-----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, MiDQ+kvOg1alevOgPEX2zQb7p31A2Cwrhzaw2CPd+7Kj+PbarZDbKbfbkXrlG42T dwkn5YD5Aiz7NKK3n8yjow== 0000900421-97-000030.txt : 19970401 0000900421-97-000030.hdr.sgml : 19970401 ACCESSION NUMBER: 0000900421-97-000030 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM INC CENTRAL INDEX KEY: 0000063814 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 952078752 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03924 FILM NUMBER: 97568374 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673669 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STREET 2: SUITE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: MCO HOLDINGS INC DATE OF NAME CHANGE: 19881115 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP DATE OF NAME CHANGE: 19800630 FORMER COMPANY: FORMER CONFORMED NAME: MCCULLOCH OIL CORP OF CALIFORNIA DATE OF NAME CHANGE: 19691118 10-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, 1996 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 -------------------- Common Stock, $.50 par value American, Pacific, Philadelphia Number of shares of common stock outstanding at March 1, 1997: 8,655,773 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 February 28, 1997 American Stock Exchange closing price of $48.125 per share, the aggregate market value of the Registrant's outstanding voting stock held by non-affiliates was approximately $288.0 million. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of Registrant's annual report to stockholders for the fiscal year ended December 31, 1996 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." MGI is a wholly owned subsidiary of MAXXAM Group Holdings Inc. ("MGHI"), which is in turn a wholly owned subsidiary of the Company. The Company is also engaged in (a) real estate investment and development, managed through MAXXAM Property Company, 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. This Annual Report on Form 10-K contains statements which constitute"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section (see Item 1. "Business--Aluminum Operations" and "--Forest Products Operations--Regulatory and Environmental Factors" and Item 3. "Legal Proceedings"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates,""will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements and changing prices and market conditions. This report and the financial portion of the Company's 1996 Annual Report to Shareholders (see Items 6 to 8 of this report) identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. ALUMINUM OPERATIONS This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See above for cautionary information with respect to such forward-looking statements. 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 Germany, France, Italy and the United Kingdom. In the packaging industry, which accounted for an estimated 21% of 1996 aluminum consumption in these countries, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. Nearly all beer cans and soft drink cans manufactured for the United States market are made of aluminum. Kaiser believes that growth in the packaging area is likely to continue through the 1990s due to general population increase and to further penetration of the beverage container market in emerging markets. Kaiser believes that growth in demand for can sheet in the United States will follow the growth in population, offset, in part, by the effects of the use of lighter gauge aluminum for can sheet and of plastic container production. In the transportation industry, which accounted for an estimated 30% of aluminum consumption in the United States, Japan, Germany, France, Italy and the United Kingdom during 1996, automotive manufacturers use aluminum instead of steel, ductile iron or copper for an increasing number of components, including radiators, wheels, suspension components, and engines, in order to meet more stringent environmental, safety, and fuel efficiency standards. Kaiser believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. In addition, Kaiser believes that consumption of aluminum in the construction industry will follow the cyclical growth pattern of that industry, and will benefit from higher growth in Asian and Latin American economies. Supply As of year-end 1996, world aluminum capacity from 179 smelting facilities was approximately 22.9 million tons per year (all references to tons in this report refer to metric tons of 2,204.6 pounds). World production of primary aluminum for 1996 increased approximately 4.5% compared to 1995. Net exports of aluminum from the former Sino Soviet bloc increased approximately 200% from 1990 levels to an estimated 1.9 million tons as of year-end 1996. In addition, one smelter continued to increase production following its start-up in 1995, and a number of producers restarted idled capacity in late 1995 and early 1996. These exports, as well as new and restarted capacity, contributed to an increase in London Metal Exchange ("LME") stocks of primary aluminum which peaked in October 1996 at 970,000 tons. At the end of 1996, LME stocks of primary aluminum had declined to 951,275 tons. See "--Industry Trends." Based upon information currently available, Kaiser believes that moderate additions will be made during 1997-1999 to world alumina and primary aluminum production capacity. The increases in alumina capacity are expected to come from one new refinery which began operations in 1996 and incremental expansions of existing refineries. In addition, Kaiser believes that there is an estimated 1.6 million tons of unutilized world smelting capacity. The increases in primary aluminum capacity during 1997-1999 are expected to come from two new smelters which may begin operations in 1997, two relocated smelters that are expected to resume operations in 1998, and the remainder principally from incremental expansions of existing smelters. INDUSTRY TRENDS Primary aluminum prices have historically been subject to significant cyclical price fluctuations. During the first half of 1996, the average Midwest United States transaction price ("AMT Price") for primary aluminum remained relatively stable in the $.75 per pound range. However, during the second half of the year the AMT Price fell, reaching a low of $.65 per pound for October 1996, before recovering late in the year. During 1996, the AMT Price for primary aluminum was approximately $.72 per pound, compared to $.86, $.72 and $.54 per pound in 1995, 1994 and 1993, respectively. The AMT Price for primary aluminum for the week ended March 14, 1997, was approximately $.81 per pound. The significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in LME inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend continued throughout most of 1996. Net reported primary aluminum inventories increased by approximately 62,000 tons in 1996 based upon reports of the LME and the International Primary Aluminium Institute ("IPAI"), following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively. However, since year-end 1996, LME stocks of primary aluminum have continued to decline from their October 1996 peak level. Increased production of primary aluminum due to restarts of certain previously idled capacity, the continued increase in production by a smelter in South Africa following its start-up in 1995, and the continued high level of exports from the Commonwealth of Independent States ("CIS") contributed to increased supplies of primary aluminum to the Western world in 1996. While the economies of the major aluminum consuming regions - the United States, Japan, Western Europe, and Asia - are, in the aggregate, performing relatively well, the Company believes that the reduction of aluminum inventories by customers, as prices have continued to decline, has mitigated the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. 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 CIS and in the People's Republic of China ("PRC"). Increased Western world production of primary aluminum, as well as continued imports of Western world alumina by the CIS and the PRC, during 1995 resulted in higher demand for Western world alumina and significantly stronger alumina pricing. In 1996, however, the alumina market softened, primarily as a result of increased alumina production and decreased alumina exports to the CIS and the PRC, resulting in lower alumina prices. However, increases in primary aluminum production as well as reductions in alumina production during the second half of 1996 resulted in stronger alumina pricing in late 1996. United States shipments of domestic fabricated aluminum products in 1995 were near 1994 levels, although in 1995 demand for can sheet in the United States softened relative to 1994. United States shipments of domestic fabricated aluminum products in 1996 are believed to have been at approximately 1995 levels, although in 1996 demand for can sheet in the United States softened relative to 1995. KAISER OPERATIONS General Kaiser, 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 Kaiser in its operations, Kaiser sells significant amounts of alumina and primary aluminum in domestic and international markets. In 1996, Kaiser produced approximately 2,838,000 tons of alumina, of which approximately 73% was sold to third parties, and produced approximately 473,200 tons of primary aluminum, of which approximately 75% was sold to third parties. Kaiser is also a major domestic supplier of fabricated aluminum products. In 1996, Kaiser shipped approximately 327,100 tons of fabricated aluminum products to third parties, which accounted for approximately 5% of the total tonnage of United States domestic shipments. A majority of Kaiser's fabricated products are sold to distributors or used by customers as components in the manufacture and assembly of finished end-use products. The following table sets forth total shipments and intracompany transfers of Kaiser's alumina, primary aluminum, and fabricated aluminum operations:
Years Ended December 31, ----------------------------------------- 1996 1995 1994 ------------- ------------- ------------- (In thousands of tons) ALUMINA: Shipments to Third Parties 2,073.7 2,040.1 2,086.7 Intracompany Transfers 912.4 800.6 820.9 PRIMARY ALUMINUM: Shipments to Third Parties 355.6 271.7 224.0 Intracompany Transfers 128.3 217.4 225.1 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties 327.1 368.2 399.0
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 Kaiser's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. Alumina prices, as well as fabricated aluminum product prices (which vary considerably among products), are significantly influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to three months. From time to time in the ordinary course of business, Kaiser enters into hedging transactions to provide price risk management in respect of its net exposure resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot and bauxite, whose prices fluctuate with the price of primary aluminum. Forward sales contracts are used by Kaiser to effectively lock-in or fix the price that Kaiser will receive for its shipments. Kaiser also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of price for its anticipated sales, and/or (iii) to permit Kaiser to realize possible upside price movements. See Notes 1 and 10 to the Company's Consolidated Financial Statements. Profit Enhancement and Cost Reduction Initiative In October 1996, Kaiser established a goal of achieving significant cost reductions and profit improvements by the end of 1997, with the full effect planned to be realized in 1998 and beyond, measured against 1996 results. To achieve this goal, Kaiser plans reductions in production costs, decreases in corporate general and administrative expenses, and enhancements to product mix and volume throughput. There can be no assurance that the initiative will result in the desired cost reductions and other profit improvements. Production Operations--General Kaiser'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 7% of world alumina produced in 1996, as reported by the IPAI. During 1996, Kaiser's shipments of bauxite to third parties represented approximately 25% of the bauxite mined by Kaiser. In addition, Kaiser's third party shipments of alumina represented approximately 73% of the alumina produced by Kaiser. Kaiser's share of world alumina capacity, as reported by the IPAI, was approximately 6% in 1996. - - The primary aluminum products business unit operates two wholly owned domestic smelters and two foreign smelters in which Kaiser holds significant ownership interests. During 1996, Kaiser's shipments of primary aluminum to third parties represented approximately 75% of its primary aluminum production. Kaiser's share of world primary aluminum capacity, as reported by the IPAI, was approximately 2% in 1996. - - Fabricated aluminum products are manufactured by two business units-- lat-rolled products and engineered products. The products include heat-treated products, body, lid, and tab stock for beverage containers, sheet and plate products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters, engine manifolds, and other castings, forgings and extruded products, which are manufactured at plants located in principal marketing areas of the United States and Canada. The aluminum utilized in Kaiser's fabricated products operations is comprised of primary aluminum, obtained both internally and from third parties, and scrap metal purchased from third parties. Production Operations--Bauxite and Alumina The following table lists Kaiser's bauxite mining and alumina refining facilities as of December 31, 1996:
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% 1,050,000 1,050,000 Alpart(2) Jamaica 65% 942,500 1,450,000 QAL(3) Australia 28.3% 973,500 3,440,000 ------------- ------------- 2,966,000 5,940,000 ============= ============= - --------------- (1) Although Kaiser 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 alumina refinery. (3) Queensland Alumina Limited ("QAL").
Bauxite mined in Jamaica by KJBC is refined into alumina at Kaiser's plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of Jamaica granted Kaiser a mining lease for the mining of bauxite sufficient to supply Kaiser's then-existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the Gramercy plant is sold to third parties. Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina plant located in Jamaica. Kaiser owns a 65% interest in Alpart, and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. Kaiser has management responsibility for the facility on a fee basis. Kaiser and Hydro have agreed to be responsible for their proportionate shares of Alpart's costs and expenses. The Government of Jamaica has granted Alpart a mining lease and has entered into other agreements with Alpart designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery as it may be expanded to a capacity of 2,000,000 tons per year through the year 2024. Kaiser owns a 28.3% interest in 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 Kaiser, purchase bauxite from another QAL stockholder under long-term supply contracts. Kaiser has contracted with QAL to take approximately 792,000 tons per year of capacity or pay standby charges. Kaiser is unconditionally obligated to pay amounts calculated to service its share ($94.4 million at December 31, 1996) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. Kaiser's principal customers for bauxite and alumina consist of other aluminum producers that purchase bauxite and reduction-grade alumina, trading intermediaries who resell raw materials to end-users, and users of chemical-grade alumina. All of Kaiser's third-party sales of bauxite in 1996 were made to two customers, the largest of which accounted for approximately 79% of such sales. Kaiser also sold alumina to fifteen customers, the largest and top five of which accounted for approximately 21% and 79% of such sales, respectively. See "--Competition." Kaiser believes that among alumina producers it is the world's second largest seller of alumina to third parties. Kaiser's strategy is to sell a substantial portion of the bauxite and alumina available to it in excess of its internal refining and smelting requirements under multi-year sales contracts. See also "--Sensitivity to Prices and Hedging Programs." Production Operations--Primary Aluminum Products The following table lists Kaiser's primary aluminum smelting facilities as of December 31, 1996:
Annual Rated Total Capacity Annual 1996 Company Available to Rated Operating Location Facility Ownership the Company Capacity Rate ------------------- ------------- ------------- ------------- ------------- ------------- (tons) (tons) Domestic Washington Mead 100% 200,000 200,000 106% Washington Tacoma 100% 73,000 73,000 100% ------------- ------------- 273,000 273,000 ------------- ------------- International Ghana Valco(1) 90% 180,000 200,000 68% Wales, United Kingdom Anglesey(2) 49% 55,000 112,000 118% ------------- ------------- 235,000 312,000 ------------- ------------- Total 508,000 585,000 ============= ============= - ------------------------------ (1) Valco Aluminium Company Limited ("Valco") (2) Anglesey Aluminium Limited ("Anglesey")
Kaiser owns two smelters located at Mead and Tacoma, Washington, where alumina is processed into primary aluminum. The Mead facility uses pre-bake technology and produces primary aluminum. Approximately 53% of Mead's 1996 production was used at Kaiser's Trentwood fabricating facility and the balance was sold to third parties. The Tacoma plant uses Soderberg technology and produces primary aluminum and high-grade, continuous-cast, redraw rod, which currently commands a premium price in excess of the price of primary aluminum. Both smelters have achieved significant production efficiencies through retrofit technology and a variety of cost controls, leading to increases in production volume and enhancing their ability to compete with newer smelters. Kaiser has also commenced the modernization and expansion of the carbon baking furnace at its Mead smelter at an estimated cost of approximately $52.0 million. This project is expected to lower costs, enhance safety and improve the environmental performance of the facility and is expected to be completed in late 1998. Electric power represents an important production cost for Kaiser at its aluminum smelters. In 1995, Kaiser successfully restructured electric power purchase agreements for its facilities in the Pacific Northwest, which resulted in significantly lower electric power costs in 1996 for the Mead and Tacoma, Washington, smelters compared to 1995 electric power costs. Kaiser expects to continue to benefit from these savings in electric power costs at these facilities in 1997. However, a number of lawsuits challenging the restructuring have been filed and the effect, if any, of such lawsuits on Kaiser's power purchase and transmission arrangements is not known at this time. Kaiser manages, and owns a 90% interest in, the Valco aluminum smelter in Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied by Kaiser and the other participant into primary aluminum under long-term tolling contracts which provide for proportionate payments by the participants. Kaiser's share of the primary aluminum is sold to third parties. Power for the Valco smelter is supplied under an agreement which expires in 2017. The agreement indexes two-thirds of the price of the contract quantity of power to the market 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. The Volta River Authority has allocated to Valco sufficient electric power to operate at 80% of its annual rated capacity through December 31, 1997. Kaiser owns a 49% interest in the Anglesey aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. Kaiser supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum output. Kaiser sells its share of Anglesey's output to third parties. Power for the Anglesey aluminum smelter is supplied under an agreement which expires in 2001. Kaiser 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--has significantly contributed to increased and more efficient production of primary aluminum and enhances Kaiser's ability to compete with the industry's newer smelters. Kaiser is actively engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide, and may participate in joint ventures or similar business partnerships which employ Kaiser's technical and managerial knowledge. See "--Research and Development." Kaiser's principal primary aluminum customers consist of large trading intermediaries and metal brokers, who resell primary aluminum to fabricated product manufacturers, and large and small international aluminum fabricators. In 1996, Kaiser sold its primary aluminum production not utilized for internal purposes to approximately 45 customers, the largest and top five of which accounted for approximately 16% and 54% of such sales, respectively. See "--Competition." Marketing and sales efforts are conducted by a small staff located at the business unit's headquarters in Pleasanton, California, and by senior executives of Kaiser who 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. Production Operations--Fabricated Aluminum Products Kaiser manufactures and markets fabricated aluminum products for the transportation, packaging, 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. Kaiser's fabricated products compete with those of numerous domestic and foreign producers and with products made of steel, copper, glass, plastic and other materials. Product quality, price and availability are the principal competitive factors in the market for fabricated aluminum products. Kaiser has focused its fabricated products operations on selected products in which Kaiser has production expertise, high-quality capability and geographic and other competitive advantages. Flat-Rolled Products. The flat-rolled products business unit, the largest of Kaiser's fabricated products businesses, operates the Trentwood sheet and plate mill at Spokane, Washington. In addition, Kaiser broke ground on its first commercial Micromill(TM) facility, near Reno, Nevada. The Micromill(TM) process is a proprietary, compact, high-speed process for continuous casting and rolling of a thin-strip aluminum sheet from molten metal. Kaiser expects the Nevada facility to be in a start-up mode in the first half of 1997, and anticipates beginning limited customer shipments by the second half of 1997. See "-- Research and Development." The Trentwood facility is Kaiser's largest fabricating plant and accounted for approximately 63% of Kaiser's 1996 fabricated aluminum products shipments. The business unit supplies the aerospace and general engineering markets (producing heat-treat products), the beverage container market (producing body, lid and tab stock) and the specialty coil markets (producing automotive brazing sheet, wheel, and tread products), both directly and through distributors. Kaiser continues to implement changes to the process and product mix of its Trentwood rolling mill in an effort to maximize its profitability and maintain full utilization of the facility. Kaiser has approved an expansion of its heat-treat capacity to approximately 60,000 tons from approximately 45,000 tons, which will enable Kaiser to increase the range of its heat-treat products, including wide heat-treated sheet for the aerospace market, enhance the quality of its heat-treated products, and improve Trentwood's operating efficiency. The project is estimated to cost approximately $45.0 million and to take approximately two years to complete. Global sales of Kaiser's heat-treat products have increased significantly over the last several years and are made primarily to the aerospace and general engineering markets, which are experiencing growth in demand. Kaiser's flat-rolled products are also sold to beverage container manufacturers located in the western United States and in the Asian Pacific Rim countries where the Trentwood plant's location provides Kaiser with a transportation advantage. Quality of products for the beverage container industry and timeliness of delivery are the primary bases on which Kaiser competes. Kaiser has made significant capital expenditures at Trentwood during the past several years in rolling technology and process control to improve the metal integrity, shape and gauge control of its products. Kaiser believes that such improvements have enhanced the quality of its products for the beverage container industry and the capacity and efficiency of its manufacturing operations. Kaiser believes that it is one of the highest quality producers of aluminum beverage can stock in the world. In 1996, the business unit shipped products to approximately 150 customers in the aerospace, transportation and industrial ("ATI") markets, most of whom 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 15% of the business unit's revenue. In 1996, the flat-rolled products business unit had approximately 40 domestic and foreign can stock customers. The largest and top five of such customers accounted for approximately 18% and 35%, respectively, of the business unit's revenue. See "--Competition." 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 end-use customers from eight sales offices located throughout the United States. International customers are served by sales offices in England and Japan and by independent sales agents in Asia and Latin America. Engineered Products. The engineered products business unit is headquartered in Detroit, Michigan, 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. Major markets for extruded products are in the transportation industry, to which the business unit 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. The sales and engineering office in Detroit, Michigan, 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. The engineered products business unit also 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, and 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 1996, the engineered products business unit had approximately 990 customers, the largest and top five of which accounted for approximately 13% and 31%, respectively, of the business unit's revenue. Sales are made directly from plants, as well as marketing locations across the United States. See "-- Competition." In September 1996, Kaiser entered into a letter of intent with Accuride Corporation ("Accuride"), a business unit of Phelps Dodge Corporation, to form a joint-venture to design, manufacture and market aluminum wheels for the commercial ground transportation industry. The formation of the joint venture, subject to various conditions including third-party consents, is expected to occur in the second quarter of 1997. COMPETITION Aluminum competes in many markets with steel, copper, glass, plastic and other materials. In recent years, plastic containers have increased and glass containers have decreased their respective shares of the soft drink sector of the beverage container market. In the United States, beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene terephthalate container capacity is brought on line by plastics manufacturers. Within the aluminum business, Kaiser competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. Many of Kaiser's competitors have greater financial resources than Kaiser. Kaiser's principal competitors in the sale of alumina include Alcoa Alumina and Chemicals L.L.C., Billiton Marketing and Trading BV, and Alcan Aluminium Limited. Kaiser 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. Kaiser also competes with a wide range of domestic and international fabricators in the sale of fabricated aluminum products. Competition in the sale of fabricated products is based upon quality, availability, price and service, including delivery performance. Kaiser concentrates its fabricating operations on selected products in which it has production expertise, high-quality capability, and geographic and other competitive advantages. Kaiser believes that, assuming the current relationship between worldwide supply and demand for alumina and primary aluminum does not change materially, the loss of any one of its customers, including intermediaries, would not have a material adverse effect on its financial condition, results of operations or liquidity. RESEARCH AND DEVELOPMENT Kaiser conducts research and development activities principally at two facilities - the Center for Technology ("CFT") in Pleasanton, California, and the Primary Aluminum Products Division Technology Center ("DTC") adjacent to the Mead smelter in Washington. Net expenditures for company-sponsored research and development activities were $20.5 million in 1996, $18.5 million in 1995, and $16.7 million in 1994. Kaiser's research staff totaled 156 at December 31, 1996. Kaiser estimates that research and development net expenditures will be approximately $22 million in 1997. CFT performs research and development across a range of aluminum process and product technologies to support Kaiser's business units and new business opportunities. It also selectively offers technical services to third parties. Significant efforts are directed at product and process technology for the aircraft, automotive and can sheet markets, and aluminum reduction cell models which are applied to improving cell designs and operating conditions. DTC maintains specialized laboratories and a miniature carbon plant where experiments with new anode and cathode technology are performed. DTC supports Kaiser's primary aluminum smelters, and concentrates on the development of cost-effective technical innovations such as equipment and process improvements. The largest and most notable single project being developed at CFT and the Reno, Nevada, facility is a unique Micromill(TM) casting facility for the production of can sheet from molten metal using a continuous cast process. The capital and conversion costs of Kaiser's Micromill(TM) facilities are expected to be significantly lower than conventional rolling mills. The use of a Micromill(TM) facility is also expected to result in lower transportation costs due to the ability to strategically locate a Micromill(TM) facility in close proximity to a manufacturing facility. Micromill(TM) facilities are expected to be particularly well suited to take advantage of the rapid growth in demand for can sheet expected in emerging markets in Asia and Latin America where there is limited indigenous supply. Kaiser believes that Micromill(TM) facilities should also be capable of manufacturing other sheet products at relatively low capital and operating costs. The Micromill(TM) technology is based on a proprietary thin-strip, high-speed, continuous-belt casting technique linked directly to hot and cold rolling mills. The major advantage of the process is that the sheet is continuously manufactured from molten metal, unlike the conventional process in which the metal is first cast into large, solid ingots and subsequently rolled into sheet through a series of highly capital-intensive steps. The first Micromill(TM) facility, which was constructed in Nevada during 1996 as a demonstration and production facility, achieved operational start-up in the fourth quarter of 1996. Kaiser expects that the Nevada Micromill(TM) will be in a start-up mode for the first half of 1997 and will be able to commence limited shipments to customers in the second half of 1997. If Kaiser is successful in proving and commercializing its Micromill(TM) technology, Micromill(TM) facilities could represent an important source of future growth. There can be no assurance that Kaiser will be able to successfully develop and commercialize the technology for use at full-scale facilities. Kaiser is currently financing the capital cost of the construction of the Nevada Micromill(TM), estimated to be approximately $70 million, from available general corporate resources. Kaiser licenses its technology and sells technical and managerial assistance to other producers worldwide. Kaiser's technology has been installed in alumina refineries, aluminum smelters and rolling mills located in the United States, Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New Zealand, Ghana, United Arab Emirates and the United Kingdom. Kaiser has technical services contracts with smelters in Wales, Africa, Europe, the Middle East and India. Kaiser's revenue from technology sales and technical assistance to third parties was $3.6 million in 1996, $5.7 million in 1995 and $10.0 million in 1994. BUSINESS DEVELOPMENT Kaiser is actively pursuing opportunities to grow in targeted areas of its portfolio, by internal investment and by acquisition, both domestically and internationally. Kaiser is pursuing opportunities to increase its participation in emerging markets by using its technical expertise and capital to form joint ventures or acquire equity in aluminum-related facilities in foreign countries where it can apply its proprietary technology. Kaiser has created Kaiser Aluminum International to identify growth opportunities in targeted emerging markets and develop the needed country competence to complement Kaiser's product and process competence in capitalizing on such opportunities. Kaiser has focused its efforts on countries that are expected to be important suppliers of aluminum and/or large customers for aluminum and alumina, including Venezuela--where Kaiser is the Qualified Operator in one of five consortia seeking to participate in the privatization of Venezuela's aluminum industry--the PRC, Russia and other members of the CIS, and India. Kaiser's proprietary retrofit technology has been installed by Kaiser at various third party locations throughout the world and is an integral part of Kaiser's initiatives for participating in new and existing smelting facilities. See "--Research and Development." In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of Kaiser, entered into a Joint Venture Agreement and related agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the China National Nonferrous Metals Industry Corporation relating to the formation and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise organized under PRC law (the "Joint Venture"). KYRIL contributed $9.0 million to the capital of the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the future of the Joint Venture. Governmental approval in the PRC will be necessary in order to implement any arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. At a meeting of the Board of Directors of the Joint Venture held on January 16, 1997, LAS reported that negotiations had begun with an investor which might be interested in buying KYRIL's interest in the Joint Venture. In light of such report, the directors adopted a resolution that, among other things, (i) contained an agreement to continue until June 30, 1997, discussions concerning the future of the Joint Venture, (ii) provided that KYRIL granted to LAS the right to seek a buyer to purchase KYRIL's equity interest in the Joint Venture, and (iii) provided that if a buyer to purchase KYRIL's equity interest in the Joint Venture was not found by June 30, 1997, the Joint Venture would be terminated and dissolved. Kaiser, through its engineered products business unit, has entered into contracts to form two small joint venture companies in the PRC. Kaiser indirectly acquired equity interests of approximately 45% and 49%, respectively, in these two companies which will manufacture aluminum extrusions, in exchange for the contribution to those companies of certain used equipment, technology, services and cash. The majority equity interests in the two companies are owned by affiliates of Guizhou Guang Da Construction Company. EMPLOYEES During 1996, Kaiser employed an average of approximately 9,600 persons, compared with an average of approximately 9,500 employees in 1995, and 9,700 employees in 1994. At December 31, 1996, Kaiser's work force was approximately 9,500, including a domestic work force of approximately 5,900, of whom approximately 4,000 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 75% of such employees are covered by a master agreement (the "Labor Contract") with the United Steelworkers of America ("USWA") which expires September 30, 1998. The Labor Contract covers Kaiser's plants in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract provides for base wages at all covered plants. In addition, workers covered by the Labor Contract may receive quarterly or more frequent bonus payments based on various indices of profitability, productivity, efficiency, and other aspects of specific plant or departmental performance, as well as, in certain cases, the price of alumina or primary aluminum. Pursuant to the Labor Contract, base wage rates were raised effective January 2, 1995, were raised again effective November 6, 1995, and will be raised an additional amount effective November 3, 1997, and an amount in respect of the cost of living adjustment under the previous master agreement will be phased into base wages during the term of the Labor Contract. In the second quarter of 1995, Kaiser acquired up to $2,000 of preference stock held in a stock plan for the benefit of certain employees covered by the Labor Contract and in the first half of 1998 will acquire up to an additional $4,000 of such preference stock held in such plan for the benefit of substantially the same employees. In addition, a profitability test was satisfied and, therefore, Kaiser acquired during 1996 up to an additional $1,000 of such preference stock held in such plan for the benefit of substantially the same employees. Kaiser made comparable acquisitions of preference stock held for the benefit of certain salaried employees. The contract covering Alpart's employees expired in April 1996, and contract negotiations are ongoing. Management considers Kaiser's employee relations to be satisfactory. ENVIRONMENTAL MATTERS Kaiser is subject to a wide variety of international, federal, state and local environmental laws and regulations (the "Environmental Laws"). The Environmental Laws regulate, among other things, air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; the release of hazardous or toxic substances, pollutants and contaminants into the environment; and, in certain instances, the environmental condition of industrial property prior to transfer or sale. In addition, Kaiser is subject to various federal, state and local workplace health and safety laws and regulations ("Health Laws"). From time to time, Kaiser is subject, with respect to its current and former operations, to fines or penalties assessed for alleged breaches of the Environmental and Health Laws and to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action under the Environmental and Health Laws or damages related to alleged injuries to health or to the environment, including claims with respect to certain waste disposal sites and the remediation of sites presently or formerly operated by Kaiser. See "Legal Proceedings--Kaiser Litigation--Environmental Litigation." Kaiser 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"). Kaiser, 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. Kaiser's Mead, Washington, facility has been listed on the National Priorities List under CERCLA. By letter dated June 18, 1996, the Washington State Department of Ecology advised Kaiser that there are several options for remediation at the Mead facility that would be acceptable to the Department. Kaiser expects that one of these remedial options will be agreed upon and incorporated into a consent decree in 1997. In addition, in connection with certain of its asset sales, Kaiser 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. 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 to the Consolidated Financial Statements, each under the heading "Environmental Contingencies" for further information. PROPERTIES The locations and general character of the principal plants, mines, and other materially important physical properties relating to Kaiser's operations are described in "--Production Operations." Kaiser owns or leases all the real estate and facilities used in connection with its business. Plants and equipment and other facilities are generally in good condition and suitable for their intended uses, subject to changing environmental requirements. Although Kaiser's domestic aluminum smelters and alumina facility were initially designed early in Kaiser's history, they have been modified frequently over the years to incorporate technological advances in order to improve efficiency, increase capacity, and achieve energy savings. Kaiser believes that its domestic plants are cost competitive on an international basis. Kaiser's obligations under its credit agreement are secured by, among other things, mortgages on its major domestic plants (other than the Gramercy alumina refinery and Nevada Micromill ). LEGAL PROCEEDINGS See "Legal Proceedings--Kaiser Litigation" for a description of certain legal proceedings in which Kaiser is involved. FOREST PRODUCTS OPERATIONS GENERAL The Company engages in forest products operations through MGI and its wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber, which has been in continuous operation for over 125 years, engages in several principal aspects of the lumber industry--the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (as Pacific Lumber cannot efficiently process them in its own mills). PACIFIC LUMBER OPERATIONS TIMBERLANDS Pacific Lumber owns and manages approximately 193,000 acres of virtually contiguous commercial timberlands 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, are located in close proximity to Pacific Lumber's four sawmills and contain an extensive network of roads. Approximately 179,000 acres of Pacific Lumber's timberlands are owned by Scotia Pacific (the "Scotia Pacific Timberlands"). 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. Approximately 6,000 acres of Pacific Lumber's timberlands are owned by Salmon Creek. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been partially harvested in the past. Pacific Lumber engages 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. 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. During 1996, Pacific Lumber planted an estimated 529,000 redwood and Douglas-fir 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 laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. See "--Regulatory and Environmental Factors" for information regarding a critical habitat designation, sustained yield regulations and similar matters concerning Pacific Lumber and its operations. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base and conducting field studies, Pacific Lumber's foresters are better able to develop detailed THPs addressing the various regulatory requirements. Pacific Lumber also utilizes a Global Positioning System ("GPS") which allows precise location of geographic features through satellite positioning. 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. The systems chosen are those which will most closely emulate those natural processes that result in the cycling of natural forest stands. Due to the magnitude of its timberlands and conservative application of silvicultural systems, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. PRODUCTION FACILITIES Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances that 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 289 million board feet, with approximately 291, 290 and 286 million board feet produced in 1996, 1995 and 1994, respectively. The Fortuna sawmill produces primarily common grade lumber. During 1996, the Fortuna mill produced approximately 99 million board feet of lumber. The Carlotta sawmill produces both common and upper grade redwood lumber. During 1996, the Carlotta mill produced approximately 63 million board feet of lumber. Sawmills "A" and "B" are both located in Scotia. Sawmill "A" processes Douglas-fir logs and Sawmill "B" primarily processes large diameter redwood logs. During 1996, Sawmills "A" and "B" produced 88 million and 41 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 redwood lumber 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 common lumber into wider or longer pieces in its state-of-the-art end and edge glue plants. The result is a standard sized upper grade product which can be sold at a significant premium over common grade products. Pacific Lumber has installed a lumber remanufacturing facility at its mill in Fortuna which processes low grade redwood common lumber into value-added, higher grade redwood fence and related 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 three to twelve months and then kiln-dried for seven to twenty-four days to produce a dimensionally stable and high quality product which generally commands higher prices than "green" lumber (which is lumber sold before it has been dried). Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of approximately 95 million board feet, to dry its upper grades of lumber efficiently in order to produce a quality, premium product. Pacific Lumber also maintains several large enclosed storage sheds which hold approximately 27 million board feet of lumber. In addition, Pacific Lumber owns and operates a modern 25-megawatt cogeneration power plant which is fueled almost entirely by the wood residue from Pacific Lumber's milling and finishing operations. This power plant generates substantially all of the energy requirements of Scotia, California, the town adjacent to Pacific Lumber's timberlands where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1996, 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, 1996 Year Ended December 31, 1995 ----------------------------------------- ----------------------------------------- % of Total % of Total Lumber % of Total Lumber % of Total Production Lumber % of Total Production Lumber % of Total Product Volume Revenues Revenues Volume Revenues Revenues ------------- ------------- ------------- ------------- ------------- ------------- Upper grade redwood lumber 13% 33% 28% 17% 38% 31% Common grade redwood lumber 53% 42% 35% 54% 40% 32% ------------- ------------- ------------- ------------- ------------- ------------- Total redwood lumber 66% 75% 63% 71% 78% 63% ------------- ------------- ------------- ------------- ------------- ------------- Upper grade Douglas- fir lumber 3% 6% 5% 3% 5% 4% Common grade Douglas- fir lumber 27% 16% 13% 23% 14% 11% ------------- ------------- ------------- ------------- ------------- ------------- Total Douglas- fir lumber 30% 22% 18% 26% 19% 15% ------------- ------------- ------------- ------------- ------------- ------------- Other grades of lumber 4% 3% 2% 3% 3% 4% ------------- ------------- ------------- ------------- ------------- ------------- Total lumber 100% 100% 83% 100% 100% 82% ============= ============= ============= ============= ============= ============= Logs 9% 7% ============= ============= Hardwood chips 2% 4% Softwood chips 4% 5% ------------- ------------- Total wood chips 6% 9% ============= =============
Lumber. Pacific Lumber primarily produces and markets lumber. In 1996, Pacific Lumber sold approximately 307 million board feet of lumber, which accounted for approximately 83% 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 that 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 large diameter logs and is characterized by an absence of knots and other defects, is used primarily in 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, and 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 majority of these logs are purchased by Britt. The balance are purchased by 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 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, 1996 and 1995 was approximately $21.3 million and approximately $11.5 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 66% of these sales in 1996. Common grades of Douglas-fir lumber are sold primarily in California. In 1996, the largest and top five of Pacific Lumber's customers accounted for approximately 9% and 24%, respectively, of total revenues. Exports of lumber accounted for approximately 5% of Pacific Lumber's total revenues in 1996. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of products. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes 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, 1997, 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, but are not limited to, 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. 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 $112,000 per month in 1996 and is expected to be approximately $115,200 per month in 1997. 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 the purpose 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 the purchase price is therefore based upon "stumpage prices." Title to the harvested logs does not pass to Pacific Lumber until the logs are transported to Pacific Lumber's log decks and measured. Substantially all of Scotia Pacific's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. Pacific Lumber, Scotia Pacific and Salmon Creek also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, Pacific Lumber entered into an Environmental Indemnification Agreement with Scotia Pacific pursuant to which Pacific Lumber agreed to indemnify Scotia Pacific from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the Scotia Pacific Timberlands. Pacific Lumber entered into an agreement with Britt (the "Britt Agreement") which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from 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 1996, Britt sold approximately 79 million board feet of lumber products to approximately 75 different customers. Over one-half of Britt's 1996 lumber sales were in northern California. The remainder of its 1996 sales were in southern California and ten other western states. The largest and top five of such customers accounted for approximately 27% and 68%, respectively, of such 1996 sales. Britt markets its products through its own salesmen to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers. Britt's backlog of sales orders at December 31, 1996 and 1995 was approximately $4.2 million and $3.2 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 37.4 million board feet of fencing products per year. As of March 1, 1997, Britt employed approximately 120 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 1996. Britt competes primarily with the northern California mills of Louisiana Pacific, Georgia Pacific and Eel River. REGULATORY AND ENVIRONMENTAL FACTORS This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business--General" for cautionary information with respect to such forward-looking statements. 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. Moreover, these laws and regulations are modified from time to time and are subject to judicial and administrative interpretation. 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 and Federal Clean Water Act require, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. Pacific Lumber is subject to certain pending matters described below which could have a material adverse effect on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. There can be no assurance that certain pending or future legislation, governmental regulations or judicial or administrative decisions will not have a material adverse effect on Pacific Lumber. 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 6,600 acres (all containing virgin or residual old growth timber) which are occupied marbled murrelet habitat. Pacific Lumber is unable to predict when or if it will be able to harvest this acreage. In May 1996, the USFWS published its final designation of critical habitat for the marbled murrelet (the "Final Designation"), designating over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of Pacific Lumber's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timber. The bulk of Pacific Lumber's 6,600 acres of occupied marbled murrelet habitat falls within the 33,000 acres of Pacific Lumber's timberlands included in the Final Designation. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") alleging that certain portions of their timberlands have been "taken" and seeking just compensation. See Item 3. "Legal Proceedings-- Pacific Lumber Litigation" for a description of the Takings Litigation. Pursuant to an agreement entered into by the Company, MAXXAM, the United States and the State of California on September 28, 1996 (the "Headwaters Agreement") and described below under "--Headwaters Agreement," the Takings Litigation has been stayed at the request of the parties. It is impossible for the Company to determine the potential adverse effect of the Final Designation on Pacific Lumber's consolidated financial position, results of operations or liquidity until such time as various regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse to Pacific Lumber (and in turn MGI and MGHI). If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have other species listed as threatened or endangered under the ESA and/or the CESA and to designate critical habitat for such species. For example, the National Marine Fisheries Service has announced that by April 25, 1997 it will make a final determination whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. In 1994, the BOF adopted certain regulations regarding compliance with long-term sustained yield ("LTSY") objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a LTSY harvest level that takes into account environmental and economic considerations. The sustained yield plan ("SYP") must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the CDF. The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last six years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP (as defined below under "--Headwaters Agreement") will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on Pacific Lumber's future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands (and making corresponding amendments to the SYP); however, there can be no assurance that Pacific Lumber would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. The Company is unable to predict the ultimate impact the sustained yield regulations will have on Pacific Lumber's future financial position, results of operations or liquidity. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or which challenge other operations by Pacific Lumber. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to Pacific Lumber's THPs relating to young growth timber and to its other operations have been limited; however, no assurance can be given as to the extent of such challenges in the future. The Company believes that environmentally focused challenges to its timber harvesting and other operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, they have not had a material adverse effect on Pacific Lumber's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. In early 1997, the Environmental Protection Agency ("EPA") entered into a consent decree agreeing to establish limits on sedimentation, temperature and other factors (i.e. non-point source total maximum daily loadings, "TMDL") under the Federal Clean Water Act for seventeen northern California rivers and certain of their tributaries, including rivers within Pacific Lumber's timberlands. The TMDL scheme will be primarily aimed at protecting fish habitat. It is impossible to predict the ultimate impact this consent decree will have on Pacific Lumber's consolidated financial position, results of operations or liquidity. In June 1990, the USFWS designated the northern spotted owl as threatened under the ESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations (and related California regulations) generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. Pacific Lumber has developed and the USFWS has given its full concurrence to a northern spotted owl management plan (the "Federal Owl Plan"). The Federal Owl Plan, as amended from time to time, is currently applicable through 1999 and the USFWS expressed its agreement that operations consistent with the Federal Owl Plan would not result in the taking of any owls. Pacific Lumber has also developed a Spotted Owl Resource Plan (the "State Owl Plan"), and the California Department of Fish and Game has expressed its agreement that operations consistent with the State Owl Plan would not result in the taking of any owls. By incorporating the Federal Owl Plan or State Owl Plan into each THP filed with the CDF, Pacific Lumber is able to expedite the approval time with respect to its THPs. The plaintiffs in the Marbled Murrelet action have requested and received injunctive relief with respect to certain THPs involving the Federal Owl Plan. See Item 3."Legal Proceedings- - -Pacific Lumber Litigation." Both federal and state agencies continue to review and consider possible additional regulations regarding the northern spotted owl. It is uncertain if such additional regulations will become effective or their ultimate content or impact on Pacific Lumber. Laws, regulations and related judicial and administrative interpretations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. From time to time, bills are introduced in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection, air and water quality, and the restriction, regulation and administration of timber harvesting practices. It is impossible to predict the content of any such bills, the likelihood of any of the bills passing or the impact of any of these bills on the future liquidity, consolidated financial position or operating results of Pacific Lumber. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is impossible, however, to assess the effect of such matters on Pacific Lumber's consolidated financial position, operating results or liquidity. HEADWATERS AGREEMENT On September 28, 1996, Pacific Lumber (on behalf of itself, its subsidiaries and affiliates) and MAXXAM (collectively, "the Pacific Lumber Parties") entered into the Headwaters Agreement with the United States and California. The Headwaters Agreement provides the framework for the acquisition by the United States and California of certain timberlands of Pacific Lumber. The Headwaters Agreement requires the parties to use their respective best, good faith efforts to achieve certain items (the "Specified Items"). The Specified Items include the transfer to the United States and California of approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest and related buffer zones (respectively, the "Headwaters Forest" and the "Elk Head Forest" and, collectively, the "Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands consists of virgin old growth timberlands. Approximately 4,900 of these acres are owned by Salmon Creek. The remaining acreage is owned by Scotia Pacific (Pacific Lumber having harvesting rights on a portion of the acreage). The Headwaters Timberlands would be transferred in exchange for (a) property and other consideration (possibly including cash) from both the United States and California having an aggregate fair market value of $300 million and (b) 7,755 acres of adjacent timberlands to be acquired by the United States and California from a third party (the "Elk River Timberlands"). The United States and California would also acquire and retain an additional 1,900 acres of timberlands from such third party. An additional Specified Item is the expedited development and submission by Pacific Lumber and processing by the United States of an incidental take permit ("Permit") to be based upon a habitat conservation plan for multiple species ("Multi-Species HCP") covering (a) the timberlands and timber harvesting rights which Pacific Lumber will own after consummation of the Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and (b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands retained by the United States and California (both as conserved habitat). The agreement also requires expedited processing by California of an SYP covering the Resulting Pacific Lumber Timber Property. The Headwaters Agreement contains various provisions regarding the processing of the Multi-Species HCP, the Permit and the SYP. The Specified Items also require, among other things, dismissal with prejudice at closing of the Takings Litigation pending against the United States and California. See Item 3. "Legal Proceedings--Pacific Lumber Litigation." Pursuant to the Headwaters Agreement, the parties have stayed the Takings Litigation, subject to certain rights of the parties to terminate the stay. The Headwaters Agreement also requires the United States and/or California to provide to Pacific Lumber a list of property interests owned or controlled by the United States and/or California meeting certain conditions, including that they have a good faith estimated fair market value equal to or in excess of $300 million. On December 5, 1996, the United States and California each furnished a list of properties for Pacific Lumber's review and approval. Neither list was accompanied by the requisite background information, although both lists did indicate that additional information would be made available. The list of United States properties consisted of oil and gas interests in Kern County, California, approximately 3,000 acres of young growth timberlands in Humboldt, Mendocino and Trinity Counties in California, and surplus acreage next to a federal office building in Laguna Niguel, California. In February 1997, after full and careful consideration, Pacific Lumber notified California that its Presented Properties were not acceptable due to, among other things, various physical problems and encumbrances on the properties, certain properties having been withdrawn by the state and public opposition to the transfer of some of the properties. Pacific Lumber also advised California that it should proceed with the steps necessary to assure that California can provide cash for its portion of the consideration to be paid to Pacific Lumber. There have been ongoing discussions between the Pacific Lumber Parties and the United States regarding the properties or other consideration to be furnished by the United States. As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct logging operations, including salvage logging (the "Moratorium"). The Moratorium was to terminate if by July 28, 1997 the parties had not achieved the Specified Items to their respective satisfaction. On March 11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters Agreement to extend the period of time during which these closing conditions must be met to February 17, 1998. The extension is, however, subject to the achievement of certain milestones toward completion of the Headwaters Agreement. The parties have agreed to execute an amendment to the Headwaters Agreement evidencing these modifications. Closing of the Headwaters Agreement is subject to various conditions, including (a) completion of the Specified Items, (b) approval of a Multi-Species HCP and SYP and issuance of the Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) approval by the boards of directors of the applicable Pacific Lumber Parties. The Headwaters Agreement also provides that the parties will cooperate and act in good faith to preserve diligently the Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against third party challenge. The parties to the Headwaters Agreement are working to satisfy these conditions; however, there can be no assurance that the Headwaters Agreement will be consummated. LEGAL PROCEEDINGS See "Legal Proceedings--Pacific Lumber Litigation" for a description of certain legal proceedings in which Pacific Lumber is involved and "Legal Proceedings--USAT Matters" for a description of the Martel action in which MGI is involved. 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, 1996, the Company had approximately $18.2 million of outstanding receivables derived from the financing of real estate sales in its land developments and may continue to finance real estate sales in the future. As of December 31, 1996, these receivables had a weighted average interest rate of approximately 9.6%, a weighted average maturity of less than three years and average borrower equity of approximately 54%. As of December 31, 1996, the Company also held $1.4 million of other receivables as a portion of the RTC Portfolio (as defined below). Principal Properties Palmas del Mar. Palmas del Mar, a resort located on the southeastern coast of Puerto Rico near Humacao ("Palmas"), was acquired by a subsidiary of the Company in 1984. Palmas consists of approximately 1,900 acres of undeveloped land, 104 condominiums utilized in its time-sharing program (comprising 5,300 time-share intervals, of which approximately 1,258 remain to be sold), a 102-room hotel and adjacent executive convention center known as the Candelero Hotel, a 23-room luxury hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole golf course, 20 tennis courts, golf and tennis pro shops, restaurants, beach and pool facilities, an equestrian center and a marina. The Candelero Hotel, approximately 1,300 private residences, a marina and certain other facilities are owned by third parties, and certain of these facilities are operated by third parties. Since 1985, subsidiaries of MAXXAM have been actively engaged in the development and sale of condominiums, estate lots and villas. During 1996, Palmas del Mar Properties, Inc. ("PDMPI"), the subsidiary through which the Company conducts its Palmas operations, sold 20 condominiums, 219 time-share intervals, one residential lot and 727 time-share conversions for an aggregate of $9.6 million. In addition, on December 20, 1996, PDMPI completed the sale of the Candelero Hotel and certain other assets of Palmas for a purchase price of $7.6 million to BlueWater Palmas Ltd. ("BlueWater"), an affiliate of the Talon Group, Inc. The Candelero Hotel and certain other current or former assets of Palmas are being managed for BlueWater and PDMPI by an affiliate of Wyndham hotels. PDMPI will continue to receive royalty payments from BlueWater, for a period of 49 years, equal to 3% of the gross revenues from the Candelero Hotel and a percentage of gross revenues from certain other assets. During 1995, PDMPI sold 31 condominium units and 65 time-share intervals. Additionally, PDMPI completed a sale and leaseback transaction on July 14, 1995 of 33 furnished condominium units for approximately $8.4 million. Palmas Country Club, Inc. ("PCCI"), a subsidiary of PDMPI, owns the Palmas Country Club which consists of the golf course at Palmas, a clubhouse, tennis courts and other facilities. PCCI has entered into a $12.5 million loan agreement, the proceeds of which will be used to construct an additional golf course, a new clubhouse and related facilities. An additional $2.5 million can be borrowed if certain financial tests are met. The loan is currently secured by the existing facilities and the land on which the additional golf course is being built. The new golf course, clubhouse and other facilities will also serve as security for the loan, provided that at the time the new facilities are completed, certain of the existing facilities will be released as security for the loan. Fountain Hills. In 1968, a subsidiary of MAXXAM purchased and began developing approximately 12,100 acres of real property at Fountain Hills, Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As of December 31, 1996, Fountain Hills had approximately 3,660 acres of undeveloped residential land, 81 developed commercial and industrial lots, 81 acres of undeveloped commercial and industrial land and 165 developed residential lots available for sale. The population of Fountain Hills is approximately 15,000. 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 Company subsidiaries may engage in limited construction and direct sale of residential units. During 1996, 67 residential lots, 20 commercial parcels and 2 acres were sold for an aggregate of $7.5 million. During 1995, 115 residential lots, 22 commercial parcels and 103 acres were sold for an aggregate of $14.5 million. These sales figures do not include those arising from the SunRidge Canyon development described in the following paragraph. In 1994 a subsidiary of the Company entered into a joint venture to develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The development is a residential golf-oriented, upscale master-planned community. The project includes 950 acres, of which 185 have been developed into a championship-quality, public golf course which opened for play in November 1995. The remaining 765 acres are being developed into approximately 860 single family lots. Sales of the individual lots began in November 1995. The project consists of both custom lots, marketed on an individual basis, and production lots, marketed to home builders. There are currently five homebuilders actively involved in the construction and sale of new homes within SunRidge Canyon. During 1996, 39 custom lots and 70 production lots were sold for an aggregate of $8.9 million. Nine custom lots and three production lots were sold during 1995 for an aggregate of $1.4 million. The development is being done 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 joint 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. Texas. In June 1991, a wholly owned subsidiary of MAXXAM purchased from the Resolution Trust Corporation at an auction, for approximately $122.3 million, a portfolio of 27 parcels of income producing real property and 28 loans secured by real property (the "RTC Portfolio"). Substantially all of the real property was located in Texas, with the largest concentration in the vicinities of San Antonio, Houston, Austin and Dallas. From 1992 to December 31, 1996, an aggregate of approximately $41.7 million in loans (which represented thirteen loans) were sold or paid off and thirty-six properties (including fourteen acquired via foreclosure) were sold for aggregate consideration of approximately $182.4 million. These transactions resulted in aggregate gains of $97.3 million. As of December 31, 1996, two loans resulting from property sales and six properties (including one acquired via foreclosure) were held, which had an aggregate net book value of $15.7 million. One property within this portfolio has subsequently been sold for $4.5 million, resulting in a gain of $2.5 million and net cash proceeds of $4.3 million. All of the remaining assets are being marketed for sale. 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 marketing of the remaining 137 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 Ritz-Carlton Rancho Mirage Hotel is located in the development. The three remaining parcels encompass approximately 130 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 April 1996, the Company sold the 1,600-acre Vail Valley Ranch project and Del Lago Water Company near Tucson, Arizona, for an aggregate of $6.0 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 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, 1997, the Company's real estate operations had approximately 160 employees. SAM HOUSTON RACE PARK General In July 1993, MAXXAM, through subsidiaries, acquired various interests in SHRP, Ltd., a Texas limited partnership which owns and operates Sam Houston Race Park (the "Race Park"), a Texas Class 1 horse racing facility located within the greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on its 11-3/4% Senior Secured Notes. On April 17, 1995, the Debtors, consisting of SHRP, Ltd. and two affiliated entities, filed voluntary petitions, each seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. On September 22, 1995, the Bankruptcy Court confirmed the Debtors' plan of reorganization (the "Plan") and on October 6, 1995, the transactions called for by the Plan were completed. The Plan provided for, among other things, a significant modification of SHRP, Ltd.'s 11-3/4% Senior Secured Notes (the "Original Notes" and, as modified, the "Extendible Notes"), an additional capital infusion and a reorganization of SHRP, Ltd. The Extendible Notes have an aggregate initial principal amount of $37.5 million, mature on September 1, 2001 and bear interest at the rate 11% per annum. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) between January 1, 2001 and August 15, 2001. 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 New SHRP Investor Group made a capital contribution of cash in the aggregate amount of $5.9 million (wholly owned subsidiaries of MAXXAM contributed $5.8 million). Additionally, a wholly owned subsidiary of MAXXAM contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of land (having a fair market value of $2.3 million). A wholly owned subsidiary of MAXXAM is the new managing general partner of SHRP, Ltd. Each member of the New SHRP Investor Group provided its pro rata share of a $1.7 million line of credit, should the initial cash contributed to SHRP, Ltd. prove insufficient to fund the future operating and working capital requirements of SHRP, Ltd. MAXXAM has guaranteed its subsidiaries' share of the line of credit, which totaled $1.6 million. The Company has subsequently purchased certain 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.). After giving effect to these transactions, wholly owned subsidiaries of MAXXAM hold, directly or indirectly, approximately 88.5% of the equity in the reorganized SHRP, Ltd. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Investing and Financing Activities--Real Estate and Other Operations--Investing" for information concerning the projected losses of SHRP, Ltd. for the next two years. Racing Operations and Race Park Facilities The Race Park offers pari-mutuel wagering on live thoroughbred or quarter horse racing or simulcast racing generally seven days a week throughout the year. Simulcasting is the process by which live races held at one facility are broadcast simultaneously to other locations at which additional wagers are placed on the race being broadcast. The Race Park's principal sources of revenue are its statutory and contractual share of total wagering on live and simulcast racing. The Race Park also derives revenues from admission fees, food services, club memberships, luxury suites, advertising sales and other sources. The Race Park is located on approximately 300 acres of land in northwest Harris County approximately 18 miles from the Houston central business district and approximately 15 miles from Houston Intercontinental Airport. Regulation of Racing Operations The ownership and operation of horse racetracks in Texas are subject to significant regulation by the Texas Racing Commission (the "Racing Commission") under the Texas Racing Act and related regulations (collectively, the "Racing Act"). The Racing Act provides, among other things, for the allocation of wagering proceeds among betting participants, horsemen's purses, racetracks, the State of Texas and for other purposes, and empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. The Racing Commission must approve the number of live race days that may be offered at the Race Park each year, as well as all simulcast agreements. Class 1 racetracks in Texas are entitled to conduct at least seventeen weeks of live racing for each breed of horses (thoroughbreds and quarter horses). Marketing and Competition The Race Park believes that the majority of the patrons for the Race Park reside within a 50-mile radius of the Race Park, which includes the greater Houston metropolitan area, and that a secondary market of occasional patrons can be developed outside the 50-mile radius but within a 100-mile radius of the Race Park. The Race Park uses a number of marketing strategies in an attempt to reach these people and make them more frequent visitors to the Race Park. The Race Park competes with other forms of entertainment, including casinos located approximately 125 to 150 miles from Houston, a greyhound racetrack located 60 miles from the Race Park and a wide range of sporting events and other entertainment activities in the Houston area. The Race Park could in the future also compete with other forms of gambling in Texas, including casino gambling on Indian reservations or otherwise. While the Race Park believes that the location of the Race Park is a competitive advantage over the other more distant gaming ventures mentioned above, the most significant challenge for the Race Park is to develop and educate new racing fans in a market where pari-mutuel wagering has been absent since the 1930's. Other competitive factors faced by the Race Park include the allocation of sufficient live race days by the Racing Commission and attraction of sufficient race horses to run at the Race Park. The Race Park had 146 days of live racing during 1996. The Race Park currently has 134 days of live racing scheduled for 1997. EMPLOYEES At March 1, 1997, MAXXAM and its subsidiaries employed approximately 2,040 persons, exclusive of those involved in Aluminum Operations. ITEM 2. PROPERTIES For information concerning the principal properties of the Company, see Item 1. "Business." ITEM 3. LEGAL PROCEEDINGS GENERAL This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business--General" for cautionary information with respect to such forward-looking statements. 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 herein) 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. However, there can be no assurance that there will not be adverse determinations or settlements in one or more of the matters identified below or other proceedings that could have a material adverse effect on the Company's financial condition, results of operations and liquidity. 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. MAXXAM INC. LITIGATION This section describes certain legal proceedings in which MAXXAM Inc. (and in some instances, certain of its subsidiaries) is involved. The term "Company," as used in this section, refers to MAXXAM Inc., except where reference is made to the Company's consolidated financial position, results of operations or liquidity. 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. as receiver. At the time of the receivership, the Company owned approximately 13% of the voting stock of UFG. On December 26, 1995, the OTS initiated a formal administrative proceeding (the "OTS action") against the Company and others by filing a Notice of Charges (No. AP 95-40; the "Notice"). The Notice alleges, among other things, 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 61.1% 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, as a result of such status and agreements with the FHLBB, it was obligated to maintain the net worth of USAT. The Notice makes numerous other allegations against the Company and the other respondents, including 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 from certain respondents and restitution and reimbursement of certain losses as well as a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. The date for the hearing on the merits is scheduled for September 22, 1997. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. See also the description of the FDIC action and the Martel action below. 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 whose bid was more costly to the government and taxpayers. The action was entitled MAXXAM Inc. v. Office of Thrift Supervision, Department of the Treasury (No. 95-60753). By order dated December 10, 1996, the U.S. Fifth Circuit Court of Appeals denied the Company's petition for review and denied any relief to the Company. 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 (the "FDIC action") in the U.S. District Court for the Southern District of Texas (No. H-95-3956). The original complaint was against Mr. Hurwitz and sought 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 original complaint further alleged, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM maintained the net worth of USAT. This action did not name the Company as a defendant. The Court has joined the OTS as a party to the FDIC action and granted the motions to intervene filed by the Company and three other respondents in the OTS action. The OTS is seeking to be dismissed from the FDIC action. On January 15, 1997, the FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing in the OTS action, unspecified damages from Mr. Hurwitz relating to amounts the OTS does not collect from the Company and Federated with respect to alleged obligations to maintain USAT's net worth. It is impossible to predict the ultimate outcome of the foregoing matter or its potential impact on the Company's consolidated financial position, results of operations or liquidity. In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court for the Northern District of California (No. C950322) and names as defendants 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 the 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. In August 1996, the Court transferred this matter (No. 96-CV-1164) to the court handling the FDIC action. The parties are awaiting a ruling or hearing on defendants' motion to dismiss. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against MAXXAM, MGI, MAXXAM Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of the Company's directors in the Court of Chancery of the State of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al. (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. and the two cases were consolidated (under case No. 10785; 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, certain of the Company's directors and MCO Properties Inc., a subsidiary of the Company ("MCOP"). 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) (the "NL Industries action"); Kahn, et al. v. Federated Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377) (the "Thistlethwaite action"); Glinert, et al. v. Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al. (No. 12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No. 12404). The Kahn, Glinert, Friscia and Kassoway actions have been consolidated with the Progressive United action into In re MAXXAM Inc./Federated Development Shareholders Litigation (No. 12111); the NL Industries action has been "coordinated" with the consolidated actions; and the Thistlethwaite action has been stayed pending the outcome of the consolidated actions. In January 1994, a derivative action entitled NL Industries, Inc., et al. v. Federated Development Company, et al. (No. 94-00630) was filed in the District Court of Dallas County, Texas, against 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 held a hearing on April 2, 1996 on various trial-related matters, including defendants' motion to dismiss the claims relating to the 1987 loan transactions. On August 14, 1996, the Court heard final oral argument on the merits of the case, but has not issued its decision. By order dated September 6, 1996, the Court denied defendants' motion to dismiss the 1987 loan claims and granted plaintiffs' motion to intervene and substitute a new plaintiff to cure standing problems concerning plaintiffs' 1987 loan claims. Based on post-trial briefs, plaintiffs have indicated they are seeking $49 million in damages from the director defendants. KAISER LITIGATION ENVIRONMENTAL LITIGATION Aberdeen Pesticide Dumps Site Matter The Aberdeen Pesticide Dumps Site, listed on the Superfund National Priorities List, is composed of five separate sites around the town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites are of concern to the United States Environmental Protection Agency (the "EPA") because of their past use as either pesticide formulation facilities or pesticide disposal areas from approximately the mid-1930's through the late 1980's. The United States originally filed a cost recovery complaint (as amended, the "Complaint") in the United States District Court for the Middle District of North Carolina, Rockingham Division, No. C-89-231-R, which, as amended, includes KACC and a number of other defendants. The Complaint seeks reimbursement for past and future response costs and a determination of liability of the defendants under Section 107 of CERCLA. In 1993 and 1994, the EPA issued unilateral Administrative Orders under Section 106(a) of CERCLA ordering the respondents, including KACC, to perform soil remedial design and remedial action and groundwater remediation for three of the Sites. In addition to KACC, a number of other companies are also named as respondents. KACC has entered into interim PRP Participation Agreements with certain of the respondents (the "Aberdeen Site PRP Group" or the "Group") to participate jointly in responding to the Administrative Orders, to share costs incurred on an interim basis, and to seek to reach a final allocation of costs through agreement or to allow such final allocation and determination of liability to be made by the United States District Court. In March 1997, certain members of the Group, including KACC, entered into a Settlement Agreement and Participation Agreement which allocates one hundred percent of all costs incurred or to be incurred for work at each of the five Sites. Negotiations with the United States Department of Justice ("DOJ") and the EPA concerning an acceptable consent decree to resolve the outstanding litigation in whole or in part commenced during the first quarter of 1997. Based on current estimates of future costs, Kaiser believes that its aggregate financial exposure at these Sites is less than $2.0 million. United States of America v. Kaiser Aluminum & Chemical Corporation In February 1989, a civil action was filed by the DOJ at the request of the EPA against KACC in the United States District Court for the Eastern District of Washington, Case Number C-89-106-CLQ. The complaint alleged that emissions from certain stacks at KACC's Trentwood facility in Spokane, Washington, intermittently violated the opacity standard contained in the Washington State Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air Act. KACC and the EPA, without adjudication of any issue of fact or law, and without any admission of the violations alleged in the underlying complaint, have entered into a Consent Decree, which was approved by a Consent Order entered by the United States District Court for the Eastern District of Washington in January 1996. As approved, the Consent Decree settles the underlying disputes and requires KACC to (i) pay a $.5 million civil penalty (which 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. KACC anticipates that capital expenditures for the environmental upgrade of the furnace operation at its Trentwood facility, including the improvements and changes required by the Consent Decree, will be approximately $20.0 million. Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son, Inc. In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a Second Amended Complaint for Damages and Declaratory Relief against the United States, Catellus Development Corporation ("Catellus") and other defendants (collectively, the "Defendants") alleging, among other things, that the Defendants caused or allowed hazardous substances to be discharged or released on certain property located in Richmond, California (the "Property") formerly owned by Catellus and leased to KACC for the purpose of shipbuilding activities conducted by KACC on behalf of the United States during World War II. The Plaintiffs sought recovery of response costs and natural resource damages under CERCLA. Certain of the Plaintiffs alleged that they had incurred or expect to incur costs and damages of approximately $49.0 million. Catellus subsequently filed a third party complaint (the "Third Party Complaint") against KACC in the United States District Court for the Northern District of California, Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC, Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims against the United States for $3.5 million plus thirty-five percent (35%) of future response costs. The trial involving this case commenced in March 1995. During the trial, Plaintiffs settled their claims against Catellus in exchange for payment of approximately $3.3 million. On December 7, 1995, the United States District Court issued a final judgment on those claims concluding that KACC is liable for various costs and interest, aggregating approximately $2.2 million, fifty percent (50%) of future costs of cleaning up certain parts of the Property, and certain fees and costs associated specifically with the claim by Catellus against KACC. KACC paid the City of Richmond $1.8 million in partial satisfaction of this judgment. In January 1996, Catellus filed a notice of appeal with respect to its indemnity judgment against KACC. KACC has since filed a notice of cross appeal as to the Court's decision adjudicating that KACC is obligated to indemnify Catellus. On July 8, 1996, the Court issued an order awarding Plaintiffs nominal costs, which amount has been paid. The order also awarded Catellus de minimis costs. Catellus has filed a notice of appeal. On August 12, 1996, the Court issued an order granting the Catellus motion for attorneys' fees in the amount of approximately $.9 million. KACC and Catellus have filed notices of appeal with respect to the attorneys' fees award. Asbestos-related Litigation KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. For a discussion of asbestos-related litigation, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition and Investing and Financing Activities-- Aluminum Operations--Asbestos Contingencies." DOJ Proceedings On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356 ("CID No. 11356") requesting information from Kaiser regarding (i) its production, capacity to produce, and sales of primary aluminum from January 1, 1991, to the date of the response; (ii) any actual or contemplated reduction in its production of primary aluminum during that period; and (iii) any communications with others regarding any actual, contemplated, possible or desired reductions in primary aluminum production by Kaiser or any of its competitors during that period. Kaiser believes that its actions have at all times been appropriate, and KACC has submitted documents and interrogatory answers to the DOJ responding to CID No. 11356. On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503 ("CID No. 12503"), as part of an industry-wide investigation, requesting information from KACC regarding (i) any actual or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum ingot used by KACC to produce can sheet and the manner in which KACC's cost of acquiring aluminum scrap is factored into its can sheet prices, and (iii) any communications with others regarding any actual or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995. Kaiser believes that its actions have at all times been appropriate, and KACC has submitted documents and interrogatory answers to the DOJ responding to CID No. 12503. KACC was informed in November 1996 that the DOJ has officially closed its investigation of CID No. 12503, and has returned the documents submitted by KACC. OTHER PROCEEDINGS Matheson, et al. v. Kaiser Aluminum Corporation, et al. On March 19, 1996, a lawsuit was filed against the Company, Kaiser and Kaiser's directors challenging and seeking to enjoin a proposed recapitalization of Kaiser (the "Proposed Recapitalization"). See Note 7 to the Consolidated Financial Statements. The suit, which is entitled Matheson, et al. v. Kaiser Aluminum Corporation, et al. (No. 14900) and was filed in the Delaware Court of Chancery, alleges, among other things, breaches of fiduciary duties by certain defendants and that the Proposed Recapitalization violates Delaware law and the certificate of designations for the outstanding preferred stock of Kaiser. On April 8, 1996, the Delaware Court of Chancery issued a ruling which preliminarily enjoined Kaiser from implementing the Proposed Recapitalization. On May 1, 1996, Kaiser's stockholders approved the Proposed Recapitalization which was not implemented at that time due to a pending appeal of the trial court's ruling. On August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction and remanded the case to the Court of Chancery. On September 24, 1996, the plaintiffs filed a motion to make permanent the temporary injunction issued on April 8, 1996. On September 27, 1996, Kaiser's Board of Directors adopted a resolution abandoning the Proposed Recapitalization. On March 18, 1997, plaintiffs withdrew their motion for a permanent injunction, leaving their fee application as the only issue for the Court of Chancery to consider. On March 25, 1997, the Court of Chancery awarded plaintiffs' attorneys' fees and expenses in the total amount of $800,000. It is anticipated that the Court of Chancery will sign an order approved as to form by all parties, awarding such fees, dissolving the preliminary injunction, and dismissing plaintiffs' case with prejudice. The decision to abandon the Proposed Recapitalization does not preclude a recapitalization being proposed to the stockholders of Kaiser in the future. Hammons v. Alcan Aluminum Corp., et al. In March 1996, a class action complaint was filed against KACC, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds Metals Company and the Aluminum Association in the Superior Court of California for the County of Los Angeles, Case No. BC145612. The complaint claims that the defendants conspired, in violation of the California Cartwright Act, in conjunction with a Memorandum of Understanding ("MOU") entered into by representatives of Australia, Canada, the European Union, Norway, the Russian Federation and the United States in 1994, to restrict the production of primary aluminum resulting in increased prices for primary aluminum and aluminum products. The complaint seeks certification of a class consisting of persons who at any time between January 1, 1994, and the date of the complaint purchased aluminum or aluminum products manufactured by one or more of the defendants and estimates damages sustained by the class to be $4.4 billion during the year 1994, before trebling. Plaintiff's counsel has estimated damages to be $4.4 billion per year for each of the two years the MOU was active, which when trebled equals $26.4 billion. In April 1996 the case was removed to the United States District Court for the Central District of California. In July 1996, the Court granted summary judgment in favor of KACC and other defendants and dismissed the complaint as to all defendants. In July 1996, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. Other Matters Various other lawsuits and claims are pending against KACC. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on Kaiser's consolidated financial position, results of operations or liquidity. PACIFIC LUMBER LITIGATION Various actions, similar to each other, have been filed against the Company, MGI, Pacific Lumber and its subsidiaries, various state officials and others, alleging, among other things, violations of the Forest Practice Act, CEQA, ESA, CESA and/or related regulations. These actions seek to prevent Pacific Lumber and its subsidiaries from harvesting certain of their THPs and conducting certain other timber 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, among other things, exemptions for forest health which Pacific Lumber and its subsidiaries had previously filed covering their entire timberlands. These exemptions allow Pacific Lumber to harvest dead, dying or diseased trees ("exempt harvesting operations"). As amended, the complaint alleges, among other things, violations of the ESA, the National Environmental Protection Act ("NEPA") and the Administrative Procedures Act ("APA"). Plaintiffs claim, among other things, that the exempt harvesting operations will contribute to the destruction of habitat for the marbled murrelet and the northern spotted owl. After the U.S. Ninth Circuit Court of Appeals reversed a preliminary injunction granted by the trial court enjoining the exempt harvesting operations, the plaintiffs asked for leave to amend their pleadings. On April 3, 1996, the trial court granted a preliminary injunction preventing harvesting on eight already-approved THPs to the extent that they rely on the Federal Owl Plan. In addition to appealing the preliminary injunction, Pacific Lumber has obtained regulatory reapproval of seven of the eight enjoined THPs without reliance on the Federal Owl Plan and has, to date, confirmed with the trial court that six of those THPs are not subject to the preliminary injunction. On November 4, 1996, the U.S. Ninth Circuit Court of Appeals heard oral arguments concerning Pacific Lumber's appeal but has not yet rendered a decision on this matter. In January 1997, the trial court dismissed plaintiffs' claims that Pacific Lumber had and was causing "takes" of the marbled murrelet and northern spotted owl. See Item 1. "Business--Forest Products Operations--Pacific Lumber Operations--Regulatory and Environmental Factors" above for a description of regulatory and similar matters which could affect Pacific Lumber's timber harvesting practices and future operating results. The EPIC, et al. v. California State Board of Forestry, et al. (No. 91CP244) action in the Superior Court of Humboldt County, filed by the Sierra Club and the Environmental Protection Information Center ("EPIC") in 1991, relates to a THP for approximately 237 acres of virgin old growth timber. After the Superior Court reversed the BOF's approval of this THP, certain modifications were made to the THP, which was then unanimously approved by the BOF. The Superior Court later issued judgment in favor of Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the trial court's judgment approving harvesting under this THP. In April 1993, EPIC filed another action with respect to this THP entitled EPIC, Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No. C93-1400) (the "EPIC action") in the U.S. District Court for the Northern District of California, alleging an unlawful "taking" of the marbled murrelet under the ESA. In February 1995, the Court ruled that the area covered by the THP is occupied by the marbled murrelet and permanently enjoined implementation of the THP in order to protect the marbled murrelet. Upon appeal, the U.S. Ninth Circuit Court of Appeals affirmed the District Court's decision. Pacific Lumber subsequently appealed the matter to the U.S. Supreme Court, but on February 19, 1997, the U.S. Supreme Court ruled that it would not consider Pacific Lumber's appeal. In March 1997, Pacific Lumber paid approximately $1.4 million in legal fees which the trial court had awarded to the plaintiffs. On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon Creek Corporation v. California State Board of Forestry, et al. (No. 96CS01057) in the Superior Court of Sacramento County. This action seeks to overturn the BOF's decision denying approval of a THP for approximately 8 acres of virgin old growth timber in the Headwaters Forest. Salmon Creek seeks a court order requiring approval of the THP so that it may harvest in accordance with the THP. Salmon Creek also seeks constitutional "just compensation" damages to the extent that its old growth timber within and surrounding the THP has been "taken" by reason of this regulatory denial and previous actions of governmental authorities. In addition, on May 7, 1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit entitled The Pacific Lumber Company, et al. v. The United States of America in the United States Court of Federal Claims. The suit alleges that the federal government has "taken" over 3,800 acres of Pacific Lumber's old growth timberlands (including the Headwaters Forest) through its application of the ESA. Pacific Lumber, Scotia Pacific and Salmon Creek seek constitutional "just compensation" damages for the taking of these timberlands by the federal government's actions. The Court in each of these actions has granted the parties' agreed motions to stay the actions pursuant to the Headwaters Agreement. These actions would be dismissed if the Headwaters Agreement is consummated. See Item 1. "Business--Forest Products Operations--Pacific Lumber Operations--Headwaters Agreement" for a description of the Headwaters Agreement. OTHER MATTERS Groundwater contamination has been found on property sold to a subsidiary of the Company by a subsidiary of Rockwell International Corporation ("Rockwell"). In March 1992, an enforcement action was filed against Rockwell and the current property owners by the Nevada Division of Environmental Protection seeking an order that would require defendants to investigate and report on the nature and extent of the pollution and contamination on the property. This action has been stayed, pending continued environmental investigation and remediation by Rockwell. The Company was named as a defendant in three related damage actions filed by certain persons. Two of these cases have settled to date and in each case the Company's share of the settlement was 21%. In September 1996, Rockwell submitted a global settlement package to the Company. An Environmental Cleanup Liability report, which accompanied Rockwell's settlement package and which was prepared by Rockwell's experts, estimates total costs to be $26.1 million (which the Company is disputing). No further settlement discussions have taken place between Rockwell and the Company concerning the indemnification issue since the settlement package was presented. The Company is involved in other claims, lawsuits and other proceedings. 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. 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 1996 Annual Report to Stockholders (the "Annual Report") which are included as part of Exhibit 13.1 hereto and incorporated herein by reference. On December 23, 1996, the Company's wholly owned subsidiary, MAXXAM Group Holdings Inc. consummated an offering of $130.0 million aggregate principal amount of 12% Senior Secured Notes due 2003 (the "MGHI Notes"). The Company guaranteed the MGHI Notes on a senior, unsecured basis. The principal underwriters for this offering were Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial Purchasers"). The MGHI Notes were sold for cash (at 100% of principal amount) and the aggregate discount of the Initial Purchasers was $3,575,000. Sales were made to Qualified Institutional Buyers ("QIBs") in reliance on Rule 144A under the Securities Act of 1933 (the "Securities Act") and to a limited number of Institutional Accredited Investors (as defined under Rule 501(a)(1), (2), (3), or (7) under the Securities Act), that prior to their purchase of MGHI Notes, delivered to the Initial Purchasers a letter containing, among other things, certain representations from prospective Institutional Accredited Investors). This reliance was based on the Initial Purchasers' knowledge of the QIBs and the representation letters received from the Institutional Accredited Investors. On December 24, 1996, MGHI and the Company filed a Form S-4 Registration Statement relating to an exchange offer pursuant to which the MGHI Notes could be exchanged for registered notes containing substantially identical terms. The Form S-4 Registration Statement was declared effective on January 8, 1997 and the exchange offer was consummated on February 11, 1997. 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 DISCUSSIONS 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 31 to 62 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 42 Schedule I - Condensed Financial Information of Registrant at December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 43-46 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 There were no reports on Form 8-K during the fourth quarter of 1996; however, on March 12, 1997, the Company filed a Current Report on Form 8-K (under Item 5), dated March 11, 1997, concerning an agreement to amend the Headwaters Agreement to extend to February 17, 1998 the period of time during which the closing conditions must be met. (C) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 48), 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 1996 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 14, 1997. 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 41 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 14, 1997 MAXXAM INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
December 31, --------------------------- 1996 1995 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 169.6 $ 20.4 Marketable securities 18.9 9.3 Other current assets 14.6 13.9 ------------- ------------- Total current assets 203.1 43.6 Deferred income taxes 66.1 52.1 Investment in subsidiaries 16.5 -- Other assets 3.9 3.7 ------------- ------------- $ 289.6 $ 99.4 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 8.3 $ 7.4 Long-term debt, current maturities 42.6 .2 ------------- ------------- Total current liabilities 50.9 7.6 Long-term debt, less current maturities -- 41.6 Losses recognized in excess of investment in subsidiaries -- 12.4 Notes payable to subsidiaries, net of notes receivable and advances 192.2 18.8 Other noncurrent liabilities 97.3 102.8 ------------- ------------- Total liabilities 340.4 183.2 ------------- ------------- Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 669,701 .3 .3 Common stock, $.50 par value; 28,000,000 shares authorized; shares issued: 10,063,885 and 10,063,359, respectively 5.0 5.0 Additional capital 155.9 155.0 Accumulated deficit (185.6) (208.5) Pension liability adjustment (5.1) (16.1) Treasury stock, at cost (shares held: preferred - 845; common: 1,400,112 and 1,355,512, respectively) (21.3) (19.5) ------------- ------------- Total stockholders' deficit (50.8) (83.8) ------------- ------------- $ 289.6 $ 99.4 ============= ============= See notes to consolidated financial statements and accompanying notes.
MAXXAM INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF OPERATIONS (UNCONSOLIDATED) (IN MILLIONS OF DOLLARS)
Years Ended December 31, ----------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Investment, interest and other income (expense) $ (1.5) $ 5.6 $ 12.6 Interest expense (7.0) (6.2) (11.7) General and administrative expenses (32.8) (18.9) (11.0) Equity in earnings (losses) of subsidiaries 15.1 43.6 (132.0) ------------- ------------- ------------- Income (loss) before income taxes (26.2) 24.1 (142.1) Credit for income taxes 49.1 33.4 20.0 ------------- ------------- ------------- Net income (loss) $ 22.9 $ 57.5 $ (122.1) ============= ============= ============= See notes to consolidated financial statements and accompanying notes.
MAXXAM INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (UNCONSOLIDATED) (IN MILLIONS OF DOLLARS)
Years Ended December 31, ----------------------------------------- 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 22.9 $ 57.5 $ (122.1) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Equity in losses (earnings) of subsidiaries (15.1) (43.6) 132.0 Net sales (purchases) of marketable securities (7.1) 14.5 6.8 Amortization of deferred financing costs and discounts on long-term debt .3 .3 .3 Decrease in receivables .3 .6 1.1 Increase in accrued and deferred income taxes (30.2) (18.9) (7.9) Decrease in accounts payable and other liabilities (.1) (14.5) (5.3) Other 2.1 2.3 (.2) ------------- ------------- ------------- Net cash provided by (used for) operating activities (26.9) (1.8) 4.7 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of Kaiser Depositary Shares -- 7.6 10.3 Dividends received from subsidiaries 3.9 4.8 7.5 Investments in and net advances from (to) subsidiaries 49.7 .4 (27.5) Capital expenditures (.4) (.2) (.4) ------------- ------------- ------------- Net cash provided by (used for) investing activities 53.2 12.6 (10.1) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of intercompany note 125.0 -- -- Redemption, repurchase of and principal payments on long-term debt (.3) (5.9) (5.8) Other (1.8) -- -- ------------- ------------- ------------- Net cash provided by (used for) financing activities 122.9 (5.9) (5.8) ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 149.2 4.9 (11.2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20.4 15.5 26.7 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 169.6 $ 20.4 $ 15.5 ============= ============= ============= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Reduction of stockholders' deficit due to redemption of Kaiser preferred stock $ -- $ 136.2 $ -- Distribution of intercompany payable received from a subsidiary 20.0 8.0 132.0 Assumption by the Company of subsidiary's payables to the Company and affiliates -- -- (63.1) Net assets transferred to subsidiary -- (14.5) -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 6.7 $ 6.0 $ 7.0 Income taxes paid (refunded) 1.5 (.3) 1.1 See notes to consolidated financial statements and accompanying notes.
MAXXAM INC. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT 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, --------------------------- 1996 1995 ------------- ------------- 14% Senior Subordinated Reset Notes due May 20, 2000 $ 25.0 $ 25.0 12-1/2% Subordinated Debentures due December 15, 1999, net of discount 17.6 16.5 Other -- .3 ------------- ------------- 42.6 41.8 Less: current maturities (42.6) (.2) ------------- ------------- $ -- $ 41.6 ============= =============
The Company redeemed the 14% Senior Subordinated Reset Notes and the 12-1/2% Subordinated Debentures at par on January 7, 1997 and January 22, 1997, respectively. C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES At December 31, 1996, the Company's indebtedness to its subsidiaries, which includes accrued interest, consists of the following:
December 31, --------------------------- 1996 1995 ------------- ------------- Note payable, interest at 11% $ 125.0 $ -- Unsecured note payable, interest at 6% 19.3 18.3 Unsecured notes payable, interest at 7% 14.6 13.7 Net advances 33.3 (13.2) ------------- ------------- $ 192.2 $ 18.8 ============= =============
The increase in net advances is principally due to cash receipts from the sale of real property and notes from the RTC Portfolio. There are no restrictions which would preclude the Company's subsidiaries from declaring a dividend of such advances to the Company. 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, 1997 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz Executive Vice President and Chief 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, 1997 By: /S/ CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President, Chief Executive Officer and Director Date: March 28, 1997 By: /S/ ROBERT J. CRUIKSHANK Robert J. Cruikshank Director Date: March 28, 1997 By: /S/ EZRA G. LEVIN Ezra G. Levin Director Date: March 28, 1997 By: /S/ STANLEY D. ROSENBERG Stanley D. Rosenberg Director Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ Paul N. Schwartz Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 28, 1997 By: /S/ TERRY L. FREEMAN Terry L. Freeman 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 Amended and Restated By-laws of the Company dated February 3, 1997 4.1 Non-Negotiable Intercompany Note, dated December 23, 1996, executed by the Company in favor of MAXXAM Group Holdings Inc. (incorporated herein by reference to Exhibit 10.8 to the Registration Statement on Form S-4 of MAXXAM Group Holdings Inc. ("MGHI"), Registration No. 333-18723) 4.2 Loan and Pledge Agreement, dated as of June 28, 1996, between Custodial Trust Company and the Company (the "CTC Loan Agreement"; incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 4.3 Amendment Agreement, dated December 23, 1996, relating to the CTC Loan Agreement, (incorporated herein by reference to Exhibit 4.33 to Amendment No. 1 to MGHI's Registration Statement on Form S-4, Registration No. 333-18723) 4.4 Indenture, dated as of December 23, 1996, among MGHI, as Issuer, the Company, as Guarantor, and First Bank National Association, as Trustee, regarding the 12% Senior Secured Notes due 2003 of MGHI (incorporated herein by reference to Exhibit 4.1 to MGHI's Registration Statement on Form S-4, Registration No. 333-18723) 4.5 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 (the "MGI Indenture"; 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) 4.6 First Supplemental Indenture, dated as of December 17, 1996, to the MGI Indenture (incorporated herein by reference to Exhibit 4.35 to Amendment No. 1 to MGHI's Registration Statement on Form S-4, Registration No. 333-18723) 4.7 Second Supplemental Indenture, dated as of December 23, 1996, to the MGI Indenture (incorporated herein by reference to Exhibit 4.36 to Amendment No. 1 to MGHI's Registration Statement on Form S-4, Registration No. 333-18723) 4.8 Indenture, dated December 23, 1996, among Kaiser Aluminum & Chemical Corporation ("KACC"), Kaiser Aluminum Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as subsidiary guarantors ("the Subsidiary Guarantors") and First Trust National Association, as Trustee, regarding KACC's 10-7/8% Series C Senior Notes due 2006 (incorporated herein by reference to KACC's Registration Statement on Form S-4, Registration No. 333-19143) 4.9 Indenture, dated as of October 23, 1996, among KACC, as Issuer, the Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 10-7/8% Senior Notes due 2006 (incorporated by reference to Exhibit 4.2 to Kaiser Aluminum Corporation's ("Kaiser") Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1- 9447) 4.10 Indenture, dated as of February 1, 1993, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., and Kaiser Jamaica Corporation, as subsidiary guarantors, 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) 4.11 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) 4.12 Second Supplemental Indenture, dated as of February 1, 1996, to the KACC Senior Subordinated Note Indenture (incorporated herein 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) 4.13 Indenture, dated as of February 17, 1994, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser Finance Corporation, as subsidiary guarantors, and First Trust National Association, Trustee, regarding Kaiser'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. 1-9447; the "Kaiser 1993 Form 10-K") 4.14 First Supplemental Indenture, dated as of February 1, 1996, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser Finance Corporation, as subsidiary guarantors, and First Trust National Association, Trustee, regarding KACC's 9-7/8% Senior Notes (incorporated herein 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) 4.15 Credit Agreement, dated as of February 17, 1994 (the "Kaiser Credit Agreement"), among Kaiser, KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent (incorporated herein by reference to Exhibit 4.4 to the Kaiser 1993 Form 10-K) 4.16 First Amendment, dated July 21, 1994, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q of Kaiser for the quarter ended June 30, 1994, File No. 1-9447) 4.17 Second Amendment, dated March 10, 1995, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.6 to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-9447) 4.18 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) 4.19 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) 4.20 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) 4.21 Sixth Amendment, dated as of October 1, 1996, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.1 to KACC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-3605) 4.22 Seventh Amendment, dated December 17, 1996, to the Kaiser Credit Agreement (incorporated herein by reference to Exhibit 4.18 to KACC's Registration Statement on Form S-4 dated January 2, 1997; File No. 333-19143) 4.23 Eighth Amendment, dated February 24, 1997, to the Kaiser Credit Agreement (incorporated herein by reference to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-9447) 4.25 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 1993 Form 10-K) 4.26 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) 4.27 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) 4.28 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) 4.29 First Amendment, dated as of February 10, 1997, to the Pacific Lumber Credit Agreement (incorporated by reference to Exhibit 4.4 to The Pacific Lumber Company's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-9204) 4.30 Second Amended and Restated Credit and Security Agreement, dated July 15, 1995, among the First National Bank of Boston, MCO Properties, Inc., Westcliff Development Corporation, Horizon Corporation, Horizon Properties Corporation and MCO Properties L.P. (incorporated herein by reference to Exhibit 4.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) 4.31 Amended and Restated Indenture, dated October 6, 1995, by and among Sam Houston Race Park, Ltd. ("SHRP"), New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of SHRP for the quarter ended June 30, 1995, File No. 33-67738) 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, dated December 23, 1996, between the Company and MGHI (incorporated herein by reference to Exhibit 10.1 to MGHI's Registration Statement on Form S-4, Registration No. 333-18723) 10.2 Tax Allocation Agreement, dated as of December 21, 1989, between the Company and KACC (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) 10.3 Tax Allocation Agreement, dated as of February 26, 1991, 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) 10.4 Tax Allocation Agreement, dated August 4, 1993, between the Company and MGI (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) 10.5 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) 10.6 Tax Allocation Agreement, dated as of March 23, 1993, among Pacific Lumber, Scotia Pacific, Salmon Creek Corporation and the Company (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of Scotia Pacific, Registration No. 33-55538) 10.7 Tax Allocation Agreement, dated as of July 3, 1990, between the Company and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.4 to MGI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8857) 10.8 Senior Subordinated Intercompany Note , dated February 15, 1994 , executed by KACC in favor of Kaiser (incorporated herein by reference to Exhibit 4.22 to the Kaiser 1993 Form 10-K) 10.9 Senior Subordinated Intercompany Note, dated March 17, 1994, executed by KACC in favor of Kaiser (incorporated herein by reference to Exhibit 4.23 to the Kaiser 1993 Form 10-K) *10.10 Intercompany Note, dated December 21, 1989, executed by Kaiser in favor of KACC *10.11 Confirmation of Amendment of Non-Negotiable Intercompany Note, dated as of October 6, 1993, between Kaiser and KACC 10.12 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) 10.13 Agreement, dated September 28, 1996, among MAXXAM Inc., The Pacific Lumber Company (on behalf of itself, its subsidiaries and its affiliates), the United States of America and the State of California (incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated September 28, 1996) 10.14 Exchange Agreement, dated as of May 20, 1991, by and among the Company, MCO Properties Inc. ("MCOP") and Federated Development Company (incorporated by reference to Exhibit 10(ff) to Amendment No. 4 to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300) 10.15 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) 10.16 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) 10.17 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) 10.18 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) 10.19 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, File No. 1- 3924) 10.20 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) 10.21 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 Quarterly Report on Form 10-Q of SHRP for the quarter ended June 30, 1995, File No. 33- 67738) Executive Compensation Plans and Arrangements --------------------------------------------- 10.22 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") 10.23 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) 10.24 MAXXAM 1994 Non-Employee Director Plan (incorporated herein by reference to Exhibit 99 to the Company 1994 Proxy Statement) 10.25 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) *10.26 Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee Director Plan 10.27 MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to Exhibit 99 to the Company 1994 Proxy Statement) 10.28 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) 10.29 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") 10.30 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) 10.31 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) 10.32 MAXXAM Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(ii) to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300) 10.33 Form of Company Deferred Compensation Agreement (incorporated herein by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.34 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) 10.35 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) 10.36 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) 10.37 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, File No. 1-9447) 10.38 Kaiser 1995 Executive Incentive Compensation Program (incorporated herein by reference to Exhibit 99 to Kaiser's Proxy Statement dated April 26, 1995) 10.39 Promissory Note, dated February 1, 1989, by Anthony R. Pierno and Beverly J. Pierno in favor of the Company (the "1989 Pierno Note") (incorporated herein by reference to Exhibit 10.30 to the Company 1990 Form 10- K) 10.40 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) 10.41 Promissory Note dated July 19, 1990 by Anthony R. Pierno in favor of the Company (the "1990 Pierno Note") (incorporated herein by reference to Exhibit 10.31 to the Company 1990 Form 10-K) 10.42 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) 10.43 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) *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, 1996 which are incorporated herein by reference *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-3 2 EXHIBIT 3.4 AMENDED AND RESTATED BY-LAWS OF MAXXAM INC. ARTICLE I OFFICES Section 1. Registered Office. The corporation shall maintain a registered office in the State of Delaware as required by law. Section 2. Other Offices. The corporation may also have offices at other places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the corporation may require. ARTICLE II STOCKHOLDERS Section 1. Place of Meetings. All meetings of stockholders shall be held at such places, either within or without the State of Delaware, as may be fixed from time to time by the Board of Directors. Section 2. Annual Meeting. Annual meetings of stockholders shall be held on such date during the month of May or June of each year, or such other date as may be determined by the Board of Directors, and at such time as may be fixed from time to time by the Board of Directors. At each annual meeting of stockholders, the stockholders shall elect directors by a plurality vote, and may transact such other business as may properly be brought before the meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled annual meeting of stockholders. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice, who is entitled to vote at the meeting and who complied with the applicable notice procedures. The provisions governing the required notice are set forth in (i) the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation for purposes of nominations for directors, and (ii) this By- Law for purposes of proposal of other business. For business, other than nominations for directors, to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the foregoing paragraph of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth, as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made as well as (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, if applicable, and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, if applicable. In addition to the information required in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation, any stockholder's notice relating to nominations for directors shall set forth all information relating to such person that is required to be disclosed in solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected) Notwithstanding anything herein to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. Only such persons who are nominated in accordance with the procedures set forth in the corporation's Restated Certificate of Incorporation and these By-Laws shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether any nomination or business proposed to be brought before the meeting was made in accordance with the procedures set forth in the corporation's Restated Certificate of Incorporation or these By-Laws, as applicable, and if any proposed nomination or business is not in compliance with the corporation's Restated Certificate of Incorporation or these By-Laws, as applicable, to declare that such defective nomination or proposal shall be disregarded. For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. Notwithstanding the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation or the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation and this By-Law. Nothing in the Fifteenth paragraph of the corporation's Restated Certificate of Incorporation or this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may only be called by the Board of Directors as required by the Sixteenth paragraph of the corporation's Restated Certificate of Incorporation. The power of stockholders to call a special meeting is specifically denied in the corporation's Restated Certificate of Incorporation. Business transacted at all special meetings shall be confined to the specific purpose or purposes of the persons authorized to request such special meeting as set forth in this Section 3 and only such purpose or purposes shall be set forth in the notice of such meeting. The Board of Directors acting by resolution may postpone and reschedule any previously scheduled special meeting of stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (a) pursuant to the corporation's notice of meeting (b) by or at the direction of the Board of Directors or (c) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by the third paragraph of Section 2 of Article II of these By-Laws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Only such persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible to serve as directors and only such business shall be conducted at a special meeting of the stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. The chairman of the meeting shall have the power and duty to determine whether any nomination or business proposed to be brought before the meeting was made in compliance with the procedures set forth in this By-Law, and if any proposed nomination or business is not in compliance, to declare that such defective nomination or proposal shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 4. Notice of Meetings. Written or printed notice of all meetings of the stockholders shall be mailed or delivered to each stockholder entitled to vote thereat at least ten, but not more than sixty, days prior to the meeting. Notice of any special meeting shall state in general terms the purpose or purposes for which the meeting is to be held, and no other business shall be transacted thereat except as stated in such notice. Section 5. Quorum; Adjournments of Meetings. The holders of outstanding shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast by the holders of all classes of capital stock of the Corporation entitled to vote generally in elections of directors, considered for this purpose as one class, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders, but if there be less than a quorum, the holders of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast by the holders of all classes of the Corporation's capital stock so present or represented may adjourn the meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice, except as required by law, and any business may be transacted thereat that might have been transacted on the original date of the meeting. In the event that at any meeting there are not present, in person or by proxy, holders of shares of stock of the Corporation entitled to cast that number of votes which may be required by the laws of the State of Delaware, or other applicable statute, the Certificate of Incorporation or these By-Laws, for action upon any given matter, action may nevertheless be taken at such meeting upon any other matter or matters which may properly come before the meeting if there shall be present thereat, in person or by proxy, holders of shares of stock of the Corporation entitled to cast that number of votes required for action in respect of such other matter or matters. Section 6. Voting. At any meeting of the stockholders every registered owner of shares entitled to vote may vote in person or by proxy and, except as otherwise provided by statute, in the Certificate of Incorporation or these By-Laws, shall have one vote for each such share standing in his/her or its name on the books of the corporation. Except as otherwise required by statute, the Certificate of Incorporation or these By-Laws, all matters, other than the election of directors, brought before any meeting of the stockholder shall be decided by a vote of a majority in interest of the stockholders of the corporation pre sent in person or by proxy at such meeting and voting thereon, a quorum being present. Section 7. Inspectors of Election. The Board of Directors, or, if the Board shall not have made the appointment, the chairman presiding at any meeting of stockholders, shall have power to appoint one or more persons to act as inspectors of election, to receive, canvass and report the votes cast by the stockholders at such meeting or any adjournment thereof, but no candidate for the office of director shall be appointed as an inspector at any meeting for the election of directors. Section 8. Chairman of Meetings. The Chairman of the Board of Directors or, in his absence, the President, shall preside at all meetings of the stockholders. In the absence of both the Chairman of the Board and the President, a majority of the members of the Board of Directors present in person at such meeting may appoint any other officer or director to act as chairman of any meeting. Section 9. Secretary of Meetings. The Secretary or an Assistant Secretary of the corporation shall act as secretary of all meetings of the stockholders, and, in their absence, the chairman of the meeting shall appoint any other person to act as secretary of the meeting. Section 10. List of Stockholders. It shall be the duty of the officer of the corporation who has charge of the stock ledger of the corporation to prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting (the "stockholder list"), arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his/her or its name. The stockholder list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for such ten day period either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where said meeting is to be held. The stockholder list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who may be present at said meeting. Section 11. Procedural Rules. The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business of the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman of the meeting shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comment by participants and regulation of the opening and closing of the polls for balloting determined by the Board of Directors or the chairman of the meeting. Meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. Except as otherwise provided in the Certificate of Incorporation or these By-Laws, the property, business and affairs of the corporation shall be managed and controlled by the Board of Directors. The Board may exercise all such authority and powers of the corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the stockholders. Section 2. Number of Directors. The number of directors of the corporation (exclusive of directors to be elected by the holders of any one or more classes or series of Preferred Stock of the corporation or any other class or series of stock of the corporation, which may at some time be outstanding, voting separately as a class or classes) shall not be less than three nor more than fourteen, and may be changed from time to time by action of not less than a majority of the members of the Board then in office. Whenever the words "whole Board," "entire Board" or "total number of directors" are used in these By-Laws, such words shall mean the number of directors fixed by the Board and then in effect in accordance with the provisions of the Certificate of Incorporation or these By-Laws. Section 3. Annual Meeting. The annual meeting of the Board of Directors, of which no notice shall be necessary, shall be held immediately following the annual meeting of stockholders or any adjournment thereof at the principal office, if any, of the corporation in the city in which the annual meeting of stockholders was held at which any of such directors were elected, or at such other place as a majority of the members of the newly elected Board who are then present shall determine, for the election or appointment of officers for the ensuing year and the transaction of such other business as may be brought before such meeting. Section 4. Regular Meetings. Regular meetings of the Board of Directors, other than the annual meeting, shall be held at such times and places, and on such notice, if any, as the Board of Directors may from time to time determine. Section 5. Special Meetings. Special meetings of the Board of Directors may be called by order of the Chairman of the Board or the President or may be called at the request of any two directors. Notice of the time and place of each special meeting shall be given by or at the direction of the Secretary of the corporation or an Assistant Secretary of the corporation, or, in their absence, by the person or persons calling the meeting by mailing the same at least five days before the meeting or by telephoning, telegraphing or delivering personally the same at least twenty-four hours before the meeting to each director. Except as otherwise specified in the notice thereof, or as required by statute, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at any special meeting. Section 6. Attendance By Communications Equipment. Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors or of any committee designated by the Board may participate in a meeting of the Board or any such committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in any meeting by such means shall constitute presence in person at such meeting. Any meeting at which one or more members of the Board of Directors or of any committee designated by the Board shall participate by means of conference telephone or similar communications equipment shall be deemed to have been held at the place designated for such meeting, provided that at least one member is at such place while participating in the meeting. Section 7. Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the Board or, in his absence, the President. In the absence of the Chairman of the Board and the President, a presiding officer shall be chosen by a majority of the directors present. The Secretary of the corporation, or, in his absence, an Assistant Secretary of the corporation, shall act as secretary of the meeting, but, in their absence, the presiding officer may appoint any person to act as secretary of the meeting. Section 8. Quorum; Vote. A majority of the directors then in office (but in no event less than one-third of the total number of directors) shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting to another time or place from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. Except as otherwise required by statute, the Certificate of Incorporation or these By-Laws, all matters coming before any meeting of the Board of Directors shall be decided by the vote of a majority of the directors present at the meeting, a quorum being present. Section 9. Compensation. The directors shall receive such compensation for their services as directors and as members of any committee appointed by the Board as may be prescribed by the Board of Directors and shall be reimbursed by the Corporation for ordinary and reasonable expenses incurred in the performance of their duties, and the foregoing shall not be construed as prohibiting the payment to any director of compensation for services rendered in any other capacity. ARTICLE IV COMMITTEES Section 1. Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate from among its members an Executive Committee to consist of three or more members and may designate one of such members as chairman. The Board may also designate one or more of its members as alternates to serve as a member or members of the Executive Committee in the absence of a regular member or members. Except as provided in Section 4 of this Article IV, the Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and the Executive Committee may authorize the seal of the corporation to be affixed to all papers which may require it. Section 2. Other Committees. The Board of Directors, acting by a majority of the whole Board, may also appoint from among its own members or otherwise such other committees as the Board may determine, to have such powers and duties as shall from time to time be prescribed by the Board and which, in the discretion of the Board, may be designated as committees of the Board. Section 3. Quorum and Discharge. A majority of the entire committee shall constitute a quorum for the transaction of business of any committee and may fix its rules of procedure. The Board of Directors may discharge any committee either with or without cause at any time. Section 4. Powers of Committees. No committee designated or appointed by the Board of Directors shall have the power or authority of the Board in reference to (a) amending the Certificate of Incorporation, (b) adopting an agreement of merger or consolidation, (c) recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, (e) amending the By-Laws of the corporation, (f) declaring dividends, (g) designating committees, (h) filling vacancies among committee members or (i) removing officers. The Executive Committee shall have the power and authority of the Board to authorize the issuance of shares of capital stock of the corporation of any class or any series of any class. Section 5. Committee Meetings. Regular meetings of any committee designated or appointed by the Board of Directors shall be held at such times and places and on such notice, if any, as the committee may from time to time determine. Special meetings of any committee designated or appointed by the Board may be called by order of the Chairman of the Board, Vice Chairman of the Board, President of the corporation, Chairman of the committee or any two members of any such committee. Notice shall be given of the time and place of each special meeting by mailing the same at least two days before the meeting or by telephoning, telegraphing or delivering personally the same at least twenty-four hours before the meeting to each committee member. Except as otherwise specified in the notice thereof or as required by law, the Certificate of Incorporation or these By-Laws, any and all business may be transacted at any regular or special meeting of a committee. The Secretary of the corporation shall keep the minutes of the meetings of all committees designated or appointed by the Board of Directors and shall be the custodian of all corporation records. ARTICLE V OFFICERS Section 1. General. The Board of Directors shall elect the following executive officers: a Chairman of the Board, a President, one or more Vice Presidents and a Secretary; and it may elect or appoint from time to time such other or additional officers as in its opinion are desirable for the conduct of the business of the corporation. Section 2. Term of Office: Removal and Vacancy. Each officer shall hold his/her office until his/her successor is elected and qualified or until his/her earlier resignation or removal. Any officer or agent shall be subject to removal with or without cause at any time by the Board of Directors. Vacancies in any office, whether occurring by death, resignation, removal or otherwise, may be filled at any regular or special meeting of the Board of Directors. Section 3. Powers and Duties. Each of the officers of the corporation shall, unless otherwise ordered by the Board of Directors, have such powers and duties as generally pertain to his/her respective office as well as such powers and duties as from time to time may be conferred upon him/her by the Board of Directors. Unless otherwise ordered by the Board of Directors after the adoption of these By-Laws, the Chairman of the Board, or, when the office of Chairman of the Board is vacant, the President, shall be the chief executive officer of the corporation. Section 4. Power to Vote Stock. Unless otherwise ordered by the Board of Directors, the Chairman of the Board and the President each shall have full power and authority on behalf of the corporation to attend and to vote at any meeting of stockholders of any corporation in which this corporation may hold stock, and may exercise on behalf of this corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting and shall have power and authority to execute and deliver proxies, waivers and consents on behalf of the corporation in connection with the exercise by the corporation of the rights and powers incident to the ownership of such stock. The Board of Directors, from time to time, may confer like powers upon any other person or persons. ARTICLE VI CAPITAL STOCK Section 1. Certificates of Stock. Certificates for stock of the corporation shall be in such form as the Board of Directors may from time to time prescribe and shall be signed by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary of the corporation or an Assistant Secretary of the corporation. Section 2. Transfer of Stock. Shares of capital stock of the corporation shall be transferable on the books of the corporation only by the holder of record thereof, in person or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, and with such proof of the authenticity of the signature and of authority to transfer, and of payment of transfer taxes, as the corporation or its agents may require. Section 3. Ownership of Stock. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. ARTICLE VII MISCELLANEOUS Section 1. Corporate Seal. The seal of the corporation shall be circular in form and shall contain the name of the corporation and the year and State of incorporation. The Secretary of the corporation shall be the custodian of the seal of the corporation. Section 2. Fiscal Year. The Board of Directors shall have power to fix, and from time to time to change, the fiscal year of the corporation. Section 3. Waiver of Notice. Any notice required to be given under the provisions of these By-Laws or otherwise may be waived by the stockholder, director, member of any committee or officer to whom such notice is required to be given, before or after the meeting or other action of which notice was required to be given. ARTICLE VIII AMENDMENT The Board of Directors shall have the power to make, alter or repeal the By-Laws of the corporation subject to the power of the stockholders to alter or repeal the By-Laws made or altered by the Board of Directors. ARTICLE IX INDEMNIFICATION Section 1. Obligation to Indemnify. This corporation shall, to the fullest extent permitted by Delaware law, as in effect from time to time (but, in the case of any amendment of the Delaware General Corporation Law, only to the extent that such amendment permits this corporation to provide broader indemnification rights than said law permitted this corporation to provide prior to such amendment), indemnify each person who is or was a director or officer of this corporation or of any of its wholly owned subsidiaries at any time on or after August 1, 1988, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, or was or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer, employee or agent of this corporation or of any of its wholly owned subsidiaries, or is or was at any time serving, at the request of this corporation, any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity against all expense, liability and loss (including, but not limited to, attorneys' fees, judgments, fines, excise taxes or penalties (with respect to any employee benefit plan or otherwise), and amounts paid or to be paid in settlement) incurred or suffered by such director or officer in connection with such proceeding; provided, however, that, except as provided in Section 5 of this ARTICLE IX, this corporation shall not be obligated to indemnify any person under this ARTICLE IX in connection with a proceeding (or part thereof) if such proceeding (or part thereof) was not authorized by the Board of Directors of this corporation and was initiated by such person against (i) this corporation or any of its subsidiaries, (ii) any person who is or was a director, officer, employee or agent of this corporation or any of its subsidiaries and/or (iii) any person or entity which is or was controlled, controlled by, or under common control with, this corporation or has or had business relations with this corporation or any of its subsidiaries. Section 2. Contract Right; Advance Payment of Expenses. The right to indemnification conferred in this ARTICLE IX shall be a contract right, shall continue as to a person who has ceased to be a director or officer of this corporation or of any of its wholly owned subsidiaries and shall inure to the benefit of his or her heirs, executors and administrators, and shall include the right to be paid by this corporation the expenses incurred in connection with the defense or investigation of any such proceeding in advance of its final disposition; provided, however, that, if and to the extent that Delaware law so requires, the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to this corporation of an undertaking, by or on behalf of such director or officer or former director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer or former director or officer is not entitled to be indemnified by this corporation. Section 3. Vesting of Rights. The corporation's obligation to indemnify and to pay expenses in advance of the final disposition of a proceeding under this ARTICLE IX shall arise, and all rights and protections granted to directors and officers under this ARTICLE IX shall vest, at the time of the occurrence of the transaction or event to which any proceeding relates, or at the time that the action or conduct to which any proceeding relates was first taken or engaged in (or omitted to be taken or engaged in), regardless of when any proceeding is first threatened, commenced or completed. Section 4. Continuing of Obligations. Notwithstanding any other provision of these By-laws or the Restated Certificate of Incorporation of this corporation, no action by this corporation, either by amendment to or repeal of this ARTICLE IX or the Restated Certificate of Incorporation of this corporation or otherwise shall diminish or adversely affect any right or protection granted under this ARTICLE IX to any director or officer or former director or officer of this corporation or of any of its wholly-owned subsidiaries which shall have become vested as aforesaid prior to the date that any such amendment, repeal or other corporate action is taken. Section 5. Right to Sue for Unpaid Claims. If a claim for indemnification and/or for payment of expenses in advance of the final disposition of a proceeding arising under this ARTICLE IX is not paid in full by this corporation within thirty days after a written claim has been received by this corporation, the claimant may at any time thereafter bring suit against this corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Section 6. Non-Exclusivity. The right to indemnification and the payment of expenses incurred in connection with the defense or investigation of a proceeding in advance of its final disposition conferred in this ARTICLE IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the By-Laws, Restated Certificate of Incorporation, agreement, vote of stockholders or disinterested directors or otherwise. This corporation may also indemnify all other persons to the fullest extent permitted by Delaware law. Section 7. Effective Date. The provisions of this ARTICLE IX shall apply to any proceeding commenced on or after August 1, 1988. The provisions of this ARTICLE IX of this corporation's By-Laws, as in effect on July 31, 1988, shall govern indemnification in respect of any proceeding commenced prior to August 1, 1988 and in respect of any rights to indemnification or prepayment of expenses granted under the provisions of said ARTICLE IX which shall have become vested. ARTICLE X LIABILITY INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of ARTICLE IX hereof. EX-10 3 EXHIBIT 10.10 NON-NEGOTIABLE INTERCOMPANY NOTE New York, New York December 21, 1989 FOR VALUE RECEIVED, the undersigned, KaiserTech Limited, a Delaware corporation (the "Company"), HEREBY PROMISES TO PAY to the order of Kaiser Aluminum & Chemical Corporation, a Delaware corporation (the "Payee"), the principal sum of EIGHT HUNDRED MILLION FIVE HUNDRED EIGHTY-FIVE THOUSAND TWO HUNDRED EIGHTY AND NO/100 DOLLARS ($818,585,280.00), with interest thereon, which shall be due and payable as hereinafter provided. 1. This Note shall bear interest, compounded annually (computed on the basis of the actual number of days elapsed in a year of 365 or 366 days, as appropriate), on the unpaid principal amount outstanding hereunder plus all accrued and unpaid interest thereon, from the date this Note is issued (the "Issuance Date"), until such principal amount is repaid in full, at a rate equal to the lower of (i) thirteen percent (13%) per annum or (ii) the maximum rate per annum which would result in this Note not being an "applicable high yield discount obligation" as defined in Section 7202(b) of the Omnibus Revenue Reconciliation Act of 1989, as passed by Congress on November 22, 1989, as the same or any similar provision may be enacted. 2. Subject to Section 5 hereof, no payment of principal or interest shall be required to be made on this Note prior to December 21, 2000. Beginning on December 21, 2000, this Note shall be due and payable annually on each anniversary of the date of this Note as to principal and interest (including interest accrued hereon from the Issuance Date through December 21, 1999 which shall be added to the unpaid principal amount hereof) in level installments which, if timely made, would be sufficient fully to satisfy the outstanding principal balance hereof (including interest accrued hereon from the Issuance Date through December 21, 1999) plus interest hereon over a 15-year term, commencing on December 21, 2000. Each such level payment shall be applied first to interest and the balance to principal. 3. The Company shall make each payment hereunder not later than 5:00 p.m. (New York City time) on the day when due in lawful money of the United State of America to the holder of this Note by delivery of a certified or bank cashier's check in the amount of such payment or, at such holder's option, by wire transfer of immediately available funds. 4. Whenever any payment to be made hereunder shall be stated to be due on a Saturday, Sunday or a public or bank holiday or the equivalent for banks generally under the laws of the State of New York (any other day being a "Business Day"), such payment may be made on the next succeeding Business Day. 5. The Company shall have the right to prepay the principal amount of this Note, in whole or in part, at any time or from time to time, without premium or penalty, but with interest on the portion of the principal amount so prepaid accrued to the date of prepayment. 6. If any of the following events (an "Event of Default") shall occur and shall not have been remedied, the holder of this Note may, at its option, declare this Note to be, and the same shall forthwith become, due and payable for the entire unpaid principal amount hereof and all interest accrued hereon: (a) The Company fails to pay any installment of principal of, or interest on, this Note when due; or (b) The Company (i) becomes bankrupt or insolvent, or (ii) admits in writing its inability to pay its debts as they mature, or (iii) files a petition in voluntary bankruptcy, or (iv) seeks relief under any provisions of any bankruptcy, reorganization, arrangement, insolvency or readjustment of debt, dissolution or liquidation law of any jurisdiction whether now or hereafter in effect, or (v) makes a general assignment for the benefit of creditors, or (vi) has a petition or proceeding filed against it under any provisions of the Bankruptcy Code or any insolvency law or statute of the United States of America or any state or subdivision thereof, which petition or proceeding is not dismissed within thirty days from the date of commencement thereof, or (vii) has a receiver, trustee, custodian, conservator or other person appointed by any court to take charge of its affairs or assets or business and such appointment is not vacated or discharged within thirty days thereafter. 7. No failure on the part of any holder of this Note to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by any such holder of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies provided herein are cumulative and not exclusive and are in addition to all others that may be provided by applicable law and other agreements and documents. 8. This Note shall be binding upon the Company and its successors and assigns, and the terms and provisions of this Note shall inure to the benefit of Payee and its successors and assigns, including subsequent holders hereof. 9. The terms and provisions of this Note are severable, and if any term or provision shall be determined to be superseded, illegal, invalid or otherwise unenforceable in whole or in part pursuant to applicable law by a governmental authority having jurisdiction, such determination shall not in any manner impair or otherwise affect the validity, legality or enforceability of that term or provision in any other jurisdiction or any of the remaining terms and provisions of this Note in any jurisdiction. 10. Presentment for payment, notice of dishonor, protest, notice of protest and any other notice are hereby waived. This Note shall be governed by, and construed in accordance with the internal laws of the State of New York without regard to principles of conflict of laws. 11. No amendment, modification or waiver of any term or provision of this Note, nor consent to any departure by the Company herefrom, shall be effective unless the same shall be in writing and signed by the holder of this Note and then such waiver, modification or consent shall be effective only in the specific instance and for the specific purpose for which given. IN WITNESS WHEREOF, the company has caused this Note to be executed and delivered to the Payee on the date and year first above written. KAISERTECH LIMITED By: /s/ John A. Moore ------------------------------ Name: John A. Moore Title: Vice President Pay to the order of MELLON BANK, N.A., as Collateral Agent (the "Collateral Agent"), pursuant to the terms of that certain Company Pledge Agreement dated as of December 21, 1989, as the same may be amended, supplemented, amended and restated, or otherwise modified and in effect from time to time, by and between KAISER ALUMINUM & CHEMICAL CORPORATION and the Collateral Agent. KAISER ALUMINUM & CHEMICAL CORPORATION By: /s/ John A. Moore ------------------------------ Name: John A. Moore Title: Vice President EX-10 4 EXHIBIT 10.11 Confirmation of Amendment of Non-Negotiable Intercompany Note WHEREAS, Kaiser Aluminum Corporation ("KAC"), formerly known as KaiserTech Limited, executed a Non-Negotiable Intercompany Note (the "KT Note"), dated December 21, 1989, payable to the order of Kaiser Aluminum & Chemical Corporation ("KACC"); and WHEREAS, the KT Note has been endorsed, pledged and delivered to Mellon Bank, N.A., as collateral agent (the "Collateral Agent"), under that certain Company Pledge Agreement, dated as of December 21, 1989 (the "Company Pledge Agreement"); and WHEREAS, KAC and KACC agreed in July, 1993, that the KT Note should be amended, effective as of July 1, 1993, as hereinafter described; and WHEREAS, the Company Pledge Agreement contemplates that Pledged Notes (as therein defined, including the KT Note) may be amended, modified, or supplemented from time to time; and WHEREAS, the Ninth Amendment to Credit Agreement, dated as of May 19, 1993, among other things, amended Section 10.2.14 of the Credit Agreement, dated as of December 13, 1989, among KAC, KACC, the financial institutions that are parties thereto, Bank of America National Trust and Savings Association, as Agent, and Mellon Bank, as Collateral Agent, as amended (the "Credit Agreement"), in order to permit any amendment to the KT Note that extends the maturity thereof or reduces the interest rate thereon; and WHEREAS, Section 5.08(b)(vii) of the Indenture, dated as of February 1, 1993, as supplemented, among KACC, as Issuer, certain subsidiaries of KACC, as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee (the "Indenture"), excludes from the provisions of Section 5.08(a) of the Indenture any amendment to the KT Note that extends the maturity thereof or reduces the interest rate thereon, or any other amendment thereto that does not materially adversely affect the holders of the Notes (as defined in the Indenture); and WHEREAS, this Confirmation of Amendment of Non-Negotiable Intercompany Note is made in order to memorialize the agreement between KAC and KACC amending the KT Note, and to evidence the acknowledgment of the Collateral Agent of such amendment of the KT Note; NOW, THEREFORE, KAC and KACC confirm to each other and to the Collateral Agent that the KT Note has been amended, as of July 1, 1993, in the following respect only: 1. Clause (i) of Section 1 of the KT Note is amended by deleting the words "thirteen percent (13%) per annum or", and by replacing such words with the following: "six and five-eights percent (6 5/8%) per annum or". IN WITNESS WHEREOF, KAC and KACC have executed this Confirmation of Amendment of Non-Negotiable Intercompany Note as of October 6, 1993. Kaiser Aluminum Corporation By /S/ John T. La Duc ----------------------------- Title Vice President Kaiser Aluminum & Chemical Corporation By /S/ Kris S. Vasan ----------------------------- Title Treasurer Mellon Bank, N.A., as Collateral Agent under the Company Pledge Agreement, hereby acknowledges that the KT Note has been amended as hereinabove described. Mellon Bank, N.A., as Collateral Agent By [signature illegible] ----------------------------- Title Vice President EX-10 5 EXHIBIT 10.27 DEFERRED FEE AGREEMENT THIS AGREEMENT, dated as of ___________________________, is by and between MAXXAM INC., a Delaware corporation (the "Company"), and _________________ (the "Director"), currently residing at ________________________________________________________________. WITNESSETH: WHEREAS, the Director currently serves as a member of the Board of Directors of the Company (the "Board") and receives remuneration ("Director's Fees") from the Company in that capacity; and WHEREAS, the Director desires to enter into an arrangement providing for the deferral of Director's Fees; and WHEREAS, the Company is agreeable to such an arrangement; NOW, THEREFORE, it is agreed as follows: 1. The Director irrevocably elects to defer receipt, subject to the provisions of this Agreement, of _____ percent of any Director's Fees which may otherwise become payable to the Director for the Calendar year 1994 and which relate to services performed after the date hereof. Such election shall continue in effect with respect to any Director's Fees which may otherwise become payable to the Director for any calendar year subsequent to 1994 unless, prior to January 1 of such year, the Director shall have delivered to the Secretary of the Company a written revocation of such election with respect to Director's Fees for services performed after the date of such revocation. Until such time as the election made under this paragraph is revoked, the percentage specified in the first sentence hereof shall apply on each occasion on which Director's Fees would otherwise be paid to the Director. Director's Fees with respect to which the Director shall have elected to defer receipt are hereinafter referred to as "Deferred Director's Fees." 2. The Company shall credit the amount of Deferred Director's Fees to a book account (the "Deferred Fee Account") as of the date such fees would have been paid to the Director had this Agreement not been in effect. Director's Fees which would otherwise be payable for attending a meeting of the Board or of a committee thereof shall be credited to the Deferred Fee Account as of the first business day following such meeting; Director's Fees which would otherwise be payable as a retainer shall be credited to the Deferred Fee Account as of the first business day of the period to which they relate. 3. Earnings shall be credited to the Deferred Fee Account as follows: (NOTE: (a) and (b) below must add up to 100%) (a) ____ None ____ 25% ____ 50% ____ 75% ____ 100% of the amount credited to the Deferred Fee Account pursuant to paragraph 2 shall be deemed invested in a number of phantom shares (including any fractional share) of the Company's Common Stock equal to the quotient of (a) such amount divided by (b) the closing market price (the "Closing Price") of a share of Common Stock as reported for the date such amount is credited to the Deferred Fee Account. Whenever a cash dividend is paid on Common Stock, the Deferred Fee Account shall be credited as of the payment date with a number of phantom shares (including any fractional share) equal to the quotient of (y) an amount equal to the cash dividend payable on a number of shares of Common Stock equal to the number of phantom shares (excluding any fractional share) standing credited to such Account at the record date divided by (z) the Closing Price on such payment date. In the event of a stock dividend or distribution, stock split, recapitalization or the like, the Deferred Fee Account shall be credited as of the payment date with a number of phantom shares (including any fractional share) equal to the number of shares (including any fractional share) of Company Stock payable in respect of shares of Company Stock equal in number to the number of phantom shares (excluding any fractional share) standing credited to such Account at the record date. At the time any payment is to be made from the Deferred Fee Account pursuant to paragraph 6, the number of phantom shares then standing credited thereto shall be valued at the Closing Price on the first business day of the month in which such payment is to be made, and such payment shall be made in cash. (b) ____ None ____ 25% ____ 50% ____ 75% ____ 100% of the standing balance credited to the Deferred Fee Account as of the last business day of each month shall be increased by an amount reflecting interest on such balance for such month calculated using one-twelfth of the Prime Rate plus 2% on the first day of such month. 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 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 Director showing such information as is appropriate, including the aggregate amount standing credited to the Deferred Fee Account, as of a reasonably current date. 5. The Company's obligation to make payments from the Deferred Fee Account shall be a general obligation of the Company and such payments shall be made from the Company's general assets. The Director'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 Director, 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 Director 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 Director's Fees, including all earnings credited to the Deferred Fee Account pursuant to paragraph 3, shall be paid in cash to the Director or his or her designated beneficiary as soon as practicable following the date the Director ceases for any reason to be a member of the Board. 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 January 31 and shall be an amount equal to the balance standing credited to the Deferred Fee Account as of that date divided by the number of installments (including the one then due) remaining to be paid. Amounts standing credited to the Deferred Fee 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 Director except that: (a) in the event that the Director 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 Director's personal representative(s); and (b) in the event of the Director's death, payment shall be made to the last beneficiary designated by the Director 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 Director, or no valid beneficiary designation is in effect, payment shall instead be made to the Director'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 standing credited to the Deferred Fee Account shall not in any way be subject to the debts or other obligations of the Director 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 Director any right to be or remain a member of the Board or to receive any, or any particular rate of, Director's Fees. 10. Interpretations of, and determinations related to, this Agreement, including any determinations of the amount standing credited to the Deferred Fee Account, shall be made by the Board and shall be conclusive and binding upon all parties. The Company shall incur no liability to the Director 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 Director and his or her heirs, executors, administrators and personal representatives. 13. 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. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Director has executed this Agreement, on the date first written above. ATTEST: MAXXAM INC. ______________________________ Byron L. Wade, Secretary By:___________________________ ______________________________ [Director] EX-11 6 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, ----------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Weighted average common and common equivalent shares outstanding during each year 9,369,125 9,376,703 9,376,703 Common equivalent shares attributable to stock options and convertible securities 92,072 82,590 71,175 ------------- ------------- ------------- Total common and common equivalent shares 9,461,197 9,459,293 9,447,878 ============= ============= ============= Income (loss) before extraordinary item $ 22.9 $ 57.5 $ (116.7) Extraordinary item -- -- (5.4) ------------- ------------- ------------- Net income (loss) $ 22.9 $ 57.5 $ (122.1) ============= ============= ============= Per common and common equivalent share: Income (loss) before extraordinary item $ 2.42 $ 6.08 $ (12.35) Extraordinary item -- -- (.57) ------------- ------------- ------------- Net income (loss) $ 2.42 $ 6.08 $ (12.92) ============= ============= =============
EX-13 7 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, 1996 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) 1996 1995 1994 1993 1992 - -------------------------------------------------- --------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS: Net sales $2,543.3 $2,565.2 $2,115.7 $2,031.1 $2,202.6 Operating income (loss) 131.3 257.6 7.3 (96.1) 130.8 Income (loss) before extraordinary item and cumulative effect of changes in accounting principles 22.9 57.5 (116.7) (131.9) (7.3) Extraordinary item, net -- -- (5.4) (50.6) -- Cumulative effect of changes in accounting principles, net -- -- -- (417.7) -- Net income (loss) 22.9 57.5 (122.1) (600.2) (7.3) CONSOLIDATED BALANCE SHEET AT END OF PERIOD: Total assets 4,115.7 3,832.3 3,690.8 3,572.0 3,198.8 Long-term debt, less current maturities 1,881.9 1,585.1 1,582.5 1,567.9 1,592.7 Stockholders' equity (deficit)(1) (50.8) (83.8) (275.3) (167.9) 443.9 PER COMMON AND COMMON EQUIVALENT SHARE: Income (loss) before extraordinary item and cumulative effect of changes in accounting principles 2.42 6.08 (12.35) (13.95) (0.77) Extraordinary item, net -- -- (.57) (5.35) -- Cumulative effect of changes in accounting principles, net -- -- -- (44.17) -- Net income (loss) 2.42 6.08 (12.92) (63.47) (0.77) Stockholders' equity (deficit) (5.44) (8.94) (29.36) (17.91) 47.34 (1)MAXXAM Inc. has not declared or paid any cash dividends during the five year period ended December 31, 1996.
MAXXAM INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section (see "Results of Operations-Aluminum Operations," "Results of Operations-Forest Products Operations," "Financial Condition and Investing and Financing Activities" and "Trends"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements and changing prices and market conditions. This section and the Company's Annual Report on Form 10-K each identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RESULTS OF OPERATIONS The Company operates in three principal industries: aluminum, through its majority owned subsidiary, Kaiser 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. MAXXAM Group Holdings Inc. ("MGHI") owns 100% of MGI and is a wholly owned subsidiary of the Company. All references to the "Company," "Kaiser," "MGHI," "MGI" and "Pacific Lumber" refer to the respective companies and their majority owned subsidiaries, unless otherwise indicated or the context indicates otherwise. 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 (see Notes 1 and 10 to the Consolidated Financial Statements). Kaiser, through its principal subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates in two business segments: bauxite and alumina, and aluminum processing. As an integrated aluminum producer, Kaiser uses a portion of its bauxite, alumina and primary aluminum production for additional processing at certain of its facilities. Information concerning net sales, operating income (loss) and assets attributable to certain industry segments and geographic areas is set forth in Note 11 to the Consolidated Financial Statements. INDUSTRY OVERVIEW Significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in London Metal Exchange ("LME") inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend continued throughout most of 1996. Net reported primary aluminum inventories increased by approximately 62,000 tons in 1996 based upon reports of the LME and the International Primary Aluminium Institute, following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively. Increased production of primary aluminum due to restarts of certain previously idled capacity, the commissioning of a major new smelter in South Africa, and the continued high level of exports from the Commonwealth of Independent States ("CIS") have contributed to increased supplies of primary aluminum to the Western world in 1996. While the economies of the major aluminum consuming regions-the United States, Japan, Western Europe, and Asia-are, in the aggregate, performing relatively well, Kaiser believes that the reduction of aluminum inventories by customers, as prices have continued to decline, has mitigated the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. PROFIT ENHANCEMENT AND COST REDUCTION INITIATIVE Kaiser has set a goal of achieving significant cost reduction and other profit improvements during 1997, with the full effect planned to be realized in 1998. The initiative is based on Kaiser's conclusion that the current level of performance of its existing facilities and businesses will not achieve the level of profits Kaiser considers satisfactory based upon historic long-term average prices for primary aluminum and alumina. To achieve this goal, Kaiser plans reductions in production costs, decreases in corporate selling, general and administrative expenses, and enhancements to product mix. There can be no assurance that the initiative will result in the desired cost reduction and other profit improvements. SUMMARY The following table presents selected operational and financial information for the years ended December 31, 1996, 1995 and 1994 for the Company's aluminum operations.
Years Ended December 31, -------------------------------- (In millions of dollars, except shipments and prices) 1996 1995 1994 - ----------------------------------------------------- -------------------------------- Shipments:(1) Alumina 2,073.7 2,040.1 2,086.7 Aluminum products: Primary aluminum 355.6 271.7 224.0 Fabricated aluminum products 327.1 368.2 399.0 -------- -------- -------- Total aluminum products 682.7 639.9 623.0 ======== ======== ======== Average realized sales price: Alumina (per ton) $ 195 $ 208 $ 169 Primary aluminum (per pound) .69 .81 .59 Net sales: Bauxite and alumina: Alumina $ 404.1 $ 424.8 $ 352.8 Other(2)(3) 103.9 89.4 79.7 -------- -------- -------- Total bauxite and alumina 508.0 514.2 432.5 -------- -------- -------- Aluminum processing: Primary aluminum 538.3 488.0 292.0 Fabricated aluminum products 1,130.4 1,218.6 1,043.0 Other(3) 13.8 17.0 14.0 -------- -------- -------- Total aluminum processing 1,682.5 1,723.6 1,349.0 -------- -------- -------- Total net sales $2,190.5 $2,237.8 $1,781.5 ======== ======== ======== Operating income (loss) $ 103.7 $ 216.5 $ (50.3) ======== ======== ======== Income (loss) before income taxes, minority interests and extraordinary item $ 7.6 $ 108.7 $ (145.8) ======== ======== ======== Capital expenditures $ 160.3 $ 79.4 $ 70.0 ======== ======== ======== Investments in unconsolidated affiliates $ 1.2 $ 9.0 $ -- ======== ======== ======== (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.
Results for 1996 include an after tax benefit of approximately $17.0 million resulting from settlements of certain tax matters in December 1996. Excluding the impact of these non-recurring items, Kaiser would have reported a net loss for the year ended December 31, 1996. Results for the year ended December 31, 1996 reflect the substantial reduction in market prices for primary aluminum more fully discussed below. Alumina prices, which are significantly influenced by changes in primary aluminum prices, also declined from period to period. The decrease in product prices more than offset the positive impact of increases in shipments in several segments of Kaiser's business, as more fully discussed below. Results for 1996 also include approximately $20.5 million in research and development expenses and other costs related to Kaiser's new micromill as well as additional expenses related to other strategic initiatives. 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 for 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 United Steelworkers of America ("USWA") at Kaiser's five major domestic locations, (ii) a six-day strike of the National Workers Union at Kaiser's 65%-owned Alumina Partners of Jamaica ("Alpart") bauxite mining and 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. Kaiser's corporate general and administrative expenses of $59.8 million, $82.3 million and $67.6 million in 1996, 1995 and 1994, 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. NET SALES Bauxite and alumina. Net sales to third parties for 1996 were basically unchanged from 1995 as a nominal decline in the average realized price of alumina was offset by a modest increase in alumina shipments. The reduction in prices realized reflects the substantial decline in primary aluminum prices experienced in 1996 discussed below. Net sales to third parties for the bauxite and alumina segment increased in 1995 compared to 1994. Revenue from alumina increased in 1995 compared to 1994 due to higher average realized prices, partially offset by lower shipments. The remainder of the segment's sales revenues was from sales of bauxite and the portion of sales of alumina attributable to the minority interest in Alpart. Aluminum processing. The increase in primary aluminum shipments in 1996 more than offset the decline in the average realized price for primary aluminum from year to year. The increase in shipments during the year ended December 31, 1996 was the result of increased shipments of primary aluminum to third parties as a result of a decline in intracompany transfers. Net sales of fabricated aluminum products were down for the year ended December 31, 1996 as compared to the prior year as a result of a decrease in shipments (primarily related to can sheet activities) resulting from reduced growth in demand and the reduction of customer inventories. The impact of reduced product shipments was to a limited degree offset by an increase in the average realized price from the sale of fabricated aluminum products, resulting primarily from a shift in product mix to higher value added products. Net sales to third parties for the aluminum processing segment increased in 1995 compared to 1994. 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 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 USWA discussed above. In 1995, Kaiser's average realized price from sales of primary aluminum was approximately $.81 per pound, as compared to the average Midwest United States transaction price ("AMT Price") for primary aluminum of approximately $.86 per pound. Revenue from fabricated aluminum products increased in 1995 compared to 1994 due to higher average realized prices, partially offset by lower shipments for most of these products. OPERATING INCOME (LOSS) Bauxite and alumina. The bauxite and alumina segment had an operating loss of $10.7 million in 1996, compared to operating income of $37.2 million in 1995 and $5.6 million in 1994. Operating income for 1996 for this segment of Kaiser's business declined significantly from the prior year as a result of reduced gross margins from alumina sales resulting from the previously discussed price declines and increased natural gas costs at Kaiser's Gramercy, Louisiana alumina refinery. Operating income for the year ended December 31, 1996 was also unfavorably impacted by high operating costs associated with disruptions in the power supply at Kaiser's Alpart alumina refinery, higher manufacturing costs resulting from higher market prices for fuel and caustic soda and a temporary raw material quality problem experienced at Kaiser's Gramercy facility. In 1995 compared to 1994, operating income increased principally due to higher revenue, partially offset by the effect of the strikes and boiler failure. Aluminum processing. Operating income for the aluminum processing segment was $114.4 million in 1996, compared to operating income of $179.3 million in 1995 and an operating loss of $55.9 million in 1994. Operating income for the aluminum processing segment for 1996 was impacted by approximately $5.6 million of scheduled non-recurring maintenance costs at Kaiser's Trentwood, Washington rolling mill facility, offset by $11.5 million ($7.2 million on an after-tax basis) of reduced operating costs resulting from the non-cash settlement in December 1996 of certain tax matters. Operating results improved in 1995 compared to 1994, principally due to higher revenue, partially offset by the effect of the USWA strike. INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM Income before income taxes, minority interests and extraordinary item for 1996 declined as compared to 1995 as a result of lower operating income as previously described and expenses associated with Kaiser's new micromill facility. Income before income taxes, minority interests and extraordinary item 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 litigati on reserves. As described in Note 1 to the Consolidated Financial Statements, Kaiser's cumulative losses in 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions, eliminated Kaiser's equity with respect to its common stock; accordingly, since 1993 the Company has recorded 100% of Kaiser's earnings and losses, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7 to the Consolidated Financial Statements) 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. FOREST PRODUCTS OPERATIONS The Company's forest products operations are conducted by MGI. MGI conducts its operations primarily through its 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 should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. 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, Pacific Lumber's supply of upper grade lumber has decreased in some premium product categories. Furthermore, 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 ("THPs") filed by Pacific Lumber. Pacific Lumber has been able to lessen the impact of these factors by augmenting its production facilities to increase its recovery of upper grade lumber from smaller diameter logs and by increasing production capacity for manufactured upper grade lumber products through its end and edge glue facility (which was expanded during 1994). At this facility, knot-free pieces of lumber are assembled into wider or longer pieces. 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 also increased shipments of air seasoned, primed and specialty cut lumber which are examples of value added products. Additionally, 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, and installation of a lumber remanufacturing facility at its Fortuna lumber mill. However, unless Pacific Lumber is able to sustain the harvest level of old growth trees, Pacific Lumber expects that its production of premium upper grade lumber products will decline and that its manufactured lumber products will constitute a higher percentage of its shipments of upper grade lumber products. See also "-Trends-Forest Products Operations." The following table presents selected operational and financial information for the years ended December 31, 1996, 1995 and 1994 for the Company's forest products operations.
Years Ended December 31, --------------------------------- (In millions of dollars, except shipments and prices) 1996 1995 1994 - ----------------------------------------------------- --------------------------------- Shipments: Lumber:(1) Redwood upper grades 49.7 46.5 52.9 Redwood common grades 229.6 216.7 218.4 Douglas-fir upper grades 10.6 7.4 8.6 Douglas-fir common grades 74.9 64.6 54.2 Other 17.2 11.4 12.1 ------- ------- ------- Total lumber 382.0 346.6 346.2 ======= ======= ======= Logs(2) 20.1 12.6 17.7 ======= ======= ======= Wood chips(3) 208.9 214.0 210.3 ======= ======= ======= Average sales price: Lumber:(4) Redwood upper grades $ 1,380 $ 1,495 $ 1,443 Redwood common grades 511 477 460 Douglas-fir upper grades 1,154 1,301 1,420 Douglas-fir common grades 439 392 444 Logs(4) 477 440 615 Wood chips(5) 76 102 83 Net sales: Lumber, net of discount $ 234.1 $ 211.3 $ 216.5 Logs 9.6 5.6 10.9 Wood chips 15.8 21.7 17.4 Cogeneration power 3.3 2.5 3.5 Other 1.8 1.5 1.3 ------- ------- ------- Total net sales $ 264.6 $ 242.6 $ 249.6 ======= ======= ======= Operating income $ 73.0 $ 74.3 $ 79.1 ======= ======= ======= Operating cash flow(6) $ 100.2 $ 99.6 $ 103.8 ======= ======= ======= Income (loss) before income taxes and extraordinary item $ 6.3 $ 6.4 $ (5.2) ======= ======= ======= Capital expenditures $ 15.2 $ 9.9 $ 11.3 ======= ======= ======= (1)Lumber shipments are expressed in millions of board feet. (2)Log shipments are expressed in millions of feet, net Scribner scale. (3)Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4)Dollars per thousand board feet. (5)Dollars per bone dry unit. (6)Operating income before depletion and depreciation, also referred to as "EBITDA."
NET SALES Net sales for 1996 increased compared to 1995 principally due to higher lumber shipments in all categories and higher average realized prices for common grade lumber. Partially offsetting these improvements were lower average realized prices for upper grade redwood lumber and wood chips. Shipments of fencing and other value-added common lumber products from the Company's new remanufacturing facility were a contributing factor in the improved redwood common lumber realizations. 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. OPERATING INCOME Operating income, after excluding from 1995 cost of sales a $1.5 million settlement of business interruption insurance claims related to an April 1992 earthquake, increased in 1996 due to the increase in net sales discussed above. Increases in costs of goods sold reflect both the impact of additional manufacturing costs attributable to the increased shipments of manufactured lumber products, higher shipments of lower margin lumber and the increasing cost of regulatory compliance for the Company's timber harvesting operations. Operating income for 1995 decreased compared to 1994. This decrease was primarily due to the higher cost and lower sales of lumber, logs and electrical power, partially offset by increased sales and margins on wood chips. Cost of lumber sales for 1995 was unfavorably impacted by higher purchases of logs from third parties, partially offset by improved sawmill productivity. INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM Income before income taxes for 1996 was basically flat as compared to 1995. Income (loss) before income taxes and extraordinary item increased for 1995 as compared to 1994 primarily due to higher investment, interest and other income (expense). Investment, interest and other income (expense) for 1995 includes net gains on marketable securities of $4.9 million. Investment, interest and other income (expense) for 1994 includes a loss of $21.2 million for the settlement of litigation, partially offset by the receipt of a franchise tax refund of $7.2 million (as described in Note 1 to the Consolidated Financial Statements) and net gains on marketable securities of $2.0 million. REAL ESTATE AND OTHER OPERATIONS Years Ended December 31, ------------------------------- (In millions of dollars) 1996 1995 1994 - --------------------------------------- ------------------------------- Net sales $ 88.2 $ 84.8 $ 84.6 Operating loss (12.0) (13.6) (10.0) Income (loss) before income taxes, minority interests and extraordinary item 13.2 (.8) (1.5) NET SALES Net sales include 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 Houston, Texas (see "-Financial Condition and Investing and Financing Activities-Real Estate and Other Operations"). Net sales do not include any amounts from the sale of income producing properties, such as the hotel and other resort-related assets owned by Palmas del Mar, and the RTC Portfolio properties and loans, which are recorded net of costs as investment, interest and other income. As of December 31, 1996 the RTC Portfolio consisted of two loans and six properties which had an aggregate net book value of $15.6 million. Net sales for 1996 include $20.8 million of revenues attributable to a full year of the operations of SHRP, Ltd. which more than offset lower real estate revenues as compared to 1995. The Company began consolidating SHRP, Ltd.'s results in October 1995. Net sales attributable to 1996 real estate operations of $67.4 million decreased from $79.7 million in 1995 due to lower 1996 sales of real property in the Fountain Hills, Arizona development and lower RTC Portfolio revenues due to the sale of a substantial number of these properties during 1996 and prior periods. Net sales for 1995 were essentially unchanged from 1994. The inclusion of revenues in the fourth quarter of 1995 from SHRP, Ltd. and a bulk sale of Texas acreage were offset by a decrease in rental revenues from the RTC Portfolio due to the sale of some of those properties. OPERATING LOSS The operating loss for 1996 decreased as compared to 1995, principally due to lower selling, general and administrative expenses offset in part by lower margins on sales of real property and $1.9 million of operating losses in 1996 attributable to SHRP, Ltd. 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. INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM Income before income taxes, minority interests and extraordinary item for 1996 improved compared to 1995 primarily due to 1996 gains of $19.9 million from the sale of RTC properties and mortgage notes and $4.8 million from the sale of a hotel and other resort-related assets at Palmas del Mar. Net proceeds from these sales were $36.0 million and $7.5 million, respectively. Additionally, investment income for 1996 includes income derived from lot sales and operations at SunRidge Canyon, the Company's 50%-owned joint venture in Arizona. Interest expense for 1996 includes interest on SHRP Ltd.'s Senior Secured Extendible Notes (see Note 4 to the Consolidated Financial Statements). The loss before income taxes, minority interests and extraordinary item for 1995 decreased as compared to 1994, 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 includes a 1995 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, and 1994 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. OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS Years Ended December 31, ------------------------------- (In millions of dollars) 1996 1995 1994 - --------------------------------------- ------------------------------- Operating loss $ (33.4) $ (19.6) $ (11.5) Loss before income taxes, minority interests and extraordinary item (39.2) (19.8) (19.3) OPERATING LOSS The operating loss represents corporate general and administrative expenses that are not attributable to the Company's industry segments. The operating loss for 1996 increased from 1995 principally due to accruals of $23.1 million for certain legal contingencies (see Note 9 to the Consolidated Financial Statements). The operating loss for 1995 increased compared to 1994 primarily due to a $2.5 million increase in costs attributable to phantom share rights previously granted to certain employees which were exercised in 1995 and a $6.1 million charge for the cost of certain litigation. See Note 8 to the Consolidated Financial Statements. LOSS BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY ITEM The loss before income taxes, minority interests and extraordinary item 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 1996 increased compared to 1995 primarily due to the increased operating loss. The loss for 1995 increased compared to 1994 primarily due to the increased operating loss, partially offset by higher investment, interest and other income. 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 and currently owns an 88.5% interest. 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. Revision of prior years' tax estimates includes amounts for the reversal of reserves which the Company no longer believes are necessary. The Company's credit (provision) for income taxes for 1996, 1995 and 1994 reflect benefits of $40.8 million, $20.0 million and $20.1 million, respectively, for such reversals of reserves. MINORITY INTERESTS Minority interests represent the minority stockholders' interest in the Company's aluminum operations and, with respect to periods after October 6, 1995, the 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, consisting primarily of the write-off of unamortized deferred financing costs on Kaiser's previous credit agreement. 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 $1.8 billion of debt securities, approximately $220.0 million of additional equity capital and the increase in borrowing capacity of revolving credit facilities. The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. PARENT COMPANY AND MGHI FINANCING ACTIVITIES AND LIQUIDITY 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. As of December 31, 1996, the indebtedness of the subsidiaries and the minority interests reflected on the Company's Consolidated Balance Sheet were $1,908.9 million and $219.8 million, respectively. Certain of the Company's subsidiaries, principally Kaiser and MGHI (and in turn MGHI's subsidiaries), 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. The most restrictive covenants governing debt of the Company's real estate and other subsidiaries would not restrict payment to the Company of all available cash and unused borrowing availability for such subsidiaries which together were approximately $12.8 million as of December 31, 1996. KACC's 1994 Credit Agreement (as amended, the "KACC Credit Agreement") contains covenants which, among other things, preclude Kaiser from paying any dividends with respect to its common stock and restrict transactions between Kaiser and its affiliates. The indentures governing KACC's 9 7/8% Senior Notes due 2002 (the "KACC 9 7/8% Senior Notes"), KACC's 12 3/4% Senior Subordinated Notes due 2003 (the "KACC Senior Subordinated Notes") and KACC's 10 7/8% Senior Notes due 2006 (the "KACC 10 7/8% Senior Notes" and together with the KACC 9 7/8% Senior Notes and KACC Senior Subordinated Notes, the "KACC Notes") contain covenants which restrict, among other things, KACC's ability to incur debt and liens, make investments, undertake transactions with affiliates and pay dividends. MGHI was formed on November 4, 1996, to facilitate the offering of the $130.0 million aggregate principal amount of 12% Senior Secured Notes due 2003 (the "MGHI Notes"). The Company has guaranteed the MGHI Notes on a senior, unsecured basis. Subsequent to its formation, MGHI received, as a capital contribution from the Company, 100% of the capital stock of MGI and 27,938,250 shares of Kaiser common stock representing a 34.6% interest in Kaiser on a fully diluted basis. As a result of these transactions, the Company's direct interest in Kaiser became 27.3%. These shares of Kaiser common stock (the "Pledged Shares") are pledged as security for MGI's 11 1/4% Senior Secured Notes due 2003 and 12 1/4% Senior Secured Discount Notes due 2003 (collectively, the "MGI Notes"). Furthermore, MGHI has agreed to pledge up to 16,055,000 of such Pledged Shares as security for the MGHI Notes should they be released from the pledge for the MGI Notes due to an early retirement (except by reason of a refinancing) of the MGI Notes. MGHI has also pledged the capital stock of MGI as security for the MGHI Notes. Net proceeds of $125.0 million received from the offering of the MGHI Notes were loaned to the Company pursuant to an intercompany note (the "Intercompany Note") which is pledged to secure the MGHI Notes. The Intercompany Note bears interest at the rate of 11% per annum (payable semi-annually on the interest payment dates applicable to the MGHI Notes) and matures in 2003. In January 1997, the Company used the proceeds from the Intercompany Note to redeem its 12 1/2% Subordinated Debentures and 14% Senior Subordinated Reset Notes together with accrued interest thereon for $43.3 million. The Company expects to use the remaining proceeds of the loan for general corporate purposes, including possible repurchases of its common stock. The indenture governing the MGHI Notes contains various covenants which, among other things, limit the payment of dividends and restrict transactions between MGHI and its affiliates. Except for a portion of possible proceeds from the Headwaters Agreement (see "-Trends-Forest Products Operations-Headwaters Agreement" below), the Company does not expect to receive dividends from MGHI during the next several years. The indenture governing the public indebtedness of MGI (the "MGI Indenture") restricts the payment of dividends to MGHI. Except for a portion of possible proceeds from the Headwaters Agreement, MGHI does not expect to receive a significant amount of cash dividends from MGI for the next several years. The Company therefore expects that MGHI will be primarily dependent upon cash interest payments in respect of the Intercompany Note to service the MGHI Notes. See "-Forest Products Operations-Financing Activities and Liquidity" for further information concerning the MGI Indenture, dividends paid by MGI and related information. 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. The Company has stated that, from time to time, it may purchase its common stock on national exchanges or in privately negotiated transactions. During 1996, the Company purchased 44,600 shares of its common stock for $1.8 million. On June 28, 1996, the Company entered into an agreement with the Custodial Trust Company providing for up to $25.0 million in borrowings ("the Custodial Trust Agreement"). Any amounts drawn would be secured by Kaiser common stock owned directly 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 1/2% per annum. The Custodial Trust Agreement provides for a revolving credit arrangement during the first year of the agreement. Any borrowings outstanding on June 28, 1997 convert into a term loan maturing on June 28, 1998. No borrowings were outstanding as of December 31, 1996. In March 1997, the Company applied to the Securities and Exchange Commission for withdrawal of its outstanding shelf registration statement relating to $200.0 million of debt securities. Kaiser has an effective shelf registration statement covering the offering of up to 10 million shares of Kaiser common stock owned by the Company. During the three years ended December 31, 1996, the Company's corporate general and administrative expenses, net of cost reimbursements from its subsidiaries, have ranged between $11.0 million and $33.0 million per year. The Company's corporate general and administrative expenses for 1996 included a $23.1 million charge for certain legal contingencies, of which a substantial portion related to legal fees and expenses that the Company may incur in connection with the OTS and FDIC matters described in Note 9 to the Consolidated Financial Statements. The Company expects that its general and administrative costs, net of cost reimbursements from subsidiaries and excluding expenses related to legal contingencies, will range from $9 million to $12 million for the next year. Although the Company cannot predict when or whether the expenses represented by the 1996 accrual for legal contingencies will be incurred, there can be no assurance that such accrual will be adequate or that the Company's cash requirements for its corporate general and administrative expenses will not increase. The Company has realized a substantial portion of its cash flows during the past several years from the sale of real property and loans from the RTC Portfolio. From 1992 to 1996, an aggregate of approximately $41.7 million in loans (which represented thirteen loans) were sold or paid off and thirty-six properties were sold for aggregate consideration of approximately $182.4 million. These transactions resulted in aggregate gains of $97.3 million. As of December 31, 1996, two loans resulting from property sales and six properties having an aggregate net book value of $15.6 million, were held. These assets are being managed and marketed for sale. The Company does not expect that real estate operations will be able to generate distributable cash flows during the next several years at or near recent historical levels. As of December 31, 1996, the Company (excluding its subsidiaries) had cash and marketable securities of approximately $188.4 million of which $43.3 million was expended in January 1997 to retire all of the Company's outstanding public indebtedness (see above). The Company believes that its existing resources, together with the cash available from subsidiaries and other sources of financing, will be sufficient to fund its working capital requirements for the next year. With respect to its long-term liquidity, the Company believes that its existing cash and cash resources, together with the cash proceeds from the sale of assets and distributions from its subsidiaries should be sufficient to meet its working capital requirements. However, there can be no assurance that the Company's cash resources, together with the cash proceeds from the sale of assets, distributions from its subsidiaries and other sources of financing, will be sufficient for such purposes. Any adverse outcome of the litigation described below could materially adversely affect the Company's consolidated financial position, results of operations or liquidity. INVESTING ACTIVITIES 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 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, 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"). On February 12, 1997, the Company purchased an additional $11.0 million aggregate initial principal amount of SHRP Notes for $5.9 million. See "-Real Estate and Other Operations." CONTINGENCIES On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated a formal administrative proceeding against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges, among other things, misconduct by the Company, Federated Development 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 OTS, among other things, seeks unspecified damages in excess of $138.0 million from the Company and Federated as well as civil money penalties. 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-95-3956) (the "FDIC action") in the U.S. District Court for the Southern District of Texas. The Court has joined the OTS as a party to the FDIC action and granted the motions to intervene filed by the Company and three other respondents in the OTS administrative proceeding. The OTS is seeking to be dismissed from the FDIC action. On January 15, 1997, the FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing in its administrative proceeding, unspecified damages from Mr. Hurwitz relating to amounts the OTS does not collect from the Company and Federated with respect to alleged obligations to maintain USAT's net worth. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from the OTS and FDIC matters. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matters or their potential impact on the Company's consolidated financial position, results of operations or liquidity. See Note 9 to the Consolidated Financial Statements for further discussion of these matters. ALUMINUM OPERATIONS FINANCING ACTIVITIES AND LIQUIDITY Note 4 to the Consolidated Financial Statements contains a listing of Kaiser's indebtedness and information concerning certain restrictive debt covenants. As further described in Note 10 to the Consolidated Financial Statements, KACC from time to time enters into primary aluminum and energy hedging transactions in the ordinary course of business which are designed to mitigate Kaiser's exposure to unfavorable price changes, while retaining some ability to participate in any favorable pricing environments that may materialize. During the fourth quarter of 1996 KACC sold a total $225.0 million principal amount of KACC 10 7/8% Senior Notes. The KACC 10 7/8% Senior Notes rank pari passu with the indebtedness under the KACC Credit Agreement and the KACC 9 7/8% Senior Notes (each defined below) and are guaranteed on a senior, unsecured basis by certain of KACC's subsidiaries. On February 17, 1994, Kaiser and KACC entered into the KACC Credit Agreement: a five year credit agreement under which KACC is able to borrow 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 plus eligible inventory. As of February 14, 1997, $271.9 million (of which $71.9 million could have been used for letters of credit) was available to KACC under the KACC Credit Agreement. The KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. The 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 declaration and payment of dividends by KACC on shares of its common stock is also subject to certain covenants contained in the indentures for the KACC 9 7/8% Senior Notes, the KACC 10 7/8% Senior Notes, and the KACC Senior Subordinated Notes. These indentures also limit, among other things, the ability of KACC to incur debt and liens, make investments and undertake transactions with affiliates. At December 31, 1996, Kaiser had working capital of $414.3 million, compared with working capital of $331.7 million at December 31, 1995. The increase in working capital was due primarily to an increase in cash and cash equivalents as a result of the debt offerings discussed below. Kaiser believes that its existing cash resources, together with cash flows from operations and borrowings under the 1994 KACC Credit Agreement, will be sufficient to satisfy its working capital and capital expenditure requirements for the next year. With respect to long-term liquidity, Kaiser believes that operating cash flows, together with the ability to obtain both short- and long-term financing, should provide sufficient funds to meet its working capital and capital expenditure requirements. CAPITAL STRUCTURE The Company owns approximately 61.9% of Kaiser's common stock, par value $.01 per share (the "Kaiser Common Stock"), assuming the conversion of each outstanding share of Kaiser's 8.255% Preferred Redeemable Increased Dividend Equity Securities (the "PRIDES") into one share of Kaiser Common Stock. The remaining approximately 38% of Kaiser's Common Stock is publicly held. In addition to the shelf registration covering 10 million shares of Kaiser common stock owned by the Company discussed above, Kaiser has an effective shelf registration statement covering the offering of up to $150.0 million of Kaiser equity securities. On December 31, 1997, unless either previously redeemed by Kaiser or converted at the option of the holder, each of the outstanding shares of PRIDES will mandatorily convert into one share of Kaiser's common stock, subject to adjustment in certain events. In February 1996, Kaiser proposed a recapitalization which would have provided for two separate classes of common stock with different voting rights; however, the proposed recapitalization was abandoned as a result of an unfavorable court ruling in a suit that had challenged the proposal. See Note 7 to the Consolidated Financial Statements. INVESTING ACTIVITIES Kaiser's capital expenditures of $319.9 million during the three years ended December 31, 1996 (of which $23.2 million was funded by Kaiser's minority partners in certain foreign joint ventures) were made primarily to construct new facilities, improve production efficiency, reduce operating costs, and expand capacity at existing facilities. Total consolidated capital expenditures were $161.5 million in 1996, compared with $88.4 million in 1995 and $70.0 million in 1994 (of which $7.4 million, $8.3 million and $7.5 million were funded by the minority partners in certain foreign joint ventures in 1996, 1995, and 1994, respectively). A substantial portion of the increase in capital expenditures in 1996 over prior year's level is attributable to the development and construction of Kaiser's proprietary micromill technology for the production of can sheet from molten metal. The first micromill, which was constructed in Nevada during 1996 as a demonstration and production facility, achieved operational start-up by year-end 1996. Kaiser expects that the Nevada micromill will be in a start-up mode for the first half of 1997 and will be able to commence limited product shipments to customers in the second half of 1997. Kaiser's total capital expenditures are expected to be between $70.0 million and $140.0 million per annum in each of 1997 through 1999 (of which approximately 7% is expected to be funded by Kaiser's minority partners in certain foreign joint ventures). Kaiser continues to evaluate numerous domestic and international projects all of which require substantial capital. 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 currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on 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, 1996, the balance of such accruals, which are primarily included in other noncurrent liabilities, was $33.3 million. Further, Kaiser believes it is reasonably possible that these costs could exceed the accrual by $24.0 million. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on Kaiser's consolidated financial position, results of operations, or liquidity. See Note 9 to Consolidated Financial Statements for further information regarding these contingencies. 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. Based on past experience, and reasonably anticipated future activity, and the advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims, at December 31, 1996 Kaiser has an accrual of $136.7 million, before consideration of insurance recoveries, for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. Kaiser believes, based on prior insurance-relate d recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, at December 31, 1996 an estimated aggregate insurance recovery of $109.8 million, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in other assets. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, Kaiser believes that, based on the factors discussed above and the information in Note 9 to the Consolidated Financial Statements, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on its consolidated financial position, results of operations, or liquidity. FOREST PRODUCTS OPERATIONS FINANCING ACTIVITIES AND LIQUIDITY As of December 31, 1996, MGI and its subsidiaries had consolidated working capital of $131.4 million and long-term debt of $729.8 million (net of current maturities and restricted cash deposited in a liquidity account for the benefit of the holders of the Timber Notes) as compared to $124.2 million and $732.9 million, respectively at December 31, 1995. The decrease in long-term debt was primarily due to principal payments on the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). MGI and its subsidiaries anticipate that cash from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund their working capital and capital expenditure requirements for the next year. With respect to their long-term liquidity, MGI and its subsidiaries believe that their existing cash and cash equivalents, together with their ability to generate sufficient levels of cash from operations and their ability to obtain both short- and long-term financing, should provide sufficient funds to meet their working capital and capital expenditure requirements. However, due to their highly leveraged condition, MGI and its subsidiaries (and in turn MGHI) are more sensitive than less leveraged companies to factors affecting their operations, including governmental regulation affecting their timber harvesting practices (see "-Trends" below), increased competition from other lumber producers or alternative building products and general economic conditions. MGI. 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. 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 10 1/2% Pacific Lumber Senior Notes due 2003 (the "Pacific Lumber Senior Notes"). As of December 31, 1996, the indebtedness of the subsidiaries of MGI was $571.9 million, of which $235.0 million was attributable to the Pacific Lumber Senior Notes and $336.1 million was attributable to the Timber Notes. The MGI Indenture contains various covenants which, among other things, limit the ability to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. MGI paid dividends of $4.8 million during 1995 and $3.9 million during 1996. MGI did not pay any dividends in 1994. As of December 31, 1996, $0.5 million of dividends could be paid by MGI. 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 Holding Company ("Scotia Pacific"). Moreover, Pacific Lumber is dependent upon Scotia Pacific for a substantial portion of its log requirements. 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. In the event Scotia Pacific's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber would effectively be precluded from distributing funds to MGI, and MGI's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. MGI is dependent upon its existing cash resources and dividends from Pacific Lumber and Britt to meet its financial and debt service obligations as they become due. MGI expects that Pacific Lumber will provide a major portion of its future operating cash flow. The indentures governing the Pacific Lumber Senior Notes, the Timber Notes (the "Timber Note Indenture") and Pacific Lumber's revolving credit agreement (as amended and restated, the "Pacific Lumber Credit Agreement") contain various covenants which, among other things, limit the ability to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. Pacific Lumber can pay dividends in an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from Scotia Pacific, exclusive of the net income and depletion of Scotia Pacific as long as any Timber Notes are outstanding. During the years ended December 31, 1996, 1995 and 1994, Pacific Lumber paid an aggregate of $20.5 million, $22.0 million and $24.5 million of dividends, respectively. As of December 31, 1996, under the most restrictive of these covenants, approximately $17.2 million of dividends could be paid by Pacific Lumber. Additionally, Britt paid dividends of $6.0 million, $6.0 million and $1.8 million, for the years ended December 31, 1996, 1995 and 1994, respectively, and as of December 31, 1996, Britt could pay approximately $4.1 million of dividends. As of December 31, 1996, MGI (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $77.8 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 MGI's cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, MGI believes that it 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. Pacific Lumber. During the years ended December 31, 1996, 1995 and 1994, Pacific Lumber's operating income before depletion and depreciation ("operating cash flow") amounted to $93.9 million, $90.5 million and $95.9 million, respectively, which exceeded interest expense in respect of all of its indebtedness in those years by $39.5 million, $35.0 million and $39.8 million, respectively. Pacific Lumber is dependent upon Scotia Pacific for the logs from which it generates a substantial portion of its operating cash flow. Pacific Lumber believes that its level of operating cash flow and available sources of financing will enable it to meet its working capital and capital expenditure requirements for the next year. With respect to 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 working capital and capital expenditure requirements. Under the terms of the Timber Note Indenture, Scotia Pacific will not have available cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. 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, Pacific Lumber expects that once Scotia Pacific's debt service, 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 $76.9 million, $59.0 million and $88.9 million of dividends to Pacific Lumber during the years ended December 31, 1996, 1995 and 1994, respectively. Borrowings under the Pacific Lumber Credit Agreement, which expires on May 31, 1999, are secured by Pacific Lumber's trade receivables and inventories, with interest currently 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 acquisition of timberlands. 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, 1996, $47.0 million of borrowings was available under the Pacific Lumber Credit Agreement, of which $4.7 million was available for letters of credit and $30.0 million was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1996, and letters of credit outstanding amounted to $10.3 million. The Pacific Lumber Credit Agreement con tains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. INVESTING Capital expenditures during 1994-1996 were made to improve production efficiency, reduce operating costs and, to a lesser degree, acquire additional timberlands. MGI's consolidated capital expenditures were $15.2 million, $9.9 million and $11.3 million for the years ended December 31, 1996, 1995 and 1994, respectively. Capital expenditures, excluding expenditures for timberlands, are expected to be $12.0 million in 1997 and are estimated to be between $10.0 million and $15.0 million per year for the 1998-1999 period. Pacific Lumber may purchase additional timberlands from time to time as appropriate opportunities arise, and such purchases could exceed the historically modest levels of such acquisitions. REAL ESTATE AND OTHER OPERATIONS FINANCING ACTIVITIES AND LIQUIDITY As of December 31, 1996, the Company's real estate and other subsidiaries had approximately $11.1 million available for use under the MCOP Credit Agreement (defined below), all of which could be borrowed and distributed to the Company. 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. 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 an d 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 (neither of which the Company believes is material), investments and the incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings of up to $14.0 million, of which $8.5 million may be used for standby letters of credit. The available credit is subject to borrowing base limitation calculations. As of December 31, 1996, $11.1 million of borrowings was available under the MCOP Credit Agreement; there were no outstanding borrowings, and letters of credit outstanding amounted to $1.1 million. INVESTING 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 April 17, 1995, SHRP, Ltd. and certain affiliates (collectively, the "Debtors"), filed voluntary petitions seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. 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. is SHRP General Partner, Inc., a wholly owned subsidiary of the Company (the "SHRP Managing General Partner"). In an unrelated transaction, on October 20, 1995, the Company purchased for $7.3 million certain of the 11% Senior Secured Extendible Notes due 2001 of SHRP (the "SHRP Notes") and the corresponding shares of common stock of SHRP Equity, Inc. (an additional general partner of the reorganized SHRP, Ltd.) to which the selling noteholder was entitled. On February 12, 1997, the Company purchased an additional amount of the SHRP Notes and the corresponding shares of common stock of SHRP Equity, Inc. for $5.9 million. After giving effect to these transactions, wholly owned subsidiaries of the Company hold, directly or indirectly, approximately 88.5% of the equity in the reorganized SHRP, Ltd. SHRP, Ltd. has sustained substantial operating losses since it began operations in April 1994. At December 31, 1996, SHRP, Ltd. had cash and cash equivalents of $2.6 million and a line of credit from its partners of $1.7 million, substantially all of which is the Company's portion. SHRP, Ltd. projects a loss from operations for the next two years. In the event that the existing cash resources of SHRP, Ltd. and the line of credit are inadequate to support the cash flow requirements of SHRP, Ltd., alternative sources of funding will be necessary. TRENDS ALUMINUM OPERATIONS PRICES 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 on the volume and mix of all products sold and on KACC'S hedging strategies. See Notes 1 and 10 to the Consolidated Financial Statements for a discussion of KACC's hedging activities. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. During the first half of 1996 the AMT Price remained relatively stable in the $.75 per pound range. However, during the second half of the year the AMT price fell, reaching a low of $.65 per pound for October 1996, before recovering late in the year. During 1995, the AMT Price for primary aluminum was approximately $.86 per pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The AMT Price for primary aluminum for the week ended February 14, 1997, was approximately $.75 per pound. FOREST PRODUCTS OPERATIONS REGULATORY AND ENVIRONMENTAL MATTERS Pacific Lumber's operations are subject to a variety of California and federal laws and regulations dealing with timber harvesting, endangered species and critical habitat, and air and water quality. Moreover, these laws and regulations relating to Pacific Lumber's operations are modified from time to time and are subject to judicial and administrative interpretation. Compliance with such laws, regulations and judicial and administrative interpretations, together with the cost of litigation incurred in connection with certain timber harvesting operations of Pacific Lumber, have increased the cost of logging operations. Pacific Lumber is subject to certain pending matters described below, including the resolution of issues relating to the final designation of critical habitat for the marbled murrelet, which could have a material adverse effect on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. There can be no assurance that certain pending or future governmental regulations, legislation or judicial or administrative decisions will not materially and adversely affect Pacific Lumber. In May 1996, the U.S. Fish and Wildlife Service ("USFWS") published the final designation of critical habitat for the marbled murrelet (the "Final Designation"), which designated over four million acres as critical habitat for the marbled murrelet. Although nearly all of the designated habitat is public land, approximately 33,000 acres of Pacific Lumber's timberlands are included in the Final Designation, the substantial portion of such acreage being young growth timber. In order to mitigate the impact of the Final Designation, particularly with respect to timberlands occupied by the marbled murrelet, Pacific Lumber over the last few years has attempted to develop a habitat conservation plan for the marbled murrelet (the "Murrelet HCP"). Due to, among other things, the unfavorable response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts, Pacific Lumber and its subsidiaries filed two actions (the "Takings Litigation") alleging that certain portions of its timberlands have been "taken" and seeking just compensation. Pursuant to an agreement entered into by Pacific Lumber, the Company, the United States and California on September 28, 1996 (the "Headwaters Agreement") described below, the Takings Litigation has been stayed by the Court at the request of the parties. It is impossible for Pacific Lumber to determine the potential adverse effect of the Final Designation on its consolidated financial position, results of operations or liquidity until such time as various regulatory and legal issues are resolved; however, if Pacific Lumber is unable to harvest, or is severely limited in harvesting, on timberlands designated as critical habitat for the marbled murrelet, such effect could be materially adverse to Pacific Lumber. If Pacific Lumber is unable to harvest or is severely limited in harvesting, it intends to seek just compensation from the appropriate governmental agencies on the grounds that such restrictions constitute a governmental taking. There continue to be other regulatory actions and lawsuits seeking to have other species listed as threatened or endangered under the federal Endangered Species Act ("ESA") and/or the California Endangered Species Act ("CESA") and to designate critical habitat for such species. For example, the National Marine Fisheries Service ("NMFS") recently announced that by April 25, 1997, it would make a final determination concerning whether to list the coho salmon under the ESA in northern California, including, potentially, lands owned by Pacific Lumber. It is uncertain what impact, if any, such listings and/or designations of critical habitat would have on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. See "-Headwaters Agreement" below for a description of certain terms of the Headwaters Agreement relating to processing and approval of a habitat conservation plan with respect to Pacific Lumber covering multiple species ("Multi-Species HCP"). In 1994, the California Board of Forestry ("BOF") adopted certain regulations regarding compliance with long-term sustained yield ("LTSY") objectives. These regulations require that timber companies project timber growth and harvest on their timberlands over a 100-year planning period and establish a LTSY harvest level that takes into account environmental and economic considerations. The sustained yield plan ("SYP") must demonstrate that the average annual harvest over any rolling ten-year period will not exceed the LTSY harvest level and that Pacific Lumber's projected timber inventory is capable of sustaining the LTSY harvest level in the last decade of the 100-year planning period. On December 17, 1996, Pacific Lumber submitted a proposed SYP to the California Department of Forestry ("CDF"). The proposed SYP sets forth an LTSY harvest level substantially the same as Pacific Lumber's average annual timber harvest over the last six years. The proposed SYP also indicates that Pacific Lumber's average annual timber harvest during the first decade of the SYP would approximate the LTSY harvest level. During the second decade of the proposed SYP, Pacific Lumber's average annual timber harvest would be approximately 8% less than that proposed for the first decade. The SYP, when approved, will be valid for ten years. Thereafter, revised SYPs will be prepared every decade that will address the LTSY harvest level based upon reassessment of changes in the resource base and protection of public resources. The proposed SYP assumes that the transactions contemplated by the Headwaters Agreement will be consummated and that the Multi-Species HCP will permit Pacific Lumber to harvest its timberlands (including over the next two decades a substantial portion of its old growth timberlands not transferred pursuant to the Headwaters Agreement) to achieve maximum sustained yield. The SYP is subject to review and approval by the CDF, and there can be no assurance that the SYP will be approved in its proposed form. Until the SYP is reviewed and approved, Pacific Lumber is unable to predict the impact that these regulations will have on its future timber harvesting practices. It is possible that the results of the review and approval process could require Pacific Lumber to reduce its timber harvest in future years from the harvest levels set forth in the proposed SYP. Pacific Lumber believes it would be able to mitigate the effect of any required reduction in harvest level by acquisitions of additional timberlands and making corresponding amendments to its SYP; however, there can be no assurance that it would be able to do so and the amount of such acquisitions would be limited by Pacific Lumber's available financial resources. Pacific Lumber is unable to predict the ultimate impact the sustained yield regulations will have on its future financial position, results of operations or liquidity. See "-Headwaters Agreement" below for a description of certain items of the Headwaters Agreement relating to the SYP. Various groups and individuals have filed objections with the CDF and the BOF regarding the CDF's and the BOF's actions and rulings with respect to certain of Pacific Lumber's THPs and other timber harvesting operations, and Pacific Lumber expects that such groups and individuals will continue to file such objections. In addition, lawsuits are pending or threatened which seek to prevent Pacific Lumber from implementing certain of its approved THPs or which challenge other forestry operations by Pacific Lumber. These challenges have severely restricted Pacific Lumber's ability to harvest old growth timber on its property. To date, challenges with respect to Pacific Lumber's THPs relating to young growth timber and to its other forestry operations have been limited; however, no assurance can be given as to the extent of such challenges in the future. Pacific Lumber believes that environmentally focused challenges to its timber harvesting and other operations are likely to occur in the future, particularly with respect to virgin and residual old growth timber. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, they have not had a material adverse effect on Pacific Lumber's consolidated financial position, results of operations or liquidity. Nevertheless, it is impossible to predict the future nature or degree of such challenges or their ultimate impact on the consolidated financial position, results of operations or liquidity of Pacific Lumber, and in turn MGI and MGHI. HEADWATERS AGREEMENT On September 28, 1996, Pacific Lumber (on behalf of itself, its subsidiaries and affiliates) and the Company (collectively, the "Pacific Lumber Parties") entered into the Headwaters Agreement with the United States and California. The Headwaters Agreement provides the framework for the acquisition by the United States and California of the approximately 5,600 acres of Pacific Lumber's timberlands commonly referred to as the Headwaters Forest and the Elk Head Springs Forest ("Headwaters Timberlands"). A substantial portion of the Headwaters Timberlands consist of virgin old growth timberlands. The Headwaters Timberlands would be transferred in exchange for (a) property and other consideration (possibly including cash) from the United States and California having an aggregate fair market value of $300 million and (b) approximately 7,775 acres of adjacent timberlands to be acquired by the United States and California ("Elk River Timberlands") from a third party. The United States and California would also acquire and retain an additional 1,900 acres of timberlands from such third party. The Headwaters Agreement also provides, among other things, for expedited processing by the United States of an incidental take permit ("Permit") to be based upon the Multi-Species HCP covering (a) the timberlands and timber harvesting rights which Pacific Lumber will own after consumation of the Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and (b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands retained by the United States and California (both as conserved habitat). The agreement also requires expedited processing by California of an SYP covering the Resulting Pacific Lumber Timber Property. On December 5, 1996, the United States and California each furnished a list of properties consisting of oil and gas interests, timberlands and a variety of other real estate properties for Pacific Lumber's review and approval. In February 1997, after full and careful consideration, Pacific Lumber notified California that its presented properties were not acceptable due to, among other things, various physical problems and encumbrances on the properties, certain properties having been withdrawn by the state and public opposition to the transfer of some of the properties. Pacific Lumber also advised California that it should proceed with the steps necessary to assure that California can provide cash for its portion of the consideration to be paid to Pacific Lumber. There have been ongoing discussions between the Pacific Lumber Parties and the United States regarding the properties or other consideration to be furnished by the United States. As part of the Headwaters Agreement, the Pacific Lumber Parties agreed to a moratorium on certain logging operations, including salvage logging (the "Moratorium"). The Moratorium was to terminate if by July 28, 1997, various closing conditions had not been met. On March 11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters Agreement to extend the period of time during which these closing conditions must be met to February 17, 1998. The extension is, however, subject to the achievement of certain milestones toward completion of the Headwaters Agreement. The parties have agreed to execute an amendment to the Headwaters Agreement evidencing these modifications. Closing of the Headwaters Agreement is subject to various conditions, including (a) acquisition by the government of the Elk River Timberlands from a third party, (b) approval of an SYP and a Multi-Species HCP and issuance of a Permit, each in form and substance satisfactory to Pacific Lumber, (c) the issuance by the Internal Revenue Service and the California Franchise Tax Board of closing agreements in form and substance sought by and satisfactory to the Pacific Lumber Parties, (d) the absence of a judicial decision in any litigation brought by third parties that any party reasonably believes will significantly delay or impair the transactions described in the Headwaters Agreement, and (e) the dismissal with prejudice at closing of the Takings Litigation. The parties to the Headwaters Agreement are working to satisfy these conditions; however, there can be no assurance that the Headwaters Agreement will be consummated. RECENT ACCOUNTING PRONOUNCEMENTS In October 1996 the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides authoritative guidance intended to improve and narrow the manner in which existing accounting literature is applied to the recognition, measurement, display, and disclosure of environmental remediation liabilities arising pursuant to existing federal, state and local laws and regulations. SOP 96-1 addresses the nature of items that are to be included in the measurement of a company's liability related to any environmental remediation efforts it is currently undertaking or required to complete in the future. In this regard, SOP 96-1 requires that all incremental direct third party costs, as well as any internal compensation costs (including benefits) for employees expected to devote a significant amount of time directly to remediation efforts, should be included in the determination of the estimated liability. The term "remediation effort" is defined in SOP 96-1 to include such things as remedial risk assessment, feasibility studies and operations and maintenance associated with corrective actions. SOP 96-1 must be adopted in the first quarter of 1997. The adoption of SOP 96-1 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. - ------------------------------------------------------------------------------ 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 14, 1997 MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, ----------------------- (In millions of dollars, except share amounts) 1996 1995 - --------------------------------------------------------------------------------------------------- ----------------------- ASSETS Current assets: Cash and cash equivalents $ 336.6 $ 104.2 Marketable securities 50.3 45.9 Receivables: Trade, net of allowance for doubtful accounts of $5.2 and $5.5, respectively 200.7 246.2 Other 85.9 98.9 Inventories 634.8 606.8 Prepaid expenses and other current assets 169.1 129.7 -------- -------- Total current assets 1,477.4 1,231.7 Property, plant and equipment, net of accumulated depreciation of $769.5 and $678.1, respectively 1,297.9 1,231.9 Timber and timberlands, net of accumulated depletion of $154.6 and $139.6, respectively 301.8 313.0 Investments in and advances to unconsolidated affiliates 179.5 189.1 Deferred income taxes 419.7 414.0 Long-term receivables and other assets 439.4 452.6 -------- -------- $4,115.7 $3,832.3 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 201.5 $ 196.7 Accrued interest 61.5 58.0 Accrued compensation and related benefits 158.7 166.5 Other accrued liabilities 154.1 148.4 Payable to affiliates 98.1 90.2 Long-term debt, current maturities 69.6 25.1 -------- -------- Total current liabilities 743.5 684.9 Long-term debt, less current maturities 1,881.9 1,585.1 Accrued postretirement medical benefits 731.9 742.6 Other noncurrent liabilities 589.4 680.3 -------- -------- Total liabilities 3,946.7 3,692.9 Commitments and contingencies Minority interests 219.8 223.2 Stockholders' deficit: Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05 Non-Cumulative Participating Convertible Preferred Stock; shares issued: 669,701 .3 .3 Common stock, $0.50 par value; 28,000,000 shares authorized; shares issued: 10,063,885 and 10,063,359, respectively 5.0 5.0 Additional capital 155.9 155.0 Accumulated deficit (185.6) (208.5) Pension liability adjustment (5.1) (16.1) Treasury stock, at cost (shares held: preferred-845; common: 1,400,112 and 1,355,512, respectively) (21.3) (19.5) -------- -------- Total stockholders' deficit (50.8) (83.8) -------- -------- $4,115.7 $3,832.3 ======== ======== 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) 1996 1995 1994 - ----------------------------------------------------------------------------- --------------------------------- Net sales: Aluminum operations $2,190.5 $2,237.8 $1,781.5 Forest products operations 264.6 242.6 249.6 Real estate and other operations 88.2 84.8 84.6 -------- -------- -------- 2,543.3 2,565.2 2,115.7 -------- -------- -------- Costs and expenses: Costs of sales and operations (exclusive of depreciation and depletion): Aluminum operations 1,869.1 1,798.4 1,625.5 Forest products operations 148.5 127.1 129.6 Real estate and other operations 67.4 65.4 62.8 Selling, general and administrative expenses 203.5 195.8 169.4 Depreciation and depletion 123.5 120.9 121.1 -------- -------- -------- 2,412.0 2,307.6 2,108.4 -------- -------- -------- Operating income 131.3 257.6 7.3 Other income (expense): Investment, interest and other income (expense) 41.1 18.2 (2.2) Interest expense (175.5) (172.7) (167.3) Amortization of deferred financing costs (9.0) (8.6) (9.6) -------- -------- -------- Income (loss) before income taxes, minority interests and extraordinary item (12.1) 94.5 (171.8) Credit (provision) for income taxes 44.9 (14.8) 77.1 Minority interests (9.9) (22.2) (22.0) -------- -------- -------- Income (loss) before extraordinary item 22.9 57.5 (116.7) Extraordinary item: Loss on early extinguishment of debt, net of related benefits for minority interests and income taxes of $2.9 million -- -- (5.4) -------- -------- -------- Net income (loss) $ 22.9 $ 57.5 $ (122.1) ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary item $ 2.42 $ 6.08 $ (12.35) Extraordinary item -- -- (.57) -------- -------- -------- Net income (loss) $ 2.42 $ 6.08 $ (12.92) ======== ======== ======== 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) 1996 1995 1994 - -------------------------------------------------------------------------------------- ---------------------------------- Cash flows from operating activities: Net income (loss) $ 22.9 $ 57.5 $ (122.1) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and depletion 123.5 120.9 121.1 Minority interests 9.9 22.2 22.0 Amortization of deferred financing costs and discounts on long-term debt 21.5 19.5 19.3 Amortization of excess investment over equity in net assets of unconsolidated affiliates 11.6 11.4 11.6 Equity in (earnings) loss of unconsolidated affiliates, net of dividends received 3.0 (19.1) 15.0 Net gain on sales of real estate, mortgage loans and other assets (23.7) (9.7) (6.5) Net gains on marketable securities (7.8) (8.6) (4.2) Net sales (purchases) of marketable securities 3.4 (4.0) 12.9 Extraordinary loss on early extinguishment of debt, net -- -- 5.4 Increase (decrease) in cash resulting from changes in: Prepaid expenses and other assets (33.3) 84.5 (47.9) Accounts payable 4.8 34.7 26.3 Receivables 60.4 (103.6) 24.5 Inventories (30.6) (65.3) (37.5) Accrued and deferred income taxes (46.0) (13.1) (77.2) Payable to affiliates and other liabilities (74.0) (1.2) 37.5 Accrued interest 6.2 (1.0) 8.3 Other 4.2 12.8 (4.0) -------- -------- -------- Net cash provided by operating activities 56.0 137.9 4.5 -------- -------- -------- Cash flows from investing activities: Net proceeds from disposition of property and investments 51.8 39.3 30.0 Capital expenditures (173.1) (97.7) (89.3) Investment in subsidiaries and joint ventures (2.4) (15.9) (7.4) Other (1.4) (1.1) (1.2) -------- -------- -------- Net cash used for investing activities (125.1) (75.4) (67.9) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 371.8 5.7 229.7 Net borrowings (payments) under revolving credit agreements and short-term borrowings (payments) (13.8) 4.4 (191.8) Proceeds from issuance of Kaiser capital stock .1 1.2 100.1 Restricted cash withdrawals .4 1.0 1.2 Redemptions, repurchase of and principal payments on long-term debt (32.8) (40.9) (39.1) Dividends paid to Kaiser's minority preferred stockholders (10.5) (20.5) (13.7) Redemption of preference stock (5.2) (8.8) (8.5) Incurrence of financing costs (12.1) (1.8) (19.7) Other 3.6 16.8 5.9 -------- -------- -------- Net cash provided by (used for) financing activities 301.5 (42.9) 64.1 -------- -------- -------- Net increase in cash and cash equivalents 232.4 19.6 .7 Cash and cash equivalents at beginning of year 104.2 84.6 83.9 -------- -------- -------- Cash and cash equivalents at end of year $ 336.6 $ 104.2 $ 84.6 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
MAXXAM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Common Stock Pension Stock ------------------ Additional Accumulated Liability Treasury (In millions of dollars and shares) ($.50 Par) Shares ($.50 Par) Capital Deficit Adjustment Stock Total - ----------------------------------- ---------- ------------------ ---------- ----------- ---------- -------- ------- Balance, January 1, 1994 $ .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) Net income -- -- -- -- 22.9 -- -- 22.9 Gain from issuance of Kaiser Aluminum Corporation common stock -- -- -- .9 -- -- -- .9 Treasury stock repurchases -- -- -- -- -- -- (1.8) (1.8) Reduction of pension liability -- -- -- -- -- 11.0 -- 11.0 ---------- -------- -------- ---------- ----------- ---------- ------- ------- Balance, December 31, 1996 $ .3 8.7 $ 5.0 $155.9 $(185.6) $ (5.1) $ (21.3) $ (50.8) ========== ======== ======== ========== =========== ========== ======= ======= 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 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. MAXXAM Group Holdings Inc. ("MGHI") owns 100% of MGI and is a wholly owned subsidiary of the Company. The cumulative losses of Kaiser in 1993, principally due to the implementation of the new accounting standard for postretirement benefits other than pensions, eliminated Kaiser's equity with respect to its common stock; accordingly, since 1993 the Company has recorded 100% of Kaiser's earnings and losses, without regard to the minority interests represented by Kaiser's other common stockholders (as described in Note 7) 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. DESCRIPTION OF THE COMPANY'S OPERATIONS Kaiser operates in the aluminum industry through its wholly owned principal operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in several 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 processing needs, which allows it to be a major seller of alumina and primary aluminum in domestic and international markets. A 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 are 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 6% 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. USE OF ESTIMATES AND ASSUMPTIONS 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 Company's consolidated financial position, results of operations or liquidity. 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. 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, 1996 were: 1996-net unrealized holding losses of $.8 and net realized gains of $8.1; 1995-net unrealized holding gains of $1.9 and net realized gains of $6.8; and 1994-net unrealized holding losses of $1.0 and net realized gains of $5.2. INVENTORIES Inventories are stated at the lower of cost or market. Cost for the aluminum and forest products operations inventories is primarily determined using the last-in, first-out ("LIFO") method. Other inventories of the aluminum operations, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor and manufacturing overhead, including depreciation and depletion. Inventories consist of the following: December 31, ------------------- 1996 1995 ------------------- Aluminum Operations: Finished fabricated products $ 113.5 $ 91.5 Primary aluminum and work in process 200.3 195.9 Bauxite and alumina 110.2 119.6 Operating supplies and repair and maintenance parts 138.2 118.7 ------- ------- 562.2 525.7 ------- ------- Forest Products Operations: Lumber 55.8 65.5 Logs 16.8 15.6 ------- ------- 72.6 81.1 ------- ------- $ 634.8 $ 606.8 ======= ======= 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, 1996 and 1995, cash and cash equivalents includes $17.6 and $19.7, 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, 1996 and 1995, long-term receivables and other assets includes $30.0 and $31.4, respectively, of restricted cash deposits held for the benefit of the Timber Note holders (the "Liquidity Account") 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. 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, 1996, 1995 and 1994 includes $3.1, $17.8 and $16.5, respectively, of pre-tax charges related principally to establishing additional litigation reserves for asbestos claims and environmental reserves for potential soil and ground water remediation matters, each pertaining to operations which were discontinued prior to the acquisition of Kaiser by the Company in 1988. Also included in investment, interest and other income (expense) are net gains from sales of real estate of $25.4, $11.1 and $7.1 for the years ended December 31, 1996, 1995 and 1994, respectively. FOREIGN CURRENCY TRANSLATION The Company uses the United States dollar as the functional currency for its foreign operations. DERIVATIVE FINANCIAL INSTRUMENTS Hedging transactions using derivative financial instruments are primarily designed to mitigate KACC's exposure to changes in prices for certain of the products which KACC sells and consumes and, to a lesser extent, to mitigate KACC's exposure to changes in foreign currency exchange rates. KACC does not utilize derivative financial instruments for trading or other speculative purposes. KACC's derivative activities are initiated within guidelines established by Kaiser's management and approved by KACC's and Kaiser's boards of directors. Hedging transactions are executed centrally on behalf of all of KACC's business segments to minimize transaction costs, monitor consolidated net exposures and to allow for increased responsiveness to changes in market factors. Most of KACC's hedging activities involve the use of option contracts (which establish a maximum and/or minimum amount to be paid or received) and forward sales contracts (which effectively fix or lock-in the amount KACC will pay or receive). Option contracts typically require the payment of an up-front premium in return for the right to receive the amount (if any) by which the price at the settlement date exceeds the strike price. Any interim fluctuations in prices prior to the settlement date are deferred until the settlement date of the underlying hedged transaction, at which point they are reflected in net sales or cost of sales and operations (as applicable) together with the related premium cost. Forward sales contracts do not require an up-front payment and are settled by the receipt or payment of the amount by which the price at the settlement date varies from the contract price. No accounting recognition is accorded to interim fluctuations in prices of forward sales contracts. KACC has established margin accounts and credit limits with certain counterparties related to open forward sales and option contracts. When unrealized gains or losses are in excess of such credit limits, KACC is entitled to receive advances from the counterparties on open positions or is required to make margin deposits to counterparties as the case may be. At December 31, 1996, KACC had received $13.0 of margin advances from counterparties. At December 31, 1995, KACC had neither received nor made any m argin deposits. Kaiser considers credit risk related to possible failure of the counterparties to perform their obligations pursuant to the derivative contracts to be minimal. Deferred gains or losses are included in prepaid expenses and other current assets and other accrued liabilities. See Note 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash equivalents and restricted cash approximate fair value. Marketable securities are carried at fair value which is determined based on quoted market prices. As of December 31, 1996 and 1995, the estimated fair value of long-term debt was $1,972.2 and $1,672.0, respectively. 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. Some of the Company'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). As of December 31, 1996 and 1995, the difference between the carrying amount and fair value of foreign currency contracts was not significant. 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). Had the Company applied the alternative "fair value based" method as described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net income and earnings per share would have been $22.3 and $2.36 per share, respectively, for the year ended December 31, 1996 and $57.1 and $6.03 per share, respectively, for the year ended December 31, 1995. 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 9,461,197 shares, 9,459,293 shares and 9,447,878 shares for the years ended December 31, 1996, 1995 and 1994, 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 $281.6, $284.4 and $219.7 for the years ended December 31, 1996, 1995 and 1994, respectively. 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, 1996 and 1995, KACC's net receivables from these affiliates were not material. Kaiser, principally through KACC, has a variety of financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 10), letters of credit and guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs and certain other costs of this joint venture. The aggregate minimum amount of required future principal payments at December 31, 1996 is $94.4, of which approximately $12.0 is due in each of 2000 and 2001 with the balance being due thereafter. KACC's share of payments, including operating costs and certain other expenses under the agreements, has ranged between $110.0 and $120.0 over the past three years. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Summarized combined financial information for KACC's investees is as follows: December 31, -------------------- 1996 1995 --------- --------- Current assets $ 450.3 $ 429.0 Property, plant and equipment, net and other assets 364.7 370.1 --------- --------- Total assets $ 815.0 $ 799.1 ========= ========= Current liabilities $ 116.9 $ 125.4 Long-term debt and other liabilities 386.7 367.4 Stockholders' equity 311.4 306.3 --------- --------- Total liabilities and stockholders' equity $ 815.0 $ 799.1 ========= ========= Years Ended December 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Net sales $ 660.5 $ 685.9 $ 489.8 Costs and expenses (631.5) (618.7) (494.8) Provision for income taxes (8.7) (18.7) (6.3) --------- --------- --------- Net income (loss) $ 20.3 $ 48.5 $ (11.3) ========= ========= ========= KACC's equity in earnings (loss) of affiliates $ 8.8 $ 19.2 $ (1.9) ========= ========= ========= Dividends received from affiliates $ 11.8 $ -- $ -- ========= ========= ========= 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, 1996, KACC's investment in these affiliates exceeded its equity in their net assets by approximately $42.0 which amount will be fully amortized over the next four years. 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 in the joint venture. 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 aggreg ate principal amount of the joint venture's debt. At December 31, 1996, the joint venture had assets of $33.5, liabilities of $11.1 and equity of $22.4. At December 31, 1995, the joint venture had assets of $32.8, liabilities of $10.7 and equity of $22.1. For the years ended December 31, 1996 and 1995, the joint venture incurred income of $2.3 and $.2, respectively. 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. SHRP, Ltd. incurred net losses for the year ended December 31, 1994 of approximately $20.0. Included in investment, interest and other income (expense) for the year ended December 31, 1994 are losses of $13.1 with respect to the Company's investment 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) and the contribution by a wholly owned subsidiary of the Company of a tract of land 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, the Company purchased for $7.3 certain of the 11% Senior Secured Extendible Notes due September 1, 2001 of SHRP, Ltd. (the "SHRP Notes") and the corresponding equity interest in SHRP Equity, Inc. (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 held, 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. On February 12, 1997, the Company purchased an additional amount of the SHRP Notes and the corresponding equity interest in SHRP Equity Inc. for $5.9, thereby increasing the Company's ownership in SHRP, Ltd. to 88.5%. The assets and liabilities of SHRP, Ltd. are included in the accompanying Consolidated Balance Sheet as of December 31, 1996 and 1995, and the results of SHRP, Ltd.'s operations and cash flows for the period from October 6, 1995 to December 31, 1995 and for the year ended December 31, 1996 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. 3. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows: December 31, Estimated Useful -------------------- Lives 1996 1995 - -------------------------------------------------------------------------- Land and improvements 5-30 years $ 194.6 $ 185.8 Buildings 5-45 years 304.6 272.4 Machinery and equipment 3-22 years 1,479.1 1,388.5 Construction in progress 89.1 63.3 --------- --------- 2,067.4 1,910.0 Less: accumulated depreciation (769.5) (678.1) --------- --------- $1,297.9 $1,231.9 ========= ========= Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $105.9, $105.4 and $105.7, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ------------------------ 1996 1995 ------------------------ 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 17.6 16.5 12% MGHI Senior Secured Notes due August 1, 2003 130.0 -- 11 1/4% MGI Senior Secured Notes due August 1, 2003 100.0 100.0 12 1/4% MGI Senior Secured Discount Notes due August 1, 2003, net of discount 104.2 92.5 10 1/2% Pacific Lumber Senior Notes due March 1, 2003 235.0 235.0 7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015 336.1 350.2 1994 KACC Credit Agreement -- 13.1 10 7/8% KACC Senior Notes due October 15, 2006, including premium 225.9 -- 9 7/8% KACC Senior Notes due February 15, 2002, net of discount 224.0 223.8 12 3/4% KACC Senior Subordinated Notes due February 1, 2003 400.0 400.0 Alpart CARIFA Loans 60.0 60.0 Other aluminum operations debt 52.0 61.2 Other notes and contracts, primarily secured by receivables, buildings, real estate and equipment 41.7 32.9 --------- --------- 1,951.5 1,610.2 Less: current maturities (69.6) (25.1) --------- --------- $1,881.9 $1,585.1 ========= =========
14% MAXXAM SENIOR SUBORDINATED RESET NOTES DUE 2000 (THE "RESET NOTES") AND 12 1/2% MAXXAM SUBORDINATED DEBENTURES DUE 1999 (THE "12 1/2% DEBENTURES") The Company redeemed the Reset Notes and 12 1/2% Debentures at par on January 7, 1997 and January 22, 1997, respectively, using proceeds from the Intercompany Note (defined below). MAXXAM LOAN AGREEMENT (THE "CUSTODIAL TRUST AGREEMENT") On June 28, 1996, the Company entered into a loan and pledge agreement with the Custodial Trust Company providing for up to $25.0 in borrowings. Any amounts drawn would 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 1/2% per annum. The Custodial Trust Agreement provides for a revolving credit arrangement during the first year of the agreement. Any borrowings outstanding on June 28, 1997 convert into a term loan maturing on June 28, 1998. No borrowings were outstanding as of December 31, 1996. 12% MGHI SENIOR SECURED NOTES DUE 2003 (THE "MGHI NOTES") On December 23, 1996, MGHI issued $130.0 principal amount of 12% Senior Secured Notes due August 1, 2003. Interest is payable semi-annually on February 1 and August 1 of each year beginning February 1, 1997. The MGHI Notes are guaranteed on a senior, unsecured basis by the Company. MGHI has agreed to pledge up to 16,055,000 of the 27,938,250 shares of Kaiser common stock it owns if and when such shares are released from the pledge securing the MGI Notes (as defined below). The MGHI Notes are effectively subordinated to liabilities of MGHI's subsidiaries, including trade payables. The net proceeds from the offering after estimated expenses were approximately $125.0, all of which was loaned to the Company pursuant to an intercompany note (the "Intercompany Note") which is pledged to secure the MGHI Notes. The Intercompany Note bears interest at the rate of 11% per annum (payable semi-annually on the interest payment dates applicable to the MGHI Notes) and matures on August 1, 2003. The Company will be entitled to defer the payment of interest on the Intercompany Note on any interest payment date to the extent that MGHI has sufficient available funds to satisfy its obligations on the MGHI Notes on such date. Any such deferred interest will be added to the principal amount of the Intercompany Note and will be payable at maturity. 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 MGHI's pledge of 27,983,250 shares of Kaiser's common stock. The indenture governing the MGI Notes, among other things, restricts the ability of MGI to incur additional indebtedness, to engage in transactions with affiliates, to pay dividends and to make investments. As of December 31, 1996, under the most restrictive of these covenants, approximately $0.5 of dividends could be paid by MGI. The MGI Notes are senior indebtedness of MGI; however, they are effectively subordinated 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 $21.5 and $33.2 at December 31, 1996 and 1995, 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. 10 1/2% PACIFIC LUMBER SENIOR NOTES DUE 2003 (THE "PACIFIC LUMBER SENIOR NOTES") Interest on the Pacific Lumber Senior Notes is payable semi-annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. The Pacific Lumber Senior Notes are unsecured and are senior indebtedness of Pacific Lumber; however, they are effectively subordinated to the Timber Notes. The indenture governing the Pacific Lumber Senior Notes contains various covenants which, among other things, limit Pacific Lumber's ability to incur additional indebtedness and liens, to engage in transactions with affiliates, to pay dividends and to make investments. 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, 1999, are secured by Pacific Lumber's trade receivables and inventories, with interest currently 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, 1996, $47.0 of borrowings was available under the Pacific Lumber Credit Agreement, of which $4.7 was available for letters of credit and $30.0 was restricted to timberland acquisitions. No borrowings were outstanding as of December 31, 1996, and letters of credit outstanding amounted to $10.3. The Pacific Lumber Credit Agreement contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. SCOTIA PACIFIC TIMBER NOTES 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 $166.0 of the Company's consolidated balance at December 31, 1996), (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. 1994 KACC CREDIT AGREEMENT (AS AMENDED, THE "KACC CREDIT AGREEMENT") In February 1994, Kaiser and KACC entered into the KACC Credit Agreement which provides a $325.0 five-year secured, revolving line of credit. KACC is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing base relating to eligible accounts receivable plus eligible inventory. As of December 31, 1996, no borrowings were outstanding and $269.7 (of which $71.9 could have been used for letters of credit) was available to KACC under the KACC Credit Agreement. The KACC Credit Agreement is unconditionally guaranteed by Kaiser and by certain significant subsidiaries of KACC. Interest on outstanding balances will bear a premium (which varies based on the results of a financial test) over either a base rate or LIBOR at Kaiser's option. The KACC Credit Agreement requires KACC to comply with 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. Neither Kaiser nor KACC currently is permitted to pay dividends on its common stock. The KACC Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding KACC's Gramercy alumina plant and Nevada micromill), (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 KACC Credit Agreement indebtedness. 10 7/8% KACC SENIOR NOTES DUE 2006 (THE "KACC 10 7/8% SENIOR NOTES"), 9 7/8% KACC SENIOR NOTES DUE 2002 (THE "KACC 9 7/8% SENIOR NOTES") AND 12 3/4% KACC SENIOR SUBORDINATED NOTES DUE 2003 (THE "KACC SENIOR SUBORDINATED NOTES") During the fourth quarter of 1996, KACC sold a total of $225.0 principal amount of KACC 10 7/8% Senior Notes in two separate transactions. A net premium of $0.9 was realized from the issuance of the KACC 10 7/8% Senior Notes. The KACC 10 7/8% Senior Notes rank pari passu in right and priority of payment with the indebtedness under the KACC Credit Agreement and the KACC 9 7/8% Senior Notes (defined below). 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 9 7/8% Senior Notes. The net proceeds from the offering of the KACC 9 7/8% 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 KACC Credit Agreement and for working capital and general corporate purposes. The KACC 9 7/8% Senior Notes are net of discount of $1.0 and $1.2 at December 31, 1996 and 1995, respectively. The obligations of KACC with respect to the KACC 9 7/8% Senior Notes, the KACC 10 7/8% Senior Notes and the KACC Senior Subordinated Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the KACC 9 7/8% Senior Notes, the KACC 10 7/8% Senior Notes and the KACC Senior Subordinated Notes restrict, among other things, KACC's ability to incur debt, undertake transactions with affiliates, and pay dividends. Under the most restrictive of the covenants in the indentures and the KACC Credit Agreement, neither Kaiser nor KACC currently is permitted to pay dividends on their common stock. Further, the indentures governing the KACC 9 7/8% Senior Notes, the KACC 10 7/8% Senior Notes and the KACC Senior Subordinated Notes provide that KACC must offer to purchase such notes upon the occurrence of a Change of Control (as defined therein), and the KACC Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. ALPART CARIFA LOANS 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"). Pursuant to the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined in applicable laws. Alpart has also 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 in Alpart). 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, 1996, $11.1 of additional borrowings was available under the MCOP Credit Agreement and outstanding letters of credit amounted to $1.1. MATURITIES Scheduled maturities and redemptions of long-term debt outstanding at December 31, 1996 are as follows:
Years Ending December 31, --------------------------------------------------------------------- 1997 1998 1999 2000 2001 Thereafter --------------------------------------------------------------------- 14% MAXXAM Senior Subordinated Reset Notes $ 25.0 $ -- $ -- $ -- $ -- $ -- 12 1/2% MAXXAM Subordinated Debentures 17.6 -- -- -- -- -- 12% MGHI Senior Secured Notes -- -- -- -- -- 130.0 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 7.95% Scotia Pacific Timber Collateralized Notes 16.2 19.3 21.6 24.0 24.7 230.3 10 7/8% KACC Senior Notes -- -- -- -- -- 225.0 9 7/8% KACC Senior Notes -- -- -- -- -- 225.0 12 3/4% KACC Senior Subordinated Notes -- -- -- -- -- 400.0 Alpart CARIFA Loans -- -- -- -- -- 60.0 Other aluminum operations debt 8.9 9.1 0.4 0.4 0.4 32.8 Other 1.9 1.9 10.2 2.5 46.5 5.7 ------- ------- ------- ------- ------- -------- $ 69.6 $ 30.3 $ 32.2 $ 26.9 $ 71.6 $1,769.5 ======= ======= ======= ======= ======= ========
CAPITALIZED INTEREST Interest capitalized during the years ended December 31, 1996, 1995 and 1994 was $5.0, $2.8 and $3.0, 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, 1996, 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 $173.7 of the Company's real estate assets with the extinguishment of $24.1 of debt. 5. INCOME TAXES Income taxes are determined using an asset and liability approach which 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. 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. Income (loss) before income taxes, minority interests and extraordinary item by geographic area is as follows: Years Ended December 31, --------------------------------- 1996 1995 1994 --------------------------------- Domestic $ (55.0) $ (49.4) $ (177.9) Foreign 42.9 143.9 6.1 --------- --------- --------- $ (12.1) $ 94.5 $ (171.8) ========= ========= ========= 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 and extraordinary item consists of the following: Years Ended December 31, --------------------------------- 1996 1995 1994 --------------------------------- Current: Federal $ (1.5) $ (4.3) $ -- State and local (.5) (.4) (.2) Foreign (21.8) (40.2) (18.0) --------- --------- --------- (23.8) (44.9) (18.2) --------- --------- --------- Deferred: Federal 42.6 35.4 94.3 State and local 18.5 (.4) .4 Foreign 7.6 (4.9) .6 --------- --------- --------- 68.7 30.1 95.3 --------- --------- --------- $ 44.9 $ (14.8) $ 77.1 ========= ========= ========= The 1996 federal deferred credit for income taxes of $42.6 includes $8.8 for the benefit of operating loss carryforwards generated in 1996. The 1994 federal deferred credit for income taxes of $94.3 includes $36.0 for the benefit of operating loss carryforwards generated in 1994. 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 and extraordinary item is as follows:
Years Ended December 31, ------------------------------- 1996 1995 1994 ------------------------------- Income (loss) before income taxes, minority interests and extraordinary item $ (12.1) $ 94.5 $ (171.8) ========== ======== ======== Amount of federal income tax based upon the statutory rate $ 4.2 $ (33.1) $ 60.1 Revision of prior years' tax estimates and other changes in valuation allowances 41.2 24.2 16.7 Percentage depletion 3.9 4.2 5.6 State and local taxes, net of federal tax benefit 1.1 (2.4) .1 Foreign taxes, net of federal tax benefit (5.5) (6.9) (5.3) Other -- (.8) (.1) ---------- -------- -------- $ 44.9 $ (14.8) $ 77.1 ========== ======== ========
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 relates to the expiration of the relevant statute of limitations with respect to certain income tax returns, or the resolution of specific income tax matters with the relevant tax authorities. For the years ended December 31, 1996, 1995 and 1994, the reversal of reserves which the Company believes are no longer necessary resulted in a credit to the income tax provision of $40.8, $20.0 and $20.1, respectively. As shown in the Consolidated Statement of Operations for the year ended December 31, 1994, the Company reported an extraordinary loss on the early extinguishment of debt. The Company reported the loss net of related deferred federal income taxes of $2.9 which approximated the federal statutory income tax rate. The components of the Company's net deferred income tax assets (liabilities) are as follows: December 31, ------------------- 1996 1995 ------- -------- Deferred income tax assets: Postretirement benefits other than pensions $ 294.7 $ 293.6 Other liabilities 203.4 195.0 Loss and credit carryforwards 179.0 190.5 Real estate 47.3 58.1 Timber and timberlands 37.8 41.9 Other 113.0 86.6 Valuation allowances (141.2) (141.5) -------- -------- Total deferred income tax assets, net 734.0 724.2 -------- -------- Deferred income tax liabilities: Property, plant and equipment (163.7) (177.9) Other (101.4) (104.7) -------- -------- Total deferred income tax liabilities (265.1) (282.6) -------- -------- Net deferred income tax assets $ 468.9 $ 441.6 ======== ======== As of December 31, 1996, approximately $309.2 of the net deferred income tax assets listed above are attributable to Kaiser. A principal component of this amount is the $259.1 tax benefit, net of certain valuation allowances, 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. Included in the remaining $50.1 of Kaiser's net deferred income tax assets is approximately $82.4 attributable to the tax benefit of loss and credit carryforwards, net of valuation allowances. A substantial portion of the valuation allowances for Kaiser relate to loss and credit carryforwards. 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 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 allowanc es were not provided. The net deferred income tax assets listed above which are not attributable to Kaiser are approximately $159.7 as of December 31, 1996. This amount includes approximately $76.3 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. As of December 31, 1996 and 1995, $76.6 and $58.5, respectively, of the net deferred income tax assets listed above are included in prepaid expenses and other current assets. Certain other portions of the deferred income tax liabilities listed above are included in other accrued liabilities and other noncurrent liabilities. The Company files consolidated federal income tax returns together with its domestic subsidiaries, other than Kaiser and its subsidiaries. Kaiser and its domestic subsidiaries are members of a separate consolidated return group which files its own consolidated federal income tax returns. The following table presents the tax attributes for federal income tax purposes at December 31, 1996 attributable to the Company and Kaiser. The utilization of certain of these tax attributes is subject to limitations.
The Company Kaiser ------------------ ------------------- Expiring Expiring Through Through ------------------ ------------------- Regular Tax Attribute Carryforwards: Current year net operating loss $ 28.5 2011 $ -- -- Prior year net operating losses 77.7 2010 36.0 2010 General business tax credits .8 2002 23.1 2010 Foreign tax credits -- -- 68.5 2001 Alternative minimum tax credits 1.2 Indefinite 19.9 Indefinite Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $ 24.7 2011 $ -- -- Prior year net operating losses 64.2 2010 26.6 2010 Foreign tax credits -- -- 72.2 2001
6. EMPLOYEE BENEFIT AND INCENTIVE PLANS POSTRETIREMENT MEDICAL BENEFITS The Company has unfunded defined postretirement medical 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 expected costs of postretirement medical benefits are accrued over the period the employees provide services to the date of their full eligibility for such benefits. 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, when they become 65. KAMP is voluntary for other hourly retirees of Kaiser's operations in California, Louisiana, Pennsylvania, Rhode Island and Washington. Postretirement medical benefits 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 medical benefit cost is as follows:
Years Ended December 31, -------------------------------- 1996 1995 1994 ------- ------- ------- Service cost--medical benefits earned during the year $ 4.3 $ 4.9 $ 8.8 Interest cost on accumulated postretirement medical benefit obligation 47.5 52.7 57.5 Net amortization and deferral (12.5) (9.1) (3.2) ------- ------- ------- Net periodic postretirement medical benefit cost $ 39.3 $ 48.5 $ 63.1 ======= ======= =======
Included in the net periodic postretirement medical benefit cost is $38.3, $47.9 and $61.9 for the years ended December 31, 1996, 1995 and 1994, respectively, attributable to Kaiser's plans. The postretirement medical benefit liability recognized in the Company's Consolidated Balance Sheet is as follows: December 31, ------------------- 1996 1995 ------- ------- Retirees $ 500.9 $ 558.9 Actives eligible for benefits 37.7 31.5 Actives not eligible for benefits 72.3 65.5 ------- ------- Accumulated postretirement medical benefit obligation 610.9 655.9 Unrecognized prior service cost 98.6 111.1 Unrecognized net gain 72.4 22.4 ------- ------- Postretirement medical benefit liability $ 781.9 $ 789.4 ======= ======= The accumulated postretirement medical benefit obligation attributable to Kaiser's plans was $602.8 and $649.4 as of December 31, 1996 and 1995, respectively. The postretirement medical benefit liability recognized in the Company's Consolidated Balance Sheet attributable to Kaiser's plans was $772.6 and $780.8 as of December 31, 1996 and 1995, respectively. 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 6.0% for retirees under age 65 and over age 65, respectively, and are assumed to decrease gradually to approximately 5.5% in 2004 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement medical benefit obligation as of December 31, 1996 by approximately $61.6 and the aggregate of the service and interest cost components of net periodic postretirement medical benefit cost by approximately $6.3. The discount rates and rates of compensation increase used in determining the accumulated postretirement medical benefit obligation were 7.8% and 5.0% at December 31, 1996, respectively, and 7.5% and 5.0% at December 31, 1995, 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 annual plans and 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, ------------------------------- 1996 1995 1994 ------------------------------- Defined benefit plans: Service cost--benefits earned during the year $ 15.7 $ 12.1 $ 13.6 Interest cost on projected benefit obligations 62.8 62.5 59.5 Return on assets: Actual gain (94.4) (118.7) (.8) Deferred gain (loss) 34.8 64.6 (53.0) Net amortization and deferral 8.0 8.7 2.8 Curtailment gain (.6) -- -- -------- -------- -------- Net periodic pension cost 26.3 29.2 22.1 Defined contribution plans 3.1 5.4 2.8 Non-qualified retirement and incentive plans (3.2) 8.2 5.0 -------- -------- -------- $ 26.2 $ 42.8 $ 29.9 ======== ======== ========
The total pension costs attributable to Kaiser's plans was $21.3, $38.3 and $24.9 for the years ended December 31, 1996, 1995 and 1994, respectively. The following table sets forth the funded status and amounts recognized for the defined benefit plans in the Consolidated Balance Sheet:
December 31, ------------------- 1996 1995 ------------------- Actuarial present value of accumulated plan benefits: Vested benefit obligation $ 768.9 $ 781.7 Non-vested benefit obligation 40.9 31.1 ------- ------- Total accumulated benefit obligation $ 809.8 $ 812.8 ======= ======= Projected benefit obligation $ 854.7 $ 853.1 Plan assets at fair value, primarily common stocks and fixed income obligations (698.1) (623.1) ------- ------- Projected benefit obligation in excess of plan assets 156.6 230.0 Unrecognized net transition obligation (.5) (.6) Unrecognized net loss (9.0) (54.9) Unrecognized prior service cost (27.3) (29.1) Adjustment required to recognize minimum liability 13.7 49.8 ------- ------- Accrued pension cost $ 133.5 $ 195.2 ======= =======
With respect to Kaiser's defined benefit plans, the projected benefit obligation was $816.2 and $815.9 as of December 31, 1996 and 1995, respectively. This obligation exceeded Kaiser's fair value of plan assets by $154.2 and $223.6 as of December 31, 1996 and 1995, respectively. The assumptions used in accounting for the defined benefit plans were as follows: December 31, ------------------------------- 1996 1995 1994 ------------------------------- Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.8% 7.5% 8.5% Expected long-term rate of return on assets 9.5% 9.5% 9.5% 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 1996 and 1995, the pension liability adjustment decreased by $11.0 and increased by $4.7, respectively. These adjustments were recorded net of a related deferred federal and state income tax credit (provision) of $(6.5) and $2.8, respectively, which approximated the federal and state statutory rates. 7. MINORITY INTERESTS Minority interests represent the following: December 31, ------------------- 1996 1995 ------------------- Kaiser Aluminum Corporation: Common stock, par $.01 $ -- $ -- 8.255% PRIDES 98.1 98.1 Minority interests attributable to Kaiser's subsidiaries 121.7 122.7 Sam Houston Race Park, Ltd. -- 2.4 ------- ------- $ 219.8 $ 223.2 ======= ======= As a result of Kaiser's issuance of preferred stock in 1993 and 1994 and Kaiser's redemption of the Depositary Shares in 1995 (each as described below), the Company's equity interest in Kaiser has decreased to approximately 61.9%, on a fully diluted basis, as of December 31, 1996. 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, in 1995 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. KAISER PROPOSED RECAPITALIZATION In February 1996, Kaiser proposed a 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 have (i) provided 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) redesignated as Class A Common Shares the 100 million currently authorized shares of existing common stock and authorized 250 million shares to be designated as Common Stock, and (iii) changed 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. However, the proposed recapitalization was ultimately abandoned as a result of an unfavorable court ruling in a suit that had challenged the plan. The decision to abandon the proposed recapitalization does not preclude a recapitalization from being proposed to Kaiser's stockholders in the future. $.65 DEPOSITARY SHARES (THE "DEPOSITARY SHARES") On June 30, 1993, Kaiser issued 19,382,950 of its Depositary Shares, each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). MGI acquired 2,132,950 of the Depository Shares 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 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. 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. Then, 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. As a result of the Company's sale of its Depository Shares prior to September 19, 1995, the shares of Kaiser's common stock which were issued upon redemption of the Series A Shares are all held by minority stockholders. PRIDES 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 con tributions 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 by Kaiser 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. 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. The number of shares of Kaiser's common stock a holder will receive upon redemption will vary depending on a formula and the market price of the common stock from time to time, but in no event will be less than .8333 of a share of common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of common stock (equivalent to a conversion price of $14.10 per share of common stock), subject to adjustment in certain events. The 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 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its Cumulative (1985 Series B) Preference Stock (together, the "Redeemable Preference Stock") each of which has a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any, and have a total redemption value of $31.7 as of December 31, 1996. No additional Redeemable Preference Stock is expected to be issued. Holders of the Redeemable Preference Stock are entitled to an annual cash dividend of $5 per share, or an amount based on a formula tied to KACC's pre-tax income from aluminum operations when and as declared by KACC's board of directors. Changes in Series A and B Stock are as follows: Years Ended December 31, -------------------------------- 1996 1995 1994 -------------------------------- Shares: Beginning of year 737,363 912,167 1,081,548 Redeemed (102,679) (174,804) (169,381) --------- --------- --------- End of year 634,684 737,363 912,167 ========= ========= ========= Redemption fund agreements require KACC to make annual payments by March 31 of the subsequent year based on a formula tied to KACC's consolidated net income until the redemption funds are sufficient to redeem all of the Redeemable Preference Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. KACC also has certain additional repurchase requirements which are based, among other things, upon profitability tests. The Redeemable Preference 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 Redeemable Preference Stock restricts the ability of KACC to redeem or pay dividends on common stock if KACC is in default on any dividends payable on Redeemable Preference Stock. KAISER STOCK INCENTIVE PLANS 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 572,254 shares were available to be awarded at December 31, 1996. During 1994, 102,564 restricted shares, which are now fully vested, were distributed to two Kaiser executives. Compensation expense recognized during 1996, 1995 and 1994 associated with the 1993 Incentive Plan and a prior long-term incentive plan (the "LTIP") was approximately $0.7, $1.4 and $2.2, respectively. In 1994, the Compensation Committee of Kaiser's Board of Directors approved the award of "nonqualified stock options" to certain members of management. These options generally will vest at the rate of 25% per year. Information relating to nonqualified stock options is shown below. The prices shown in the table below are the weighted average price per share for the respective number of underlying shares.
1996 1995 1994 ----------------- ------------------ ------------------- Shares Price Shares Price Shares Price ----------------- ------------------ ------------------- Outstanding at beginning of year 926,085 $ 10.32 1,119,680 $ 9.85 664,400 $ 7.55 Granted -- -- -- -- 494,800 12.75 Exercised (8,275) 8.99 (155,500) 7.32 (6,920) 7.25 Expired or forfeited (27,415) 10.45 (38,095) 8.88 (32,600) 7.46 -------- ---------- --------- Outstanding at end of year 890,395 10.33 926,085 10.32 1,119,680 9.85 ======== ========== ========= Exercisable at end of year 436,195 $ 10.47 211,755 $ 10.73 120,180 $ 7.57 ======== ========== =========
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 of which 940,000 and 910,000 shares, respectively, were available to be awarded at December 31, 1996. 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. The options (or rights, as applicable) granted in 1995 and 1996 vest at the rate of 20% per year commencing one year from the date of grant. The Company paid $2.7 in respect of awards issued pursuant to the 1984 Plan for the year ended December 31, 1995. Amounts paid in respect of awards issued pursuant to the 1984 Plan for the years ended December 31, 1996 and 1994 were not significant. The following table summarizes the options or rights outstanding and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan. The prices shown are the weighted average price per share for the respective number of underlying shares.
1996 1995 1994 ----------------- ------------------ ------------------- Shares Price Shares Price Shares Price ----------------- ------------------ ------------------- Outstanding at beginning of year 207,900 $ 31.59 238,000 $ 26.74 267,800 $ 26.96 Granted 45,000 48.84 36,000 45.15 70,000 30.38 Exercised (1,800) 15.31 (66,100) 21.52 (37,050) 18.93 Expired or forfeited (1,000) 45.15 -- -- (62,750) 36.37 -------- -------- -------- Outstanding at end of year 250,100 34.75 207,900 31.59 238,000 26.74 ======== ======== ======== Exercisable at end of year 122,100 $ 29.40 93,900 $ 27.95 124,100 $ 23.83 ======== ======== ========
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 1996, 1995 and 1994, options to purchase 900 shares, 900 shares and 1,500 shares of common stock, respectively, were granted to three non-employee directors. The exercise prices of these options are $43.88, $31.63 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, 1996, options for 975 shares were exercisable. SHARES RESERVED FOR ISSUANCE At December 31, 1996, the Company had 2,703,856 common shares and 1,000,000 Class A Preferred shares reserved for future issuances in connection with various options, convertible securities and other rights as described in this Note 8. 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 31.3% of the Company's common stock (resulting in combined voting control of approximately 61.1% 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 Minimum rental commitments under operating leases at December 31, 1996 are as follows: years ending December 31, 1997-$28.2; 1998-$30.5; 1999-$35.1; 2000-$31.1; 2001-$28.4; thereafter-$160.8. Rental expense for operating leases was $34.2, $31.4 and $29.2 for the years ended December 31, 1996, 1995 and 1994, respectively. The minimum future rentals receivable under noncancelable subleases at December 31, 1996 were $46.7. 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 potentia lly 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, ------------------------------ 1996 1995 1994 ------------------------------ Balance at beginning of year $ 38.9 $ 40.1 $ 40.9 Additional amounts 3.2 3.3 2.8 Less expenditures (8.8) (4.5) (3.6) ------- ------- ------- Balance at end of year $ 33.3 $ 38.9 $ 40.1 ======= ======= ======= 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 1997 through 2001 and an aggregate of approximately $6.0 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 $24.0 and that, subject to further regulatory review and approval, 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, 1996, the number of claims pending was approximately 71,100, compared to 59,700 at December 31, 1995. During 1996, approximately 21,100 claims were received and approximately 9,700 were settled or dismissed. A substantial portion of the asbestos-related claims that were filed and served on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its counsel that, although there can be no assurance, the increase in pending claims may have been attributable in part to tort reform legislation in Texas. Although asbestos-related claims are currently exempt from certain aspects of the Texas tort reform legislation, KACC has been advised that efforts to remove the asbestos-related exemption in the tort reform legislation as well as other developments in the legislative and legal environment in Texas, may be responsible for the accelerated pace of new claims experienced in late 1995 and its continuance in 1996, albeit at a somewhat reduced rate. 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 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 $136.7, before consideration of insurance recoveries, is included primarily in other noncurrent liabilities at December 31, 1996. While KACC does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. KACC estimates that annual future cash payments in connection with such litigation will be approximately $8.0 to $17.0 for each of the years 1997 through 2001, and an aggregate of approximately $80.0 thereafter. 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 LLP with respect to applicable insurance coverage law relating to the terms and conditions of these policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $109.8 determined on the same basis as the asbestos-related cost accrual, is recorded primarily in long-term receivables and other assets at December 31, 1996. KACC continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from KACC's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, KACC currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. OTS CONTINGENCY AND RELATED MATTERS On December 26, 1995, the United States Department of Treasury's Office of Thrift Supervision ("OTS") initiated a formal administrative proceeding against the Company and others by filing a Notice of Charges (the "Notice"). The Notice alleges, among other things, misconduct by the Company, Federated Development 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, among other things, allegations that through USAT it was involved in prohibited transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified damages in excess of $138.0 from the Company and Federated, civil money penalties and a removal from, and prohibition against the Company and the other respondents engaging in, the banking industry. 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-95-3956) (the "FDIC action") in the U.S. District Court for the Southern District of Texas (the "Court"). The original complaint 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 original complaint further alleges, among other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated and MAXXAM maintained the net worth of USAT. The Court has joined the OTS as a party to the FDIC action and granted the motions to intervene filed by the Company and three other respondents in the OTS administrative proceeding. The OTS is seeking to be dismissed from the FDIC action. On January 15, 1997, the FDIC filed an amended complaint which seeks, conditioned on the OTS prevailing in its administrative proceeding, unspecified damages from Mr. Hurwitz relating to amounts the OTS does not collect from the Company and Federated with respect to alleged obligations to maintain USAT's net worth. The Company's bylaws provide for indemnification of its officers and directors to the fullest extent permitted by Delaware law. The Company is obligated to advance defense costs to its officers and directors, subject to the individual's obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, the Company's indemnity obligation can, under certain circumstances, include amounts other than defense costs, including judgments and settlements. The Company has concluded that it is unable to determine a reasonable estimate of the loss (or range of loss), if any, that could result from this contingency. Accordingly, it is impossible to assess the ultimate outcome of the foregoing matters or its potential impact on the Company's consolidated financial position, results of operations or liquidity. OTHER MATTERS The Company is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At December 31, 1996, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, (based on an average price of $1,610 per ton ($.73 per pound) of primary aluminum), natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts, was approximately $10.5. However, increases in the price of primary aluminum during January 1997 caused KACC's net hedging position at January 31, 1997 to change to an unrealized loss of approximately $2.2. Any gains or losses on the derivative contracts utilized in KACC's hedging activities are offset by losses or gains, respectively, on the transactions being hedged. ALUMINA AND ALUMINUM Kaiser's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. During the period January 1, 1993 through December 31, 1996, the average Midwest United States transaction price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. From time to time in the ordinary course of business, KACC enters into hedging transactions to provide price risk management in respect of the net exposure of earnings resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the market price of primary aluminum. Forward sales contracts are used by KACC to effectively lock-in or fix the price that KACC will receive for its shipments. KACC also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of price for KACC's anticipated sales and/or (iii) to permit KACC to realize possible upside price movements. As of December 31, 1996, KACC had sold forward, at fixed prices, approximately 70,000 and 93,600 tons of primary aluminum with respect to 1997 and 1998, respectively. As of December 31, 1996, KACC had also purchased put options to establish a minimum price for approximately 202,700 and 52,000 tons with respect to 1997 and 1998, respectively, and had entered into option contracts that established a price range for an additional 165,600 tons with respect to 1998. During January 1997, KACC entered into additional option contracts that establish a price range for 51,500, 60,000 and 51,000 tons with respect to 1997, 1998 and 1999, respectively. During January 1997 KACC also sold forward, at fixed prices, an additional 24,000 tons with respect to 1999. As of December 31, 1996, KACC had sold forward approximately 90% of the alumina available to it in excess of its projected internal smelting requirements for 1997 and 1998. Virtually all of such 1997 and 1998 sales were made at prices indexed to future prices of primary aluminum. ENERGY KACC is exposed to energy price risk from fluctuating prices for fuel oil and natural gas consumed in the production process. Accordingly, KACC from time to time in the ordinary course of business enters into hedging transactions with major suppliers of energy and energy related financial instruments. As of December 31, 1996, KACC had a combination of fixed price purchase and option contracts for the purchase of approximately 40,000 MMBtu of natural gas per day during the first and second quarter of 1997, and for 25,000 MMBtu of natural gas per day for the period July 1997 through December 1998. At December 31, 1996, KACC also held option contracts for an average of 152,000 barrels of fuel oil per month for 1997 and 174,000 barrels of fuel oil per month for 1998. FOREIGN CURRENCY KACC enters into forward foreign exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At December 31, 1996, KACC had net forward foreign exchange contracts totaling approximately $81.6 for the purchase of 110.0 Australian dollars from January 1997 through June 1998, in respect of its commitments for 1997 and 1998 expenditures denominated in Australian dollars. 11. SEGMENT INFORMATION The following tables present financial information by industry segment and by geographic area at December 31, 1996 and 1995 and for the three years ended December 31, 1996, 1995 and 1994. INDUSTRY SEGMENTS
Real Bauxite Forest Estate Years and Aluminum Products and Other Ended Alumina Processing Operations Operations Corporate Total ------------------------------------------------------------------------- Sales to unaffiliated customers 1996 $ 508.0 $1,682.5 $ 264.6 $ 88.2 $ -- $2,543.3 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 Operating income (loss) 1996 (10.7) 114.4 73.0 (12.0) (33.4) 131.3 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 Equity in earnings (loss) of unconsolidated affiliates 1996 1.8 7.0 -- 2.3 -- 11.1 1995 3.5 15.7 -- (.1) -- 19.1 1994 (4.6) 2.7 -- -- (13.1) (15.0) Depreciation and depletion 1996 30.2 59.9 27.2 5.7 .5 123.5 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 Capital expenditures 1996 31.6 128.7 15.2 10.7 .4 186.6 1995 30.2 49.2 9.9 8.2 .2 97.7 1994 29.4 40.6 11.3 7.6 .4 89.3 Investments in and advances to unconsolidated affiliates 1996 121.5 46.9 -- 11.1 -- 179.5 1995 130.3 47.9 -- 10.9 -- 189.1 Identifiable assets 1996 1,032.1 1,852.8 681.2 207.1 342.5 4,115.7 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3
Sales to unaffiliated customers exclude intersegment sales between bauxite and alumina and aluminum processing of $181.6, $159.7 and $146.8 for the years ended December 31, 1996, 1995 and 1994, 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 The Company's operations are located in many foreign countries, including Australia, Canada, the Peoples Republic of China, Ghana, Jamaica, and the United Kingdom. Foreign operations in general may be more vulnerable than domestic operations due to a variety of political and other risks. Sales and transfers among geographic areas are made on a basis intended to reflect the market value of products. Geographical area information relative to operations is summarized as follows:
Years Other Ended Domestic Caribbean Africa Foreign Eliminations Total --------------------------------------------------------------------------- Sales to unaffiliated customers 1996 $1,962.8 $ 201.8 $ 198.3 $ 180.4 $ -- $2,543.3 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 Sales and transfers among geographic areas 1996 -- 116.9 -- 206.0 (322.9) -- 1995 -- 79.6 -- 191.5 (271.1) -- 1994 -- 98.7 -- 139.4 (238.1) -- Operating income (loss) 1996 37.9 1.6 27.8 64.0 -- 131.3 1995 79.0 9.8 83.5 85.3 -- 257.6 1994 (65.3) 9.9 18.3 44.4 -- 7.3 Equity in earnings (loss) of unconsolidated affiliates 1996 2.6 -- -- 8.5 -- 11.1 1995 (.3) -- -- 19.4 -- 19.1 1994 (12.9) -- -- (2.1) -- (15.0) Investments in and advances to unconsolidated affiliates 1996 11.6 25.3 -- 142.6 -- 179.5 1995 12.1 27.1 -- 149.9 -- 189.1 Identifiable assets 1996 3,318.4 391.2 194.7 211.4 -- 4,115.7 1995 3,037.0 381.9 196.5 216.9 -- 3,832.3
Included in results of operations are aggregate foreign currency translation and transaction gains of $5.3 for the year ended December 31, 1995. Foreign currency translation and transaction gains were immaterial in 1996 and 1994. Export sales were less than 10% of total revenues during the years ended December 31, 1996, 1995 and 1994. For the years ended December 31, 1996 and 1995, sales to any one customer did not exceed 10% of consolidated revenues. For the year ended December 31, 1994, the Company had bauxite and alumina sales of $58.2 and aluminum processing sales of $147.7 to one customer. 12. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31, --------------------------------- 1996 1995 1994 --------------------------------- Supplemental information on non-cash investing and financing activities: Capital spending accrual excluded from investing activities $ 13.5 $ -- $ -- Contribution of property in exchange for joint venture interest, net of deferred gain of $8.6 -- 1.3 -- Net margin borrowings (repayments) for marketable securities -- (6.9) 5.9 Reduction of stockholders' deficit due to redemption of Kaiser preferred stock -- 136.2 -- Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 156.8 $ 162.8 $ 149.3 Income taxes paid, net 21.5 30.3 18.3
QUARTERLY FINANCIAL INFORMATION (UNAUDITED), MARKET FOR COMMON EQUITY AND RELATED MATTERS (In millions of dollars, except share amounts) - ------------------------------------------------------------------------------- Summary quarterly financial information for the years ended December 31, 1996 and 1995 is as follows:
Three Months Ended --------------------------------------------------- March 31 June 30 September 30 December 31 --------------------------------------------------- 1996: Net sales $ 612.2 $ 667.7 $ 641.2 $ 622.2 Operating income 53.2 46.0 9.6 22.5 Net income (loss) 5.8 16.9 5.3 (5.1) Per common and common equivalent share: Net income (loss) .61 1.78 .56 (.54) Common stock market price(1): High 48 7/8 50 7/8 45 47 3/4 Low 35 3/8 39 1/4 35 3/4 37 1/8 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 Common stock market price(1): High 33 1/8 36 1/8 67 5/8 48 5/8 Low 27 1/4 28 3/4 35 5/8 30 3/4 (1)The Company's common stock is traded on the American, Pacific and Philadelphia Stock Exchanges. The stock symbol is MXM. This 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.
EX-21 8 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. Texas Sam Houston Entertainment Corp. Texas Sam Houston Race Park, Ltd. (limited Texas partnership) OTHER MAXXAM Group Holdings Inc. Delaware
EX-23 9 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-54479. ARTHUR ANDERSEN LLP Houston, Texas March 24, 1997 EX-27 10
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-31-1996 JAN-01-1996 DEC-31-1996 1 336,600 50,300 205,900 5,200 634,800 1,477,400 2,067,400 769,500 4,115,700 743,500 1,951,500 0 300 5,000 (56,100) 4,115,700 2,543,300 2,543,300 2,085,000 2,085,000 327,000 0 184,500 (12,100) (44,900) 22,900 0 0 0 22,900 2.42 2.42
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