Kaiser common stock owned by the Company (or such other marketable securities acceptable to the lender) with an initial market value (as defined therein) of approximately three times the amount borrowed. Borrowings under this agreement would bear interest at the prime rate plus 1% per annum. The Custodial Trust Agreement contains a negative pledge on 22 million shares of Kaiser's common stock owned by the Company and provides that the Company may sell such shares upon 24 hours notice to the Custodial Trust Company. No borrowings were outstanding as of December 31, 1995. On October 6, 1995, wholly owned subsidiaries of the Company made investments in SHRP, Ltd. of approximately $8.7 million, consisting of land, cash ($5.8 million) and other assets. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3 million, $14.6 million aggregate initial principal amount of SHRP, Ltd.'s 11% Senior Secured Extendible Notes (the "SHRP Notes"). See "-Real Estate and Other Operations." As of December 31, 1995, the Company (excluding its subsidiaries) had cash and marketable securities of approximately $29.9 million. The Company expects that its general and administrative costs, net of cost reimbursements from subsidiaries and non-cash accruals for contingencies and other items, will range from $9.0 to $14.0 million for the next year. The Company's cash outlays for interest and sinking fund obligations with respect to parent company indebtedness will aggregate approximately $6.0 million in 1996 and $9.0 million in 1997. The Company believes that its existing cash, cash equivalents and marketable securities (excluding such items owned by its subsidiaries), together with the funds available to it, will be sufficient to fund its working capital requirements for the next year. With respect to its long-term liquidity, the Company believes that its existing cash and cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries, and the proceeds from the sale of debt securities should be sufficient to meet its working capital requirements. 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 do so. On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated formal administrative proceedings against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of United Savings Association of Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc. ("UFG"). The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 million from the Company, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate impact, if any, of the outcome this matter may have on the Company's consolidated financial position, results of operations or liquidity. On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern District of Texas (the "Court"). The FDIC action did not name the Company as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 million based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. On December 8, 1995, the Company filed a motion to intervene in this action and conditioned it on the Court joining the OTS to this action. The Company filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting the Company's bid for USAT. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. It is impossible to assess the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. On January 5, 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission ("SEC") for up to $200.0 million aggregate principal amount of debt securities. The Company has not determined the initial amount, collateral, interest rates, conversion features (if any), or any of the specific terms under which such debt securities may be offered. The debt securities may be secured by, or convertible into, shares of Kaiser common stock owned by the Company. In that regard, Kaiser also filed a shelf registration statement with the SEC on January 5, 1996, covering 10 million shares of its common stock owned by the Company. The Company would use the net proceeds (or portions thereof) from the sale of such debt securities to retire all or portions of its Reset Notes and 12-1/2% Subordinated Debentures due December 15, 1999 (see Note 4 to the Consolidated Financial Statements); any remaining net proceeds would be used for working capital and general corporate purposes. The Company believes that its existing cash resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient to fund its working capital requirements, and to pay interest on any newly issued debt securities which may be sold; however, there can be no assurance that the Company's cash resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient for such purposes or that the Company would be able to refinance or repay at maturity such debt securities which may be sold. ALUMINUM OPERATIONS On February 22, 1996, Kaiser announced that it had proposed on February 8, 1996 to acquire all of the outstanding shares of Alumax Inc. ("Alumax"), a leading corporation in the aluminum industry, for a combination of cash and equity securities of Kaiser at a combined value of $40 to $45 per common share, of which $30 would be paid in cash and the balance in equity securities of Kaiser. Alumax rejected the proposal and subsequently adopted a "poison pill," a defensive, self-protective measure. Although management of Kaiser remains convinced that a combination of Kaiser and Alumax would offer stockholders of both companies an opportunity to realize enhanced value, on March 2, 1996, Kaiser announced its decision to withdraw its proposal and to not submit proxy materials for consideration by stockholders of Alumax. Kaiser is currently evaluating various acquisition and financing transactions, in which the issuance of Common Shares (pursuant to the proposed recapitalization as described below) could be involved, but there is no specific plan to issue additional equity or convertible securities. The 1994 KACC Credit Agreement consists of a $325.0 million five-year secured revolving line of credit which matures in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $325.0 million or a borrowing base relating to eligible accounts receivable and inventory. As of February 29, 1996, $174.9 million (of which $72.4 million could have been used for letters of credit) was available to KACC under the 1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus 1-1/2% or LIBOR (Reserve Adjusted) (as defined) plus 3-1/4%. Effective June 30, 1995, the interest rate margins applicable to borrowings under the 1994 KACC Credit Agreement may be reduced by up to 1-1/2% (non-cumulatively), based on a financial test, determined quarterly. As of December 31, 1995, the financial test permitted a reduction of 1-1/2% per annum in margins effective January 1, 1996. In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). See Note 7 to the Consolidated Financial Statements. On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted in the simultaneous redemption of all Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and unpaid dividends up to and including the day immediately prior to the redemption date of $2.8 million, and (iii) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. As a result of the issuance of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") and the Depositary Shares, and the subsequent redemption of the Depositary Shares, the Company's equity interest in Kaiser has decreased to approximately 62% on a fully diluted basis. On February 17, 1994, KACC issued $225.0 million of the KACC Senior Notes. On February 1, 1993, KACC issued $400.0 million of the KACC Senior Subordinated Notes. The obligations of KACC with respect to the KACC Senior Subordinated Notes and the KACC Senior Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. See Note 4 to the Consolidated Financial Statements for a description of the terms of the KACC Notes and the use of proceeds from their issuance. Pursuant to the terms of the indentures governing the KACC Notes, at December 31, 1995, $66.0 million was available for payment of dividends on Kaiser's common stock. However, pursuant to the terms of the 1994 KACC Credit Agreement, Kaiser is precluded from paying any dividends with respect to its common stock. The declaration and payment of dividends by Kaiser with respect to the PRIDES are expressly permitted by the terms of the 1994 KACC Credit Agreement. On February 5, 1996, Kaiser announced that it had filed a preliminary proxy statement with the SEC relating to a proposed recapitalization. Under the terms of the proposed recapitalization, the relative ownership interest and voting power of stockholders would be unchanged as a result of the recapitalization (except as a result of the treatment of fractional shares). The proposed recapitalization would (i) provide for two classes of common stock: Class A Common Shares, $.01 par value, with one vote per share and a new lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote per share, (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorize 250 million shares to be designated as Common Stock, and (iii) change each issued share of Kaiser's existing common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock. Kaiser would pay cash in lieu of fractional shares. Kaiser anticipates that both the Class A Common Shares and the Common Stock would be approved for trading on the New York Stock Exchange. Upon the effective date of the recapitalization, approximately 23.6 million Class A Common Shares and 48.0 million shares of Common Stock would be issued and outstanding. The proportionate voting power of the holders of the PRIDES will increase immediately after the effectiveness of the recapitalization until such shares are redeemed or converted, which will occur on or before December 31, 1997. As of January 31, 1996, holders of the existing common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all stockholders. Immediately after the recapitalization, the voting power of such holders of the PRIDES would increase to 19.6% in the aggregate, with a corresponding reduction in the voting power of such holders of the existing common stock. At such time as the PRIDES were redeemed or converted, the relative voting power of such holders of the PRIDES would decrease and the relative voting power for both such holders of the PRIDES and the existing common stock would be approximately the same as it would have been had the recapitalization not occurred. Kaiser's capital expenditures of approximately $217.1 million (of which $25.2 million was funded by Kaiser's minority partners in certain foreign joint ventures) during the three years ended December 31, 1995 were made primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities and construct new facilities. Kaiser's capital expenditures were $79.4 million in 1995, compared to $70.0 million in 1994 and $67.7 million in 1993 (of which $8.3 million, $7.5 million and $9.4 million were funded by such minority partners in 1995, 1994 and 1993, respectively). Kaiser's capital expenditures (of which approximately 10% is expected to be funded by such minority partners) are expected to be between $123.0 million and $143.0 million per year in the 1996 - 1998 period, subject to necessary approvals, if required, from the lenders under the 1994 KACC Credit Agreement. A portion of the capital expenditures is spent on environmental matters. Kaiser has historically participated in various raw material joint ventures outside the United States. At December 31, 1995, Kaiser was unconditionally obligated for $88.9 million of indebtedness of one such joint venture affiliate. Kaiser has developed a unique micromill for the production of can sheet from molten metal based on a proprietary thin-strip, high-speed, continuous-belt casting technique linked directly to hot rolling and cold rolling mills. The first micromill will be constructed in Nevada in 1996 as a demonstration production facility. KACC currently intends to finance the cost of the construction of the Nevada micromill, estimated to be $45.0 million, from general corporate funds, including possible borrowings under the 1994 KACC Credit Agreement, although KACC is in discussions with third parties which might provide some or all of such funding. In 1995, Kaiser Yellow River Investment Limited ("KYRIL") was formed to participate in the privatization, modernization and operation of aluminum smelting facilities in the People's Republic of China (the "PRC"). KYRIL has entered into a joint venture agreement and related agreements with the Lanzhou Aluminum Smelters of the China National Nonferrous Metals Industry Corporation relating to the formation and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise organized under the laws of the PRC (the "Joint Venture"). KYRIL contributed $9.0 million to the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the amount, timing, and other conditions relating to KYRIL's additional contributions to the Joint Venture. Governmental approval in the PRC will be necessary in order to implement certain arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. As described in Note 9 to the Consolidated Financial Statements, Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (as amended by the Superfund Amendments Reauthorization Act of 1986, "CERCLA") and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At December 31, 1995, the balance of such accruals, which is primarily included in other noncurrent liabilities, was $38.9 million. These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation actions to be taken. Kaiser expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 million to $9.0 million for the years 1996 through 2000 and an aggregate of approximately $10.0 million thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $23.0 million and that the factors upon which a substantial portion of this estimate is based are expected to be resolved over the next twelve months. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Additionally, KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At December 31, 1995, the number of claims pending was approximately 59,700, compared to 25,200 at December 31, 1994. During 1995, approximately 41,700 claims were received and approximately 7,200 were settled or dismissed. KACC believes that, although there can be no assurance, the recent increase in pending claims may be attributable, in part, to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to September 1, 1995. Based on past experience and reasonably anticipated future activity, KACC has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and KACC's actual costs could exceed these estimates. KACC's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A., with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $160.1 million, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at December 31, 1995. KACC estimates that annual future cash payments in connection with such litigation will be approximately $13.0 million to $20.0 million for each of the years 1996 through 2000, and an aggregate of approximately $78.0 million thereafter through 2008. While KACC does not believe there is a reasonable basis for estimating such costs beyond 2008, and, accordingly, did not accrue such costs, there is a reasonable possibility that such costs may continue beyond 2008, and that such costs may be substantial. KACC believes that it has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. KACC believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $137.9 million, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at December 31, 1995. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Kaiser and KACC are involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Kaiser expects that its existing cash resources, together with cash flow from operations and borrowings under the 1994 KACC Credit Agreement, will be sufficient to satisfy its working capital and capital expenditure requirements for the next year. With respect to its long-term liquidity, Kaiser believes that its history of prior operating cash flow, together with its ability to obtain both short and long-term financing should provide sufficient funds to meet its long-term working capital and capital expenditure requirements. Kaiser enters into forward sales and hedging transactions to mitigate the effect declining prices for primary aluminum could have on its results of operations and liquidity. See "-Trends-Aluminum Operations-Sensitivity to Prices and Hedging Programs." FOREST PRODUCTS OPERATIONS MGI conducts its operations primarily through its subsidiaries, Pacific Lumber and Britt. Creditors of MGI's subsidiaries have priority with respect to the assets, cash flows and earnings of such subsidiaries over the claims of the creditors of MGI, including the holders of the MGI Notes. As of December 31, 1995, the indebtedness of the subsidiaries reflected on MGI's Consolidated Balance Sheet was $586.0 million. The indentures governing Pacific Lumber's 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") and Pacific Lumber's revolving credit agreement (as amended and restated, the "Pacific Lumber Credit Agreement") contain various covenants which, among other things, restrict transactions between Pacific Lumber and its affiliates and the payment of dividends. Pacific Lumber can pay dividends in an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from Scotia Pacific Holding Company ("Scotia Pacific," a wholly owned subsidiary of Pacific Lumber), exclusive of the net income and depletion of Scotia Pacific for as long as any Timber Notes are outstanding. As of December 31, 1995, under the most restrictive of these covenants, approximately $15.7 million of dividends could be paid by Pacific Lumber. Pacific Lumber paid an aggregate of $22.0 million and $24.5 million of dividends in 1995 and 1994, respectively. Substantially all of MGI's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's consolidated assets are owned by Scotia Pacific. MGI expects that Pacific Lumber will provide a major portion of its future operating cash flow. Pacific Lumber is dependent upon Scotia Pacific for a significant portion of its timber requirements from which it generates the substantial portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flows of Scotia Pacific, and the holders of the Pacific Lumber Senior Notes have priority over the claims 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"), Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Once appropriate provision is made for current debt service on the Timber Notes and expenditures for operating and capital costs, and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from Scotia Pacific to Pacific Lumber. Accordingly, the Company expects that, once Scotia Pacific's debt service and operating and capital expenditure requirements have been met, substantially all of Scotia Pacific's available cash will be periodically distributed to Pacific Lumber. Scotia Pacific paid $59.0 million, $88.9 million and $58.3 million of dividends to Pacific Lumber during the years ended December 31, 1995 and 1994 and the period from March 23, 1993 to December 31, 1993, respectively. In the event Scotia Pacific's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes and to service its other indebtedness would be materially impaired and MGI's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. See Note 4 to the Consolidated Financial Statements for a description of the principal payment requirements of the Timber Notes. During the years ended December 31, 1995, 1994 and 1993, Pacific Lumber's operating income plus depletion and depreciation ("operating cash flow") amounted to $90.5 million, $95.9 million and $76.6 million, respectively, which exceeded interest accrued on all of its indebtedness in those years by $35.0 million, $39.8 million and $17.4 million, respectively. The Company believes that Pacific Lumber's level of operating cash flow and other available sources of financing will enable it to meet the debt service requirements on the Pacific Lumber Senior Notes and the Timber Notes for the next year. With respect to its long-term liquidity, Pacific Lumber believes that its ability to generate sufficient levels of cash from operations, and its ability to obtain both short and long-term financing should provide sufficient funds to meet its long-term working capital and capital expenditure requirements. As of December 31, 1995, MGI (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $58.4 million. MGI believes, although there can be no assurance, that the aggregate dividends which will be available to it from Pacific Lumber and Britt, during the period in which cash interest will not be payable on the MGI Discount Notes, will exceed its 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 should be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. On August 4, 1993, MGI issued $100.0 million aggregate principal amount of the MGI Senior Notes and $126.7 million aggregate principal amount (approximately $70.0 million net of original issue discount) of the MGI Discount Notes. The MGI Notes are secured by, among other things, the capital stock of Pacific Lumber and Britt and 28 million shares of Kaiser's common stock owned by the Company. See Note 4 to the Consolidated Financial Statements for a description of the terms of the MGI Notes and the use of proceeds from their issuance. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. On March 23, 1993, Pacific Lumber issued $235.0 million of the Pacific Lumber Senior Notes and Scotia Pacific issued $385.0 million of the Timber Notes. See Note 4 to the Consolidated Financial Statements for a description of the terms of the Pacific Lumber Senior Notes and the Timber Notes and the use of proceeds from their issuance. Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31, 1998, are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Pacific Lumber Credit Agreement provides for borrowings of up to $60.0 million, of which $15.0 million may be used for standby letters of credit and $30.0 million is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48.1 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $3.1 million was available for letters of credit and $30.0 million was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11.9 million. The Pacific Lumber Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. Pacific Lumber's and Britt's capital expenditures were made to improve production efficiency, reduce operating costs and, to a lesser degree, acquire additional timberlands. Pacific Lumber's and Britt's capital expenditures were $9.9 million, $11.3 million and $11.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Capital expenditures for 1996 are expected to be $12.5 million and for the 1997 - 1998 period are estimated to be between $10.0 million and $15.0 million per year. Pacific Lumber may purchase additional timberlands from time to time as appropriate opportunities arise. Moreover, such purchases could exceed historical levels. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by an earthquake in April 1992 were approximately $1.9 million for 1993 and $2.6 million for 1994, when construction was completed. As of December 31, 1995, MGI and its subsidiaries had consolidated working capital of $124.2 million and long-term debt of $732.9 million (net of current maturities and restricted cash deposited in a liquidity account for the benefit of the holders of the Timber Notes). MGI and its subsidiaries anticipate that cash flow from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, MGI and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash from operations, and their ability to obtain both short and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, MGI and its subsidiaries are more sensitive than less leveraged companies to factors affecting their operations, including governmental regulation affecting their timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. See "-Trends-Forest Products Operations." REAL ESTATE AND OTHER OPERATIONS As of December 31, 1995, approximately $8.0 million was outstanding pursuant to a loan agreement secured by the RTC Portfolio (the "RTC Portfolio Loan"). The loan agreement governing the RTC Portfolio Loan provides for additional borrowings of up to approximately $12.1 million on or before March 31, 1996. The Company anticipates that such amount will be borrowed if such date is not extended. The RTC Portfolio Loan matures on December 31, 1999 and bears interest at prime plus 3%. Upon the sale of any secured property or loan, principal payments are required based on the release price (as defined) of such property or loan. The entire amount of the loan must also be paid if the principal balance declines to less than $8.0 million. On July 15, 1995, a real estate subsidiary of the Company, MCO Properties Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank which will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings under the MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables and real estate held for investment or development and sale, (ii) MCOP's pledge of the common stock of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's subsidiaries and the Company. Further, the Company has pledged MCOP's common stock as additional security. Interest is computed at the bank's prime rate plus - -1/2% or the bank's Eurodollar rate plus 2-3/4%. The MCOP Credit Agreement contains various covenants including a minimum net worth requirement and limitations on the payment of dividends, investments and the incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0 million, of which $8.5 million may be used for standby letters of credit. The available credit is subject to borrowing base limitation calculations. As of December 31, 1995, $10.6 million of additional borrowings was available under the MCOP Credit Agreement; outstanding borrowings and letters of credit outstanding amounted to $.7 million and $2.1 million, respectively. In July 1993, the Company, through various subsidiaries, acquired various interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million. The Company increased its equity interest in SHRP, Ltd. to 45.0%, as a result of a $5.6 million capital contribution in October 1994. On January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on $75.0 million aggregate principal amount of its 11-3/4% Senior Secured Notes. On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, SHRP Capital Corp., together with SHRP Acquisition, Inc., a wholly owned subsidiary of the Company and SHRP, Ltd.'s largest limited partner (collectively, the "Debtors"), filed voluntary petitions seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy cases were consolidated and transferred to the United States Bankruptcy Court for the Southern District of Texas, Houston Division, Case No. 95-43739-H3-11. On September 22, 1995, the bankruptcy plan of the Debtors (the "Plan") was confirmed and on October 6, 1995, the transactions called for by the Plan were completed. A new investor group (the "New SHRP Investor Group") made a capital contribution of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of the Company contributed $5.8 million) to SHRP, Ltd. Additionally, a wholly owned subsidiary of the Company contributed an adjoining approximately 87-acre tract of land (with a fair market value of $2.3 million). The new managing general partner of the reorganized SHRP, Ltd. (the "SHRP Managing General Partner") is SHRP General Partner, Inc., a wholly owned subsidiary of the Company. SHRP Managing General Partner was issued a 1% interest in the reorganized SHRP, Ltd. in exchange for contributing its pro rata share of the investment made by the New SHRP Investor Group. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3 million, $14.6 million aggregate initial principal amount of the SHRP Notes and the corresponding shares of common stock of SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which the selling noteholder was entitled. Such shares of common stock represent 39.0% of the shares of common stock of SHRP Equity, Inc. After giving effect to these transactions, wholly owned subsidiaries of the Company hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd. As of December 31, 1995, the Company's real estate and other subsidiaries had approximately $22.7 million available for use under various credit agreements. The substantial portion of the availability was attributable to the credit availability pursuant to the RTC Portfolio Loan and the MCOP Credit Agreement. The Company believes that the existing cash and credit facilities of its real estate and other subsidiaries are sufficient to fund the working capital and capital expenditure requirements of such subsidiaries for the next year. With respect to the long-term liquidity of such subsidiaries, the Company believes that their ability to generate cash from the sale of their existing real estate, together with their ability to obtain financing should provide sufficient funds to meet their working capital and capital expenditure requirements. TRENDS ALUMINUM OPERATIONS - SENSITIVITY TO PRICES AND HEDGING PROGRAMS KACC enters into primary aluminum hedging transactions in the normal course of business. The prices realized by KACC under certain sales contracts for alumina, primary aluminum and fabricated aluminum products, as well as the costs incurred by KACC for certain items, such as aluminum scrap, rolling ingot, power and bauxite, fluctuate with the market price of primary aluminum, together resulting in a "net exposure" of earnings. The primary aluminum hedging transactions are designed to mitigate the net exposure of earnings to declines in the market price of primary aluminum, while retaining the ability to participate in favorable pricing environments that may materialize. KACC has employed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. With respect to its 1996 anticipated net exposure, at December 31, 1995, KACC had purchased approximately 53,300 tons of primary aluminum at fixed prices as a partial hedge against approximately 161,100 tons of fabricated aluminum products sold to customers at fixed or capped prices, and had sold forward 15,750 tons of primary aluminum at fixed prices. In addition, as of December 31, 1995, KACC had sold approximately 75% and 45% of the alumina available to it in excess of its projected internal smelting requirements for 1996 and 1997, respectively. Approximately 56% of such alumina sold for 1996 and all of such alumina sold for 1997 has been sold at prices linked to the future prices of primary aluminum as a percentage of the price of primary aluminum ("Variable Price Contracts"), and approximately 44% of such alumina sold for 1996 has been sold at fixed prices ("Fixed Price Contracts"). The average realized prices of alumina sold under Variable Price Contracts will depend on future prices of primary aluminum, and the average realized prices of alumina sold under Fixed Price Contracts will substantially exceed Kaiser's manufacturing cost of alumina. KACC also enters into hedging transactions in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates. At December 31, 1995, KACC had net forward foreign exchange contracts totaling $102.8 million for the purchase of 142.4 million Australian dollars through April 30, 1997. KACC has established margin accounts with its counterparties related to forward aluminum sales and option contracts. KACC is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At December 31, 1995, Kaiser was not required to maintain any such margin deposits. At December 31, 1994, KACC had $50.5 million on deposit with various counterparties with respect to such deposit requirements. These amounts are recorded in prepaid expenses and other current assets. Since December 31, 1995, KACC has entered into additional hedge positions with respect to its anticipated 1996, 1997, and 1998 production. As of February 29, 1996, KACC had sold forward an additional 19,500 metric tons of primary aluminum at fixed prices, had purchased 20,150 metric tons of primary aluminum under forward purchase contracts at fixed prices, and had purchased put options to establish a minimum price for 45,000 metric tons of primary aluminum. It has also entered into additional forward foreign exchange contracts totaling $12.8 million for the purchase of 18.0 million Australian dollars from March 1996 through December 1997 with respect to its commitments for 1996 and 1997 expenditures denominated in Australian dollars. At February 29, 1996, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,747 per metric ton ($.79 per pound) of primary aluminum, and forward foreign exchange contracts was $13.3 million. FOREST PRODUCTS OPERATIONS The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species, water quality and air and water pollution. 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 and California Endangered Species Act 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 provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. The regulations under certain of these laws are modified from time to time. The Company does not expect that Pacific Lumber's compliance with such existing laws and regulations will have a material adverse effect on Pacific Lumber's future consolidated operating results, financial position or liquidity; however, there can be no assurance that future legislation, governmental regulations or judicial or administrative decisions would not adversely affect Pacific Lumber or its ability to sell lumber, logs or timber. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield objectives. These regulations require timber companies to project the average annual growth they will have on their timberlands during the last decade of a 100-year planning period ("Projected Annual Growth"). During any rolling ten-year period, the average annual harvest over such ten-year period may not exceed Projected Annual Growth. The first ten-year period began in May 1994. Pacific Lumber is required to submit, by October 1996, a plan setting forth, among other things, its Projected Annual Growth. Pacific Lumber has not completed its analysis of the projected productivity of its timberlands and is therefore unable to predict the impact that these regulations will have on its future timber harvesting practices; however, the final results of this analysis could require Pacific Lumber to reduce (or permit it to increase) its timber harvest in future years from the average annual harvest that it has experienced in recent years. Pacific Lumber believes that it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and by increasing the productivity of its timberlands. In 1995, the U.S. Fish and Wildlife Service ("USFWS") published its proposed final designation ("Proposed Designation") of critical habitat for the marbled murrelet, seeking to designate over four million acres as critical habitat for the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's timberlands. The Proposed Designation was subject to a 60-day comment period and Pacific Lumber filed comments vigorously opposing the Proposed Designation. The USFWS has not yet published its final designation of critical habitat for the marbled murrelet. It is impossible for the Company to determine the potential adverse impact of such designation on Pacific Lumber's consolidated financial position, results of operations or liquidity until such time as the Proposed Designation and related regulatory and legal issues are fully resolved. However, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as marbled murrelet critical habitat, such restrictions could have a material adverse effect on its consolidated financial position, results of operations or liquidity. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek full compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a regulatory taking. Judicial or regulatory actions adverse to Pacific Lumber, increased regulatory delays and inclement weather in northern California, independently or collectively, could impair Pacific Lumber's ability to maintain adequate log inventories and force Pacific Lumber to temporarily idle or curtail operations at certain of its lumber mills from time to time. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the estimated future cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value, less cost to sell. SFAS 121 is effective for financial statements for fiscal years beginning after December 31, 1995. The Company does not expect that the adoption of SFAS 121 will have a material impact on the Company's consolidated financial statements. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans, and provides for alternative methods for an employer to recognize stock-based compensation costs. Under the first method, an employer may continue to account for compensation costs for stock, stock options, and other equity instruments issued to employees as it has historically, using the "intrinsic value based method" (as described in SFAS 123), and such compensation costs would be the excess, if any, of the quoted market price of the stock subject to an option at the grant date or other measurement date over the amount an employee must pay to acquire the stock. The intrinsic value based method generally would not result in the recognition of compensation costs upon the grant of stock options. Under the second method, an employer may adopt the "fair value based method" (as described in SFAS 123). Under the fair value based method, such compensation costs would be valued using an option-pricing model, and such amount would be charged to expense over the option's vesting period. Employers which elect to continue to account for stock-based compensation under the intrinsic value based method will be required by SFAS 123 to disclose in the notes to their financial statements the amount of net income and the earnings per share which would have been reported had the employer elected to use the fair value based method. The Company has elected to continue to account for stock-based compensation under the intrinsic value based method, and will comply with the disclosure requirement of SFAS 123 for fiscal years beginning January 1, 1996. 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, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Notes 5 and 6 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes, postretirement benefits other than pensions and postemployment benefits. ARTHUR ANDERSEN LLP Houston, Texas February 16, 1996 MAXXAM Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET
December 31, ----------------------- (In millions of dollars, except share amounts) 1995 1994 ---------- ---------- Assets Current assets: Cash and cash equivalents $ 104.2 $ 84.6 Marketable securities 45.9 40.3 Receivables: Trade, net of allowance for doubtful accounts of $5.5 and $4.4 at December 31, 1995 and 1994, respectively 246.2 176.8 Other 98.9 62.9 Inventories 606.8 541.4 Prepaid expenses and other current assets 129.7 185.3 ---------- ---------- Total current assets 1,231.7 1,091.3 Property, plant and equipment, net 1,231.9 1,231.6 Timber and timberlands, net of depletion of $139.6 and $123.9 at December 31, 1995 and 1994, respectively 313.0 325.2 Investments in and advances to unconsolidated affiliates 189.1 169.7 Deferred income taxes 414.0 425.6 Long-term receivables and other assets 452.6 447.4 ---------- ---------- $ 3,832.3 $ 3,690.8 ========== ========== Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 196.7 $ 161.8 Accrued interest 58.0 62.0 Accrued compensation and related benefits 166.5 138.3 Other accrued liabilities 148.4 200.2 Payable to affiliates 90.2 81.8 Long-term debt, current maturities 25.1 33.7 ---------- ---------- Total current liabilities 684.9 677.8 Long-term debt, less current maturities 1,585.1 1,582.5 Accrued postretirement benefits 742.6 743.1 Other noncurrent liabilities 680.3 618.4 ---------- ---------- Total liabilities 3,692.9 3,621.8 ---------- ---------- Commitments and contingencies Minority interests 223.2 344.3 Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 1995 - 669,701 and 1994 - 669,957 .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,359 5.0 5.0 Additional capital 155.0 53.2 Accumulated deficit (208.5) (302.9) Pension liability adjustment (16.1) (11.4) Treasury stock, at cost (shares held: preferred - 845; common: 1995 - 1,355,512 and 1994 - 1,355,768) (19.5) (19.5) ---------- ---------- Total stockholders' deficit (83.8) (275.3) ---------- ---------- $ 3,832.3 $ 3,690.8 ========== ==========
The accompanying notes are an integral part of these financial statements. MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, ------------------------------------ (In millions of dollars, except share amounts) 1995 1994 1993 ---------- ---------- ---------- Net sales: Aluminum operations $ 2,237.8 $ 1,781.5 $ 1,719.1 Forest products operations 242.6 249.6 233.5 Real estate and other operations 84.8 84.6 78.5 ---------- ---------- ---------- 2,565.2 2,115.7 2,031.1 ---------- ---------- ---------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations 1,798.4 1,625.5 1,587.7 Forest products operations 127.1 129.6 134.6 Real estate and other operations 65.4 62.8 65.3 Selling, general and administrative expenses 195.8 169.4 183.0 Depreciation and depletion 120.9 121.1 120.8 Restructuring of aluminum operations - - 35.8 ---------- ---------- ---------- 2,307.6 2,108.4 2,127.2 ---------- ---------- ---------- Operating income (loss) 257.6 7.3 (96.1) Other income (expense): Investment, interest and other income (expense) 18.2 (2.2) 69.8 Interest expense (172.7) (167.3) (169.5) Amortization of deferred financing costs (8.6) (9.6) (15.6) ---------- ---------- ---------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles 94.5 (171.8) (211.4) Credit (provision) for income taxes (14.8) 77.1 82.5 Minority interests (22.2) (22.0) (3.0) ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect of changes in accounting principles 57.5 (116.7) (131.9) Extraordinary item: Loss on early extinguishment of debt, net of related benefits for minority interests of $nil in 1994 and $2.8 in 1993 and income taxes of $2.9 in 1994 and $27.5 in 1993, respectively - (5.4) (50.6) Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions and postemployment benefits, net of related benefits for minority interests of $64.6 and income taxes of $240.2 - - (444.3) Accounting for income taxes - - 26.6 ---------- ---------- ---------- Net income (loss) $ 57.5 $ (122.1) $ (600.2) ========== ========== ========== Per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles $ 6.08 $ (12.35) $ (13.95) Extraordinary item - (.57) (5.35) Cumulative effect of changes in accounting principles - - (44.17) ---------- ---------- ---------- Net income (loss) $ 6.08 $ (12.92) $ (63.47) ========== ========== ==========
The accompanying notes are an integral part of these financial statements. MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ------------------------------------ (In millions of dollars) 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ 57.5 $ (122.1) $ (600.2) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and depletion 120.9 121.1 120.8 Minority interests 22.2 22.0 3.0 Amortization of deferred financing costs and discounts on long-term debt 19.5 19.3 21.7 Amortization of excess investment over equity in net assets of unconsolidated affiliates 11.4 11.6 11.9 Equity in (earnings) loss of unconsolidated affiliates (19.1) 15.0 4.9 Net gain on sales of real estate, mortgage loans and other assets (9.7) (6.5) (45.8) Net gains on marketable securities (8.6) (4.2) (7.1) Net sales (purchases) of marketable securities (4.0) 12.9 31.1 Extraordinary loss on early extinguishment of debt, net - 5.4 50.6 Cumulative effect of changes in accounting principles, net - - 417.7 Decrease (increase) in prepaid expenses and other assets 84.5 (47.9) 5.4 Increase (decrease) in accounts payable 34.7 26.3 (14.1) Decrease (increase) in receivables (103.6) 24.5 5.0 Decrease (increase) in inventories (65.3) (37.5) 10.9 Increase in accrued and deferred income taxes (13.1) (77.2) (96.5) Increase (decrease) in payable to affiliates and other liabilities (1.2) 37.5 110.5 Increase (decrease) in accrued interest (1.0) 8.3 14.3 Other 12.8 (4.0) 8.0 ---------- ---------- ---------- Net cash provided by operating activities 137.9 4.5 52.1 ---------- ---------- ---------- Cash flows from investing activities: Net proceeds from disposition of property and investments 39.3 30.0 143.0 Capital expenditures (97.7) (89.3) (86.2) Investment in subsidiaries and joint ventures (15.9) (7.4) (9.4) Other (1.1) (1.2) (2.8) ---------- ---------- ---------- Net cash provided by (used for) investing activities (75.4) (67.9) 44.6 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt 5.7 229.7 1,201.3 Net borrowings (payments) under revolving credit agreements and short-term borrowings (payments) 4.4 (191.8) (107.6) Proceeds from issuance of Kaiser capital stock 1.2 100.1 119.3 Restricted cash (deposits), net of withdrawals 1.0 1.2 (33.6) Redemptions, repurchase of and principal payments on long-term debt (40.9) (39.1) (1,219.4) Dividends paid to Kaiser's minority preferred stockholders (20.5) (13.7) (5.6) Redemption of preference stock (8.8) (8.5) (4.2) Incurrence of financing costs (1.8) (19.7) (47.9) Other 16.8 5.9 3.0 ---------- ---------- ---------- Net cash provided by (used for) financing activities (42.9) 64.1 (94.7) ---------- ---------- ---------- Net increase in cash and cash equivalents 19.6 .7 2.0 Cash and cash equivalents at beginning of year 84.6 83.9 81.9 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 104.2 $ 84.6 $ 83.9 ========== ========== ========== Supplementary schedule of non-cash investing and financing activities: Net margin borrowings (repayments) for marketable securities $ (6.9) $ 5.9 $ (.9) Reduction of stockholders' deficit due to redemption of Kaiser preferred stock 136.2 - - Contribution of property in exchange for joint venture interest, net of deferred gain of $8.6 1.3 - - Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 162.8 $ 149.3 $ 149.1 Income taxes paid, net 30.3 18.3 13.2
The accompanying notes are an integral part of these financial statements. MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In millions of Preferred Common Stock Retained Pension dollars and Stock ----------------------- Additional Earnings Liability Treasury shares) ($.50 Par) Shares ($.50 Par) Capital (Deficit) Adjustment Stock Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, January 1, 1993 $ .3 8.7 $ 5.0 $ 47.9 $ 419.4 $ (9.0) $ (19.7) $ 443.9 Net loss - - - - (600.2) - - (600.2) Gain from issuance of Kaiser Aluminum Corporation common stock - - - 3.3 - - - 3.3 Additional pension liability - - - - - (14.9) - (14.9) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1993 .3 8.7 5.0 51.2 (180.8) (23.9) (19.7) (167.9) Net loss - - - - (122.1) - - (122.1) Gain from issuance of Kaiser Aluminum Corporation common stock - - - 2.2 - - - 2.2 Conversions of preferred stock to common stock - - - (.2) - - .2 - Reduction of pension liability - - - - - 12.5 - 12.5 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1994 .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3) Net income - - - - 57.5 - - 57.5 Gain from issuance of Kaiser Aluminum Corporation common stock - - - 2.5 - - - 2.5 Redemption of Kaiser Aluminum Corporation preferred stock - - - 99.3 36.9 - - 136.2 Additional pension liability - - - - - (4.7) - (4.7) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 $ .3 8.7 $ 5.0 $ 155.0 $ (208.5) $ (16.1) $ (19.5) $ (83.8) ========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. MAXXAM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars, except share amounts) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION THE COMPANY The consolidated financial statements include the accounts of MAXXAM Inc. and its majority and wholly owned subsidiaries. All references to the "Company" include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless otherwise indicated or the context indicates otherwise. Intercompany balances and transactions have been eliminated. Investments in affiliates (20% to 50%-owned) are accounted for utilizing the equity method of accounting. Certain reclassifications have been made to prior years' financial statements to be consistent with the current year's presentation. The Company is a holding company and, as such, conducts substantially all of its operations through its subsidiaries. The Company operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries, principally The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate investment and development, managed through its wholly owned subsidiary, MAXXAM Property Company; and other commercial operations through various other wholly owned subsidiaries. DESCRIPTION OF THE COMPANY'S OPERATIONS Kaiser operates in the aluminum industry through its principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all principal aspects of the aluminum industry - the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of aluminum, and the manufacture of fabricated and semi-fabricated aluminum products. KACC's production levels of alumina and primary aluminum exceed its internal requirements and allow it to be a major seller of alumina and primary aluminum in domestic and international markets. The substantial portion of the Company's consolidated assets, liabilities, revenues, results of operations and cash flows are attributable to Kaiser (see Note 11). Pacific Lumber operates in several principal aspects of the lumber industry - the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the manufacture of lumber into a variety of finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which is obtained from Pacific Lumber. Housing, construction and remodeling markets are the principal markets for the Company's lumber products. Export sales generally constitute less than 4% of forest products sales. A significant portion of forest products sales are made to third parties located west of the Mississippi river. The Company, principally through its wholly owned subsidiaries, is engaged in the business of residential and commercial real estate investment and development, primarily in California, Arizona, Texas and Puerto Rico. With respect to periods after October 6, 1995, other commercial operations include the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited partnership which owns and operates a Class 1 horse racing facility in the greater Houston metropolitan area. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Company reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the subsequent resolution of any one of the contingent matters described in Note 9 could differ materially from current estimates. The results of an adverse resolution of such uncertainties could have a material effect on the reported amounts of the Company's consolidated assets and liabilities. The cumulative losses of Kaiser in the first and second quarters of 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions as described in Note 6, eliminated Kaiser's equity with respect to its common stock; accordingly, the Company recorded 100% of Kaiser's losses in the third and fourth quarters of 1993 and all of 1994, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7). The Company recorded 100% of Kaiser's earnings in 1995 and will continue to do so until such time as the cumulative losses recorded by the Company with respect to Kaiser's minority common stockholders are recovered. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. MARKETABLE SECURITIES Marketable securities are carried at fair value. Prior to December 31, 1993, marketable securities were carried at the lower of cost or market. The cost of the securities sold is determined using the first-in, first-out method. Included in investment, interest and other income (expense) for each of the three years ended December 31, 1995 were: 1995 - net unrealized holding gains of $1.9 and net realized gains of $6.8; 1994 - net unrealized holding losses of $1.0 and net realized gains of $5.2; and 1993 - net realized gains of $4.2, the recovery of $2.0 of net unrealized losses and net unrealized gains of $.9. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. INVENTORIES Inventories are stated at the lower of cost or market. Cost for the aluminum and forest products operations inventories is primarily determined using the last-in, first-out ("LIFO") method. Other inventories of the aluminum operations, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor and manufacturing overhead, including depreciation and depletion. The Company recorded pre-tax charges of approximately $19.4 in 1993 because of reductions in the carrying value of its aluminum operations inventories caused principally by prevailing lower prices for alumina, primary aluminum and fabricated aluminum products. Inventories consist of the following:
December 31, ----------------------- 1995 1994 ---------- ---------- Aluminum Operations: Finished fabricated products $ 91.5 $ 49.4 Primary aluminum and work in process 195.9 203.1 Bauxite and alumina 119.6 102.3 Operating supplies and repair and maintenance parts 118.7 113.2 ---------- ---------- 525.7 468.0 ---------- ---------- Forest Products Operations: Lumber 65.5 61.3 Logs 15.6 12.1 ---------- ---------- 81.1 73.4 ---------- ---------- $ 606.8 $ 541.4 ========== ==========
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed principally utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. TIMBER AND TIMBERLANDS Timber and timberlands are stated at cost, net of accumulated depletion. Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. DEFERRED FINANCING COSTS Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. RESTRICTED CASH AND CONCENTRATIONS OF CREDIT RISK At December 31, 1995 and 1994, cash and cash equivalents includes $19.7 and $19.4, respectively, which is reserved for debt service payments on the Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At December 31, 1995 and 1994, long-term receivables and other assets includes $31.4 and $32.4, respectively, of restricted cash deposits held for the benefit of the Timber Note holders as described in Note 4. Each of these deposits is held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. RESTRUCTURING OF ALUMINUM OPERATIONS In 1993, Kaiser implemented a restructuring plan primarily for its flat-rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which had resulted in declining prices in Trentwood's key markets. Additionally, KACC implemented a plan to streamline its casting operations, which included the shutdown of two facilities located in Ohio. This entire restructuring was successfully completed by the end of 1995. The pre-tax charge for this restructuring of $35.8 included $25.2 for pension, severance and other termination benefits at Trentwood; $8.0 related to casting facilities; and $2.6 for various other items. INVESTMENT, INTEREST AND OTHER INCOME (EXPENSE) During 1994, the Company, Pacific Lumber and others agreed to a settlement, subsequently approved by the court, of class and related individual claims brought by former stockholders of Pacific Lumber against the Company, MGI, Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's acquisition of Pacific Lumber. Of the $52.0 settlement, $33.0 was paid by insurance carriers of the Company and Pacific Lumber, $14.8 was paid by Pacific Lumber, and the balance was paid by other defendants and through the assignment of certain claims. In 1994, the Company recorded a pre-tax loss of $21.2 which consists of Pacific Lumber's $14.8 cash payment to the settlement fund, a $2.0 accrual for certain contingent claims, and $4.4 of related legal fees. Insofar as these matters do not originate from, or relate in any manner to, its ongoing operations, the Company recorded the settlement as a charge to investment, interest and other income (expense). Additionally, in February 1994, Pacific Lumber received a franchise tax refund of $7.2, the substantial portion of which represents interest, from the state of California relating to tax years 1972 through 1985. The net effect of these transactions are included in investment, interest and other income (expense) for the year ended December 31, 1994. Investment, interest and other income (expense) for the years ended December 31, 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9, respectively, of pre-tax charges related principally to establishing additional litigation reserves for asbestos claims and environmental reserves for potential solid waste disposal and soil and ground water remediation matters, each pertaining to operations which were discontinued prior to the acquisition of Kaiser by the Company in 1988. Investment, interest and other income for the year ended December 31, 1993 includes a fourth quarter pre-tax gain of $47.8 from the sale of sixteen multi-family real estate properties for cash proceeds of $113.6. FOREIGN CURRENCY TRANSLATION The Company uses the United States dollar as the functional currency for its foreign operations. DERIVATIVE FINANCIAL INSTRUMENTS Gains and losses arising from the use of derivative financial instruments are reflected in Kaiser's operating results concurrently with the consummation of the underlying hedged transactions. Deferred gains or losses are included in prepaid expenses and other current assets and other accrued liabilities. Kaiser does not hold or issue derivative financial instruments for trading purposes (see Note 10). FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents and restricted cash approximate fair value. The fair value of marketable securities is determined based on quoted market prices. The estimated fair value of long-term debt is determined based on the quoted market prices for the publicly traded issues and on the current rates offered for borrowings similar to the other debt. MGI's publicly traded debt issues are thinly traded financial instruments; accordingly, their market prices at any balance sheet date may not be representative of the prices which would be derived from a more active market. The fair value of foreign currency contracts generally reflects the estimated amounts that Kaiser would receive to enter into similar contracts at the balance sheet date, thereby taking into account unrealized gains or losses on open contracts (see Note 10). The estimated fair values of the Company's financial instruments, along with the carrying amounts of the related assets (liabilities), are as follows:
December 31, 1995 December 31, 1994 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Cash and cash equivalents $ 104.2 $ 104.2 $ 84.6 $ 84.6 Marketable securities (held for trading purposes) 45.9 45.9 40.3 40.3 Restricted cash 31.4 31.4 32.4 32.4 Long-term debt (1,610.2) (1,672.0) (1,616.2) (1,545.9) Foreign currency contracts - 1.9 - 3.5
STOCK-BASED COMPENSATION The Company applies the intrinsic value based method for accounting for stock or stock-based compensation awards described by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (see Note 8). PER SHARE INFORMATION Per share calculations are based on the weighted average number of common shares outstanding in each year and, if dilutive, weighted average common equivalent shares and common stock options based upon the average price of the Company's common stock during the year. The weighted average number of common and common equivalent shares was 9,459,293 shares, 9,447,878 shares and 9,457,083 shares for the years ended December 31, 1995, 1994 and 1993, respectively. 2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Kaiser's investments in unconsolidated affiliates are held by KACC. KACC holds a 28.3% interest in Queensland Alumina Limited ("QAL"), a leading producer of alumina, and a 49% interest in both Kaiser Jamaica Bauxite Company, a bauxite supplier, and Anglesey Aluminium Limited ("Anglesey"), which produces primary aluminum. KACC provides some of its affiliates with services such as financing, management and engineering. Purchases from these affiliates for the acquisition and processing of bauxite, alumina and primary aluminum aggregated $284.4, $219.7 and $206.6 for the years ended December 31, 1995, 1994 and 1993, respectively (see Note 9). KACC received dividends of $8.1 from the investees for the year ended December 31, 1995. No dividends were received for the years ended December 31, 1994 or 1993. KACC's equity in earnings (loss) before income taxes of such operations is treated as a reduction (increase) in cost of sales. At December 31, 1995 and 1994, KACC's net receivables from these affiliates were not material. Summarized combined financial information for KACC's investees is as follows:
December 31, ---------------------- 1995 1994 ---------- ---------- Current assets $ 429.0 $ 342.3 Property, plant and equipment, net 330.8 349.4 Other assets 39.3 42.4 ---------- ---------- Total assets $ 799.1 $ 734.1 ========== ========== Current liabilities $ 125.4 $ 122.4 Long-term debt 331.8 307.6 Other liabilities 35.6 31.0 Stockholders' equity 306.3 273.1 ---------- ---------- Total liabilities and stockholders' equity $ 799.1 $ 734.1 ========== ==========
Years Ended December 31, ----------------------------------- 1995 1994 1993 ---------- --------- ---------- Net sales $ 685.9 $ 489.8 $ 510.3 Costs and expenses (618.7) (494.8) (527.2) Credit (provision) for income taxes (18.7) (6.3) 1.9 ---------- --------- ---------- Net income (loss) $ 48.5 $ (11.3) $ (15.0) ========== ========= ========== KACC's equity in earnings (loss) of affiliates $ 19.2 $ (1.9) $ (3.3) ========== ========= ==========
KACC's equity in earnings (loss) differs from the summary net income (loss) for unconsolidated affiliates due to various percentage ownerships in the constituent entities and the amortization of the excess of KACC's investment in the affiliates over its equity in their net assets. At December 31, 1995, KACC's investment in these affiliates exceeded its equity in their net assets by $54.9. KACC is amortizing this amount over a twelve-year period which results in an annual charge of approximately $11.4. OTHER INVESTEES In 1995, pursuant to a joint venture agreement with SunCor Development Company ("SunCor") for the purpose of developing and managing a real estate project, the Company, through a wholly owned real estate subsidiary, contributed 950 acres of undeveloped land valued at $10.0 and cash of $1.0 in exchange for a 50% interest. SunCor, the managing partner, contributed $11.0 in cash in exchange for its 50% interest. A subsidiary of the Company and SunCor are each guarantors of 50% of $4.6 aggregate principal amount of the joint venture's debt. At December 31, 1995, the joint venture had assets of $32.6, liabilities of $10.5 and equity of $22.1. For the year ended December 31, 1995, the joint venture incurred losses of $.2. On July 8, 1993, the Company, through various subsidiaries, acquired control of the general partner and became responsible for the management of SHRP, Ltd. for an investment of $9.1. The Company's subsidiaries held an initial equity interest in SHRP, Ltd. of 29.7%. The Company increased its equity interest in SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in October 1994. At December 31, 1994, SHRP, Ltd. had assets of $76.9 ($6.5 current), liabilities of $88.6 ($13.4 current) and a deficiency in net assets of $11.7. SHRP, Ltd. incurred net losses for the years ended December 31, 1994 and 1993 of approximately $20.0 and $5.9, respectively. The Company recorded losses with respect to its investment in SHRP, Ltd. of $13.1 and $1.6 for the year ended December 31, 1994 and for the period from July 8, 1993 to December 31, 1993, respectively. 1995 ACQUISITION OF MAJORITY INTEREST IN SHRP, LTD. On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together with SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the Company), filed voluntary petitions seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy plan (the "Plan") was confirmed on September 22, 1995, and the transactions called for by the Plan were completed on October 6, 1995. Such transactions included cash contributions to SHRP, Ltd. from a new investor group totaling $5.9 (of which wholly owned subsidiaries of the Company contributed $5.8). Additionally, a wholly owned subsidiary of the Company contributed a tract of land to SHRP, Ltd. (with a fair market value of $2.3). The new managing general partner of the reorganized SHRP, Ltd. is a wholly owned subsidiary of the Company. In an unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3 (which approximated fair value), $14.6 aggregate initial principal amount of the SHRP Notes (as defined in Note 4) and the corresponding equity interest in SHRP Equity, Inc. (a Delaware corporation and an additional general partner of the reorganized SHRP, Ltd.) to which the selling noteholder was entitled. After giving effect to the previously described transactions, wholly owned subsidiaries of the Company hold, directly or indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd. Supplemental cash flows disclosure related to the acquisition of SHRP, Ltd. in October 1995 is as follows: assets acquired of $29.3, assumed liabilities of $20.7, and additional minority interest of $2.8. The assets and liabilities of SHRP, Ltd. are included in the accompanying Consolidated Balance Sheet as of December 31, 1995, and the results of SHRP, Ltd.'s operations and cash flows for the period from October 6, 1995 to December 31, 1995 are included in the accompanying Consolidated Statements of Operations and Cash Flows. The carrying value of SHRP, Ltd.'s assets and liabilities following its emergence from the Chapter 11 proceedings differs in material amounts from those of the predecessor entity. The pro forma disclosures, assuming SHRP, Ltd. was included in the Company's consolidated results of operations are as follows: revenue - $2,579.3, $2,135.9; income (loss) before extraordinary items - $50.6, ($125.0); net income (loss) - $50.6, ($130.4); and earnings (loss) per common and common equivalent share - $5.35, ($13.80), for the years ended December 31, 1995 and 1994, respectively. The pro forma information excludes amounts attributable to SHRP, Ltd.'s extraordinary gain of $14.9 resulting from the restructuring transactions contained in the Plan. The extraordinary gain was omitted because the Company believes the item would distort normal trends. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
December 31, Estimated Useful ----------------------- Lives 1995 1994 ---------------- ---------- ---------- Land and improvements 5 - 30 years $ 185.8 $ 176.1 Buildings 5 - 45 years 272.4 259.6 Machinery and equipment 3 - 40 years 1,388.5 1,330.8 Construction in progress 63.3 45.0 ---------- ---------- 1,910.0 1,811.5 Less: accumulated depreciation (678.1) (579.9) ---------- ---------- $ 1,231.9 $ 1,231.6 ========== ==========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $105.4, $105.7 and $104.9, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1995 1994 ---------- ---------- Corporate: 14% MAXXAM Senior Subordinated Reset Notes due May 20, 2000 $ 25.0 $ 25.0 12-1/2% MAXXAM Subordinated Debentures due December 15, 1999, net of discount 16.5 20.9 Other .1 .2 Aluminum Operations: 1994 KACC Credit Agreement 13.1 6.7 9-7/8% KACC Senior Notes due February 15, 2002, net of discount 223.8 223.6 Alpart CARIFA Loan 60.0 60.0 12-3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0 Other 61.2 69.2 Forest Products Operations: 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 350.2 363.8 11-1/4% MGI Senior Secured Notes due August 1, 2003 100.0 100.0 12-1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 92.5 82.8 10-1/2% Pacific Lumber Senior Notes due March 1, 2003 235.0 235.0 Other .8 .9 Real Estate and Other Operations: 11% SHRP, Ltd. Senior Secured Extendible Notes due September 1, 2001, net of discount 13.3 - RTC Portfolio secured notes due December 31, 1999, interest at prime plus 3% 8.0 10.0 MCOP Credit Agreement .7 2.6 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 10.0 15.5 ---------- ---------- 1,610.2 1,616.2 Less: current maturities (25.1) (33.7) ---------- ---------- $ 1,585.1 $ 1,582.5 ========== ==========
CORPORATE 14% MAXXAM SENIOR SUBORDINATED RESET NOTES DUE 2000 (THE "RESET NOTES") Pursuant to the terms of the indenture governing the Reset Notes, no further adjustments to the interest rate are permitted. The Reset Notes are redeemable at the Company's option, in whole or in part, at par. 12-1/2% MAXXAM SUBORDINATED DEBENTURES DUE 1999 (THE "12-1/2% DEBENTURES") The 12-1/2% Debentures, which are net of discount of $1.1 and $1.7 at December 31, 1995 and 1994, respectively, have mandatory redemptions of $3.2 in December 1997 and $3.3 in December 1998. The 12-1/2% Debentures are redeemable at the Company's option, in whole or in part, at par. MAXXAM DEMAND LOAN AGREEMENT On October 10, 1994, the Company entered into a demand loan and pledge agreement (the "Custodial Trust Agreement") with Custodial Trust Company providing for up to $25.0 in borrowings. Any amounts drawn would be payable upon demand and be secured by Kaiser common stock owned by the Company (or such other marketable securities acceptable to the lender) with an initial market value (as defined therein) of approximately three times the amount borrowed. Borrowings under the Custodial Trust Agreement would bear interest at the prime rate plus 1% per annum. The Custodial Trust Agreement contains a negative pledge on 22 million shares of Kaiser's common stock owned by the Company and provides that the Company may sell such shares upon 24 hours notice to the Custodial Trust Company. No borrowings were outstanding as of December 31, 1995. ALUMINUM OPERATIONS THE 1994 KACC CREDIT AGREEMENT (AS AMENDED, THE "1994 KACC CREDIT AGREEMENT") The 1994 KACC Credit Agreement consists of a $325.0 five-year secured revolving line of credit which matures in 1999. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base relating to eligible accounts receivable and inventory. As of December 31, 1995, $259.3 (of which $72.4 could have been used for letters of credit) was available to KACC under the 1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement bear interest at a rate per annum, at KACC's election, equal to a Reference Rate (as defined) plus 1-1/2% or LIBOR (Reserve Adjusted) (as defined) plus 3-1/4%. Effective June 30, 1995, the interest rate margins applicable to borrowings under the 1994 KACC Credit Agreement may be reduced by up to 1-1/2% (non-cumulatively), based on a financial test, determined quarterly. As of December 31, 1995, the financial test permitted a reduction of 1-1/2% per annum in margins effective January 1, 1996. Kaiser recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to Kaiser's previous credit agreement (the "1989 KACC Credit Agreement"). The 1994 KACC Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on Kaiser's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures and enter into unrelated lines of business. The 1994 KACC Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding Kaiser's Gramercy alumina plant), (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks and substantially all other personal property of KACC and certain of its subsidiaries, (iii) a pledge of all of the stock of KACC owned by Kaiser, and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries and pledges of a portion of the stock of certain partially owned foreign affiliates. Substantially all of the identifiable assets of the bauxite and alumina and aluminum processing segments (see Note 11) are attributable to KACC and collateralize the 1994 KACC Credit Agreement indebtedness. 9-7/8% KACC SENIOR NOTES DUE 2002 (THE "KACC SENIOR NOTES") Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") (see Note 7), KACC issued $225.0 of the KACC Senior Notes. The net proceeds from the offering of the KACC Senior Notes were used to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement immediately prior to the effectiveness of the 1994 KACC Credit Agreement and for working capital and general corporate purposes. The KACC Senior Notes are net of discount of $1.2 and $1.4 at December 31, 1995 and 1994, respectively. 12-3/4% KACC SENIOR SUBORDINATED NOTES DUE 2003 (THE "KACC SENIOR SUBORDINATED NOTES") On February 1, 1993, KACC issued $400.0 of the KACC Senior Subordinated Notes. The net proceeds from the sale of the KACC Senior Subordinated Notes were used to retire KACC's 14-1/4% Senior Subordinated Notes due 1995, to prepay $18.0 of the term loan under the 1989 KACC Credit Agreement and to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0, consisting primarily of the payment of premiums and the write-off of unamortized discount and deferred financing costs on the 14-1/4% Senior Subordinated Notes. The obligations of KACC with respect to the KACC Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. Pursuant to the terms of the indentures governing the KACC Senior Notes and the KACC Senior Subordinated Notes, at December 31, 1995, $66.0 was available for payment of dividends on Kaiser's common stock. However, pursuant to the terms of the 1994 KACC Credit Agreement, at December 31, 1995, Kaiser is precluded from paying any dividends on its common stock. Further, the indentures governing the KACC Senior Notes and the KACC Subordinated Notes provide that KACC must offer to purchase such notes upon the occurrence of a Change of Control (as defined therein), and the 1994 KACC Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. ALPART CARIFA LOAN In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned subsidiary of KACC) entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal amount of Series A bonds matures on June 1, 2008. Substantially all of the Series A bonds bear interest at a floating rate of 87% of the applicable LIBID rate (LIBOR less -1/8 of 1%). The $22.0 aggregate principal amount of Series B bonds matures on June 1, 2007 and bears interest at a fixed rate of 8.25%. Proceeds from the sale of the bonds were used by Alpart to refinance interim loans from the partners in Alpart, to pay eligible project costs for the expansion and modernization of its alumina refinery and related port and bauxite mining facilities, and to pay certain costs of issuance. Under the terms of the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined by applicable laws. Alpart has agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. Alpart's obligations under the loan agreement are secured by a $64.2 letter of credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed by Kaiser's minority partner). FOREST PRODUCTS OPERATIONS SCOTIA PACIFIC TIMBER NOTES AND 10-1/2% PACIFIC LUMBER SENIOR NOTES DUE 2003 (THE "PACIFIC LUMBER SENIOR NOTES") On March 23, 1993, Pacific Lumber issued $235.0 of the Pacific Lumber Senior Notes and its newly formed wholly owned subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"), issued $385.0 of the Timber Notes. Pacific Lumber and Scotia Pacific used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163.8 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299.7 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes"), and (c) $41.7 aggregate principal amount of Pacific Lumber's 12-1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"), (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption, (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities, (iv) repay Pacific Lumber's $28.9 cogeneration facility loan, (v) fund the initial deposit of $35.0 to an account held by the trustee for the Timber Notes (the "Liquidity Account"), and (vi) pay a $25.0 dividend to a subsidiary of MGI. These transactions resulted in a pre-tax extraordinary loss of $38.1, consisting primarily of the payment of premiums and the write-off of unamortized discounts and deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits Scotia Pacific from incurring any additional indebtedness for borrowed money and limits the business activities of Scotia Pacific to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of Scotia Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) Scotia Pacific's timber and timberlands (representing $179.4 of the Company's consolidated balance at December 31, 1995), (ii) substantially all of Scotia Pacific's property and equipment, and (iii) other property including cash equivalents reserved for debt service payments and the funds deposited in the Liquidity Account. The Timber Notes are structured to link, to the extent of available cash, the deemed depletion of Scotia Pacific's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The required amount of amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which Scotia Pacific must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2015. The amount of principal which Scotia Pacific must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which Scotia Pacific will pay the final installment of principal is July 20, 2009. Principal and interest on the Timber Notes are payable semi-annually on January 20 and July 20. The Timber Notes are redeemable at the option of Scotia Pacific, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like-term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. PACIFIC LUMBER REVOLVING CREDIT AGREEMENT (AS AMENDED AND RESTATED, THE "PACIFIC LUMBER CREDIT AGREEMENT") Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31, 1998, are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. The Pacific Lumber Credit Agreement provides for borrowings of up to $60.0, of which $15.0 may be used for standby letters of credit and $30.0 is restricted to timberland acquisitions. Borrowings made pursuant to the portion of the credit facility restricted to timberland acquisitions would also be secured by the purchased timberlands. As of December 31, 1995, $48.1 of borrowings was available under the Pacific Lumber Credit Agreement, of which $3.1 was available for letters of credit and $30.0 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1995, and letters of credit outstanding amounted to $11.9. The Pacific Lumber Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes, and the Pacific Lumber Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1995, under the most restrictive of these covenants, approximately $15.7 of dividends could be paid by Pacific Lumber. 11-1/4% MGI SENIOR SECURED NOTES DUE 2003 (THE "MGI SENIOR NOTES") AND 12-1/4% MGI SENIOR SECURED DISCOUNT NOTES DUE 2003 (THE "MGI DISCOUNT NOTES") On August 4, 1993, MGI issued $100.0 aggregate principal amount of the MGI Senior Notes and $126.7 aggregate principal amount (approximately $70.0 net of original issue discount) of the MGI Discount Notes (together, the "MGI Notes"). The MGI Notes are secured by MGI's pledge of 100% of the common stock of Pacific Lumber, Britt and MAXXAM Properties Inc. (a wholly owned subsidiary of MGI) and by the pledge of 28 million shares of Kaiser's common stock owned by the Company. The indenture governing the MGI Notes, among other things, restricts the ability of MGI to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. As of December 31, 1995, under the most restrictive of these covenants, approximately $1.9 of dividends could be paid by MGI, of which $1.6 was paid in January 1996. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinate to the liabilities of MGI's subsidiaries, which include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $33.2 and $43.9 at December 31, 1995 and 1994, respectively. The MGI Senior Notes pay interest semi-annually on February 1 and August 1 of each year. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semi-annual interest payments will become due on each February 1 and August 1 thereafter. MGI used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its former 12-3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. MGI used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20.0 dividend to the Company. The Company used such proceeds to redeem, on August 20, 1993, $20.0 aggregate principal amount of its Reset Notes at 100% of their principal amount plus accrued interest thereon. The early retirement of the 12-3/4% Notes and the redemption of $20.0 aggregate principal amount of the Reset Notes resulted in a pre-tax extraordinary loss of $9.8 consisting of net interest cost, the write-off of unamortized deferred financing costs, premiums and the write-off of unamortized original issue discount. REAL ESTATE AND OTHER OPERATIONS 11% SHRP, LTD. SENIOR SECURED EXTENDIBLE NOTES DUE 2001 (THE "SHRP NOTES") The SHRP Notes were issued on October 6, 1995 at an aggregate principal amount of $37.9, maturing on September 1, 2001. The SHRP Notes were recorded at their estimated fair value which resulted in a discount of approximately $17.1. At December 31, 1995, the aggregate principal amount (including accrued interest thereon) of the SHRP Notes and the unamortized discount were $38.8 and $17.0, respectively. On October 20, 1995, a wholly owned subsidiary of the Company purchased approximately 39% of the SHRP Notes from an unrelated party. Accordingly, the amount of indebtedness shown in the accompanying table has been adjusted to reflect the elimination of the Company's holdings. Should the Texas Legislature pass certain gaming legislation, the SHRP Notes may be extended to September 1, 2003; such extension would increase the rate of interest to 13% per annum. The SHRP Notes are secured by substantially all of the assets of SHRP, Ltd., which aggregate $33.6 of the assets reflected on the accompanying Consolidated Balance Sheet at December 31, 1995. Interest on the SHRP Notes is payable in-kind on April 1 and October 1, and will not be payable in cash until a specified level of cash flow from operations has been achieved. Once cash interest payments commence, subsequent interest payments may not be paid in-kind. The indenture governing the SHRP Notes generally precludes the payment of cash distributions until two consecutive cash interest payments have been made. RTC PORTFOLIO SECURED NOTES DUE 1999 (THE "RTC PORTFOLIO LOAN") As of December 31, 1995, approximately $8.0 was outstanding pursuant to the RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan provides for additional borrowings of up to approximately $12.1 on or before March 31, 1996. The Company anticipates that such amount will be borrowed if such date is not extended. Upon the sale of any secured property or loan, principal payments are required based on the release price (as defined) of such property or loan. The entire amount of the loan must also be paid if the principal balance declines to less than $8.0. THE MCOP CREDIT AGREEMENT (AS AMENDED, THE "MCOP CREDIT AGREEMENT") On July 15, 1995, a real estate subsidiary of the Company, MCO Properties Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank which will expire on May 15, 1998. Borrowings under the MCOP Credit Agreement are secured primarily by (i) MCOP's eligible receivables and real estate held for investment or development and sale, (ii) MCOP's pledge of the common stock of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's subsidiaries and the Company. Further, the Company has pledged MCOP's common stock as additional security. Interest is computed at the bank's prime rate plus -1/2% or the bank's Eurodollar rate plus 2-3/4%. The MCOP Credit Agreement contains various covenants including a minimum net worth requirement and limitations on the payment of dividends, investments and the incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0, of which $8.5 may be used for standby letters of credit. The available credit is subject to borrowing base limitation calculations. As of December 31, 1995, $10.6 of additional borrowings was available under the MCOP Credit Agreement and outstanding letters of credit amounted to $2.1. OTHER MATURITIES Scheduled maturities of long-term debt outstanding at December 31, 1995 are as follows:
Years Ending December 31, --------------------------------------------------------------------------- 1996 1997 1998 1999 2000 Thereafter ---------- ---------- ---------- ---------- ---------- ---------- 14% MAXXAM Senior Subordinated Reset Notes $ - $ - $ - $ - $ 25.0 $ - 12-1/2% MAXXAM Subordinated Debentures - 3.2 3.3 11.1 - - 1994 KACC Credit Agreement - - - 13.1 - - 9-7/8% KACC Senior Notes - - - - - 225.0 Alpart CARIFA Loan - - - - - 60.0 12-3/4% KACC Senior Subordinated Notes - - - - - 400.0 7.95% Scotia Pacific Timber Collateralized Notes 14.1 16.2 19.3 21.6 24.0 255.0 11-1/4% MGI Senior Secured Notes - - - - - 100.0 12-1/4% MGI Senior Secured Discount Notes - - - - - 125.7 10-1/2% Pacific Lumber Senior Notes - - - - - 235.0 11% SHRP, Ltd. Senior Secured Extendible Notes - - - - - 43.4 RTC Portfolio secured notes - - - 8.0 - - Other 11.0 10.2 10.1 1.6 2.0 38.0 ---------- ---------- ---------- ---------- ---------- ---------- $ 25.1 $ 29.6 $ 32.7 $ 55.4 $ 51.0 $ 1,482.1 ========== ========== ========== ========== ========== ==========
CAPITALIZED INTEREST Interest capitalized during the years ended December 31, 1995, 1994 and 1993 was $2.8, $3.0 and $4.4, respectively. RESTRICTED NET ASSETS OF SUBSIDIARIES Certain debt instruments restrict the ability of the Company's subsidiaries to transfer assets, make loans and advances and pay dividends to the Company. As of December 31, 1995, all of the assets relating to the Company's aluminum, forest products, real estate and other operations are subject to such restrictions. The Company could eliminate all of such restrictions with respect to approximately $200.2 (see Note 11) of the Company's real estate assets with the extinguishment of $18.7 of debt. 5. INCOME TAXES Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles by geographic area is as follows:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Domestic $ (49.4) $ (177.9) $ (223.4) Foreign 143.9 6.1 12.0 ---------- ---------- ---------- $ 94.5 $ (171.8) $ (211.4) ========== ========== ==========
Income taxes are classified as either domestic or foreign based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is subject to domestic income taxes. The credit (provision) for income taxes on income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles consists of the following:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Current: Federal $ (4.3) $ - $ (.1) State and local (.4) (.2) (1.3) Foreign (40.2) (18.0) (7.9) ---------- ---------- ---------- (44.9) (18.2) (9.3) ---------- ---------- ---------- Deferred: Federal 35.4 94.3 77.1 State and local (.4) .4 2.7 Foreign (4.9) .6 12.0 ---------- ---------- ---------- 30.1 95.3 91.8 ---------- ---------- ---------- $ (14.8) $ 77.1 $ 82.5 ========== ========== ==========
The 1994 federal deferred credit for income taxes of $94.3 includes $36.0 for the benefit of operating loss carryforwards generated in 1994. The 1993 federal deferred credit for income taxes of $77.1 includes $29.2 for the benefit of operating loss carryforwards generated in 1993 and a $7.0 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. A reconciliation between the credit (provision) for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles is as follows:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles $ 94.5 $ (171.8) $ (211.4) ========== ========== ========== Amount of federal income tax based upon the statutory rate $ (33.1) $ 60.1 $ 74.0 Revision of prior years' tax estimates and other changes in valuation allowances 24.2 16.7 (.6) Percentage depletion 4.2 5.6 6.4 Foreign taxes, net of federal tax benefit (6.9) (5.3) (5.0) State and local taxes, net of federal tax benefit (2.4) .1 .9 Increase in net deferred income tax assets due to tax rate change - 1.8 7.0 Removal of Kaiser from the Company's consolidated federal return group - - 3.5 Other (.8) (1.9) (3.7) ---------- ---------- ---------- $ (14.8) $ 77.1 $ 82.5 ========== ========== ==========
The caption entitled "Revision of prior years' tax estimates and other changes in valuation allowances," as shown in the preceding table, includes amounts for the reversal of reserves which the Company no longer believes are necessary, other changes in prior year tax estimates and changes in valuation allowances with respect to deferred income tax assets. Generally, the reversal of reserves relate to the expiration of the relevant statute of limitations with respect to certain income tax returns, or the resolution of specific income tax matters with the relevant tax authorities. For the years ended December 31, 1995, 1994 and 1993, the reversal of reserves which the Company believes are no longer necessary amounted to $20.0, $20.1 and $2.9, respectively. As shown in the Consolidated Statement of Operations for the years ended December 31, 1994 and 1993, the Company reported extraordinary losses on the early extinguishment of debt. The Company reported the losses net of related deferred federal income taxes of $2.9 and $27.5, respectively, which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $26.6. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of various subsidiaries in prior years. As a result of restating these assets and liabilities, the loss before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was increased by $5.9. Certain of the deferred income tax assets and liabilities listed in the following table are included in the Consolidated Balance Sheet in the captions entitled prepaid expenses and other current assets, other accrued liabilities and other noncurrent liabilities. The components of the Company's net deferred income tax assets (liabilities) are as follows:
December 31, ----------------------- 1995 1994 ---------- ---------- Deferred income tax assets: Postretirement benefits other than pensions $ 293.6 $ 297.2 Loss and credit carryforwards 190.5 208.8 Other liabilities 139.0 133.5 Real estate 58.1 71.5 Pensions 56.0 51.0 Timber and timberlands 41.9 46.2 Foreign and state deferred income tax liabilities 30.8 28.1 Property, plant and equipment 23.3 23.7 Other 32.5 26.7 Valuation allowances (141.5) (147.0) ---------- ---------- Total deferred income tax assets, net 724.2 739.7 ---------- ---------- Deferred income tax liabilities: Property, plant and equipment (177.9) (202.7) Investments in and advances to unconsolidated affiliates (66.4) (63.8) Inventories (15.5) (27.4) Other (22.8) (20.0) ---------- ---------- Total deferred income tax liabilities (282.6) (313.9) ---------- ---------- Net deferred income tax assets $ 441.6 $ 425.8 ========== ==========
The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1995, approximately $291.8 of the net deferred income tax assets listed above are attributable to Kaiser. Of this amount, approximately $97.7 relates to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for these carryforwards, including any limitations concerning their use, the year the carryforwards expire and the levels of taxable income necessary for utilization. For example, full valuation allowances were provided for certain credit carryforwards that expire in the near term. With regard to future levels of income, the Company believes that Kaiser, based on the cyclical nature of its business, its history of prior operating earnings and its expectations for future years, will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. The remaining portion of Kaiser's net deferred income tax assets is approximately $194.1 at December 31, 1995. A principal component of this amount is the tax benefit associated with the accrual for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of this accrual will occur over a thirty to forty-year period. If such deductions create or increase a net operating loss in any one year, Kaiser has the ability to carry forward such loss for fifteen taxable years. For these reasons, the Company believes a long-term view of profitability is appropriate and has concluded that this net deferred income tax asset will more likely than not be realized despite Kaiser's operating losses incurred in recent years. The net deferred income tax assets listed above which are not attributable to Kaiser are approximately $149.8 as of December 31, 1995. This amount includes approximately $91.2 which relates to the excess of the tax basis over financial statement basis with respect to timber and timberlands and real estate. The Company has concluded that it is more likely than not that these net deferred income tax assets will be realized based in part upon the estimated values of the underlying assets which are in excess of their tax basis. The Company files consolidated federal income tax returns together with its domestic subsidiaries. As a consequence of Kaiser's public offering of shares on June 30, 1993, as discussed in Note 7, Kaiser and its subsidiaries are no longer included in the consolidated federal income tax return group of the Company. Kaiser and its subsidiaries have become members of a new consolidated return group of which Kaiser is the common parent corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group files consolidated federal income tax returns for taxable periods beginning on or after July 1, 1993. The following table presents the tax attributes for federal income tax purposes at December 31, 1995 attributable to the Company and to the New Kaiser Tax Group. The utilization of certain of these tax attributes is subject to limitations.
The Company New Kaiser Tax Group ----------------------- ----------------------- Expiring Expiring Through Through ---------- ---------- Regular Tax Attribute Carryforwards: Current year net operating loss $ 26.4 2010 $ - - Prior year net operating losses 51.2 2009 32.9 2007 General business tax credits .9 2002 28.4 2008 Foreign tax credits - - 89.7 2000 Alternative minimum tax credits 1.5 Indefinite 19.4 Indefinite Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $ 21.6 2010 $ - - Prior year net operating losses 42.4 2009 17.1 2002 Foreign tax credits - - 83.5 2000
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has unfunded defined postretirement benefit plans which cover most of its employees. Under the plans, employees are eligible for health care benefits (and life insurance benefits for Kaiser employees) upon retirement. Retirees from companies other than Kaiser make contributions for a portion of the cost of their health care benefits. The Company adopted Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as of January 1, 1993. The costs of postretirement benefits other than pensions are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $437.9, net of related benefits for minority interests of $63.6 and income taxes of $236.8. The deferred income tax benefit related to the adoption of SFAS 106 was recorded at the federal statutory rate in effect on the date SFAS 106 was adopted, before giving effect to certain valuation allowances. The adoption of SFAS 106 increased the Company's loss before extraordinary item and cumulative effect of changes in accounting principles by $13.3, or $1.41 per share ($19.9 before income taxes), for the year ended December 31, 1993. In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for the United Steelworkers of America ("USWA") retirees who retire after December 31, 1995, and when they become 65, and voluntary for other hourly retirees of Kaiser's operations in California, Louisiana, and Washington. The USWA contract, ratified on February 28, 1995, also contained changes to the retiree health benefits including increased retirees' copayments, deductibles, and coinsurance, and restricted Medicare Part B premium reimbursement to the 1995 level for employees retiring after November 1, 1994. These changes will lower Kaiser's expenses for retiree medical care. Postretirement benefits other than pensions are generally provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. A summary of the components of net periodic postretirement benefit cost is as follows:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Service cost - benefits earned during the year $ 4.9 $ 8.8 $ 7.4 Interest cost on accumulated postretirement benefit obligation 52.7 57.5 59.0 Net amortization and deferral (9.1) (3.2) - ---------- ---------- ---------- Net periodic postretirement benefit cost $ 48.5 $ 63.1 $ 66.4 ========== ========== ==========
The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet is as follows:
December 31, ----------------------- 1995 1994 ---------- ---------- Retirees $ 558.9 $ 568.3 Actives eligible for benefits 31.5 31.4 Actives not eligible for benefits 65.5 102.8 ---------- ---------- Accumulated postretirement benefit obligation 655.9 702.5 Unrecognized prior service cost 111.1 31.8 Unrecognized net gain (loss) 22.4 55.8 ---------- ---------- Postretirement benefit liability $ 789.4 $ 790.1 ========== ==========
The annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rates) are approximately 8.0% and 7.5% for retirees under age 65 and over age 65, respectively, and are assumed to decrease gradually to approximately 5.0% in 2008 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 by approximately $69.7 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $7.9. The discount rates and rates of compensation increase used in determining the accumulated postretirement benefit obligation were 7.5% and 5.0% at December 31, 1995, respectively, and 8.5% and 5.0% at December 31, 1994, respectively. RETIREMENT PLANS The Company has various retirement plans which cover essentially all employees. Most of the Company's employees are covered by defined benefit plans. The benefits are determined under formulas based on years of service and the employee's compensation. The Company's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by ERISA. The Company has various defined contribution savings plans designed to enhance the existing retirement programs of participating employees. Under the MAXXAM Inc. Savings Plan (the "MAXXAM Savings Plan"), employees may elect to contribute up to 16% of their compensation to the plan. For those participants who have elected to make voluntary contributions to the MAXXAM Savings Plan, the Company's contributions consist of a matching contribution of up to 4% of the compensation of participants for each calendar quarter. Under the Kaiser Aluminum Savings and Retirement Plan, salaried employees may elect to contribute from 2% to 18% of their compensation to the plan. For those eligible participants who have elected to make contributions to the plan, Kaiser's contributions are determined based on earnings and net worth formulas. In 1995, Kaiser adopted the Kaiser Aluminum Total Compensation System, an unfunded incentive compensation program, which provides incentive pay based upon performance against plan over a three-year period. A summary of the components of net periodic pension costs for the defined benefit plans and total pension costs for the defined contribution plans and non-qualified retirement and incentive plans is as follows:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Defined benefit plans: Service cost-benefits earned during the year $ 12.1 $ 13.6 $ 13.0 Interest cost on projected benefit obligations 62.5 59.5 60.8 Return on assets: Actual gain (118.7) (.8) (73.9) Deferred gain (loss) 64.6 (53.0) 15.9 Net amortization and deferral 8.7 2.8 4.7 ---------- ---------- ---------- Net periodic pension cost 29.2 22.1 20.5 Defined contribution plans 5.4 2.8 1.7 Non-qualified retirement and incentive plans 8.2 5.0 4.3 ---------- ---------- ---------- $ 42.8 $ 29.9 $ 26.5 ========== ========== ==========
The following table sets forth the funded status and amounts recognized for the defined benefit plans in the Consolidated Balance Sheet:
December 31, ----------------------- 1995 1994 ---------- ---------- Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 781.7 $ 684.3 Non-vested benefit obligation 31.1 42.9 ---------- ---------- Total accumulated benefit obligation $ 812.8 $ 727.2 ========== ========== Projected benefit obligation $ 853.1 $ 761.2 Plan assets at fair value, primarily common stocks and fixed income obligations (623.1) (546.9) ---------- ---------- Projected benefit obligation in excess of plan assets 230.0 214.3 Unrecognized net transition obligation (.6) (.9) Unrecognized net loss (54.9) (40.4) Unrecognized prior service cost (29.1) (31.6) Adjustment required to recognize minimum liability 49.8 42.9 ---------- ---------- Accrued pension cost $ 195.2 $ 184.3 ========== ==========
The assumptions used in accounting for the defined benefit plans were as follows:
December 31, ------------------------------ 1995 1994 1993 --------- -------------------- Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.5% 8.5% 7.5% Expected long-term rate of return on assets 9.5% 9.5% 10.0%
The Company has recorded an additional pension liability equal to the excess of the accumulated benefit obligation over the fair value of plan assets. The amount of the additional pension liability in excess of unrecognized prior service cost is recorded as a reduction to stockholders' equity. In 1995 and 1994, the pension liability adjustment increased by $4.7 and decreased by $12.5, respectively. These adjustments were recorded net of a related deferred federal and state income tax credit (provision) of $2.8 and ($7.3), respectively, which approximated the federal and state statutory rates. POSTEMPLOYMENT BENEFITS The Company adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") as of January 1, 1993. The costs of postemployment benefits are accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 was recorded as a charge to results of operations of $6.4, net of related benefits for minority interests of $1.0 and income taxes of $3.4. 7. MINORITY INTERESTS Minority interests represent the following:
December 31, ----------------------- 1995 1994 ---------- ---------- Kaiser Aluminum Corporation: Common stock, par $.01 $ - $ - $.65 Depositary Shares - 128.0 8.255% PRIDES 98.1 100.1 Subsidiary redeemable preference stock: KACC Series A and B Cumulative Preference Stock, par $1 29.7 29.1 KACC Cumulative Convertible Preference Stock, par $100 1.7 1.7 KACC Minority Interests: Alumina Partners of Jamaica 73.9 70.4 Volta Aluminium Company Limited 14.9 13.6 Kaiser LaRoche Hydrate Partners 2.5 1.4 Sam Houston Race Park, Ltd. 2.4 - ---------- ---------- $ 223.2 $ 344.3 ========== ==========
As a result of Kaiser's issuance of preferred stock in 1993 and 1994, the 1995 redemption of the Depositary Shares (each as described below), and the issuance of Kaiser's common stock in connection with the LTIP (as described below), the Company's equity interest in Kaiser has decreased to approximately 62% on a fully diluted basis, as of December 31, 1995. KAISER PROPOSED RECAPITALIZATION On February 5, 1996, Kaiser announced that it had filed a preliminary proxy statement with the Securities and Exchange Commission relating to a proposed recapitalization. Under the terms of the proposed recapitalization, the relative ownership interest and voting power of stockholders would be unchanged as a result of the recapitalization (except as a result of the treatment of fractional shares). The proposed recapitalization would (i) provide for two classes of common stock: Class A Common Shares, $.01 par value, with one vote per share and a new lesser-voting class designated as Common Stock, $.01 par value, with 1/10 vote per share, (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorize 250 million shares to be designated as Common Stock, and (iii) change each issued share of Kaiser's existing common stock into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock. Kaiser would pay cash in lieu of fractional shares. Kaiser anticipates that both the Class A Common Shares and the Common Stock would be approved for trading on the New York Stock Exchange. Upon the effective date of the recapitalization, approximately 23.6 million Class A Common Shares and 48.0 million shares of Common Stock would be issued and outstanding. The proportionate voting power of the holders of the PRIDES would increase immediately after the effectiveness of the recapitalization until such shares are redeemed or converted, which would occur on or before December 31, 1997. As of January 31, 1996, holders of the existing common stock and the PRIDES had 91.2% and 8.8%, respectively, of the total voting power of all stockholders. Immediately after the recapitalization, the voting power of such holders of the PRIDES would increase to 19.6% in the aggregate, with a corresponding reduction in the voting power of such holders of the existing common stock. At such time as the PRIDES were redeemed or converted, the relative voting power of such holders of the PRIDES would decrease and the relative voting power for both such holders of the PRIDES and the existing common stock would be approximately the same as it would have been had the recapitalization not occurred. $.65 DEPOSITARY SHARES On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). In connection with the issuance of the Depositary Shares, Kaiser issued an additional 2,132,950 of its Depositary Shares to MGI in exchange for a $15.0 promissory note issued by KACC which evidenced a $15.0 cash loan made by MGI to KACC in January 1993 (the "MGI Loan"). Kaiser made capital contributions and intercompany loans to KACC from the proceeds of the sale of the Series A Shares. KACC used approximately $13.7 of such funds to prepay the remaining balance of the term loan under the 1989 KACC Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the revolving credit facility of the 1989 KACC Credit Agreement. The Depositary Shares called for the payment of quarterly dividends (when and as declared by Kaiser's Board of Directors) of approximately $3.2 ($.1625 per share). The Company accounted for Kaiser's issuance of the Depositary Shares as additional minority interest. On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted in the simultaneous redemption of all 19,382,950 Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and unpaid dividends up to and including the day immediately prior to the redemption date of $2.8, and (iii) cash in lieu of any fractional shares of common stock that would have otherwise been issuable. During 1994, the Company sold 1,239,400 of the Depositary Shares for aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. From January through May of 1995, the Company sold the remaining Depositary Shares that it owned for aggregate net proceeds of $7.6, resulting in pre-tax gains of $1.3. As a result of these sales, the shares of Kaiser's common stock which were issued upon redemption of the Series A Shares are held by minority stockholders. The Company has recorded 100% of the losses attributable to Kaiser's common stock since July 1993, as Kaiser's cumulative losses through that date had eliminated Kaiser's equity with respect to its common stock. The redemption of Kaiser's Series A Shares, together with the voluntary redemption of 181,700 shares of PRIDES in 1995, decreased Kaiser's preferred equity, and reduced Kaiser's deficit in common equity, by $136.2. Accordingly, the Company recorded an adjustment to reduce the minority interests reflected on its Consolidated Balance Sheet for that same amount, with an offsetting decrease in the Company's stockholders' deficit. 8.255% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES During the first quarter of 1994, Kaiser consummated a public offering for the sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of the PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds to make non-interest bearing loans to KACC (evidenced by notes) which are designed to provide sufficient funds to make the required dividend payments on the PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion Date") and $66.9 of such net proceeds to make capital contributions to KACC. Holders of shares of PRIDES have a 4/5 vote for each share held of record and, except as required by law, are entitled to vote together with the holders of Kaiser's common stock and together with the holders of any other classes or series of Kaiser's stock who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed or converted at the option of the holder, each outstanding share of PRIDES will mandatorily convert into one share of Kaiser's common stock, subject to adjustment in certain events, and the right to receive an amount in cash equal to all accrued and unpaid dividends thereon. Shares of PRIDES are not redeemable, at the election of Kaiser, prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, Kaiser may redeem any or all of the outstanding shares of PRIDES. Upon any such redemption, each holder will receive, in exchange for each share of PRIDES, the number of shares of Kaiser's common stock equal to (i) the sum of $11.9925, declining after December 31, 1996 to $11.75 until December 31, 1997, plus, in the event Kaiser does not elect to pay cash dividends to the redemption date, all accrued and unpaid dividends thereon divided by (ii) the Current Market Price (as defined) on the applicable date of determination, but in no event less than .8333 of a share of Kaiser's common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of Kaiser's common stock (equivalent to a conversion price of $14.10 per share of Kaiser's common stock), subject to adjustment in certain events. The number of shares of Kaiser's common stock a holder will receive upon redemption, and the value of the shares received upon conversion, will vary depending on the market price of Kaiser's common stock from time to time. The PRIDES call for the payment of quarterly dividends of approximately $2.1 ($.2425 per share). The Company accounted for Kaiser's issuance of the PRIDES as additional minority interest. SUBSIDIARY REDEEMABLE PREFERENCE STOCK In March 1985, KACC entered into a three-year agreement with the USWA whereby shares of a new series of KACC Cumulative (1985 Series A) Preference Stock (the "Series A Stock") would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbargaining employees which provided for the issuance of KACC Cumulative (1985 Series B) Preference Stock (the "Series B Stock"). The Series A Stock and the Series B Stock ("Series A and B Stock") each have a liquidation and redemption value of $50 per share plus accrued dividends, if any, and have a total redemption value of $36.9 at December 31, 1995. Changes in Series A and B Stock are as follows:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Shares: Beginning of year 912,167 1,081,548 1,163,221 Redeemed (174,804) (169,381) (81,673) ---------- ---------- ---------- End of year 737,363 912,167 1,081,548 ========== ========== ==========
No additional Series A or B Stock will be issued. While held by the plan trustee, Series B Stock is entitled to cumulative annual dividends, when and as declared by KACC's Board of Directors, payable in Series B Stock or in cash at the option of KACC, based on a formula tied to KACC's income before tax from aluminum operations. When distributed to plan participants (generally upon separation from KACC), the Series A and B Stock is entitled to an annual cash dividend of $5 per share, payable quarterly, when and as declared by KACC's Board of Directors. Redemption fund agreements require KACC to make annual payments by March 31 of each year based on a formula tied to KACC's consolidated net income until the redemption funds are sufficient to redeem all Series A and B Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March 1994 and 1995, KACC contributed $4.3 for each of the years ended December 31, 1993 and 1994, and will contribute $4.3 in March 1996 for the year ended December 31, 1995. Under the USWA labor contract effective November 1, 1990, KACC was obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1994 at a price equal to its redemption value of $50 per share. The employees could elect to receive their shares, accept cash or place the proceeds into KACC's 401(k) savings plan. Under separate action, KACC also offered to purchase 40 shares of Series B Stock from active participants in 1994. Under the provisions of these contracts, in February 1994, KACC purchased $4.6 and $.8 of the Series A Stock and Series B Stock, respectively. Under the USWA labor contract effective November 1, 1994, KACC was obligated to offer to purchase up to 40 shares of Series A Stock from each active participant in 1995 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 80 shares from each participant in 1998. In addition, a profitability test was satisfied for 1995; therefore, KACC will offer to purchase from each active participant an additional 20 shares of such preference stock held in the stock ownership plan for the benefit of substantially the same employees in 1996. The employees may elect to receive their shares, accept cash or place the proceeds into KACC's 401(k) savings plan. KACC also will offer to make comparable purchases of Series B Stock from active participants. The Series A and B Stock is distributed in the event of death or retirement of the plan participant, or in other specified circumstances. KACC may also redeem such stock at $50 per share plus accrued dividends, if any. At the option of the plan participant, the trustee shall redeem stock distributed from the plans at the redemption value to the extent funds are available in the redemption fund. Under the Tax Reform Act of 1986, at the option of the plan participant, KACC must purchase distributed shares earned after December 31, 1985 at the redemption value on a five-year installment basis, with interest at market rates. The obligation of KACC to make such installment payments must be secured. The Series A and B Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates, or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restricts the ability of KACC to redeem or pay dividends on its common stock if KACC is in default on any dividends payable on the Series A and B Stock. KAISER STOCK INCENTIVE PLANS Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees. All compensation vested at December 31, 1993 under the LTIP was paid to the participants in cash or common stock of Kaiser. Under the LTIP, as amended, 764,092 restricted shares of Kaiser common stock were distributed to six Kaiser executives during 1993 for benefits generally earned but not vested as of December 31, 1992. These shares generally vest at the rate of 25% per year. Kaiser is recording the related expense of $6.5 over the four-year period ending December 31, 1996. In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock were reserved for awards or for payment of rights granted under the plan, of which 544,839 shares were available to be awarded at December 31, 1995. During 1994, 102,564 restricted shares, which vest at the rate of 25% per year, were distributed to two Kaiser executives. Kaiser is recording the related expense of $1.0 over the four-year period ending December 31, 1998. In 1993 and 1994, the Compensation Committee of Kaiser's Board of Directors approved the award of "nonqualified stock options" to members of management other than those participating in the LTIP. These options generally will vest at the rate of 20 - 25% per year. Information relating to nonqualified stock options is shown below:
1995 1994 1993 ---------- ---------- ---------- Outstanding at beginning of year 1,119,680 664,400 - Granted - 494,800 664,400 Exercised (at $7.25 and $9.75 per share) (155,500) (6,920) - Expired or forfeited (38,095) (32,600) - ---------- ---------- ---------- Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 926,085 1,119,680 664,400 ========== ========== ========== Exercisable at end of year 211,755 120,180 - ========== ========== ==========
8. STOCKHOLDERS' DEFICIT PREFERRED STOCK The holders of the Company's Class A $.05 Non-Cumulative Participating Convertible Preferred Stock (the "Class A Preferred Stock") are entitled to receive, if and when declared, preferential cash dividends at the rate of $.05 per share per annum and will participate thereafter on a share for share basis with the holders of 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. STOCK OPTION PLANS In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive Plan (the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and 1,000,000 shares of Class A Preferred Stock were reserved for awards or for payment of rights granted under the 1994 Omnibus Plan. The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984 Plan") which expired in June 1994, although previous grants thereunder remain outstanding. In December 1994, options to purchase 25,000 shares of common stock of the Company were granted to an executive officer. In addition, also in December 1994, another executive officer relinquished stock appreciation rights relating to 50,000 shares of common stock of the Company in exchange for options to purchase 45,000 shares of Class A Preferred Stock. The exercise price of these options is $30.375 per share (the quoted market price at the date of grant). In November 1995, stock appreciation rights equivalent to 36,000 shares of common stock of the Company were granted to certain employees with an exercise price of $45.15 (reflecting a 20% premium above the quoted market price at the date of grant). These options (or rights, as applicable) vest at the rate of 20% per year commencing one year from the date of grant. At December 31, 1995, 14,000 of rights granted pursuant to the 1994 Omnibus Plan were exercisable. The Company paid $2.7 with respect to the 1984 Plan for the year ended December 31, 1995. Amounts paid with respect to the 1984 Plan for the years ended December 31, 1994 and 1993 were not significant. The following table summarizes the options or rights outstanding and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan:
1995 1994 1993 ---------- ---------- ---------- Outstanding at beginning of year 238,000 267,800 226,300 Granted 36,000 70,000 50,000 Exercised (66,100) (37,050) (8,500) Expired or forfeited - (62,750) - ---------- ---------- ---------- Outstanding at end of year (prices ranging from $13.75 to $45.15 per share) 207,900 238,000 267,800 ========== ========== ========== Exercisable at end of year 93,900 124,100 133,725 ========== ========== ==========
Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted the MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to 35,000 shares of common stock are reserved for awards under the 1994 Director Plan. In May 1995 and 1994, options to purchase 900 shares and 1,500 shares of common stock, respectively, were granted to three non-employee directors. The exercise prices of these options are $31.60 and $36.50 per share, respectively, based on the quoted market price at the date of grant. The options vest at the rate of 25% per year commencing one year from the date of grant. At December 31, 1995, 375 of such options were exercisable. In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the "MGI 1976 Plan") were converted into the right to receive, upon exercise of each option, $6.11 in cash, .25 shares of the Company's common stock (88,500 shares) and $6.00 principal amount of the Reset Notes. Options granted under the MGI 1976 Plan generally were exercisable for a period of ten years from the date of grant. During 1993, 60,000 options granted under the MGI 1976 Plan at a price of $10.875 per share were surrendered for a cash payment in lieu of the consideration referred to above. At December 31, 1993, all options granted under the MGI 1976 Plan had been exercised. SHARES RESERVED FOR ISSUANCE At December 31, 1995, the Company had the following shares reserved for future issuance:
Common shares: Class A Preferred Stock 668,856 1994 Omnibus Plan 939,000 1994 Director Plan 32,600 ---------- 1,640,456 ========== Class A Preferred Stock: 1994 Omnibus Plan 955,000 ==========
RIGHTS On November 29, 1989, the Board of Directors of the Company declared a dividend to its stockholders consisting of (i) one Series A Preferred Stock Purchase Right (the "Series A Right") for each outstanding share of the Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase Right (the "Series B Right") for each outstanding share of the Company's common stock. The Series A Right and the Series B Right are collectively referred to herein as the "Rights." The Rights are exercisable only if a person or group of affiliated or associated persons (an "Acquiring Person") acquires beneficial ownership, or the right 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 Inc., a wholly owned subsidiary of Federated Development Company ("Federated"), and Mr. Charles E. Hurwitz collectively own 99.1% of the Company's Class A Preferred Stock and 31.1% of the Company's common stock (resulting in combined voting control of approximately 60.7% of the Company). Mr. Hurwitz is the Chairman of the Board, President and Chief Executive Officer of the Company and Chairman and Chief Executive Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. 9. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company, principally through KACC, has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 10), letters of credit and other guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs and certain other costs of this joint venture. At December 31, 1995, such indebtedness was $88.9, with $26.7 due in 1997 and $62.2 due in 2002. KACC's share of payments, including operating costs and certain other expenses under the agreement, was $77.5, $85.6 and $86.7 for the years ended December 31, 1995, 1994 and 1993, respectively. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1995 are as follows: years ending December 31, 1996 - $27.7; 1997 - $25.5; 1998 - $28.3; 1999 - $33.0; 2000 - $29.9; thereafter - $187.3. Rental expense for operating leases was $31.4, $29.2 and $31.3 for the years ended December 31, 1995, 1994 and 1993, respectively. The minimum future rentals receivable under noncancelable subleases at December 31, 1995 were $67.6. ENVIRONMENTAL CONTINGENCIES Kaiser and KACC are subject to a number of environmental laws and regulations, to fines or penalties assessed for alleged breaches of the environmental laws and regulations, and to 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 on Kaiser's evaluation of these and other environmental matters, Kaiser has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in other noncurrent liabilities:
Years Ended December 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Balance at beginning of year $ 40.1 $ 40.9 $ 46.4 Additional amounts 3.3 2.8 1.7 Less expenditures (4.5) (3.6) (7.2) ---------- ---------- ---------- Balance at end of year $ 38.9 $ 40.1 $ 40.9 ========== ========== ==========
These environmental accruals represent Kaiser's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology and Kaiser's assessment of the likely remediation action to be taken. Kaiser expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an aggregate of approximately $10.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. Kaiser believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $23.0 and that the factors upon which a substantial portion of this estimate is based are expected to be resolved over the next twelve months. While uncertainties are inherent in the final outcome of these environmental matters, and it is impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ASBESTOS CONTINGENCIES KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At December 31, 1995, the number of claims pending was approximately 59,700, compared to 25,200 at December 31, 1994. During 1995, approximately 41,700 claims were received and approximately 7,200 were settled or dismissed. KACC believes that, although there can be no assurance, the recent increase in pending claims may be attributable in part to tort reform legislation in Texas which was passed by the legislature in March 1995 and which became effective on September 1, 1995. The legislation, among other things, is designed to restrict, beginning September 1, 1995, the filing of cases in Texas that do not have a sufficient nexus to that jurisdiction, and to impose, generally as of September 1, 1996, limitations relating to joint and several liability in tort cases. A substantial portion of the asbestos-related claims that were filed and served on KACC between June 30, 1995 and November 30, 1995 were filed in Texas prior to September 1, 1995. Based on past experience and reasonably anticipated future activity, KACC has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs and KACC's actual costs could exceed these estimates. KACC's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an asbestos-related cost accrual of $160.1, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at December 31, 1995. KACC estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008. While KACC does not believe there is a reasonable basis for estimating such costs beyond 2008, and, accordingly, did not accrue such costs, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. KACC believes that it has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. KACC believes, based on prior insurance-related recoveries with respect to asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to applicable insurance coverage law relating to the terms and conditions of these policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $137.9 determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at December 31, 1995. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and the insurance recoveries that will be received, management believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS CONTINGENCY AND RELATED MATTERS On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated formal administrative proceedings against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and others (the "respondents") with respect to the failure of United Savings Association of Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc. ("UFG"). The Notice claims that the Company was a savings and loan holding company, that with others it controlled USAT, and that it was therefore obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 from the Company, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate impact, if any, of the outcome this matter may have on the Company's consolidated financial position, results of operations or liquidity. On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed a civil action entitled Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the Southern District of Texas (the "Court"). The FDIC action did not name the Company as a defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0 based on the allegation that Mr. Hurwitz was a controlling shareholder, de facto senior officer and director of USAT, and was involved in certain decisions which contributed to the insolvency of USAT. The FDIC further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company maintained the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action. On December 8, 1995, the Company filed a motion to intervene in this action and conditioned it on the Court joining the OTS to this action. The Company filed with its motion to intervene a proposed complaint which alleges that the OTS violated the Administrative Procedures Act by rejecting the Company's bid for USAT. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. It is impossible to assess the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS KACC enters into a number of financial instruments in the normal course of business that are designed to reduce its exposure to fluctuations in foreign exchange rates, alumina, primary aluminum and fabricated aluminum products prices and the cost of purchased commodities. KACC has significant expenditures which are denominated in foreign currencies related to long-term purchase commitments with its affiliates in Australia and the United Kingdom, which expose KACC to certain exchange rate risks. In order to mitigate its exposure, KACC periodically enters into forward foreign exchange and currency option contracts in Australian dollars and Pounds Sterling to hedge these commitments. The forward foreign currency exchange contracts are agreements to purchase or sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1995, KACC had net forward foreign exchange contracts totaling $102.8 for the purchase of 142.4 Australian dollars through April 30, 1997. To mitigate its exposure to declines in the market prices of alumina, primary aluminum and fabricated aluminum products, while retaining the ability to participate in favorable pricing environments that may materialize, KACC has developed strategies which include forward sales of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. Under the principal components of KACC's price risk management strategy, which can be modified at any time, (i) varying quantities of KACC's anticipated production are sold forward at fixed prices, (ii) call options are purchased to allow KACC to participate in certain higher market prices, should they materialize, for a portion of KACC's primary aluminum and alumina sold forward, (iii) option contracts are entered into to establish a price range KACC will receive for a portion of its primary aluminum and alumina, and (iv) put options are purchased to establish minimum prices KACC will receive for a portion of its primary aluminum and alumina. In this regard, with respect to its 1996 anticipated production, as of December 31, 1995, KACC had sold forward 15,750 metric tons of primary aluminum at fixed prices. In addition, KACC enters into forward fixed price arrangements with certain customers which provide for the delivery of a specific quantity of fabricated aluminum products over a specified future period of time. In order to establish the cost of primary aluminum for a portion of such sales, KACC may enter into forward sales and options contracts. In this regard, at December 31, 1995, KACC had purchased 53,300 metric tons of primary aluminum under forward purchase contracts at fixed prices that expire at various times through December 1996. At December 31, 1995, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average price of $1,721 per metric ton ($.78 per pound) of primary aluminum, and forward foreign exchange contracts was $4.1. KACC has established margin accounts with its counterparties related to aluminum forward sales and option contracts. KACC is entitled to receive advances from counterparties related to unrealized gains and, in turn, is required to make margin deposits with counterparties to cover unrealized losses related to these contracts. At December 31, 1995, KACC was not required to maintain any such margin deposits. At December 31, 1994, KACC had $50.5 on deposit with various counterparties with respect to such deposit requirements. These amounts were included in prepaid expenses and other current assets. KACC is exposed to credit risk in the event of non-performance by other parties to these currency and commodity contracts, but KACC does not anticipate non-performance by any of these counterparties given their creditworthiness. When appropriate, KACC arranges master netting agreements. 11. SEGMENT INFORMATION The following tables present financial information by industry segment and by geographic area at December 31, 1995 and 1994 and for the three years ended December 31, 1995, 1994 and 1993. INDUSTRY SEGMENTS
Real Bauxite Forest Estate and Years and Aluminum Products Other Ended Alumina Processing Operations Operations Corporate Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- Sales to unaffiliated customers 1995 $ 514.2 $ 1,723.6 $ 242.6 $ 84.8 $ - $ 2,565.2 1994 432.5 1,349.0 249.6 84.6 - 2,115.7 1993 423.4 1,295.7 233.5 78.5 - 2,031.1 Operating income (loss) 1995 37.2 179.3 74.3 (13.6) (19.6) 257.6 1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3 1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1) Effect of changes in accounting principles on operating income (loss): Postretirement benefits other than pensions 1993 (2.3) (16.9) (.4) (.2) (.1) (19.9) Income taxes 1993 (6.3) (5.6) .1 .7 - (11.1) Equity in earnings (loss) of unconsolidated affiliates 1995 3.5 15.7 - (.1) - 19.1 1994 (4.6) 2.7 - - (13.1) (15.0) 1993 (2.5) (.8) - - (1.6) (4.9) Depreciation and depletion 1995 30.0 58.4 25.3 6.2 1.0 120.9 1994 32.3 57.2 24.7 5.9 1.0 121.1 1993 33.8 57.3 24.5 4.1 1.1 120.8 Capital expenditures 1995 30.2 49.2 9.9 10.5 .2 100.0 1994 29.4 40.6 11.3 7.6 .4 89.3 1993 35.8 31.9 11.1 7.1 .3 86.2 Investments in and advances to unconsolidated affiliates 1995 130.3 47.9 - 10.9 - 189.1 1994 137.1 32.6 - - - 169.7 Identifiable assets 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3 1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
Sales to unaffiliated customers exclude intersegment sales between bauxite and alumina and aluminum processing of $159.7, $146.8 and $129.4 for the years ended December 31, 1995, 1994 and 1993, respectively. Intersegment sales are made on a basis intended to reflect the market value of the products. Operating losses for Corporate represent general and administrative expenses of MAXXAM Inc. that are not attributable to the Company's industry segments. General and administrative expenses of Kaiser are allocated in the Company's industry segment presentation based upon those segments' ratio of sales to unaffiliated customers. GEOGRAPHICAL INFORMATION
Years Other Ended Domestic Caribbean Africa Foreign Eliminations Total ---------- ---------- ---------- ---------- --------- ------------ ---------- Sales to unaffiliated customers 1995 $ 1,916.9 $ 191.7 $ 239.4 $ 217.2 $ - $ 2,565.2 1994 1,597.4 169.9 180.0 168.4 - 2,115.7 1993 1,489.8 155.4 207.5 178.4 - 2,031.1 Sales and transfers among geographic areas 1995 - 79.6 - 191.5 (271.1) - 1994 - 98.7 - 139.4 (238.1) - 1993 - 88.2 - 79.6 (167.8) - Operating income (loss) 1995 79.0 9.8 83.5 85.3 - 257.6 1994 (65.3) 9.9 18.3 44.4 - 7.3 1993 (118.6) (11.8) 21.9 12.4 - (96.1) Equity in earnings (loss) of unconsolidated affiliates 1995 (.3) - - 19.4 - 19.1 1994 (12.9) - - (2.1) - (15.0) 1993 (1.6) - - (3.3) - (4.9) Investments in and advances to unconsolidated affiliates 1995 12.1 27.1 - 149.9 - 189.1 1994 1.2 28.8 - 139.7 - 169.7 Identifiable assets 1995 3,037.0 381.9 196.5 216.9 - 3,832.3 1994 2,926.5 364.8 200.0 199.5 - 3,690.8
Sales and transfers among geographic areas are made on a basis intended to reflect the market value of the products. Included in results of operations are aggregate foreign currency translation and transaction gains of $5.3, $.8 and $4.9 for the years ended December 31, 1995, 1994 and 1993, respectively. Export sales were less than 10% of total revenues during the years ended December 31, 1995, 1994 and 1993. For the year ended December 31, 1995, sales to any one customer did not exceed 10% of consolidated revenues. For the years ended December 31, 1994 and 1993, the Company had bauxite and alumina sales of $58.2 and $40.7, respectively, and aluminum processing sales of $147.7 and $145.7, respectively, to one customer. Summary quarterly financial information for the years ended December 31, 1995 and 1994 is as follows:
Three Months Ended --------------------------------------------------------- (In millions of dollars, except share amounts) March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 1995: Net sales $ 581.3 $ 673.3 $ 638.0 $ 672.6 Operating income 40.6 81.9 64.4 70.7 Net income (loss) (1.0) 25.4 10.7 22.4 Per common and common equivalent share: Net income (loss) (.11) 2.69 1.13 2.37 1994: Net sales $ 489.0 $ 543.8 $ 544.9 $ 538.0 Operating income (loss) (15.0) 6.5 9.0 6.8 Loss before extraordinary item (34.5) (43.2) (14.9) (24.1) Extraordinary item, net (5.4) - - - Net loss (39.9) (43.2) (14.9) (24.1) Per common and common equivalent share: Loss before extraordinary item (3.65) (4.57) (1.58) (2.55) Extraordinary item, net (.57) - - - Net loss (4.22) (4.57) (1.58) (2.55)
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 ---------- ---------- 1995: First Quarter $33 1/8 $27 1/4 Second Quarter 36 1/8 28 3/4 Third Quarter 67 5/8 35 5/8 Fourth Quarter 48 5/8 30 3/4 1994: First Quarter $44 1/2 $35 3/8 Second Quarter 37 1/8 32 5/8 Third Quarter 38 3/8 29 1/2 Fourth Quarter 37 3/4 29 5/8
The following table sets forth the number of record holders of the Company's publicly owned equity securities as of March 1, 1996.
Number of Title of Class Record Holders - ---------------------------------------------------------------------- ------------------- Common Stock 5,148 Class A $.05 Non-Cumulative Participating Convertible Preferred Stock 38
The Company has not declared any cash dividends on its common stock or its Class A Preferred Stock and has no present intention to do so. -----END PRIVACY-ENHANCED MESSAGE-----