-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RYzmutPGI5vo9EfAYhAtoxI2FyV/mwYU7ZrSydqO8ub4HMdRbAZRB4geoObyIMn4 zn/3wPt5I/4X10tihOpT1A== 0000900421-94-000006.txt : 19940404 0000900421-94-000006.hdr.sgml : 19940404 ACCESSION NUMBER: 0000900421-94-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXAM GROUP INC /DE/ CENTRAL INDEX KEY: 0000764542 STANDARD INDUSTRIAL CLASSIFICATION: 2400 IRS NUMBER: 131310680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08857 FILM NUMBER: 94519379 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139757600 MAIL ADDRESS: STREET 1: P O BOX 572887 STREET 2: P O BOX 572887 CITY: HOUSTON STATE: TX ZIP: 77257-2887 10-K 1 MAXXAM GROUP INC. 1993 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 Commission File Number 1- 8857 MAXXAM GROUP INC. (Exact name of Registrant as Specified in its Charter) DELAWARE 13-1310680 (State or other (I.R.S. Employer jurisdiction Identification Number) of incorporation or organization) 5847 SAN FELIPE, SUITE 2600 HOUSTON, TEXAS 77057 (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (713) 975-7600 __________________ Securities registered pursuant to Section 12(b) of the Act: None. 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 / / Shares of Common Stock outstanding at March 15, 1994: 100 All of the Registrant's voting stock is held by an affiliate of the Registrant. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. DOCUMENTS INCORPORATED BY REFERENCE The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation are incorporated herein by reference and included as Exhibit 99 hereto. MAXXAM GROUP INC. PART I ITEM 1. BUSINESS GENERAL MAXXAM Group Inc. and its majority and wholly owned subsidiaries are collectively referred to herein as the "Company" or "MGI" unless otherwise indicated or the context indicates otherwise. The Company is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). As a result of the Forest Products Group Formation described in the following paragraph, the Company is engaged almost exclusively in forest products operations through its 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"). Pacific Lumber, which has been in continuous operation for 125 years, engages in all principal aspects of the lumber industry--the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber products and the manufacturing of lumber into a variety of value-added finished products. Britt manufactures redwood and cedar fencing and decking products from small diameter logs, a substantial portion of which Britt acquires from Pacific Lumber (which cannot efficiently process them in its own mills). FOREST PRODUCTS GROUP FORMATION On August 4, 1993, the Company issued $100 million aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and $126.7 million aggregate principal amount (approximately $70 million net of original issue discount) of 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes" and together with the MGI Senior Notes, the "MGI Notes"). In connection with such offering, the Company reorganized its operations so that it would be engaged in the forest products business (the "Forest Products Group Formation"). Prior to the Forest Products Group Formation, the Company also operated in two other industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer, and real estate management and development, through the Palmas del Mar development located in Puerto Rico ("Palmas") owned by a subsidiary of the Company. On August 4, 1993, the Company (i) transferred to MAXXAM 50 million shares of Kaiser's common stock held by a subsidiary of the Company, representing the Company's entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of MAXXAM's common stock held by a subsidiary of the Company, (iii) transferred to MAXXAM certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to the Company of approximately $1.1 million, and (iv) exchanged with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser in June 1993 for $15.0 million, such exchange being in satisfaction of a $15.0 million promissory note evidencing a cash loan made by MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed approximately $17.5 million of certain liabilities of the Company that were unrelated to the Company's forest products operations or were related to operations which have been disposed of by the Company. Additionally, in September 1993, the Company transferred to MAXXAM its interest in Palmas. PACIFIC LUMBER REFINANCING On March 23, 1993 (the "Closing Date"), Pacific Lumber transferred (the "Transfer") approximately 179,000 acres of timberlands (the "Subject Timberlands"), its geographical information system and certain other assets to its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), in exchange for (i) the assumption by SPHC of $323.4 million of Pacific Lumber's public indebtedness consisting of all of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes") and a portion of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (ii) all of SPHC's outstanding common stock. SPHC was organized as a special purpose Delaware corporation to facilitate the Transfer and the offering of the Timber Notes described below. The Subject Timberlands consist substantially of residual old growth and young growth redwood and Douglas-fir timber. On the Closing Date, Pacific Lumber and SPHC entered into a Master Purchase Agreement, a Services Agreement, an Additional Services Agreement and certain other agreements providing for a variety of ongoing relationships. See "Pacific Lumber Operations-- Relationships with SPHC and Britt Lumber." On the Closing Date, Pacific Lumber also transferred to its newly-formed wholly owned subsidiary, Salmon Creek Corporation ("Salmon Creek"), in exchange for all of Salmon Creek's common stock, approximately 3,000 contiguous acres of its virgin old growth redwood timber, together with approximately 3,000 additional acres of adjacent timberlands owned by Pacific Lumber which could not be readily segregated from such virgin old growth redwood timberlands (collectively, the "Salmon Creek Property"). Pacific Lumber retained the exclusive right to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-contiguous acres of the Subject Timberlands consisting substantially of virgin old growth redwood and virgin old growth Douglas-fir timber located on numerous small parcels throughout the Subject Timberlands. In addition, Pacific Lumber retained its lumber milling, manufacturing, cogeneration and related facilities, as well as approximately 11,000 acres of real property located in Humboldt County, California, which do not constitute part of the Subject Timberlands (collectively, the "Pacific Lumber Real Property"). The Pacific Lumber Real Property consists of the town of Scotia, the land on which Pacific Lumber's sawmills, manufacturing facilities and related facilities are located and areas adjacent thereto, certain potential residential and commercial development sites and other areas, including timberlands owned by Pacific Lumber which cannot be readily segregated from the foregoing properties. Pacific Lumber is milling logs and producing and marketing lumber products from timber located on the timberlands of SPHC, Pacific Lumber and Salmon Creek in substantially the same manner as conducted prior to the Transfer. Pacific Lumber is, pursuant to the Master Purchase Agreement, harvesting and purchasing from SPHC all or substantially all of the logs harvested from the Subject Timberlands. See "--Pacific Lumber Operations--Relationships with SPHC and Britt Lumber" below. On the Closing Date, Pacific Lumber consummated its offering of $235 million aggregate principal amount of 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and SPHC consummated its offering of $385 million aggregate principal amount of 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). The net proceeds of such offerings, together with cash and marketable securities, were used to redeem all of Pacific Lumber's outstanding public indebtedness (including the amounts assumed by SPHC), to make required deposits into certain accounts for the benefit of the holders of the Timber Notes, to repay Pacific Lumber's cogeneration loan and to pay a $25.0 million dividend to MAXXAM Properties Inc., a subsidiary of the Company ("MPI"). Substantially all of SPHC's assets, including the Subject Timberlands, were pledged as security for the Timber Notes. PACIFIC LUMBER OPERATIONS TIMBERLANDS Pacific Lumber owns and manages approximately 187,000 acres of commercial timberlands in Humboldt County in northern California. These timberlands contain approximately three-quarters redwood and one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually contiguous, is located in close proximity to its sawmills and contains an extensive (1,100 mile) network of roads. These factors significantly reduce harvesting costs and facilitate Pacific Lumber's forest management techniques. The extensive roads throughout Pacific Lumber's timberlands facilitate log hauling, serve as fire breaks and allow Pacific Lumber's foresters access to employ forest stewardship techniques which protect the trees from forest fires, erosion, insects and other damage. The forest products industry grades lumber in various classifications according to quality. The two broad categories within which all grades fall, based on the absence or presence of knots, are called "upper" and "common" grades, respectively. "Old growth" trees, often defined as trees which have been growing for approximately 200 years or longer, have a higher percentage of upper grade lumber than "young growth" trees (those which have been growing for less than 200 years). "Virgin" old growth trees are located in timber stands that have not previously been harvested. "Residual" old growth trees are located in timber stands which have been selectively harvested in the past. Pacific Lumber has engaged in extensive efforts, at relatively low cost, to supplement the natural regeneration of timber and increase the amount of timber on its timberlands. Regeneration of redwood timber generally is accomplished through the natural growth of redwood sprouts from the stump remaining after a redwood tree is harvested. Such new redwood sprouts grow quickly, thriving on existing mature root systems. In addition, Pacific Lumber supplements natural redwood generation by planting redwood seedlings. Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost entirely by planting seedlings. During the 1992-93 planting season (December through March), Pacific Lumber planted approximately 488,000 redwood and Douglas-fir seedlings at a cost of approximately $215,500. HARVESTING PRACTICES The ability of Pacific Lumber to sell logs or lumber products will depend, in part, upon its ability to obtain regulatory approval of timber harvesting plans ("THPs"). THPs are required to be filed with the California Department of Forestry ("CDF") prior to the harvesting of timber and are designed to comply with existing environmental laws and regulations. The CDF's evaluation of proposed THPs incorporates review and analysis of such THPs provided by several California and federal agencies and public comments received with respect to such THPs. An approved THP is applicable to specific acreage and specifies the harvesting method and other conditions relating to the harvesting of the timber covered by such THP. The method of harvesting as set forth in a THP is chosen from among a number of accepted methods based upon suitability to the particular site conditions. Pacific Lumber maintains a detailed geographical information system covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties, including timber type, tree class, wildlife data, roads, rivers and streams. By carefully monitoring and updating this data base, Pacific Lumber's foresters are able to develop detailed THPs which are required to be filed with and approved by the CDF prior to the harvesting of timber. Pacific Lumber principally harvests trees through selective harvesting, which harvests only a portion of the trees in a given area, as opposed to clearcutting, which harvests an entire area of trees in one logging operation. Selective harvesting generally accounts for over 90% (by volume on a net board foot basis) of Pacific Lumber's timber harvest in any given year. Harvesting by clearcutting is used only when selective harvesting methods are impractical due to unique conditions. Selective harvesting allows the remaining trees to obtain more light, nutrients and water thereby promoting faster growth rates. Due to the size of its timberlands and conservative harvesting practices, Pacific Lumber has historically conducted harvesting operations on approximately 5% of its timberlands in any given year. PRODUCTION FACILITIES Pacific Lumber owns four highly mechanized sawmills and related facilities located in Scotia, Fortuna and Carlotta, California. The sawmills historically have been supplied almost entirely from timber harvested from Pacific Lumber's timberlands. Since 1986, Pacific Lumber has implemented numerous technological advances which have increased the operating efficiency of its production facilities and the recovery of finished products from its timber. Over the past three years, Pacific Lumber's annual lumber production has averaged approximately 249 million board feet, with approximately 228, 264 and 256 million board feet produced in 1993, 1992 and 1991, respectively. Pacific Lumber operates a finishing plant which processes rough lumber into a variety of finished products such as trim, fascia, siding and paneling. These finished products include the industry's largest variety of customized trim and fascia patterns. Pacific Lumber also enhances the value of some grades of common grade lumber by cutting out knot-free pieces and reassembling them into longer or wider pieces in Pacific Lumber's state-of-the-art end and edge glue plant. The result is a standard sized upper grade product which can be sold at a significant premium over common grade products. Pacific Lumber dries the majority of its upper grade lumber before it is sold. Upper grades of redwood lumber are generally air-dried for six to eighteen months and then kiln-dried for seven to twenty-four days to produce a dimensionally stable and high quality product which generally commands higher prices than "green" lumber (which is lumber sold before it has been dried). Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of approximately 95 million board feet, to dry its upper grades of lumber efficiently in order to produce a quality, premium product. Pacific Lumber also maintains several large enclosed storage sheds which hold approximately 25 million board feet of lumber. In addition, Pacific Lumber owns and operates a modern 25-megawatt cogeneration power plant which is fueled almost entirely by the wood residue from Pacific Lumber's milling and finishing operations. This power plant generates substantially all of the energy requirements of Scotia, California, the town adjacent to Pacific Lumber's timberlands owned by Pacific Lumber where several of its manufacturing facilities are located. Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 1993, the sale of surplus power to Pacific Gas and Electric Company accounted for approximately 2% of Pacific Lumber's total revenues. In April 1992, an earthquake and a series of aftershocks occurred in northern California which produced a significant amount of damage in and around the area where Pacific Lumber's forest products operations are located. Standing timber on Pacific Lumber's timberlands suffered virtually no damage; however, among other damage, a large number of kilns used to dry upper grade redwood lumber and two sawmills were damaged, including one sawmill which was not operational for a period of approximately six weeks. Pacific Lumber maintains insurance coverage with respect to damage to its property and the disruption of its business from earthquakes. Consistent with its past practices and the owners of most other timber tracts in the United States, Pacific Lumber does not maintain earthquake or fire insurance in respect of standing timber. PRODUCTS Lumber Pacific Lumber primarily produces and markets lumber. In 1993, Pacific Lumber sold approximately 240 million board feet of lumber, which accounted for approximately 82% of Pacific Lumber's total revenues. Lumber products vary greatly by the species and quality of the timber from which it is produced. Lumber is sold not only by grade (such as "upper" grade versus "common" grade), but also by board size and the drying process associated with the lumber. Redwood lumber is Pacific Lumber's largest product category, constituting approximately 81% of Pacific Lumber's total lumber revenues and 67% of Pacific Lumber's total revenues in 1993. Redwood is commercially grown only along the northern coast of California and possesses certain unique characteristics which permit it to be sold at a premium to many other wood products. Such characteristics include its natural beauty, superior ability to retain paint and other finishes, dimensional stability and innate resistance to decay, insects and chemicals. Typical applications include exterior siding, trim and fascia for both residential and commercial construction, outdoor furniture, decks, planters, retaining walls and other specialty applications. Redwood also has a variety of industrial applications because of its chemical resistance and because it does not impart any taste or odor to liquids or solids. Upper grade redwood lumber, which is derived primarily from old growth trees and is characterized by an absence of knots and other defects and a very fine grain, is used primarily in more costly and distinctive interior and exterior applications. During 1993, upper grade redwood lumber products accounted for approximately 25% of Pacific Lumber's total lumber production volume (on a net board foot basis), 49% of its total lumber revenues and 40% of its total revenues. Common grade redwood lumber, Pacific Lumber's largest volume product, has many of the same aesthetic and structural qualities of redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is commonly used for construction purposes, including outdoor structures such as decks, hot tubs and fencing. In 1993, common grade redwood lumber accounted for approximately 48% of Pacific Lumber's total lumber production volume (on a net board foot basis), 32% of its total lumber revenues and 26% of its total revenues. Douglas-fir lumber is used primarily for new construction and some decorative purposes and is widely recognized for its strength, hard surface and attractive appearance. Douglas-fir is grown commercially along the west coast of North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is derived primarily from old growth Douglas-fir timber and is used principally in finished carpentry applications. In 1993, upper grade Douglas-fir lumber accounted for approximately 5% of Pacific Lumber's total lumber production volume (on a net board foot basis), 8% of its total lumber revenues and 6% of its total revenues. Common grade Douglas-fir lumber is used for a variety of general construction purposes and is largely interchangeable with common grades of other whitewood lumber. In 1993, common grade Douglas-fir lumber accounted for approximately 22% of Pacific Lumber's total lumber production volume, 11% of its total lumber revenues and 9% of its total revenues. Logs Pacific Lumber currently sells certain logs that, due to their size or quality, cannot be efficiently processed by its mills into lumber. The purchasers of these logs are largely Britt, and surrounding mills which do not own sufficient timberlands to support their mill operations. In 1993, log sales accounted for approximately 10% of Pacific Lumber's total revenues. See "--Relationships with SPHC and Britt Lumber" below. Except for the agreement with Britt described below, Pacific Lumber does not have a significant contractual relationships with any third parties relating to the purchase of logs. Pacific Lumber has historically not purchased significant quantities of logs from third parties; however, Pacific Lumber may from time to time purchase logs from third parties for processing in its mills or for resale to third parties if, in the opinion of management, economic factors are advantageous to the Company. See also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Operating Income" for a description of 1993 log purchases by Pacific Lumber due to inclement weather conditions. Wood Chips In 1990, Pacific Lumber installed a whole-log chipper to produce wood chips from hardwood trees which were previously left as waste. These chips primarily are sold to third parties for the production of facsimile and other specialty papers. In 1993, hardwood chips accounted for approximately 3% of Pacific Lumber's total revenues. Pacific Lumber also produces softwood chips from the wood residue and waste from its milling and finishing operations. These chips are sold to third parties for the production of wood pulp and paper products. In 1993, softwood chips accounted for approximately 3% of Pacific Lumber's total revenues. BACKLOG AND SEASONALITY Pacific Lumber's backlog of sales orders at December 31, 1993 and 1992 was approximately $16.0 million and $15.4 million, respectively, the substantial portion of which was delivered in the first quarter of the succeeding fiscal year. Pacific Lumber has historically experienced lower first and fourth quarter sales due largely to the general decline in construction-related activity during the winter months. As a result, Pacific Lumber's results in any one quarter are not necessarily indicative of results to be expected for the full year. MARKETING The housing, construction and remodeling markets are the primary markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a wide distribution of its products both geographically and in terms of the number of customers. Pacific Lumber sells its lumber products throughout the country to a variety of accounts, the large majority of which are wholesalers, followed by retailers, industrial users, exporters and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold throughout the entire United States, as well as to export markets. Common grades of redwood lumber are sold principally west of the Mississippi river, with California accounting for approximately 60% of these sales in 1993. Common grades of Douglas-fir lumber are sold primarily in California. In 1993, no single customer accounted for more than 6% of Pacific Lumber's total revenues. Exports of lumber accounted for approximately 4% of Pacific Lumber's total lumber revenues in 1993. Pacific Lumber markets its products through its own sales staff which focuses primarily on domestic sales. Pacific Lumber actively follows trends in the housing, construction and remodeling markets in order to maintain an appropriate level of inventory and assortment of product. Due to its high quality products, large inventory, competitive prices and long history, Pacific Lumber believes that it has a strong degree of customer loyalty. COMPETITION Pacific Lumber's lumber is sold in highly competitive markets. Competition is generally based upon a combination of price, service and product quality. Pacific Lumber's products compete not only with other wood products but with metals, masonry, plastic and other construction materials made from non-renewable resources. The level of demand for Pacific Lumber's products is dependent on such broad factors as overall economic conditions, interest rates and demographic trends. In addition, competitive considerations, such as total industry production and competitors' pricing, as well as the price of other construction products, affect the sales prices for Pacific Lumber's lumber products. Pacific Lumber currently enjoys a competitive advantage in the upper grade redwood lumber market due to the quality of its timber holdings and relatively low cost production operations. Competition in the common grade redwood and Douglas-fir lumber market is more intense, and Pacific Lumber competes with numerous large and small lumber producers. EMPLOYEES As of March 1, 1994, Pacific Lumber had approximately 1,200 employees. RELATIONSHIPS WITH SPHC AND BRITT LUMBER On the Closing Date, Pacific Lumber and SPHC entered into a Services Agreement (the "Services Agreement") and an Additional Services Agreement (the "Additional Services Agreement"). Pursuant to the Services Agreement, Pacific Lumber provides operational, management and related services with respect to the Subject Timberlands containing timber of SPHC ("SPHC Timber") not performed by SPHC's own employees. Such services include the furnishing of all equipment, personnel and expertise not within the SPHC's possession and reasonably necessary for the operation and maintenance of the Subject Timberlands containing the SPHC Timber. In particular, Pacific Lumber is required to regenerate SPHC Timber, prevent and control loss of the SPHC Timber by fires, maintain a system of roads throughout the Subject Timberlands, take measures to control the spread of disease and insect infestation affecting the SPHC Timber and comply with environmental laws and regulations, including measures with respect to waterways, habitat, hatcheries and endangered species. Pacific Lumber also is required (to the extent necessary) to assist SPHC personnel in updating the GIS and to prepare and file, on SPHC's behalf, all pleadings and motions and otherwise diligently pursue appeals of any denial of any THP and related matters. As compensation for these and the other services to be provided by Pacific Lumber, SPHC pays a fee which is adjusted on January 1 of each year based on a specified government index relating to wood products. The fee was $100,000 per month in 1993 and is expected to be approximately $114,000 per month in 1994. Pursuant to the Additional Services Agreement, SPHC provides Pacific Lumber with a variety of services, including (a) assisting Pacific Lumber to operate, maintain and harvest its own timber properties, (b) updating and providing access to the GIS with respect to information concerning Pacific Lumber's own timber properties, and (c) assisting Pacific Lumber with its statutory and regulatory compliance. Pacific Lumber pays SPHC a fee for such services equal to the actual cost of providing such services, as determined in accordance with generally accepted accounting principles. Pacific Lumber and SPHC also entered into the Master Purchase Agreement on the Closing Date. The Master Purchase Agreement governs all purchases of logs by the Company from SPHC. Each purchase of logs by Pacific Lumber from SPHC is made pursuant to a separate log purchase agreement (which incorporates the terms of the Master Purchase Agreement) for the SPHC Timber covered by an approved THP. Each log purchase agreement generally constitutes an exclusive agreement with respect to the timber covered thereby, subject to certain limited exceptions. The purchase price must be at least equal to the SBE Price (as defined below). The Master Purchase Agreement provides that if the purchase price equals or exceeds (i) the price for such species and category thereof set forth on the structuring schedule applicable to the Timber Notes, and (ii) the SBE Price, then such price shall be deemed to be the fair market value of such logs. The Master Purchase Agreement defines the "SBE Price," for any species and category of timber, as the stumpage price for such species and category as set forth in the most recent "Harvest Value Schedule" published by the California State Board of Equalization applicable to the timber sold during the period covered by such Harvest Value Schedule. Such Harvest Value Schedules are published for purposes of computing yield taxes and generally are established every six months. As Pacific Lumber purchases logs from SPHC pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its own expense, for harvesting and removing the standing SPHC Timber covered by approved THPs and, thus, the purchase price thereof is based upon "stumpage prices." Title to the harvested logs does not pass to Pacific Lumber until the logs are transported to Pacific Lumber's log decks and measured. Substantially all of SPHC's revenues are derived from the sale of logs to Pacific Lumber under the Master Purchase Agreement. In connection with the Transfer, Pacific Lumber, SPHC and Salmon Creek also entered into a Reciprocal Rights Agreement granting to each other certain reciprocal rights of egress and ingress through their respective properties in connection with the operation and maintenance of such properties and their respective businesses. In addition, on the Closing Date, Pacific Lumber entered into an Environmental Indemnification Agreement with SPHC pursuant to which Pacific Lumber agreed to indemnify SPHC from and against certain present and future liabilities arising with respect to hazardous materials, hazardous materials contamination or disposal sites, or under environmental laws with respect to the Subject Timberlands. On the Closing Date, Pacific Lumber entered into an agreement with Britt which governs the sale of logs by Pacific Lumber and Britt to each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to each other, and the provision by Pacific Lumber of certain administrative services to Britt (including accounting, purchasing, data processing, safety and human resources services). The logs which Pacific Lumber sells to Britt and which are used in Britt's manufacturing operations are sold at approximately 75% of applicable SBE prices (to reflect the lower quality of these logs). Logs which either Pacific Lumber or Britt purchases from third parties and which are then sold to each other are transferred at the actual cost of such logs. Hog fuel is sold at applicable market prices, and administrative services are provided by Pacific Lumber based on Pacific Lumber's actual costs and an allocable share of Pacific Lumber's overhead expenses consistent with past practice. BRITT LUMBER OPERATIONS BUSINESS Britt is located in Arcata, California, approximately 45 miles north of Pacific Lumber's headquarters. Britt's primary business is the processing of small diameter redwood logs into wood fencing products for sale to retail and wholesale customers. Britt was incorporated in 1965 and operated as an independent manufacturer of fence products until July 1990, when it was purchased by a subsidiary of the Company. Britt purchases small diameter (6 to 14 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and a variety of different diameter and different length logs from various timberland owners. Britt processes logs at its mill into a variety of different fencing products, including "dog-eared" 1" to 6" fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and other fencing products in 6 through 12 foot lengths. Britt's purchases of logs from third parties are generally consummated pursuant to short-term contracts of twelve months or less. See "--Pacific Lumber Operations--Relationships with SPHC and Britt Lumber" for a description of Britt's log purchases from Pacific Lumber. MARKETING In 1993, Britt sold approximately 73 million board feet of lumber products to approximately 90 different customers, compared to 1992 sales of approximately 68 million board feet of lumber products to approximately 100 customers. In both years, over one-half of its sales were in northern California. The remainder of its 1993 and 1992 sales were in southern California, Arizona, Colorado, Hawaii and Nevada. The largest and top five of such customers accounted for approximately 33% and 46%, respectively, of such 1993 sales and 33% and 80%, respectively, of 1992 sales. Britt markets its products through its own sales person to a variety of customers, including distribution centers, industrial remanufacturers, wholesalers and retailers. FACILITIES AND EMPLOYEES Britt's manufacturing operations are conducted on 12 acres of land, 10 acres of which are leased on a long-term fixed-price basis from an unrelated third party. Fence production is conducted in a 46,000 square foot mill. An 18 acre log sorting and storage yard is located 1/4 mile away. The mill was constructed in 1980, and capital expenditures to enhance its output and efficiency are made on a yearly basis. Britt's (single shift) mill capacity, assuming 40 production hours per week, is estimated at 40.3 million board feet of fencing products per year. As of March 1, 1994, Britt employed approximately 100 people. COMPETITION Management estimates that Britt accounted for approximately 24% of the redwood fence market in 1993 in competition with the northern California mills of Louisiana Pacific and Georgia Pacific. REGULATORY AND ENVIRONMENTAL FACTORS Regulatory and environmental issues play a significant role in Pacific Lumber's forest products operations. Pacific Lumber's forest products operations are subject to a variety of California, and in some cases, federal laws and regulations dealing with timber harvesting, endangered species, and air and water quality. These laws include the California Forest Practice Act (the "Forest Practice Act"), which requires that timber harvesting operations be conducted in accordance with detailed requirements set forth in the Forest Practice Act and in the regulations promulgated thereunder by the California Board of Forestry (the "BOF"). The federal Endangered Species Act (the "ESA") and the California Endangered Species Act (the "CESA") provide in general for the protection and conservation of specifically listed fish, wildlife and plants which have been declared to be endangered or threatened. The California Environmental Quality Act ("CEQA") provides, in general, for protection of the environment of the state, including protection of air and water quality and of fish and wildlife. In addition, the California Water Quality Act requires, in part, that Pacific Lumber's operations be conducted so as to reasonably protect the water quality of nearby rivers and streams. Pacific Lumber does not expect that compliance with such existing laws and regulations will have a material adverse effect on its timber harvesting practices or future operating results. There can be no assurance, however, that future legislation, governmental regulations or judicial or administrative decisions would not adversely affect Pacific Lumber. Additional BOF regulations (i.e., late succession forest stand rules and sensitive watershed rules) went into effect March 1, 1994. These new regulations require, among other things, the inclusion of more information in THPs (concerning, among other things, timber generation systems, the presence or absence of fish, wildlife and plant species, and potentially impacted watersheds) and modification of certain timber harvesting practices to comply with the new regulations. In early March 1994, the BOF also approved silviculture with sustained yield rules. The Office of Administrative Law (the "OAL") is expected to (i) approve these proposed regulations, (ii) request additional review, information or action and resubmittal to the OAL, or (iii) reject the proposed regulations. These proposed regulations are scheduled to become effective on May 1, 1994, and if approved, will require additional information to be included in THPs (concerning, among other things, compliance with long-term sustained yield objectives) and modifications of certain timber harvesting practices (including the creation of buffer zones between harvest areas and increases in the amount of timber required to be retained in a harvest area). Various groups and individuals have filed objections with the CDF regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's THPs, and the Company expects that such groups and individuals will continue to file objections to certain of Pacific Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved THPs. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth timber on its property during the past few years. To date, litigation with respect to Pacific Lumber's THPs relating to young growth and residual old growth timber has been limited; however, no assurance can be given as to the extent of such litigation in the future. See Item 3. "Legal Proceedings--Pacific Lumber Environmental Litigation." In June 1990, the U.S. Fish and Wildlife Service (the "USFWS") designated the northern spotted owl as threatened under the ESA. The State of California also has adopted regulations designed to protect the northern spotted owl, although the northern spotted owl has not been listed as threatened or endangered under the CESA. The owl's range includes all of Pacific Lumber's timberlands. The ESA and its implementing regulations generally prohibit harvesting operations in which individual owls might be killed, displaced or injured or which result in significant habitat modification that could impair the survival of individual owls or the species as a whole. Since 1988, biologists have conducted inventory and habitat utilization studies of northern spotted owls on Pacific Lumber's timberlands. The USFWS has given its full concurrence to a northern spotted owl management plan (the "Owl Plan"), a comprehensive wildlife management plan submitted by Pacific Lumber with respect to the northern spotted owl. Pacific Lumber incorporates this plan into each THP filed with the CDF and is no longer required to receive individual approval of its northern spotted owl conservation practices in connection with each THP it submits. The Owl Plan enables Pacific Lumber to expedite the approval process with respect to its THPs. Both federal and state agencies continue to review and consider possible additional regulations regarding the northern spotted owl. It is uncertain if such additional regulations will become effective or their ultimate content. On March 12, 1992, the marbled murrelet was approved for listing as endangered under the CESA. Pacific Lumber has incorporated, and will continue to incorporate, additional mitigation measures into its THPs to protect and maintain habitat for marbled murrelets on its timberlands. The California Department of Fish and Game (the "CDFG") requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys and to provide certain other site specific mitigations in connection with its THPs covering virgin old growth timber and unusually dense stands of residual old growth timber. Such surveys can only be conducted during April to July, the murrelets' nesting and breeding season. Accordingly, such surveys are expected to delay the approval process with respect to certain of the THPs filed by Pacific Lumber. The results of such surveys could prevent Pacific Lumber from conducting certain of its harvesting operations. In October 1992, the USFWS issued its final rule listing the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California. In January 1994, the USFWS proposed designation of critical habitat for the marbled murrelet under the ESA. This proposal is subject to public comment, hearings and possible future modification. Both federal and state agencies continue to review and consider possible additional regulations regarding the marbled murrelet. It is uncertain if such additional regulations will become effective or their ultimate content. Pacific Lumber's wildlife biologist is conducting research concerning the marbled murrelet on Pacific Lumber's timberlands and is currently developing a comprehensive management plan for the marbled murrelet (the "Murrelet Plan") similar to the Owl Plan. Pacific Lumber is continuing to work with the USFWS and the other government agencies on the Murrelet Plan. It is uncertain when the Murrelet Plan will be completed and approved. In October 1993, the USFWS received a petition proposing listing the coho salmon (which is found on Pacific Lumber's property) as threatened or endangered. Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. A variety of bills are currently pending in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection and the restriction, regulation and administration of timber harvesting practices. For example, the U.S. Congressman for the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, incorporate within the boundaries of an existing national forest approximately 42,000 acres of Pacific Lumber's timberlands and would designate approximately 12,000 acres of Pacific Lumber's timberlands to be studied for possible inclusion within such national forest. Corresponding legislation has been introduced in the California legislature. These 54,000 acres constitute approximately 30% of Pacific Lumber's timberlands. Since this and the other bills are subject to amendment, it is premature to assess the ultimate content of these bills, the likelihood of any of the bills passing, or the impact of any of these bills on the financial position or results of operations of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements, administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or consolidated financial position of the Company. ITEM 2. PROPERTIES A description of the Company's properties is included under Item 1 above ITEM 3. LEGAL PROCEEDINGS PACIFIC LUMBER MERGER LITIGATION During the mid-to-late 1980's, Pacific Lumber was named as defendant along with several other entities and individuals, including MAXXAM and MGI, in various class, derivative and other actions brought in the Superior Court of Humboldt County by former stockholders of Pacific Lumber relating to the cash tender offer (the "Tender Offer") for the shares of Pacific Lumber by a subsidiary of MGI and the subsequent merger (the "Merger"), as a result of which Pacific Lumber became a wholly-owned subsidiary of MGI (the "Humboldt County Lawsuits"). The Humboldt County Lawsuits which remain open are captioned: Fries, et al. v. Carpenter, et al. (No. 76328) ("Fries State"); Omicini, et al. v. The Pacific Lumber Company, et al. (No. 76974) ("Omicini"); Thompson, et al. v. Elam, et al. (No. 78467) ("Thompson State"); and Russ, et al. v. Milken, et al. (No. DR-85429) ("Russ"). The Humboldt County Lawsuits generally allege, among other things, that in documents filed with the Securities and Exchange Commission (the "Commission"), the defendants made false statements concerning, among other things, the estimated value of Pacific Lumber's assets, financing for the Tender Offer and the Merger and minority stockholders' appraisal rights, and that the individual directors of Pacific Lumber breached certain fiduciary duties owed stockholders and other constituencies of Pacific Lumber. MGI and MAXXAM are alleged to have aided and abetted these violations and committed other wrongs. The Thompson State, Omicini and Fries State suits seek compensatory damages in excess of $1 billion, exemplary damages in excess of $750 million, rescission and other relief. The Russ suit does not specify the amount of damages sought. There has been no activity in the Fries State case since 1987 nor in the Omicini case since 1986. The Thompson State and Russ actions are stayed pending the outcome of the In re Ivan F. Boesky Multidistrict Securities Litigation described below. In 1988, the plaintiffs in the Fries State action filed another action entitled Fries, et al. v. Hurwitz, et al. (No. 88-3493 RMT), in United States District Court, Central District of California ("Fries Federal") against Pacific Lumber, MGI, MAXXAM and others. Fries Federal repeats many of the allegations and seeks damages and relief similar to that contained in the Humboldt County Lawsuits, and, among other things, asserts that the defendants violated RICO and the Hart-Scott-Rodino Antitrust Improvements Act, and further alleges that, as a result of alleged arrangements between Ivan F. Boesky and others, MGI beneficially owned, for purposes of Pacific Lumber's bylaws, more than 5% of Pacific Lumber's outstanding shares so that the Merger required the approval of 80% of the outstanding shares rather than a majority. In 1988, plaintiffs in the Thompson State action and others filed a complaint in the United States District Court, Central District of California, entitled Thompson, et al. v. MAXXAM Group Inc., et al. (No. 88-06274) ("Thompson Federal"). The defendants in the Thompson Federal action include Pacific Lumber, MGI, MAXXAM and others. This action, as amended, repeats the allegations, asserts claims and seeks damages and relief similar to that contained in the Fries Federal and Fries State actions. In May 1989, the Thompson Federal and Fries Federal actions were consolidated in the In re Ivan F. Boesky Multidistrict Securities Litigation in the United States District Court, Southern District of New York (MDL No. 732 M 21-45-MP) ("Boesky"). An additional action filed in November 1989, entitled American Red Cross, et al. v. Hurwitz, et al. (No. 89 Civ 7722) ("American Red Cross"), has been consolidated with the Boesky action. The American Red Cross action contains allegations and seeks damages and relief similar to that contained in the Russ, Thompson Federal and Fries Federal actions. In September 1990, the Court in the Boesky action certified a class of plaintiffs comprised of persons who sold their shares in Pacific Lumber on or after September 27, 1985. Various plaintiffs in the Boesky action have opted out of the certified class of plaintiffs and are prosecuting their claims individually within the Boesky proceeding. The Boesky action has been set for trial commencing April 11, 1994. In September 1989, seven past and present employees of Pacific Lumber brought an action against Pacific Lumber, MAXXAM, MGI, certain current and former directors and officers of Pacific Lumber, MAXXAM and MGI, and First Executive Life Insurance Company ("First Executive") (subsequently dismissed as a defendant) in the United States District Court, Northern District of California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) ("Kayes"). Plaintiffs purport to be participants in or beneficiaries of Pacific Lumber's former Retirement Plan (the "Retirement Plan") for whom a group annuity contract was purchased from Executive Life Insurance Company ("Executive Life") in 1986 after termination of the Retirement Plan. The Kayes action alleges that the Pacific Lumber, MAXXAM and MGI defendants breached their ERISA fiduciary duties to participants and beneficiaries of the Retirement Plan by purchasing the group annuity contract from First Executive and selecting First Executive to administer the annuity payments. Plaintiffs seek, among other things, a new group annuity contract on behalf of the Retirement Plan participants and beneficiaries. This case was dismissed on April 14, 1993 and was refiled as Jack Miller, et al. v. Pacific Lumber Company, et al. (No. C-89- 3500-SBA) ("Miller") on April 26, 1993; the Miller case was dismissed on May 14, 1993. These dismissals have been appealed. On October 28, 1993, a bill amending ERISA, was passed by the U.S. Senate which appears to be intended, in part, to overturn the District Court's dismissal of the Miller action and to make available certain remedies. This bill has not been voted upon by the House of Representatives. It is impossible to say if the bill will be enacted or if enacted its ultimate content. In June 1991, the U.S. Department of Labor filed a civil action entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in the United States District Court, Northern District of California, against Pacific Lumber, MAXXAM, MGI and certain of their current and former officers and directors. The allegations in the DOL civil action are substantially similar to that in the Kayes action. The DOL civil action has been stayed pending resolution of the Kayes and Miller appeals. Management is of the opinion that the outcome of the foregoing litigation is unlikely to have a material adverse effect on the Company's consolidated financial position. Management is unable to express an opinion as to whether the outcome of such litigation is unlikely to have a material adverse effect on the Company's results of operations in respect of any fiscal year. In April 1991, the California Commissioner of Insurance (the "Commissioner") filed for conservatorship of Executive Life in Los Angeles County Superior Court in proceedings entitled Insurance Commissioner of the State of California v. Executive Life Insurance Co. and Does 1-1000 (Case No. BS006912) ("Executive Life Conservatorship"). In September 1993, the final rehabilitation plan for Executive Life (the "Plan") was closed. The Commissioner expects that for nearly all policyholders who chose to remain with Aurora National Life Assurance Corporation, the new owner and successor of Executive Life ("Aurora"), such persons will receive full payments. Policyholders who chose to "opt-out" of the Plan (i.e., chose to terminate their policy and cash in at a discounted rate), will be paid in accordance with their choice to opt-out. PACIFIC LUMBER ENVIRONMENTAL LITIGATION Various actions, similar to each other, have been filed against Pacific Lumber, MAXXAM, MGI, various state officials and others, alleging, among other things, violations of the Forest Practices Act, the CEQA, ESA, CESA, and/or related regulations. These actions seek to prevent Pacific Lumber from harvesting certain of its THPs. The Sierra Club, et al. v. State Board of Forestry, et al. (No. 82371) action in Superior Court of Humboldt County, filed by the Sierra Club and the Environmental Protection Information Center ("EPIC") in 1988, relates to two THPs for approximately 82 and 237 acres, respectively, of Pacific Lumber's virgin old growth timber. On appeal, the Court of Appeal overturned the Superior Court's decision upholding the BOF's approval of the two THPs. Pacific Lumber appealed the Court of Appeal decision and in June 1992 the California Supreme Court granted Pacific Lumber's petition for review. This matter is still pending before the California Supreme Court. Harvesting has been stayed pending outcome of the appeal. The Sierra Club, et al. v. The California Department of Forestry, et al. (No. 82983) and Sierra Club, et al. v. The California Department of Forestry, et al. (No. 83428) actions in the Superior Court of Humboldt County, each filed by the Sierra Club and EPIC in 1988, relate to two THPs for approximately 230 and 226 acres, respectively, of virgin old growth timber. Initially, the Superior Court ruled in favor of Pacific Lumber and dismissed these cases. After plaintiffs' appeal, the cases were remanded to Superior Court for trial. On remand, the decision of the Superior Court in each action prevented Pacific Lumber from harvesting the contested THP. Both decisions were appealed to the Court of Appeal, which in December 1993, affirmed the trial court's judgments reversing the approval of the THPs. In February 1994, Pacific Lumber sought review of this case by the California Supreme Court. In March 1994, the California Supreme Court affirmed the decision of the Court of Appeal, but ordered the decision of the Court of Appeal depublished, rendering it without precedential value. The Sierra Club, et al. v. The California Department of Forestry, et al. (No. DR84664) action in the Superior Court of Humboldt County, filed by the Sierra Club and EPIC in 1989, seeks substantially the same relief requested in the Sierra Club action No. 83428 cited above. After the Superior Court dismissed this action and imposed sanctions on plaintiffs based on the pending resolution of Sierra Club III, the plaintiffs appealed the sanction decision. The Court of Appeal remanded the action back to the Superior Court for further review. The EPIC v. The California Department of Forestry, et al. (No. 90CP0341) action in Superior Court of Humboldt County, filed by EPIC in May 1990, relates to a THP for approximately 378 acres of virgin old growth timber. A nearly identical action in Superior Court of Humboldt County, entitled Sierra Club v. The California Department of Forestry, et al. (No. 90CP0405), was brought by the Sierra Club in June 1990. These actions were subsequently consolidated and after a trial on the merits, the Superior Court in June 1992 issued its judgment in favor of Pacific Lumber and affirming the BOF's approval of this THP. The trial court's decision was appealed and the matter is still pending before the Court of Appeal. Except for certain previously felled trees, all timber harvesting operations have been stayed pending the outcome of the appeal. The EPIC, et al. v. California State Board of Forestry, et al. (No. 91CP244) action in the Superior Court of Humboldt County, filed by the Sierra Club and EPIC in 1991, relates to a THP for approximately 237 acres of virgin old growth timber ("THP 90-237"). 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 THP 90-237. In April 1993, EPIC filed another action with respect to THP 90-237 entitled Marbled Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et al. (No. C93-1400) in the U.S. District Court for the Northern District of California, alleging an unlawful "taking" of the marbled murrelet. The Court has dismissed the federal and state agency defendants and limited plaintiffs' claims against Pacific Lumber. In January 1994, plaintiffs appealed the dismissal of the state and federal defendants. Harvesting has been stayed pending outcome of the trial which is scheduled to commence in July 1994. The Lost Coast League v. The California Department of Forestry, et al. (No. 94DR0046) action in Superior Court of Humboldt County, filed in February 1994, relates to a THP for approximately 121 acres of primarily virgin old growth timber. On March 10, 1994, the Court heard plaintiff's request for a preliminary injunction, took the matter under submission, and issued a stay of timber harvesting while the Court reviews the matter. The Company's management believes that the matters described above are unlikely to have a material adverse effect on the Company's consolidated financial position or results of operations. See Item 1. "Business--Regulatory and Environmental Factors" above for a general description of regulatory and similar matters which could effect Pacific Lumber's timber harvesting practices and future operating results. Pacific Lumber is also involved as a plaintiff, directly and indirectly, in various legal proceedings relating to its timber harvesting operations. For example, Redwood Coast Watersheds Alliance v. California State Board of Forestry, et al. (No. 932123), in the Superior Court of San Francisco, California, challenges certain BOF regulations; Marbled Murrelet, et al. v. Bruce Babbitt, et al. (No. C92-522WDR), in the U.S. District Court for the Western District of Washington, challenges the USFWS's delay in listing as threatened, and designating critical habitat for, the marbled murrelet under the ESA; The Pacific Lumber Company v. California State Board of Forestry (No. 366197), in the Superior Court of Sacramento County, California, challenges the denial of two Pacific Lumber THPs for the harvest of approximately 558 acres of virgin old growth timber; The Pacific Lumber Company v. California Department of Fish & Game, et al. (No. 370562), in the Superior Court of Sacramento County, California, challenges the listing of the marbled murrelet as endangered under the CESA; Northwest Forest Resource Council, et al. v. Bruce Babbitt, et al. (No. 93-1579), in the U.S. District Court, District of Columbia, challenges the listing of the marbled murrelet as a threatened species under the ESA in the tri-state area of Washington, Oregon and California; and Sierra Club, et al. v. California State Board of Forestry, et al. (No. 95104), in the Superior Court of San Francisco County, California, challenges the approval of certain BOF regulations. ZERO COUPON NOTE LITIGATION In April 1989, an action was filed against the Company, MAXXAM, MPI and certain of MAXXAM's directors in the Court of Chancery of the State of Delaware, entitled Progressive United Corporation v. MAXXAM Inc., et al., Civil Action No. 10785. Plaintiff purports to bring this action as a stockholder of MAXXAM derivatively on behalf of MAXXAM and MPI. In May 1989, a second action containing substantially similar allegations was filed in the Court of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. (No. 10846) and the two cases were consolidated (collectively, the "Zero Coupon Note" actions). The Zero Coupon Note actions relate to a Put and Call Agreement between MPI and Mr. Charles Hurwitz (Chairman of the Board of the Company, MAXXAM and MPI), as well as a predecessor agreement (the "Prior Agreement"). Among other things, the Put and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase from MPI certain notes (or the common stock of MAXXAM into which they were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call and acquired 990,400 shares of MAXXAM's common stock. The Zero Coupon Note actions generally allege that in entering into the Prior Agreement Mr. Hurwitz usurped a corporate opportunity belonging to MAXXAM, that the Put and Call Agreement constituted an alleged waste of corporate assets of MAXXAM and MPI, and that the defendant directors breached their fiduciary duties in connection with these matters. Plaintiffs seek to have the Put and Call Agreement declared null and void, among other remedies. OTHER LITIGATION MATTERS The Company and certain of its subsidiaries are also involved in other claims and litigation, both as plaintiffs and defendants, in the ordinary course of business. Management is of the opinion that the outcome of such other litigation will not have a material adverse effect upon the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. MAXXAM GROUP INC. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is held entirely by MAXXAM. Accordingly, the Company's common stock is not traded on any stock exchange and has no established public trading market. Provisions in the indenture governing the Notes contain certain restrictions on transactions with affiliates and the payment of dividends. As of December 31, 1993, no dividends may be paid by the Company. The Company declared and paid cash dividends on its common stock of $20.0 million and $110.9 million in 1993 and 1991, respectively. The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by a pledge of 28 million common shares of Kaiser that are owned by MAXXAM. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Consolidated Financial Statements appearing in Item 8. ITEM 6. SELECTED FINANCIAL DATA Not applicable. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the Forest Products Group Formation, the Company's financial statements have been restated to present the historical results of operations relating to the net assets transferred to MAXXAM pursuant to the Forest Products Group Formation. Such restatement has been made with respect to all periods presented in this Report in a manner similar to that which would be presented if the Company had discontinued the operations relating to such net assets. RESULTS OF OPERATIONS The following should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing in Item 8. The following table presents selected historical operational and financial information for the years ended December 31, 1993, 1992 and 1991.
Years Ended December 31, 1993 1992 1991 ---------- ---------- ----------- (In millions of dollars, except shipments and prices) Shipments: Lumber (1): Redwood upper grades 68.3 76.6 86.7 Redwood common grades 184.7 193.9 197.2 Douglas-fir upper grades 10.7 10.2 11.7 Douglas-fir common grades 46.4 56.0 37.8 -------- -------- -------- Total lumber 310.1 336.7 333.4 ======== ======== ======== Logs (2) 18.6 19.1 14.5 ======== ======== ======== Wood chips (3) 156.8 202.7 168.4 ======== ======== ======== Average sales price: Lumber (4): Redwood upper grades $1,275 $1,141 $1,085 Redwood common grades 469 427 347 Douglas-fir upper grades 1,218 1,125 1,033 Douglas-fir common grades 447 298 262 Logs (4) 704 366 373 Wood chips (5) 81 83 79 Net sales: Lumber, net of discount $202.6 $194.2 $180.2 Logs 13.1 7.0 5.4 Wood chips 12.7 16.9 13.4 Cogeneration power 3.8 3.7 4.8 Other 1.2 1.5 1.9 -------- --------- -------- Total net sales $233.4 $223.3 $205.7 ======== ======== ======== Operating income $53.0 $62.5 $53.2 ======== ======== ======== Loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in $(17.7) $(24.7) $(16.4) accounting principles ======== ======== ======== Income (loss) from net assets transferred to MAXXAM, net of minority interests and related income taxes $(513.0) $33.7 $100.1 ======== ======== ======== Net income (loss) $(531.9) $7.7 $78.0 ======== ======== ======== Capital expenditures $11.1 $8.7 $6.4 ======== ======== ======== (1) Lumber shipments are expressed in millions of board feet. (2) Log shipments are expressed in millions of board feet, net Scribner scale. (3) Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds. (4) Dollars per thousand board feet. (5) Dollars per bone dry unit.
Shipments Lumber shipments to third parties in 1993 were 310.1 million board feet, a decrease of 8% from 336.7 million board feet in 1992. This decrease was attributable to a 5% decrease in redwood common lumber shipments, a 14% decrease in shipments of Douglas-fir lumber and an 11% decrease in shipments of upper grade redwood lumber. The Company believes the decrease in total lumber shipments was caused primarily by a decline in construction related activity resulting from weak economic conditions in the Western region of the United States and, to a lesser extent, by the difficulties related to weather conditions in the West and Midwestern United States during 1993. Log shipments in 1993 were 18.6 million feet (net Scribner scale), a decrease of 3% from 19.1 million feet in 1992. Lumber shipments to third parties in 1992 of 336.7 million board feet increased 1% from 333.4 million board feet in 1991. This increase was attributable to a 48% increase in common grade Douglas-fir shipments, partially offset by a 12% decrease in upper grade redwood shipments and a 2% decrease in shipments of redwood common lumber. During the second quarter of 1992, Pacific Lumber experienced lumber production delays attributable to the earthquake and aftershocks which struck Humboldt County, California in April. The earthquake and related aftershocks disabled, for a period of approximately six weeks, a large number of the kilns used to dry the upper grade redwood lumber and the sawmill which produces a significant portion of Pacific Lumber's upper grade redwood lumber. Pacific Lumber initiated additional shifts at two of its other sawmills in order to minimize the impact of the lost production. The increased production at one of the sawmills was predominantly from Douglas-fir logs that had recently been salvaged from an area that experienced a forest fire in 1990. These factors resulted in substantially increased shipments of Douglas-fir lumber and the decline in shipments of redwood lumber discussed above. Log shipments in 1992 of 19.1 million feet increased 32% from 14.5 million feet in 1991. The increase in log shipments resulted primarily from the sale, to unaffiliated parties during the second quarter of 1992, of certain logs salvaged from the 1990 forest fire that were not of a suitable quality for Pacific Lumber's sawmills. Net sales Revenues from net sales for 1993 increased by approximately 5% from 1992. This increase was principally due to a 12% increase in the average realized price of upper grade redwood lumber, a 10% increase in the average realized price of redwood common lumber, a 92% increase in the average realized price of log sales and a 50% increase in the average realized price of common grade Douglas-fir lumber, partially offset by decreased shipments of lumber and logs, as previously discussed, and decreased sales of wood chips. The decrease in sales of wood chips resulted from the closure of a pulp mill by one of Pacific Lumber's customers. Revenues from net sales for 1992 increased by approximately 9% from 1991. This increase was principally due to a 23% increase in the average realized price of redwood common lumber, higher shipments of common grade Douglas-fir lumber, a 5% increase in the average realized price of upper grade redwood lumber, increased sales of wood chips, a 14% increase in the average realized price of common grade Douglas-fir lumber and higher log shipments, partially offset by lower shipments of upper and common grades of redwood lumber and lower sales of electrical power resulting from damage sustained by Pacific Lumber's cogeneration facility during the earthquake and aftershocks in April 1992. Operating income Operating income for 1993 decreased by approximately 15% as compared to 1992. This decrease was primarily due to the additional cost of logs purchased from third parties, lower shipments of high margin wood chips and higher overhead costs, partially offset by the increase in sales of lumber and logs, as previously discussed. The Company arranged for the purchase of a significant number of logs earlier in the year in response to concerns regarding inclement weather conditions hindering logging activities on the Company's timberlands during the first five months of 1993. The cost associated with the purchase of logs from third parties significantly exceeds the Company's cost to harvest its own timber. As a result of the Company's last-in, first-out (LIFO) methodology of accounting for inventories, a substantial portion of the additional cost associated with the purchased logs was charged to cost of sales in the third quarter of 1993. Cost of goods sold for 1992 was reduced by a $3.3 million business interruption insurance claim as a result of the April 1992 earthquake. The business interruption insurance claim represents partial compensation for the added costs and lower realized gross margins on lumber sales, primarily due to lost production capacity of Pacific Lumber's drying kilns as described above under "Shipments." Cost of goods sold for 1993 includes a reduction of $1.2 million reflecting an additional business interruption insurance claim. Operating income for 1992 increased by approximately 18% as compared to 1991. This increase was principally attributable to the factors impacting shipments and sales, as previously discussed. Cost of goods sold for 1991 reflects a benefit of $3.3 million due to a reduction of Pacific Lumber's LIFO inventories. Cost of goods sold as a percentage of sales was approximately 58%, 51% and 51% for 1993, 1992 and 1991, respectively. The increase for 1993 reflects the impact of purchased logs as discussed above. Logging costs have increased primarily due to the harvest of smaller diameter logs and, to a lesser extent, compliance with environmental regulations relating to the harvesting of timber and litigation costs incurred in connection with certain THPs filed by Pacific Lumber. See "--Trends." During the past few years, the Company has significantly increased its production of manufactured lumber products by assembling knot-free pieces of common grade lumber into wider and longer pieces in the Company's end and edge glue plant. This manufactured lumber results in a significant increase in lumber recovery and produces a standard size upper grade product which is sold at a premium price compared to common grade products of similar dimensions. The Company has instituted a number of measures at its sawmills during the past several years designed to enhance the efficiency of its operations such as expansion of its manufactured lumber facilities and other improvements in lumber recovery, automated lumber handling and the modification of its production scheduling to increase cogeneration power revenues. Loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles The loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles decreased for 1993 as compared to 1992 due to an increase in investment, interest and other income and a decrease in interest expense, partially offset by the decrease in operating income. The loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles increased for 1992 as compared to 1991 due to a decrease in investment, interest and other income, partially offset by the increase in operating income and a decrease in interest expense. Investment, interest and other income for 1993 includes net gains on marketable securities of $6.4 million. Investment, interest and other income for 1992 includes estimated minimum insurance recoveries of $1.6 million for earthquake damage incurred in April 1992. Investment, interest and other income for 1991 includes a pre-tax gain of $3.5 million resulting from the sale of Pacific Lumber's San Mateo County, California timberlands in June 1991 for $7.5 million. Interest expense decreased in 1993 as compared to 1992 due to lower interest rates resulting from the refinancing of the Company's long- term debt during 1993. See "--Financial Condition and Investing and Financing Activities." Interest expense decreased in 1992 as compared to 1991 primarily due to the repurchase of $15.5 million principal amount of long-term debt in 1991 (see Note 6 to the Consolidated Financial Statements). Income (loss) from net assets transferred to MAXXAM The loss from net assets transferred to MAXXAM for 1993 was $513.0 million as compared to income of $33.7 million for 1992 and $100.1 million for 1991. The operations associated with these net assets consist primarily of aluminum operations conducted by Kaiser and the real estate management and development operations of Palmas. Aluminum operations incurred losses for 1993 of $501.3 million, consisting of (a) losses before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles of $74.4 million, (b) benefits for minority interests of $3.6 million and income taxes of $31.1 million, (c) an extraordinary loss on the redemption of debt of $19.0 million, net of related benefits for minority interests of $2.8 million and income taxes of $11.3 million, and (d) losses attributable to the cumulative effect of changes in accounting principles for postretirement benefits other than pensions and postemployment benefits of $440.5 million, net of related benefits for minority interests of $64.6 million and income taxes of $237.7 million, and income taxes of $2.0 million. Aluminum operations reported income before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles of $32.1 million and $153.6 million for the years ended December 31, 1992 and 1991, respectively. Real estate operations, together with the other net assets transferred to MAXXAM pursuant to the Forest Products Group Formation, incurred losses before income taxes, extraordinary item and cumulative effect of changes in accounting principles of $8.5 million and losses attributable to the cumulative effect of the change in accounting principle for income taxes of $3.2 million for 1993. Real estate and other operations incurred losses before income taxes, extraordinary item and cumulative effect of changes in accounting principles for 1992 and 1991 of $5.8 million and $15.2 million, respectively. See Notes 1 and 2 to the Consolidated Financial Statements for the years ended December 31, 1993, 1992 and 1991 contained elsewhere herein. Extraordinary item The refinancing of Pacific Lumber's outstanding public indebtedness on March 23, 1993, consisting of the Series A Notes, the Series B Notes and the 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are collectively referred to as the "Old Pacific Lumber Securities"), and the Company's 12 3/4% Notes on August 4, 1993 resulted in an extraordinary loss of $17.2 million, net of related income taxes of $8.9 million. The extraordinary loss consists primarily of the redemption premiums paid and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities and the 12 3/4% Notes. See Note 6 to the Consolidated Financial Statements. Cumulative effect of changes in accounting principles As of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") and Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") as more fully described in Notes 7 and 8 to the Consolidated Financial Statements. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 increased results of operations by $14.9 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $2.3 million, net of related income taxes of $1.6 million. The new accounting method has no effect on the Company's cash outlays for postretirement benefits, nor will the cumulative effect of the change in accounting principle affect the Company's compliance with its existing debt covenants. The Company reserves the right to amend or terminate these benefits. FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES As of December 31, 1993, the Company had consolidated working capital of $81.9 million and long-term debt of $738.7 million (net of current maturities and restricted cash deposited in the Liquidity Account described below) as compared to $120.2 million and $679.9 million, respectively, at December 31, 1992. The increase in long-term debt was primarily attributable to Pacific Lumber's recent refinancing, along with the refinancing of the Company's 12 3/4% Notes (as described below). The decline in working capital was primarily due to the decline in operating income, the payment of the $20.0 million dividend made in connection with the refinancing of the Company's 12 3/4% Notes and the impact of recording a current deferred income tax liability in connection with the implementation of the new accounting standard for income taxes. The Company anticipates that cash flows from operations, together with existing cash, marketable securities and available sources of financing, will be sufficient to fund the working capital requirements of the Company and its respective subsidiaries; however, due to its highly leveraged condition, the Company is more sensitive than less leveraged companies to factors affecting its operations, including governmental regulation affecting its timber harvesting practices, increased competition from other lumber producers or alternative building products and general economic conditions. During the years ended December 31, 1993, 1992 and 1991, Pacific Lumber's operating income before depletion and depreciation ("operating cash flow") amounted to $76.6 million, $90.1 million and $83.2 million, respectively, which exceeded interest accrued on all of its indebtedness in those years by $17.4 million, $24.5 million and $14.5 million, respectively. The Company believes that Pacific Lumber's and SPHC's level of operating cash flow and other available sources of financing will enable them to meet the debt service requirements on the Pacific Lumber Senior Notes and the Timber Notes, respectively. On August 4, 1993, the Company issued $100.0 million aggregate principal amount of MGI Senior Notes and $126.7 million aggregate principal amount (approximately $70.0 million net of original issue discount) of MGI Discount Notes. The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. At December 31, 1993, under the most restrictive of these covenants, no dividends may be paid by the Company. The MGI Notes are senior indebtedness of the Company; however, they are effectively subordinate to the liabilities of the Company's subsidiaries, which liabilities include the Timber Notes and the Pacific Lumber Senior Notes. The Company used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its 12 3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. The Company used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20.0 million dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20.0 million aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 at 100% of their principal amount plus accrued interest thereon. The Company incurred a pre-tax extraordinary loss associated with the early retirement of the 12 3/4% Notes of approximately $9.7 million. On March 23, 1993, Pacific Lumber transferred to SPHC substantially all of Pacific Lumber's non-virgin old growth redwood and Douglas-fir timber and timberlands, together with certain other assets, in exchange for (i) the assumption by SPHC of $323.4 million aggregate principal amount of Pacific Lumber's outstanding public indebtedness and (ii) all of SPHC's outstanding common stock. On the same date, Pacific Lumber issued $235.0 million of the Pacific Lumber Senior Notes and SPHC issued $385.0 million of the Timber Notes. The net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's existing cash and marketable securities, were used to (i) retire the Old Pacific Lumber Securities; (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities (at approximately 1.7% of the principal amount thereof); (iv) repay Pacific Lumber's $28.9 million cogeneration facility loan; (v) fund the initial deposit of $35.0 million to a liquidity account for the benefit of the holders of the Timber Notes (the "Liquidity Account"); and (vi) pay a $25.0 million dividend to a subsidiary of the Company. The Company conducts its operations primarily through its subsidiaries. Creditors of the Company's subsidiaries have priority with respect to the assets and earnings of such subsidiaries over the claims of the creditors of the Company, including the holders of the Company's public debt. As of December 31, 1993, the indebtedness of the subsidiaries reflected on the Company's Consolidated Balance Sheet was $614.9 million. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes (the "Timber Note Indenture") and Pacific Lumber's Revolving Credit Agreement contain various covenants which, among other things, restrict transactions between Pacific Lumber and its affiliates and the payment of dividends. Pacific Lumber can pay dividends in an amount that is generally equal to 50% of Pacific Lumber's consolidated net income plus depletion and cash dividends received from SPHC (for periods subsequent to March 1, 1993), exclusive of the net income and depletion of SPHC so long as any Timber Notes are outstanding. On February 24, 1994, Pacific Lumber paid dividends of $5.7 million which represents the entire amount permitted at December 31, 1993. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's consolidated assets are owned by SPHC. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon SPHC for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flow of SPHC and the holders of the Pacific Lumber Senior Notes will have priority over the claims of creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, SPHC will not have available cash for distribution to Pacific Lumber unless SPHC's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. The Timber Note Indenture prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands and actions reasonably incidental thereto. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The actual required amount of such amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which SPHC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as Rated Amortization. Rated Amortization on the Timber Notes is as follows: years ending December 31, 1994 - nil; 1995 - $5.7 million; 1996 - $8.3 million; 1997 - $8.5 million; 1998 - $8.7 million; thereafter - $345.8 million. If all payments of principal are made in accordance with Rated Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as Scheduled Amortization. If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2009. Scheduled Amortization on the Timber Notes is as follows: years ending December 31, 1994 - $13.1 million; 1995 - $13.6 million; 1996 - $14.1 million; 1997 - $16.2 million; 1998 - $19.3 million; thereafter - $300.7 million. On July 20, 1993 and January 20, 1994, SPHC repaid approximately $8.0 million and $8.1 million, respectively, of the aggregate principal amount outstanding on the Timber Notes in accordance with Scheduled Amortization. The Company expects that, consistent with SPHC's purposes and its need to fund operating and capital expenses, substantially all of SPHC's available cash will be periodically distributed to Pacific Lumber. Once appropriate provision for current debt service on the Timber Notes and expenditures for operating and capital costs are made and in the absence of certain Trapping Events (as defined in the Timber Note Indenture) or outstanding judgments, the Timber Note Indenture does not limit monthly distributions of available cash from SPHC to Pacific Lumber. In the event SPHC's cash flows are not sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber's ability to pay interest on the Pacific Lumber Senior Notes and to service its other indebtedness would be materially impaired and the Company's ability to pay interest on the MGI Notes and its other indebtedness would also be materially impaired. SPHC paid $58.3 million of dividends to Pacific Lumber during the period from March 23, 1993 to December 31, 1993. The MGI Senior Notes require annual interest payments of $11.3 million. The Company's annual interest expense on the MGI Discount Notes will initially aggregate approximately $8.8 million. The MGI Discount Notes will require annual interest payments of $15.5 million beginning on February 1, 1999. As of December 31, 1993, the Company (excluding Pacific Lumber and its subsidiary companies) had cash and marketable securities of approximately $11.4 million. The Company believes, although there can be no assurance, that the aggregate dividends that will be available to it from Pacific Lumber and Britt, during the five year period in which cash interest will not be payable on the MGI Discount Notes, will exceed the Company's cash interest payments on the MGI Senior Notes. When cash interest payments on the MGI Discount Notes commence on February 1, 1999, the Company believes that it will be able to make such cash interest payments out of its then existing cash resources and from cash expected to be available to it from Pacific Lumber and Britt. On June 23, 1993, Pacific Lumber entered into a new Revolving Credit Agreement with a bank which provides for borrowings of up to $30.0 million, of which $15.0 million may be used for standby letters of credit. As of December 31, 1993, $19.7 million of borrowings was available under the Revolving Credit Agreement, of which $4.7 million was available for letters of credit. No borrowings were outstanding as of December 31, 1993, and letters of credit outstanding amounted to $10.3 million. The Revolving Credit Agreement expires May 31, 1996, is secured by Pacific Lumber's trade receivables and inventories and contains covenants substantially similar to those contained in the indenture governing the Pacific Lumber Senior Notes. Capital expenditures for Pacific Lumber and Britt of approximately $26.2 million for the three years ended December 31, 1993 were made to improve production efficiency and reduce operating costs. Capital expenditures of the Company's subsidiaries were $11.1 million, $8.7 million and $6.4 million for the years ended December 31, 1993, 1992 and 1991, respectively. Capital expenditures for 1994 are expected to be $10 million and for the 1995 - 1996 period are estimated to be between $5 million and $10 million per year. Capital expenditures attributable to the reconstruction of Pacific Lumber's commercial facilities destroyed by the April 1992 earthquake were approximately $1.6 million for 1993 and are expected to be approximately $2 million to $3 million for 1994 when construction is completed. The Company anticipates that the funds necessary to finance the capital expenditures of its subsidiaries will be obtained through cash flows generated by operations of such subsidiaries and other available sources of financing to the Company's subsidiaries. In February 1994, Pacific Lumber received a franchise tax refund of approximately $7.2 million, including interest, from the State of California relating to tax years 1972 through 1985. This amount will be recognized in investment, interest and other income during the first quarter of 1994. In November 1991, the Company issued $150.0 million aggregate principal amount of 12 3/4% Notes, due November 15, 1995, at 99% of their face amount. The Company used a portion of the proceeds from the sale of the 12 3/4% Notes to pay a $30.9 million cash dividend to MAXXAM, which enabled MAXXAM to redeem its 14 1/4% Senior Subordinated Notes. Additionally, the Company paid a cash dividend of $20.0 million and a non-cash dividend of $95.5 million of certain notes receivable from MAXXAM in conjunction with the issuance of the 12 3/4% Notes. The remaining proceeds from the sale of the 12 3/4% Notes, together with a portion of the Company's existing cash resources (a portion of which was obtained from Kaiser through Kaiser's initial public offering of its common stock), were used to redeem the Company's 13 5/8% Senior Subordinated Notes. During 1991, Pacific Lumber repurchased $15.5 million principal amount of Pacific Lumber Securities for $15.0 million. TRENDS The Company's forest products operations are primarily conducted by Pacific Lumber and are subject to a variety of California and, in some cases, federal laws and regulations dealing with timber harvesting, endangered species, water quality and air and water pollution. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on its future operating results. Laws and regulations dealing with Pacific Lumber's operations are subject to change and new laws and regulations are frequently introduced concerning the California timber industry. A variety of bills are currently pending in the California legislature and the U.S. Congress which relate to the business of Pacific Lumber, including the protection and acquisition of old growth and other timberlands, endangered species, environmental protection and the restriction, regulation and administration of timber harvesting practices. For example, the U.S. Congressman for the congressional district in which Pacific Lumber is located has introduced a bill which would, among other things, incorporate within the boundaries of an existing national forest approximately 42,000 acres of Pacific Lumber's timberlands and would designate approximately 12,000 acres of Pacific Lumber's timberlands to be studied for possible inclusion within such national forest. These 54,000 acres constitute approximately 30% of Pacific Lumber's timberlands. Since this and the other bills are subject to amendment, it is premature to assess the ultimate content of these bills, the likelihood of any of the bills passing or the impact of any of these bills on the consolidated financial position or results of operations of the Company. Furthermore, any bills which are passed are subject to executive veto and court challenge. In addition to existing and possible new or modified statutory enactments, regulatory requirements and administrative and legal actions, the California timber industry remains subject to potential California or local ballot initiatives and evolving federal and California case law which could affect timber harvesting practices. It is, however, impossible to assess the effect of such matters on the future operating results or consolidated financial position of the Company. Various groups and individuals have filed objections with the CDF regarding the CDF's actions and rulings with respect to certain of Pacific Lumber's THPs, and the Company expects that such groups and individuals will continue to file objections to Pacific Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific Lumber from implementing certain of its approved THPs. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth redwood timber on its property during the past few years, as well as substantial amounts of virgin Douglas-fir timber which are located in virgin old growth redwood stands. No assurance can be given as to the extent of such litigation in the future. The Company believes that environmentally focused challenges to Pacific Lumber's THPs are likely to occur in the future. Although such challenges have delayed or prevented Pacific Lumber from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's consolidated financial position or results of operations. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the operating results or consolidated financial position of the Company. MAXXAM GROUP INC. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholder and Board of Directors of MAXXAM Group Inc.: We have audited the accompanying consolidated balance sheets of MAXXAM Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and stockholder's equity for each of the three years in the period ended December 31, 1993. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MAXXAM Group Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Notes 7 and 8 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K 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 & CO. Houston, Texas January 27, 1994 CONSOLIDATED BALANCE SHEET
December 31, 1993 1992 ----------- ----------- (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $39,001 $54,254 Marketable securities 17,775 22,730 Receivables: Trade 15,910 19,105 Other 4,212 8,885 Inventories 73,413 72,108 Prepaid expenses and other current assets 3,189 3,401 -------- -------- Total current assets 153,500 180,483 Timber and timberlands, net of depletion of $171,007 and $160,419 at December 31, 1993 and 1992, respectively 365,511 389,744 Property, plant and equipment, net 102,780 100,846 Deferred financing costs, net 32,725 10,546 Deferred income taxes 58,371 - Restricted cash and other assets 43,134 11,267 Net assets transferred to MAXXAM - 531,751 ------- --------- $756,021 $1,224,637 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable $2,871 $2,504 Accrued interest 26,216 33,500 Accrued compensation and related benefits 7,782 7,896 Deferred income taxes 14,132 - Other accrued liabilities 4,543 4,717 Long-term debt, current maturities 16,093 11,707 -------- -------- Total current liabilities 71,637 60,324 Long-term debt, less current maturities 772,310 679,931 Other noncurrent liabilities 28,125 18,032 -------- -------- Total liabilities 872,072 758,287 -------- -------- Contingencies Stockholder's equity (deficit): Common stock, $.08 1/3 par value; 1000 shares - - authorized; 100 shares issued Additional capital 81,287 81,257 Retained earnings (deficit) (197,338) 385,093 -------- -------- Total stockholder's equity (deficit) (116,051) 466,350 -------- --------- $756,021 $1,224,637 ======== ========
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, 1993 1992 1991 ----------- ----------- ----------- (In thousands of dollars) Net sales: Lumber and logs $215,743 $201,176 $185,655 Other 17,696 22,169 20,052 --------- --------- --------- 233,439 223,345 205,707 --------- --------- --------- Operating expenses: Cost of goods sold (exclusive of depletion and depreciation) 134,563 113,769 103,909 Depletion and depreciation 25,811 29,932 31,966 Selling, general and administrative 20,108 17,136 16,649 --------- --------- --------- 180,482 160,837 152,524 --------- --------- --------- Operating income 52,957 62,508 53,183 Other income (expense): Investment, interest and other income 9,718 399 20,910 Interest expense (80,339) (87,606) (90,528) -------- -------- -------- Loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles (17,664) (24,699) (16,435) Credit (provision) in lieu of income taxes 3,355 (1,276) (5,660) --------- -------- -------- Loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles (14,309) (25,975) (22,095) Income (loss) from net assets transferred to MAXXAM, net of minority interests and related income taxes (512,970) 33,691 100,082 -------- --------- --------- Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (527,279) 7,716 77,987 Extraordinary item: Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $8,856 (17,189) - - Cumulative effect of changes in accounting principles: Postretirement benefits other than pensions, net of related credit in lieu of income taxes of $1,566 (2,348) - - Accounting for income taxes 14,916 - - --------- --------- --------- Net income (loss) $(531,900) $7,716 $77,987 ======== ======== ========
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1993 1992 1991 ----------- ----------- ----------- (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(531,900) $7,716 $77,987 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Loss (income) from net assets transferred to MAXXAM, net 512,970 (33,691) (100,082) Depletion and depreciation 25,811 29,932 31,966 Extraordinary loss on early extinguishment of debt, net 17,189 - - Amortization of deferred financing costs and discounts on long-term debt 7,435 3,018 2,765 Net loss (gain) on asset dispositions 177 (153) (3,373) Incurrence of financing costs (34,738) (505) (6,054) Cumulative effect of changes in accounting principles, net (12,568) - - Net losses (gains) on marketable securities (6,414) 5,374 (440) Decrease (increase) in receivables 7,558 (7,576) 270 Increase (decrease) in accounts payable 471 (3,418) 1,590 Decrease in accrued interest (7,284) (53) (1,275) Increase in accrued and deferred income taxes (5,123) - - Decrease (increase) in inventories, net of depletion (2,077) 7,872 5,638 Other 654 (426) 104 --------- --------- --------- Net cash provided by (used for) operating activities (27,839) 8,090 9,096 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of marketable securities 12,389 23,355 (24,424) Net proceeds from sale of assets 256 573 7,689 Decrease (increase) in net assets transferred to MAXXAM (11,770) (24,264) 156,716 Capital expenditures (11,120) (8,669) (6,353) Other 44 520 (607) --------- --------- --------- Net cash provided by (used for) investing activities (10,201) (8,485) 133,021 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 790,000 - 148,500 Net borrowings (payments) under revolving credit agreements 2,900 - (920) Redemptions, repurchase of and principal payments on long- term debt (716,551) (4,773) (160,009) Restricted cash deposits (33,562) - - Dividends paid (20,000) (36) (110,900) -------- -------- --------- Net cash provided by (used for) financing activities 22,787 (4,809) (123,329) -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,253) (5,204) 18,788 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54,254 59,458 40,670 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $39,001 $54,254 $59,458 ======== ========= ========= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net assets transferred to MAXXAM $30,531 Dividend of notes receivable and marketable securities to MAXXAM $14,964 $100,122 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net of capitalized interest $80,188 $84,641 $89,038 Income taxes paid (refunded) 46 966 (18) Tax allocation payments to MAXXAM 1,722 1,079 -
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Common Stock Retained ($.08 1/3 Additional Earnings Par) Capital (Deficit) Total ----------- ----------- ----------- ----------- (In thousands of dollars) Balance, January 1, 1991 $- $52,808 $525,412 $578,220 Net income - - 77,987 77,987 Dividend - - (211,022) (211,022) Gain from initial public offering of Kaiser Aluminum Corporation common stock - 28,568 - 28,568 --------- --------- --------- --------- Balance, December 31, 1991 - 81,376 392,377 473,753 Net income - - 7,716 7,716 Dividend - - (15,000) (15,000) Loss from issuance of Kaiser Aluminum Corporation common stock - (119) - (119) --------- -------- --------- --------- Balance, December 31, 1992 - 81,257 385,093 466,350 Net loss - - (531,900) (531,900) Dividend - - (20,000) (20,000) Gain from issuance of Kaiser Aluminum Corporation common stock - 30 - 30 Net assets transferred to MAXXAM - - (30,531) (30,531) --------- --------- --------- --------- Balance, December 31, 1993 $- $81,287 $(197,338) $(116,051) ========= ========= ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to herein as the "Company." The Company is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company conducts its business primarily through the operations of its subsidiaries. Prior to the Forest Products Group Formation (as defined below), the Company operated in three industries: aluminum, through its majority owned subsidiary, Kaiser Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest products, through The Pacific Lumber Company ("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"), each a wholly owned subsidiary; and real estate management and development, through the Palmas del Mar development located in Puerto Rico ("Palmas") which was owned by the Company's subsidiary, MAXXAM Properties Inc. ("MPI"). On August 4, 1993, contemporaneously with the consummation of the sale of the Notes (as defined in Note 6), the Company (i) transferred to MAXXAM 50 million common shares of Kaiser held by a subsidiary of the Company, representing the Company's (and MAXXAM's) entire interest in Kaiser's common stock, (ii) transferred to MAXXAM 60,075 shares of MAXXAM common stock held by a subsidiary of the Company, (iii) transferred to MAXXAM certain notes receivable, long-term investments, and other assets, each net of related liabilities, collectively having a carrying value to the Company of approximately $1,100 and (iv) exchanged with MAXXAM 2,132,950 Depositary Shares, acquired from Kaiser on June 30, 1993 for $15,000, such exchange being in satisfaction of a $15,000 promissory note evidencing a cash loan made by MAXXAM to the Company in January 1993. On the same day, MAXXAM assumed approximately $17,500 of certain liabilities of the Company that were unrelated to the Company's forest products operations or were related to operations which have been disposed of by the Company. Additionally, on September 28, 1993, the Company transferred to MAXXAM its interest in Palmas. The foregoing transactions are collectively referred to as the "Forest Products Group Formation." As a result of the Forest Products Group Formation, the Company restated its Consolidated Financial Statements to present the net assets transferred to MAXXAM pursuant to the Forest Products Group Formation (including certain allocated costs from MAXXAM for general and administrative expenses unrelated to the Company's forest products operations). Such restatement has been made with respect to all periods presented in a manner similar to that which would have been presented if the Company had discontinued the operations relating to such net assets. See Note 2. As a result of the Forest Products Group Formation, the Company's business is substantially limited to forest products operations which consists of 100% of the outstanding common stock of Pacific Lumber and 100% of the outstanding common stock of Britt. Pacific Lumber is engaged in all principal aspects of the lumber industry, including the growing and harvesting of redwood and Douglas-fir timber, the milling of logs into lumber and the production of manufactured lumber products. Britt mills logs to produce a variety of fencing and decking products. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. The carrying amount of these instruments approximates fair value. Marketable Securities On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance with the provisions of SFAS 115, marketable securities are carried at market value on December 31, 1993. Prior to that date, marketable securities portfolios were carried at the lower of cost or market at the balance sheet date. The cost of the securities sold is determined using the first-in, first-out method. Market values are determined based on quoted prices. The cost and market values of securities held at December 31, 1992 were $24,793 and $22,730, respectively. Included in investment, interest and other income for each of the three years ended December 31, 1993 were: 1993 - net realized gains of $3,510, the recovery of $2,063 of net unrealized losses and net unrealized gains of $841; 1992 - net realized losses of $5,003 and net unrealized losses of $371; and 1991 - net realized gains of $73 and the recovery of $367 of net unrealized losses. Net unrealized losses represent the amount required to reduce the short-term marketable securities portfolios from cost to market value prior to December 31, 1993. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out (LIFO) method. Timber and Timberlands Depletion is computed utilizing the unit-of-production method based upon estimates of timber values and quantities. Property, Plant and Equipment Property, plant and equipment, including capitalized interest, is stated at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. Deferred Financing Costs Costs incurred to obtain financing are deferred and amortized over the estimated term of the related borrowing. Restricted Cash and Concentrations of Credit Risk Restricted cash represents the amount initially deposited into an account (the "Liquidity Account") held by the trustee under the indenture governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes") as described in Note 6. The Liquidity Account is not available, except under certain limited circumstances, for working capital purposes; however, it is available to pay the Rated Amortization (as defined below) and interest on the Timber Notes if and to the extent that cash flows are insufficient to make such payments. The required Liquidity Account balance will generally decline as principal payments are made on the Timber Notes. The carrying amount of the Liquidity Account approximates its fair value. Investment, interest and other income includes approximately $2,101 attributable to an investment rate agreement (at 7.95% per annum) with the financial institution which holds the Liquidity Account. At December 31, 1993, the balance of the Liquidity Account is $33,562. At December 31, 1993, cash and cash equivalents includes $20,280 (the "Payment Account") which is reserved for debt service payments on the Timber Notes (see Note 6). The Payment Account and the Liquidity Account are each held by a different financial institution. In the event of nonperformance by such financial institutions, the Company's exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon. The Company mitigates its concentrations of credit risk with respect to these restricted cash deposits by maintaining them at high credit quality financial institutions and monitoring the credit ratings of these institutions. Stockholder's Equity (Deficit) Adjustments to the Company's additional capital for the years ended December 31, 1993, 1992 and 1991 resulted from transactions relating to Kaiser's common stock prior to the Forest Products Group Formation. The transactions included Kaiser's 1991 initial public offering of 7.25 million shares for net proceeds of $93,216 and Kaiser's subsequent issuance of shares to certain members of its management pursuant to the terms of an amended compensation plan in 1992 and 1993 of 77,279 and 4,228 shares, respectively. As a result of these transactions, the Company's equity in Kaiser's net assets differed from the Company's historical cost. The Company accounted for these differences as adjustments to additional capital. Reclassifications Certain reclassifications have been made to prior years' financial statements to be consistent with the presentation in the current year. 2. NET ASSETS TRANSFERRED TO MAXXAM As a result of the Forest Products Group Formation (as described in Note 1), the Company transferred all of its interest in Kaiser's common stock, the assets and related liabilities of Palmas, and certain other net assets that were unrelated to the Company's forest products operations, to MAXXAM. The Company did not incur any gain or loss relating to the transfer of such assets and liabilities to MAXXAM. The net income (loss) from net assets transferred to MAXXAM are as follows:
Seven Months Ended July 31, Years Ended December 31, 1993 1992 1991 ----------- ----------- ----------- Net sales: Aluminum operations $1,016,966 $1,909,115 $2,000,828 Real estate and other 19,654 27,464 22,663 --------- --------- --------- 1,036,620 1,936,579 2,023,491 --------- --------- --------- Costs and expenses: Aluminum operations 1,091,353 1,877,004 1,847,188 Real estate and other 28,132 33,298 37,902 --------- --------- --------- 1,119,485 1,910,302 1,885,090 --------- --------- --------- Income (loss) before income taxes, minority interests, extraordinary item and cumulative effect of changes in accounting principles (82,865) 26,277 138,401 Credit (provision) for income taxes 31,050 10,755 (30,399) Minority interests 3,641 (3,341) (7,920) --------- --------- --------- Income (loss) before extraordinary item and cumulative effect of changes in accounting principles (48,174) 33,691 100,082 Extraordinary item: Loss on redemption of debt, net of related benefits for income taxes and minority interests of $11,249 and $2,791, respectively (19,045) - - Cumulative effect of changes in accounting principles: Postretirement and postemployment benefits, net of related benefits for income taxes and minority interests of $237,682 and $64,554, respectively (440,519) - - Accounting for income taxes (5,232) - - --------- --------- --------- Income (loss) from net assets transferred to MAXXAM $(512,970) $33,691 $100,082 ========= ========= ========
Net assets transferred to MAXXAM are as follows:
Date of December 31, Transfer 1992 --------- --------- Current assets: Aluminum operations $780,791 $766,013 Real estate and other 16,480 18,218 --------- --------- 797,271 784,231 --------- --------- Current liabilities: Aluminum operations 477,805 445,700 Real estate and other 28,853 36,975 --------- --------- 506,658 482,675 --------- --------- Net current assets 290,613 301,556 --------- --------- Non-current assets: Aluminum operations 1,722,362 1,332,748 Real estate and other 56,422 59,317 --------- --------- 1,778,784 1,392,065 --------- --------- Non-current liabilities: Aluminum operations 1,790,946 977,148 Minority interests in aluminum operations 221,907 177,158 Real estate and other 26,013 7,564 --------- --------- 2,038,866 1,161,870 --------- --------- Net assets transferred to MAXXAM $30,531 $531,751 ========= =========
3. INVENTORIES Inventories consist of the following:
December 31, 1993 1992 ----------- ----------- Lumber $52,354 $58,379 Logs 21,059 13,729 --------- --------- $73,413 $72,108 ======== ========
During 1993, 1992 and 1991, Pacific Lumber's inventory quantities were reduced. These reductions resulted in the liquidation of Pacific Lumber's LIFO inventory quantities carried at prevailing costs from prior years which were higher than the current cost of inventory in 1993 and lower than current costs in 1992 and 1991. The effects of these inventory liquidations increased cost of goods sold by approximately $222 for the year ended December 31, 1993 and decreased cost of goods sold by approximately $372 and $3,286 for the years ended December 31, 1992 and 1991, respectively. 4. TIMBER AND TIMBERLANDS The following table presents the changes in timber and timberlands for the three years ended December 31, 1993.
Years Ended December 31, 1993 1992 1991 ----------- ----------- ----------- Balance at beginning of year $389,744 $406,137 $421,961 Adoption of new accounting principle for income taxes (see Note 7) (8,128) - - Additions at cost 264 557 319 Depletion (16,369) (16,950) (16,143) --------- --------- --------- Balance at end of year $365,511 $389,744 $406,137 ========= ========= =========
5. PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment are as follows:
Estimated December 31, Useful Lives 1993 1992 ----------- ----------- ----------- Logging roads, land and improvements 15 years $7,241 $8,822 Buildings 20-33 years 22,234 20,831 Machinery and equipment 5-20 years 123,270 113,195 Construction in progress 125 351 --------- --------- 152,870 143,199 Less: accumulated depreciation (50,090) (42,353) --------- --------- $102,780 $100,846 ========= =========
Depreciation expense for the years ended December 31, 1993, 1992 and 1991 was $8,670, $8,491 and $8,106, respectively. 6. LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1993 1992 ----------- ----------- 7.95% Timber Collateralized Notes due July 20, 2015 $376,953 $- 11 1/4% Senior Secured Notes due August 1, 2003 100,000 - 12 1/4% Senior Secured Discount Notes due August 1, 2003, net of discount 73,499 - 10 1/2% Senior Notes due March 1, 2003 235,000 - 12 3/4% Notes due November 15, 1995, net of discount - 148,852 12% Series A Senior Notes due July 1, 1996 - 163,784 12.2% Series B Senior Notes due July 1, 1996 - 304,725 12 1/2% Senior Subordinated Debentures due July 1, 1998 - 41,750 Other 2,951 32,527 --------- --------- 788,403 691,638 Less: current maturities (16,093) (11,707) --------- --------- $772,310 $679,931 ========= =========
On March 23, 1993, Pacific Lumber issued $235,000 of 10 1/2% Senior Notes due 2003 (the "Pacific Lumber Senior Notes") and its newly-formed wholly owned subsidiary, Scotia Pacific Holding Company ("SPHC"), issued $385,000 of the Timber Notes. Pacific Lumber and SPHC used the net proceeds from the sale of the Pacific Lumber Senior Notes and the Timber Notes, together with Pacific Lumber's cash and marketable securities, to (i) retire (a) $163,784 aggregate principal amount of Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate principal amount of Pacific Lumber's 12.2% Series B Senior Notes due July 1, 1996 (the "Series B Notes") and (c) $41,750 aggregate principal amount of Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the "Debentures;" the Series A Notes, the Series B Notes and the Debentures are referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay accrued interest on the Old Pacific Lumber Securities through the date of redemption thereof; (iii) pay the applicable redemption premiums on the Old Pacific Lumber Securities; (iv) repay Pacific Lumber's $28,867 cogeneration facility loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and (vi) pay a $25,000 dividend to a subsidiary of the Company. These transactions resulted in a pre-tax extraordinary loss of $16,368, consisting primarily of the payment of premiums and the write-off of unamortized deferred financing costs on the Old Pacific Lumber Securities. The indenture governing the Timber Notes (the "Timber Note Indenture") prohibits SPHC from incurring any additional indebtedness for borrowed money and limits the business activities of SPHC to the ownership and operation of its timber and timberlands. The Timber Notes are senior secured obligations of SPHC and are not obligations of, or guaranteed by, Pacific Lumber or any other person. The Timber Notes are secured by a lien on (i) SPHC's timber and timberlands, (ii) substantially all of SPHC's property and equipment, (iii) SPHC's contract rights and certain other assets and (iv) the funds deposited in the Payment Account and the Liquidity Account. The Timber Notes are structured to link, to the extent of cash available, the deemed depletion of SPHC's timber (through the harvest and sale of logs) to required amortization of the Timber Notes. The actual required amount of such amortization due on any Timber Note payment date is determined by various mathematical formulas set forth in the Timber Note Indenture. The minimum amount of principal which SPHC must pay (on a cumulative basis) through any Timber Note payment date in order to avoid an Event of Default (as defined in the Timber Note Indenture) is referred to as rated amortization ("Rated Amortization"). If all payments of principal are made in accordance with Rated Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2015. The amount of principal which SPHC must pay through each Timber Note payment date in order to avoid payment of prepayment or deficiency premiums is referred to as scheduled amortization ("Scheduled Amortization"). If all payments of principal are made in accordance with Scheduled Amortization, the payment date on which SPHC will pay the final installment of principal is July 20, 2009. Substantially all of the Company's consolidated assets are owned by Pacific Lumber and a significant portion of Pacific Lumber's assets are owned by SPHC. The Company expects that Pacific Lumber will provide a major portion of the Company's future operating cash flow. Pacific Lumber is dependent upon SPHC for a significant portion of its operating cash flow. The holders of the Timber Notes have priority over the claims of creditors of Pacific Lumber with respect to the assets and cash flow of SPHC, and the holders of the Pacific Lumber Senior Notes have priority over the claims and creditors of the Company with respect to the assets and cash flows of Pacific Lumber. Under the terms of the Timber Note Indenture, SPHC will not have available cash for distribution to Pacific Lumber unless SPHC's cash flow from operations exceeds the amounts required by the Timber Note Indenture to be reserved for the payment of current debt service (including interest, principal and premiums) on the Timber Notes, capital expenditures and certain other operating expenses. Principal and interest on the Timber Notes is payable semi- annually on January 20 and July 20. The Timber Notes are redeemable at the option of SPHC, in whole but not in part, at any time. The redemption price of the Timber Notes is equal to the sum of the principal amount, accrued interest and a prepayment premium calculated based upon the yield of like term Treasury securities plus 50 basis points. Interest on the Pacific Lumber Senior Notes is payable semi- annually on March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price of 103% of the principal amount plus accrued interest. The redemption price is reduced annually until March 1, 2000, after which time the Pacific Lumber Senior Notes are redeemable at par. Pacific Lumber has a revolving credit agreement with a bank (the "Revolving Credit Agreement") which expires on May 31, 1996. Borrowings under the Revolving Credit Agreement are secured by Pacific Lumber's trade receivables and inventories, with interest computed at the bank's reference rate plus 1 1/2% or the bank's offshore rate plus 2 1/2%. The Revolving Credit Agreement provides for borrowings of up to $30,000, of which $15,000 may be used for standby letters of credit. As of December 31, 1993, $19,742 of borrowings was available under the Revolving Credit Agreement, of which $4,742 was available for letters of credit. No borrowings were outstanding as of December 31, 1993, and letters of credit outstanding amounted to $10,258. The indentures governing the Pacific Lumber Senior Notes and the Timber Notes and Pacific Lumber's Revolving Credit Agreement contain various covenants which, among other things, limit the payment of dividends and restrict transactions between Pacific Lumber and its affiliates. As of December 31, 1993, under the most restrictive of these covenants, approximately $5,731 of dividends could be paid by Pacific Lumber. On August 4, 1993, the Company issued $100,000 aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 (the "MGI Senior Notes") and $126,720 aggregate principal amount (approximately $70,000 net of original issue discount) of 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount Notes", which, together with the MGI Senior Notes, are referred to collectively as the "MGI Notes"). The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI, and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. The indenture governing the MGI Notes, among other things, restricts the ability of the Company to incur additional indebtedness, engage in transactions with affiliates, pay dividends and make investments. At December 31, 1993, under the most restrictive of these covenants, no dividends may be paid by the Company. The MGI Notes are senior indebtedness of the Company; however, they are effectively subordinate to the liabilities of the Company's subsidiaries, which includes the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount Notes are net of discount of $53,221 at December 31, 1993. The MGI Senior Notes will pay interest semiannually on February 1 and August 1 of each year beginning on February 1, 1994. The MGI Discount Notes will not pay any interest until February 1, 1999, at which time semiannual interest payments will become due on each February 1 and August 1 thereafter. The Company used a portion of the net proceeds from the sale of the MGI Notes to retire the entire outstanding balance of its 12 3/4% Notes at 101% of their principal amount, plus accrued interest through November 14, 1993. The Company used the remaining portion of the net proceeds from the sale of the MGI Notes, together with a portion of its existing cash resources, to pay a $20,000 dividend to MAXXAM. MAXXAM used such proceeds to redeem, on August 20, 1993, $20,000 aggregate principal amount of its 14% Senior Subordinated Reset Notes due 2000 at 100% of their principal amount plus accrued interest thereon. The Company incurred a pre-tax extraordinary loss associated with the early retirement of the 12 3/4% Notes of $9,677 consisting of net interest cost of $3,763, the write-off of $3,472 of unamortized deferred financing costs, a premium of $1,500 and the write-off of $942 of unamortized original issue discount. Repurchase of Debt During 1991, Pacific Lumber purchased $15,452 principal amount of its Series B Notes for $15,029. Cash flow from operations was used to repurchase the Series B Notes. Maturities The following table of scheduled maturities of long-term debt outstanding at December 31, 1993 reflects Scheduled Amortization with respect to the Timber Notes:
Years Ending December 31, 1994 1995 1996 1997 1998 Thereafter 7.95% Timber Collateralized Notes $13,142 $13,578 $14,103 $16,165 $19,335 $300,630 11 1/4% Senior Secured Notes - - - - - 100,000 12 1/4% Senior Secured Discount Notes - - - - - 126,720 10 1/2% Senior Notes - - - - - 235,000 Other 2,951 - - - - - --------- --------- --------- --------- --------- --------- $16,093 $13,578 $14,103 $16,165 $19,335 $762,350 ========= ========= ========= ========= ========= =========
Restricted Net Assets of Subsidiaries At December 31, 1993, certain debt instruments restricted the ability of Pacific Lumber to transfer assets, make loans and advances and pay dividends to the Company. The restricted net assets of Pacific Lumber totaled $20,000 at December 31, 1993. Fair Value The estimated fair value of the Company's long-term debt is determined based on the quoted market prices for the Timber Notes, the Pacific Lumber Senior Notes, the MGI Notes, the Old Pacific Lumber Securities and the 12 3/4% Notes, and on the current rates offered for borrowings similar to the other debt. At December 31, 1993 and 1992, the fair value of the Company's long-term debt is estimated to be $817,400 and $704,100, respectively. 7. CREDIT (PROVISION) IN LIEU OF INCOME TAXES The Company and its subsidiaries are members of MAXXAM's consolidated return group for federal income tax purposes. Prior to August 4, 1993, the Company and each of its subsidiaries computed their tax liabilities or tax benefits on a separate company basis (except as discussed in the following paragraph), in accordance with their respective tax allocation agreements with MAXXAM. Effective on March 23, 1993, MAXXAM, Pacific Lumber, SPHC and Salmon Creek Corporation ("Salmon Creek") entered into a tax allocation agreement that, among other things, amended the tax calculations with respect to Pacific Lumber (the "Amended PL Tax Allocation Agreement"). Under the terms of the Amended PL Tax Allocation Agreement, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax liability of Pacific Lumber, SPHC and certain other subsidiaries of Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL Subgroup") computed as if the PL Subgroup was a separate affiliated group of corporations which was never connected with MAXXAM. The Amended PL Tax Allocation Agreement further provides that Salmon Creek is liable to MAXXAM for its federal income tax liability computed on a separate company basis as if it was never connected with MAXXAM. The remaining subsidiaries of MGI are each liable to MAXXAM for their respective income tax liabilities computed on a separate company basis as if they were never connected with MAXXAM, pursuant to their respective tax allocation agreements. Effective on August 4, 1993, MGI amended its tax allocation agreement with MAXXAM (the "Amended Tax Allocation Agreement") to provide that the Company's federal income tax liability is computed as if MGI files a consolidated tax return with all of its subsidiaries except Salmon Creek, and that such corporations were never connected with MAXXAM (the "MGI Consolidated Tax Liability"). The federal income tax liability of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities for the Company's subsidiaries (computed as discussed above), but excluding Salmon Creek. To the extent that the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of such difference to MGI. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changes the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes ("APB 11"). The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, increased the Company's results of operations by $14,916. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisitions of Pacific Lumber in 1986 and Britt in 1990. The restatement of the assigned values with respect to assets and liabilities recorded as a result of the acquisitions and the recomputation of deferred income tax assets and liabilities under SFAS 109 resulted in: (i) a decrease of $8,128 in the net carrying value of timber and timberlands, (ii) an increase of $181 in the net carrying value of property, plant and equipment and (iii) an increase of $22,863 in net deferred income tax assets. As a result of restating these assets and liabilities, the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles for the year ended December 31, 1993 was decreased by $377. Concurrent with the adoption of SFAS 109, the Company implemented changes in its accounting method for postretirement benefits pursuant to Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") (see Note 8). The pre-tax cumulative effect of the change in accounting principle relating to SFAS 106 was a charge of $3,914 and resulted in the recognition of deferred income tax assets of $1,566. The credit (provision) in lieu of income taxes on the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles consists of the following:
Years Ended December 31, 1993 1992 1991 Current: Federal credit (provision) in lieu of income taxes $(988) $(1,774) $(4,734) State and local (253) (424) (255) --------- --------- --------- (1,241) (2,198) (4,989) --------- --------- --------- Deferred: Federal credit (provision) in lieu of income taxes 4,825 922 (671) State and local (229) - - --------- --------- --------- 4,596 922 (671) --------- --------- --------- $3,355 $(1,276) $(5,660) ========= ========= =========
The Omnibus Budget Reconciliation Act of 1993 (the "Act"), enacted on August 10, 1993, retroactively increased the maximum federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. The 1993 deferred federal credit in lieu of income taxes of $4,825 includes $2,601 for the benefit of operating loss carryforwards generated in 1993 and includes an $850 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment of the Act due to the increase in the federal statutory income tax rate. The deferred credit (provision) in lieu of income taxes results from the following timing differences for 1992 and 1991:
Years Ended December 31, 1992 1991 --------- --------- Provision to reduce certain investments to estimated net $1,467 $238 realizable value Change in unrealized losses on short-term marketable (770) (962) securities Other 225 53 --------- --------- $922 $(671) ========= =========
A reconciliation between the credit (provision) in lieu of income taxes and the amount computed by applying the federal statutory income tax rate to the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles is as follows:
Years Ended December 31, 1993 1992 1991 Loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles $(17,664) $(24,699) $(16,435) ========= ========= ========= Amount of federal income tax based upon the statutory rate $6,182 $8,398 $5,588 Revision of prior years' tax estimates and other changes in valuation allowances (3,468) - - Increase in net deferred income tax assets due to tax rate change 850 - - State and local taxes, net of federal tax benefit (313) (280) (168) Financial reporting and tax basis differences - 343 1,359 Losses and expenses for which no federal tax benefit was recognized - (9,744) (12,295) Other 104 7 (144) --------- --------- --------- $3,355 $(1,276) $(5,660) ========= ========= =========
The credit in lieu of income taxes as a percentage of the loss from continuing operations before income taxes, extraordinary item and cumulative effect of changes in accounting principles would have approximated the federal statutory rate had the Company computed the credit (provision) in lieu of income taxes for the year ended December 31, 1993 on a consolidated return basis. The Company would not have been able to record a credit in lieu of income taxes with respect to the losses from continuing operations computed on a consolidated return basis, for each of the years ended December 31, 1992 and 1991, due to the uncertainty of realizing any future tax benefit attributable to such losses pursuant to the provisions of APB 11. As shown in the Consolidated Statement of Operations for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related deferred income taxes of $8,856 which approximated the federal statutory income tax rate in effect on the dates the transactions occurred. The related deferred income tax benefit recorded by the Company in respect of SFAS 106 was recorded at the federal and state statutory rates in effect on the date the accounting standard was adopted. After giving effect to the adoption of SFAS 109, the components of the Company's net deferred income tax assets (liabilities) are as follows:
January 1, 1993 December 31, (date of 1993 adoption) Deferred income tax assets: Loss and credit carryforwards $92,408 $67,116 Timber and timberlands 36,443 30,608 Investments 4,729 6,003 Other liabilities 4,616 4,152 Postretirement benefits other than pensions 1,734 1,695 Other 4,569 1,967 Valuation allowances (57,676) (44,948) --------- --------- Total deferred income tax assets, net 86,823 66,593 --------- --------- Deferred income tax liabilities: Property, plant and equipment (21,160) (22,302) Inventories (17,172) (16,567) Other (4,252) (2,489) --------- --------- Total deferred income tax liabilities (42,584) (41,358) --------- --------- Net deferred income tax assets $44,239 $25,235 ========= =========
The valuation allowances listed above relate primarily to loss and credit carryforwards. As of December 31, 1993, approximately $36,443 of the net deferred income tax assets listed above relate to the excess of the tax basis over financial statement basis with respect to timber and timberlands. The Company believes that it is more likely than not that this net deferred income tax asset will be realized, based primarily upon the estimated value of its timber and timberlands which is well in excess of its tax basis. Also included in net deferred income tax assets as of December 31, 1993 is approximately $36,231 which relates to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for loss and credit carryforwards. These factors included any limitations concerning use of the carryforwards, the year the carryforwards expire and the levels of taxable income necessary for utilization. The Company has concluded that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. Included in the net deferred income tax assets listed above are $42,752 at December 31, 1993 and $23,519 at January 1, 1993 which are recorded pursuant to the tax allocation agreements with MAXXAM. The following table presents the estimated tax attributes for federal income tax purposes for the Company and its subsidiaries as of December 31, 1993, under the terms of the respective tax allocation agreements. The utilization of certain of these attributes are subject to limitations.
Expiring Through Regular Tax Attribute Carryforwards: Current year net operating loss $53,642 2008 Prior year net operating losses 190,229 2007 Net capital losses 6,090 1997 Alternative Minimum Tax Attribute Carryforwards: Current year net operating loss $52,654 2008 Prior year net operating losses 145,350 2007
8. EMPLOYEE BENEFIT PLANS The Company has a defined benefit plan which covers all employees of Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or earlier, if certain provisions are met. The benefits are determined under a career average formula based on each year of service with Pacific Lumber and the employee's compensation for that year. Pacific Lumber's funding policy is to contribute annually an amount at least equal to the minimum cash contribution required by The Employee Retirement Income Security Act of 1974, as amended. A summary of the components of net periodic pension cost is as follows:
Years Ended December 31, 1993 1992 1991 Service cost - benefits earned during the year $1,600 $1,546 $1,225 Interest cost on projected benefit obligation 918 749 530 Actual gain on plan assets (2,128) (1,013) (1,164) Net amortization and deferral 1,359 352 775 --------- --------- --------- Net periodic pension cost $1,749 $1,634 $1,366 ========= ========= =========
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet:
December 31, 1993 1992 Actuarial present value of accumulated plan benefits: Vested benefit obligation $11,047 $8,211 Non-vested benefit obligation 1,183 1,114 --------- --------- Total accumulated benefit obligation $12,230 $9,325 ========= ========= Projected benefit obligation $15,303 $11,475 Plan assets at fair value, primarily fixed income securities (12,216) (9,108) -------- -------- Projected benefit obligation in excess of plan assets 3,087 2,367 Unrecognized net transition asset 35 41 Unrecognized net loss (582) (450) Unrecognized prior service cost (89) (97) --------- --------- Accrued pension liability $2,451 $1,861 ========= ========
The assumptions used in accounting for the defined benefit plan were as follows: 1993 1992 1991 Rate of increase in compensation levels 5.0% 5.0% 5.0% Discount rate 7.5% 8.0% 8.0% Expected long-term rate of return on assets 8.0% 9.0% 9.0%
The Company has an unfunded defined benefit plan for certain postretirement and other benefits which covers substantially all employees of Pacific Lumber. Participants of the plan are eligible for certain health care benefits upon termination of employment and retirement and commencement of pension benefits. Participants make contributions for a portion of the cost of their health care benefits. The Company adopted SFAS 106 as of January 1, 1993. The costs of postretirement benefits other than pensions are now accrued over the period the employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $2,348, net of related income taxes of $1,566. A summary of the components of net periodic postretirement benefit cost for the year ended December 31, 1993 is as follows: Service cost - benefits earned during the year $153 Interest cost on accumulated postretirement benefit obligation 315 -------- Net periodic postretirement benefit cost $468 ========
The adoption of SFAS 106 increased the Company's loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles by $212 ($360 before tax) for the year ended December 31, 1993. The postretirement benefit liability recognized in the Company's Consolidated Balance Sheet was:
January 1, 1993 December 31, (date of 1993 adoption) Retirees $963 $1,009 Actives 3,245 2,905 --------- --------- Accumulated postretirement benefit obligation 4,208 3,914 Unrecognized net gain 71 - --------- --------- Postretirement benefit liability $4,279 $3,914 ========= ========
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 13% for 1994 and is assumed to decrease gradually to 5.5% for 2007 and remain at that level thereafter. Each one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $582 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $76. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at December 31, 1993 and 8.25% at January 1, 1993. 9. RELATED PARTY TRANSACTIONS MAXXAM provides the Company and certain of the Company's subsidiaries with accounting and data processing services. In addition, MAXXAM provides the Company with office space and various office personnel, insurance, legal, operating, financial and certain other services. MAXXAM's expenses incurred on behalf of the Company are reimbursed by the Company through payments consisting of (i) an allocation of the lease expense for the office space utilized by or on behalf of the Company and (ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor costs (including costs associated with phantom share and stock appreciation rights) of MAXXAM personnel rendering services to the Company. Charges by MAXXAM for such services included in continuing operations were $3,347, $3,735 and $3,652 for the years ended December 31, 1993, 1992 and 1991, respectively. The Company believes that the services being rendered are on terms not less favorable to the Company than those which would be obtainable from unaffiliated third parties. In November 1991, MAXXAM purchased $1,222 of MAXXAM's 12 1/2% Subordinated Debentures (the "MAXXAM Debentures") from the Company for $1,304. Interest earned on the MAXXAM Debentures amounted to $164 for the year ended December 31, 1991. Interest income on loans to MAXXAM was approximately $9,810 for the year ended December 31, 1991. 10. CONTINGENCIES The Company's operations are subject to a variety of California and, in some cases, federal laws and regulations dealing with timber harvesting, endangered species, water quality and air and water pollution. The Company does not expect that compliance with such existing laws and regulations will have a material adverse effect on the Company's future operating results. There can be no assurance, however, that future legislation, governmental regulations or judicial or administrative decisions would not adversely affect the Company or its ability to sell lumber, logs or timber. Various groups and individuals have filed objections with the California Department of Forestry ("CDF") regarding the CDF's actions and rulings with respect to certain of the Company's timber harvesting plans ("THPs"), and the Company expects that such groups and individuals will continue to file objections to the Company's THPs. In addition, lawsuits are pending which seek to prevent the Company from implementing certain of its approved THPs. These challenges have severely restricted Pacific Lumber's ability to harvest virgin old growth redwood timber on its property during the past few years, as well as substantial amounts of virgin Douglas-fir timber which are located in virgin old growth redwood stands. No assurance can be given as to the extent of such litigation in the future. The Company believes that environmentally focused challenges to its THPs are likely to occur in the future. Although such challenges have delayed or prevented the Company from conducting a portion of its operations, to date such challenges have not had a material adverse effect on the Company's consolidated financial position or results of operations. It is, however, impossible to predict the future nature or degree of such challenges or their ultimate impact on the operating results or consolidated financial position of the Company. The Company, Pacific Lumber, MAXXAM and certain of their former and current officers and directors are defendants in various actions related to the Company's acquisition of Pacific Lumber. Management is of the opinion that the outcome of such litigation is unlikely to have a material adverse effect on the Company's consolidated financial position. Management is unable to express an opinion as to whether the outcome of such litigation is unlikely to have a material adverse effect on the Company's results of operations in respect of any fiscal year. The Company is also involved in various claims, lawsuits and proceedings relating to a wide variety of other matters. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect upon the Company's consolidated financial position or results of operations. 11. SUPPLEMENTARY INFORMATION The following amounts are included in the Company's Consolidated Statement of Operations:
Years Ended December 31, 1993 1992 1991 Maintenance and repairs $12,065 $10,673 $10,317 Property taxes 1,568 2,079 2,288 Yield taxes 4,372 2,691 1,960 Workers' compensation 3,776 3,288 4,259
Pacific Lumber is self-insured for workers' compensation benefits. Included in accrued compensation and related benefits and other noncurrent liabilities are accruals for workers' compensation claims amounting to $7,008 and $5,400 at December 31, 1993 and 1992, respectively. In 1993 and 1992, Pacific Lumber recorded reductions in cost of sales of $1,200 and $3,300, respectively, from business interruption insurance claims for reimbursement of higher operating costs and the related loss of revenues resulting from the April 1992 earthquake. In 1992, Pacific Lumber recorded a $1,600 gain in investment, interest and other income on a casualty insurance claim for the loss of certain commercial property due to the earthquake. Other receivables at December 31, 1993 and 1992 included $1,235 and $7,723, respectively, related to these and other earthquake related insurance claims. In June 1991, Pacific Lumber completed the sale of its San Mateo County, California timberlands for $7,492. This sale resulted in a pre-tax gain of $3,482 which is included in investment, interest and other income for the year ended December 31, 1991. 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summary quarterly financial information for the years ended December 31, 1993 and 1992 is as follows:
Three Months Ended March 31 June 30 September 30 December 31 1993: Net sales $52,737 $58,007 $58,803 $63,892 Operating income 16,233 14,997 9,185 12,542 Loss from continuing operations before extraordinary item and cumulative effect of changes in accounting principles (2,141) (3,593) (5,420) (3,155) Loss from net assets transferred to MAXXAM, net (480,370) (20,900) (11,700) - Extraordinary item, net (10,802) - (6,387) - Cumulative effect of changes in accounting principles, net 12,568 - - - Net loss (480,745) (24,493) (23,507) (3,155) 1992: Net sales $51,431 $57,604 $57,042 $57,268 Operating income 13,379 19,869 16,182 13,078 Loss from continuing operations (7,113) (1,085) (3,646) (14,131) Income from net assets transferred to MAXXAM, net 6,890 5,862 3,240 17,699 Net income (loss) (223) 4,777 (406) 3,568
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) INDEX TO FINANCIAL STATEMENTS PAGE 1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8): Report of Independent Public Accountants 27 Consolidated balance sheet at December 31, 1993 and 1992 28 Consolidated statement of operations for the years ended December 31, 1993, 1992 and 1991 29 Consolidated statement of cash flows for the years ended December 31, 1993, 1992 and 1991 30 Consolidated statement of stockholder's equity for the years ended December 31, 1993, 1992 and 1991 31 Notes to consolidated financial statements 32 The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation are incorporated herein by reference and included as Exhibit 99 hereto. 2. FINANCIAL STATEMENT SCHEDULES: Schedule III - Condensed financial information of Registrant at December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991 53 All other schedules are inapplicable or the required information is included in the consolidated financial statements or the notes thereto. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 58), which index is incorporated herein by reference. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (UNCONSOLIDATED)
December 31, 1993 1992 (In thousands of dollars) ASSETS Current assets: Cash and cash equivalents $92 $10,585 Marketable securities and other current assets 11,964 2,427 --------- --------- Total current assets 12,056 13,012 Investments in and advances from subsidiaries 39,405 68,517 Deferred financing costs and other assets 6,238 4,397 Deferred income taxes 6,369 - Net assets transferred to MAXXAM - 531,751 --------- --------- $64,068 $617,677 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $2,058 $- Accrued interest 4,562 2,475 --------- --------- Total current liabilities 6,620 2,475 Long-term debt 173,499 148,852 --------- --------- Total liabilities 180,119 151,327 --------- --------- Stockholder's equity (deficit): Common stock, $.08 1/3 par value; 1,000 shares - - authorized; 100 shares issued Additional capital 81,287 81,257 Retained earnings (deficit) (197,338) 385,093 --------- --------- Total stockholder's equity (deficit) (116,051) 466,350 --------- --------- $64,068 $617,677 ========= =========
STATEMENT OF OPERATIONS (UNCONSOLIDATED)
Years Ended December 31, 1993 1992 1991 (In thousands of dollars) Investment, interest and other income (expense) $(718) $(2,607) $(2,598) Interest expense (20,917) (21,592) (22,521) General and administrative expenses (720) (1,000) (1,000) Equity in earnings (losses) of subsidiaries 6,534 (776) 4,024 --------- --------- --------- Loss from continuing operations before income taxes, extraordinary item and cumulative effect of change in (15,821) (25,975) (22,095) accounting principle Credit in lieu of income taxes 3,334 - - --------- --------- --------- Loss from continuing operations before extraordinary item and cumulative effect of change in accounting principle (12,487) (25,975) (22,095) Income (loss) from net assets transferred to MAXXAM, net of minority interests and related income taxes (512,970) 33,691 100,082 --------- --------- --------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle (525,457) 7,716 77,987 Extraordinary item: Loss on early extinguishment of debt, net of related credit in lieu of income taxes of $3,290 (6,387) - - Cumulative effect of change in accounting principle for income taxes (56) - - --------- --------- --------- Net income (loss) $(531,900) $7,716 $77,987 ========= ========= =========
STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
Years Ended December 31, 1993 1992 1991 (In thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(531,900) $7,716 $77,987 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Loss (income) from net assets transferred to MAXXAM, net 512,970 (33,691) (100,082) Extraordinary loss on early extinguishment of debt, net 6,387 - - Amortization of deferred financing costs and discounts on long-term debt 4,855 1,806 1,095 Cumulative effect of change in accounting principle 56 - - Equity in losses (earnings) of subsidiaries (6,534) 776 (4,024) Incurrence of financing costs (6,503) - (6,054) Net losses (gains) on marketable securities (2,551) 2,608 7,270 Increase in other liabilities 3,272 31 37 Increase (decrease) in accounts payable 53 (111) (80) Increase in accrued and deferred income taxes (3,356) - - Decrease (increase) in receivables (380) 11,117 90,658 Other 62 - 467 --------- --------- --------- Net cash provided by (used for) operating (23,569) (9,748) 67,274 activities --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net advances from subsidiaries 35,695 - - Increase in net assets transferred to MAXXAM (11,770) (22,356) (25,518) Net sales (purchases) of marketable securities (5,586) 42,725 - Dividend from subsidiary - - 60,398 Other - - 244 --------- --------- --------- Net cash provided by investing activities 18,339 20,369 35,124 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 170,000 - 148,500 Redemptions of long-term debt (155,263) - (140,000) Dividends paid (20,000) (36) (110,900) --------- --------- --------- Net cash used for financing activities (5,263) (36) (102,400) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,493) 10,585 (2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,585 - 2 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $92 $10,585 $- ========= ========= ========= SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Net assets transferred to MAXXAM $30,531 Dividend of notes receivable and marketable securities to parent $14,964 $100,122 Dividend of notes received from subsidiary 60,599 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $13,975 $19,839 $21,338 Income taxes paid (refunded) 22 - (69)
NOTES TO FINANCIAL STATEMENTS A. BASIS OF PRESENTATION As described in Note 1 to the Company's Consolidated Financial Statements (contained in Item 8), the Forest Products Group Formation required the Company to restate its historical financial statements with respect to the net assets transferred to MAXXAM. Such restatement has been made with respect to all periods presented in a manner similar to that which would have been presented if the Company had discontinued the operations relating to such net assets. B. LONG-TERM DEBT The Forest Products Group Formation was done contemporaneously with the issuance of the MGI Notes and the retirement of the 12 3/4% Notes as described in Note 6 to the Consolidated Financial Statements. The MGI Notes are secured by the Company's pledge of 100% of the common stock of Pacific Lumber, Britt and MPI and by MAXXAM's pledge of 28 million shares of Kaiser's common stock it received as a result of the Forest Products Group Formation. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXXAM GROUP INC. Date: March 29, 1994 By: JOHN T. LA DUC John T. La Duc Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 29, 1994 By: JACQUES C. LAZARD Jacques C. Lazard Vice President and Controller (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 29, 1994 By: CHARLES E. HURWITZ Charles E. Hurwitz Chairman of the Board, President and Chief Executive Officer Date: March 29, 1994 By: JOHN T. LA DUC John T. La Duc Vice President, Chief Financial Officer and Director Date: March 29, 1994 By: ANTHONY R. PIERNO Anthony R. Pierno Vice President, General Counsel and Director Date: March 29, 1994 By: PAUL N. SCHWARTZ Paul N. Schwartz Vice President and Director
MAXXAM GROUP INC. INDEX OF EXHIBITS
Exhibit Number Description 3.1 Certificate of Incorporation of MAXXAM Group Inc. (the "Company" or "MGI") (incorporated herein by reference to Exhibit 3.1E to the Company's definitive proxy statement dated October 24, 1984) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company dated as of September 28, 1988 (incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company dated as of June 1, 1989 (incorporated herein by reference to Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) 3.4 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated July 10, 1986) *4.1 Indenture between the Company and Shawmut Bank, N.A., Trustee, regarding the Company's 12 3/4 Senior Secured Discount Notes due 2003 and 11 1/4% Senior Secured Notes due 2003 4.2 Indenture between The Pacific Lumber Company ("Pacific Lumber") and The First National Bank of Boston, as Trustee, regarding Pacific Lumber's 10 1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K of Pacific Lumber for the fiscal year ended December 31, 1993, File No. 1-9204) 4.3 Indenture between Scotia Pacific Holding Company ("SPHC") and The First National Bank of Boston, as Trustee, regarding SPHC's 7.95% Timber Collateralized Notes due 2015 (incorporated herein by reference to Exhibit 4.1 to SPHC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 55538; the "SPHC 1993 Form 10-K") 4.4 Revolving Credit Agreement dated as of June 23, 1993 between Pacific Lumber and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 4.19 to Amendment No. 6 to the Company's Registration Statement on Form S-2, Registration No. 33-64042; the "MGI Registration Statement") 4.5 Letter Amendment to the Pacific Lumber Revolving Credit Agreement, dated October 5, 1993 (incorporated herein by reference to Exhibit 4.1 to Pacific Lumber's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-9204) 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 between the Company and MAXXAM Inc. dated August 4, 1993 (incorporated herein by reference to Exhibit 10.6 to the MGI Registration Statement) 10.2 Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM Inc., the Company, Pacific Lumber and the corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204) 10.3 Tax Allocation Agreement among Pacific Lumber, SPHC, Salmon Creek Corporation and MAXXAM Inc. dated March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1 Registration Statement of SPHC, Registration No. 33-55538) *10.4 Tax Allocation Agreement between MAXXAM Inc. and Britt Lumber Co., Inc., dated as of July 3, 1990 10.5 Agreement dated December 20, 1985 between Pacific Lumber and General Electric Company (incorporated herein by reference to Exhibit 10(m) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549; the "1985 GE Agreement") 10.6 Amendment No. 1 to Agreement between Pacific Lumber and General Electric Company dated July 29, 1986 relating to the 1985 GE Agreement (incorporated herein by reference to Exhibit 10.4 to Pacific Lumber's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-9204) 10.7 Power Purchase Agreement dated January 17, 1986 between Pacific Lumber and Pacific Gas and Electric Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on Form S-1, Registration No. 33-5549) 10.8 Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment among SPHC, The First National Bank of Boston, as Trustee, and The First National Bank of Boston, as the Collateral Agent (incorporated herein by reference to Exhibit 4.2 to the SPHC 1993 Form 10-K) 10.9 Master Purchase Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.1 to the SPHC 1993 Form 10-K) 10.10 Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.2 to the SPHC 1993 Form 10-K) 10.11 Additional Services Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.3 to the SPHC 1993 Form 10-K) 10.12 Reciprocal Rights Agreement among Pacific Lumber, SPHC and Salmon Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the SPHC 1993 Form 10-K) 10.13 Environmental Indemnification Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.5 to the SPHC 1993 Form 10-K) 10.14 Transfer Agreement between Pacific Lumber and SPHC (incorporated herein by reference to Exhibit 10.6 to the SPHC 1993 Form 10-K) 10.15 Grant Deed from Pacific Lumber to SPHC (incorporated herein by reference to Exhibit 10.7 to the SPHC 1993 Form 10-K) 10.16 Bill of Sale and General Assignment from Pacific Lumber to SPHC (incorporated herein by reference to Exhibit 10.8 to the SPHC 1993 Form 10-K) 10.17 Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber; Registration Statement No. 33-56332) 10.18 Put and Call Agreement dated November 16, 1987 between Charles E. Hurwitz and MPI (incorporated herein by reference to Exhibit C to Schedule 13D dated November 24, 1987, filed by the Company with respect to MAXXAM Inc.'s common stock; the "Put and Call Agreement") 10.19 Amendment to Put and Call Agreement, dated May 18, 1988 (incorporated herein by reference to Exhibit D to the Final Amendment to Schedule 13D dated May 20, 1988, filed by the Company relating to MAXXAM Inc.'s common stock) 10.20 Amendment to Put and Call Agreement, dated as of February 17, 1989 (incorporated herein by reference to Exhibit 10.35 to MAXXAM Inc.'s Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-3924) 10.21 Unconditional Guarantee of Payment and Performance dated June 17, 1991, by the Company and MAXXAM Inc. to and for the benefit of General Electric Capital Corporation ("GECC") (incorporated herein by reference to Exhibit 10(ee) to Amendment No. 4 to MGI's Registration Statement on Form S-4 on Form S-2, Registration No. 33-42300) 10.22 First Renewal, Extension and Modification Agreement, dated as of June 17, 1992 among GECC, MXM Mortgage Corp. and the Company (incorporated herein by reference to Exhibit 4.3 to MAXXAM Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3924) 10.23 Loan Increase, Extension and Modification Agreement, dated as of December 30, 1992, among GECC, MXM Mortgage Corp. and MAXXAM Inc.(incorporated herein by reference to Exhibit 4.23 to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-3924) 10.24 Consent and Assumption Agreement, dated as of December 10, 1993, among GECC, MXM Mortgage Corp., MXM Mortgage L.P., the Company and MAXXAM Inc. (incorporated herein by reference to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3924) 10.25 Release and Termination of Unconditional Guarantee of Payment and Performance, dated as of December 30, 1993, executed by GECC (incorporated herein by reference to MAXXAM Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3924) 10.26 Investment Management Agreement, dated as of December 1, 1991, by and among the Company, MAXXAM Inc. and certain related corporations (incorporated herein by reference to Exhibit 10.23 to Amendment No. 5 to the MGI Registration) *10.27 Undertaking, dated August 4, 1993, executed by MAXXAM in favor of the Company *99 The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation for the fiscal year ended December 31, 1993 -------------------- * Included with this filing.
EX-4 2 EXHIBIT 4.1 MAXXAM GROUP INC. $126,720,000 12 1/4% Senior Secured Discount Notes due 2003 $100,000,000 11 1/4% Senior Secured Notes due 2003 ____________________ INDENTURE Dated as of August 4, 1993 ____________________ Shawmut Bank, N.A. Trustee TABLE OF CONTENTS
PAGE ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Other Definitions . . . . . . . . . . . . . . . . . 30 SECTION 1.03. Incorporation by Reference of Trust Indenture Act . 32 SECTION 1.04. Rules of Construction . . . . . . . . . . . . . . . 33 ARTICLE 2 The Securities SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . 33 SECTION 2.02. Execution and Authentication . . . . . . . . . . . . 34 SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . . 35 SECTION 2.04. Paying Agent to Hold Money in Trust . . . . . . . . 36 SECTION 2.05. Securityholder Lists . . . . . . . . . . . . . . . . 36 SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . 36 SECTION 2.07. Replacement Securities . . . . . . . . . . . . . . . 37 SECTION 2.08. Outstanding Securities . . . . . . . . . . . . . . . 38 SECTION 2.09. Temporary Securities . . . . . . . . . . . . . . . . 38 SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . 39 SECTION 2.11. Defaulted Interest . . . . . . . . . . . . . . . . . 39 SECTION 2.12. CUSIP Numbers . . . . . . . . . . . . . . . . . . . 39 ARTICLE 3 Redemption SECTION 3.01. Notices to Trustee . . . . . . . . . . . . . . . . . 41 SECTION 3.02. Selection of Securities to be Redeemed . . . . . . . 41 SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . . 41 SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . . 43 SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . 43 SECTION 3.06. Securities Redeemed in Part . . . . . . . . . . . . 43 SECTION 3.07. Cancellation of Redeemed Securities . . . . . . . . 44 SECTION 3.08. No Repurchase Restrictions . . . . . . . . . . . . . 44 ARTICLE 4 Covenants SECTION 4.01. Payment of Securities . . . . . . . . . . . . . . . 44 SECTION 4.02. SEC Reports . . . . . . . . . . . . . . . . . . . . 45 SECTION 4.03. Limitation on Indebtedness . . . . . . . . . . . . . 45 SECTION 4.04. Limitation on Restricted Payments . . . . . . . . . 49 SECTION 4.05. Ownership of Capital Stock of Subsidiaries . . . . . 52 SECTION 4.06. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . 53 SECTION 4.07. Limitation on Asset Sales . . . . . . . . . . . . . 56 SECTION 4.08. Limitation on Transactions with Affiliates . . . . . 63 SECTION 4.09. Change of Control . . . . . . . . . . . . . . . . . 64 SECTION 4.10. Limitation on Liens . . . . . . . . . . . . . . . . 69 SECTION 4.11. Amendment of Scotia Pacific Agreements . . . . . . . 72 SECTION 4.12. Compliance Certificate . . . . . . . . . . . . . . . 72 SECTION 4.13. Use of Proceeds . . . . . . . . . . . . . . . . . . 72 SECTION 4.14. Corporate Existence . . . . . . . . . . . . . . . . 72 SECTION 4.15. Limitation on Status as Investment Company . . . . . 73 SECTION 4.16. Limitation on Liens on Pledged Shares . . . . . . . 73 SECTION 4.17. Declaration and Payment of Dividends by Pacific Lumber and Britt . . . . . . . . . . . . . . . . . . . . . 73 ARTICLE 5 Successor Company SECTION 5.01. When Company May Merge or Transfer Assets . . . . . 74 ARTICLE 6 Defaults and Remedies SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . 76 SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . 78 SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . 79 SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . 79 SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . 79 SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . 80 SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . 81 SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . 81 SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . 81 SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . 82 SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . 82 SECTION 6.12. Waiver of Stay or Extension Laws . . . . . . . . . . 83 SECTION 6.13. Restoration of Rights and Remedies . . . . . . . . . 83 ARTICLE 7 Trustee SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . 84 SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . 85 SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . 87 SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . 87 SECTION 7.05. Notice of Defaults . . . . . . . . . . . . . . . . . 87 SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . 87 SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . 87 SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . 88 SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . 90 SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . 90 SECTION 7.11. Preferential Collection of Claims Against Company . 90 ARTICLE 8 Discharge of Indenture SECTION 8.01. Discharge of Liability on Securities; Defeasance . . 91 SECTION 8.02. Conditions to Defeasance . . . . . . . . . . . . . . 92 SECTION 8.03. Application of Trust Money . . . . . . . . . . . . . 93 SECTION 8.04. Repayment to Company . . . . . . . . . . . . . . . . 94 SECTION 8.05. Indemnity for Government Obligations . . . . . . . . 94 SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . 94 ARTICLE 9 Amendments SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . 95 SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . 95 SECTION 9.03. Compliance with Trust Indenture Act . . . . . . . . 97 SECTION 9.04. Revocation and Effect of Consents and Waivers . . . 97 SECTION 9.05. Notation on or Exchange of Securities . . . . . . . 98 SECTION 9.06. Trustee to Sign Amendments . . . . . . . . . . . . . 98 ARTICLE 10 Security SECTION 10.01. Grants of Security Interests . . . . . . . . . . . . 98 SECTION 10.02. Pledged Shares . . . . . . . . . . . . . . . . . . 102 SECTION 10.03. Collateral Accounts . . . . . . . . . . . . . . . 108 SECTION 10.04. Further Assurances; Revisions of Exhibit C . . . . 114 SECTION 10.05. Release and Substitution of Collateral . . . . . . 115 SECTION 10.06. Trustee Appointed Attorney-in-Fact . . . . . . . . 128 SECTION 10.07. Trustee May Perform . . . . . . . . . . . . . . . 129 SECTION 10.08. Remedies Upon Event of Default . . . . . . . . . . 129 SECTION 10.09. Application of Proceeds . . . . . . . . . . . . . 131 SECTION 10.10. Continuing Liens . . . . . . . . . . . . . . . . . 131 SECTION 10.11. Certificates and Opinions . . . . . . . . . . . . 132 SECTION 10.12. Representations and Warranties . . . . . . . . . . 132 SECTION 10.13. Certain Mergers, Consolidations, etc. Among the Company, Pledged Companies and Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . 135 ARTICLE 11 Miscellaneous SECTION 11.01. Trust Indenture Act Controls . . . . . . . . . . . 137 SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . 137 SECTION 11.03. Communication by Holders with Other Holders . . . 138 SECTION 11.04. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . 138 SECTION 11.05. Statements Required in Certificate or Opinion . . 139 SECTION 11.06. When Treasury Securities Disregarded . . . . . . . 139 SECTION 11.07. Rules by Trustee, Paying Agent and Registrar . . . 139 SECTION 11.08. Legal Holidays . . . . . . . . . . . . . . . . . . 140 SECTION 11.09. Governing Law . . . . . . . . . . . . . . . . . . 140 SECTION 11.10. No Recourse Against Others . . . . . . . . . . . . 140 SECTION 11.11. Successors . . . . . . . . . . . . . . . . . . . . 141 SECTION 11.12. Severability . . . . . . . . . . . . . . . . . . . 141 SECTION 11.13. Multiple Originals . . . . . . . . . . . . . . . . 141 SECTION 11.14. Table of Contents; Headings . . . . . . . . . . . 141 SECTION 11.15. Benefits of Indenture . . . . . . . . . . . . . . 141 SECTION 11.16. No Challenge . . . . . . . . . . . . . . . . . . . 141 Exhibit A-1 - Form of Series A Security . . . . . . . . . . . A-1-1 Exhibit A-2 - Form of Series B Security . . . . . . . . . . . A-2-1 Exhibit B - Salmon Creek Property Legal Description . . . . . B-1 Exhibit C - Description of Pledged Shares . . . . . . . . . . C-1
CROSS-REFERENCE TABLE TIA Indenture Section Section ------- --------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 11.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.02; 4.12; 11.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.11 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a) (last sentence) . . . . . . . . . . . . . . . . . . . . 11.06 (a)(l)(A) . . . . . . . . . . . . . . . . . . . . . . . . . 6.05 (a)(l)(B) . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 N.A. means Not Applicable. ____________________ Note: This Cross-Reference Table shall not, for any purpose, be deemed part of the Indenture.
INDENTURE dated as of August 4, 1993, between MAXXAM Group Inc., a Delaware corporation (the "Company"), and Shawmut Bank, N.A., a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 12 1/4% Senior Secured Discount Notes due 2003 (the "Series A Securities") and 11 1/4% Senior Secured Notes due 2003 (the "Series B Securities" and, together with the Series A Securities, the "Securi- ties"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "Accreted Value" as of any date (the "Specified Date") means, (A) with respect to each $1,000 principal amount at maturity of Series A Securities: (i) if the Specified Date is prior to August 1, 1998, the sum of (a) the initial offering price of such Security and (b) the portion of the original issue discount for such Security (which for this purpose shall be deemed to be the excess of the principal amount over such initial offering price) which shall be amortized with respect to such Security to but not including such date, such original issue discount to be so amortized at the rate of 12 1/4% per annum using semiannual compounding of such rate on each February 1 and August 1, commencing February 1, 1994, from and including the date of issuance of such Security to but not including the date of determination (the following table indicating the Accreted Value at the semiannual compounding dates (each a "Semiannual Compounding Date"), with respect to each $1,000 principal amount at maturity of Series A Securities, as set forth below):
Accreted Value of Semiannual Compounding Date Series A Securities --------------------------- -------------------- February 1, 1994 $585.65 August 1, 1994 621.52 February 1, 1995 659.59 August 1, 1995 699.99 February 1, 1996 742.87 August 1, 1996 788.37 February 1, 1997 836.66 August 1, 1997 887.90 February 1, 1998 942.29
and (ii) if the Specified Date is on or after August 1, 1998, $1,000.00 and (B) with respect to each $1,000 principal amount of Series B Securities, at all times, $1,000.00. "AFFILIATE" of any person means (i) any person who, directly or indirectly, is in control of, is controlled by or is under common control with such person and (ii) any person who is a director or officer (A) of such person, (B) of any subsidiary of such person, or (C) of any person described in clause (i) above, and shall be deemed to include any joint venture, partnership or other person (other than a Subsidiary of the Company) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and in which one or more Affiliates of the Company has a direct or an indirect equity ownership interest in excess of 5% there- in other than by virtue of the direct or indirect equity ownership in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries; provided, however, that the term "Affiliate" shall not include (i) the Company or (ii) any Subsidiary of the Company so long as no Affiliate of the Company has a direct or indirect equity ownership interest equal to or greater than 5% in such Subsidiary other than by virtue of the direct or indirect equity ownership in such Subsidiary held (in the aggregate) by the Company and/or one or more of its Subsidiaries. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. The fact that an Affiliate of a person is a partner of a law firm that renders services to such person or its Affiliates does not mean that the law firm is an Affiliate of such person. "ASSET SALE" means any sale, transfer or other disposition (including, without limitation, dispositions pursuant to any Taking, merger, consolidation or sale and lease back transactions) after the Issue Date by the Company or any of its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) to any person other than to the Company or any of its Restricted Subsidiaries of (i) any Capital Stock or other ownership interest of any of the Company's Restricted Subsidiaries (including sales, transfers or other dispositions by such Restricted Subsidiary of its Capital Stock or other ownership interest) or (ii) any other assets (other than any Capital Stock or ownership interests in any Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries, other than sales, transfers or other dispositions of assets in the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; provided, however, that the term Asset Sale shall not include (A) the sale, transfer or other disposition of any assets or Capital Stock or other ownership interest by the Company or its Restricted Subsidiaries if such transaction would have been an Asset Sale in the absence of this clause (A) and the gross proceeds thereof (exclusive of indemnities) do not exceed an aggregate of $25,000,000 from and after the Issue Date (such proceeds, to the extent non-cash, to be determined in good faith by the Board of Directors), (B) the creation, incurrence, assumption or existence of any Lien to the extent not prohibited by Section 4.10, (C) any of the transactions governed by Section 5.01, (D) an exchange of assets, provided, the assets received are to be used in the lines of business of the Company or any of its Restricted Subsidiaries on the Issue Date or reasonably related extensions of such lines and only to the extent such exchange qualifies for non-recognition treatment under the Code, (E) any transaction to the extent governed by Section 4.04 or Section 4.05 or (F) the sale, transfer or other disposition of Pledged Shares to a person who is not an Affiliate of the Company or of non-money or non-Cash Equivalent Collateral pursuant to and in compliance with Section 10.05(b). "AVERAGE LIFE" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness multiplied by the amount of such principal payment by (ii) the sum of all such principal payments. "BANK DEBTS" means any and all amounts payable under or in respect of the Credit Agreement, including principal, premium (if any), interest, fees, charges, expenses, reimbursement obligations, guaranties, indemnities and all other amounts payable thereunder or in respect thereof. "BERING AGREEMENT" means the investment management agreement, effective as of December 1, 1991, between Bering Holdings Inc. and each of MAXXAM, the Company, MPI and Pacific Lumber, as amended, supplemented or otherwise modified from time to time. "BOARD OF DIRECTORS" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "BRITT" means Britt Lumber Co., Inc., a California corporation and any successor Restricted Subsidiary pursuant to a transaction governed by and in accordance with Section 10.13. "BUSINESS DAY" means each day that is not a Legal Holiday. "CALL PRICE" means, expressed as a percentage of Accreted Value, 110%. "CAPITAL LEASE OBLIGATIONS" of any person means, as of any date of determination, any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such person prepared in accordance with GAAP as of such determination date (it being understood that the Capital Lease Obligations of the Company shall not include any such obligations attributable to any Unrestricted Subsidiary as of any determination date); the amount of such obligation shall be the capitalized amount thereof, determined in accordance with GAAP; and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CAPITAL STOCK" of any person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock of such person, including any Preferred Stock of such person but excluding any Redeemable Stock of such person. "CASH EQUIVALENTS" means (1) when used in respect of any Trust Moneys (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided, that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company organized under the laws of the United States of America or any State thereof (including the Trustee) whose unsecured, unguaranteed, long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in clauses (i), (ii) or (iv) of this clause (1); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) adjustable rate preferred stock that is rated "A" (or higher) by Moody's or S&P; (vii) taxable or non-taxable auction rate securities which have interest rates reset on periodic short term intervals (typically each 7, 14, 21, 28 or 49 days via a Dutch auction process) and which at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P and (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (viii) any investments hereafter developed which are substantially comparable to those described above in this clause (1); and (2) otherwise (i) any evidence of any obligation issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) (ii) demand or time deposits with, and certificates of deposit or acceptances issued by, any bank or trust company organized under the laws of the United States of America or any state thereof (including the Trustee) whose unsecured, unguaranteed long-term debt obligations are rated "A" by Standard & Poor's Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's") or higher, or whose unsecured, unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase agreements entered into with entities whose unsecured, unguaranteed long-term debt obligations are rated "A" by S&P and "A2" by Moody's or higher, or whose unsecured unguaranteed commercial paper obligations are rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written agreement with respect to any obligation described in clauses (i), (ii) or (iv) of this clause (2); (iv) commercial paper (including both noninterest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not later than 180 days from the date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2" by Moody's or higher; (v) direct obligations of any money market fund or other similar investment company all of whose investments consist primarily of obligations described in the foregoing clauses of this definition and that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable auction rate securities commonly known as "money market notes" that at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P2" if rated by Moody's and not less than "A2" if rated by S&P, or (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by S&P and "Aaa" if rated by Moody's; or (vii) any investments hereafter developed which are substantially comparable to those described above in this clause (2). "CHANGE OF CONTROL" means the occurrence of any of the following events: (i) MAXXAM, directly or indirectly, not having (other than by reason of the existence of a Lien, but including by reason of the foreclosure of or other realization upon a Lien) direct or indirect sole beneficial ownership (as defined under Regulation 13d-3 of the Exchange Act as in effect on the date of this Indenture) of at least 40% of the total common equity, on a fully diluted basis, of the Company; provided, however, that such ownership by MAXXAM, directly or indirectly, of 30% or greater, but less than 40% of the total common equity, on a fully diluted basis, of the Company shall not be a Change of Control if MAXXAM, through direct representation or through persons nominated by it, controls a majority of the Board of Directors necessary to effectuate any actions by the Board of Directors; and provided, further, that the foregoing minimum percentages shall be deemed not satisfied if any person or group shall, directly or indirectly, own more of the total voting power entitled to vote generally in the election of directors of the Company than MAXXAM; or (ii) Charles Hurwitz, members of his immediate family and trusts for the benefit thereof (each such person, including Mr. Hurwitz and any trustee of such trusts being herein called a "Beneficiary") not having (other than by reason of resolution of any litigation outstanding as of the date of this Indenture, whether or not applicable, or any similar litigation or the existence of a Lien but including by reason of the foreclosure of or other realization upon a Lien) direct or indirect sole beneficial ownership (as defined under Regulation 13d-3 of the Exchange Act as in effect on the date of this Indenture) of at least the Minimum Percentage of the total equity of MAXXAM other than as a result of new issuances of equity securities by MAXXAM to third parties (other than to a third party who is not a Beneficiary and who controls MAXXAM). Minimum Percentage means that percentage obtained by multiplying (A) the percentage of the total equity of MAXXAM directly or indirectly beneficially owned by the Beneficiaries as of the date of this Indenture and (B) 80%. "CODE" means the Internal Revenue Code of 1986, as amended (or any successor statute thereto), and the regulations promulgated thereunder, all as in effect from time to time. "COLLATERAL" means, at any time of determination, all property upon which a Lien exists at such time in favor of the Trustee for the benefit of Holders pursuant to Articles 5 and 10, including pursuant to instruments executed and delivered in compliance with Sections 5.01(i), 10.02(e) or 10.13. "COLLATERAL DEFAULT" means a Default consisting of the Company's failure to comply with any provision contained in Article 10 of this Indenture which (i) either (A) results in an impairment of the validity, perfection, or priority of the Lien of this Indenture with respect to any portion of the Collateral having a fair market value in excess of $1 million in the aggregate or (B) would be materially adverse in any way to the Holders (any Default consisting of the failure to make any offer required to be made pursuant to Article 10 being deemed, without limitation, material for this purpose) and (ii) would constitute an Event of Default unless cured within the applicable cure or grace period set forth in Section 6.01(3). "COMMON STOCK" means the common stock, par value $.08-1/3 per share, of the Company. "COMPANY" means MAXXAM Group Inc., a Delaware corporation, and, subject to the provisions of Article 5 hereof, shall mean its successors and assigns; provided, however, that, for purposes of any provision contained herein which is required by the TIA, "Company" shall also mean each other obligor (if any) on the indenture securi- ties. "CONSOLIDATED CASH FLOW COVERAGE RATIO" of the Company means, as of the date of the transaction giving rise to the need to calculate the Consolidated Cash Flow Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount of EBITDA for the immediately preceding four fiscal quarters for which financial information in respect thereof is available immediately prior to the Transaction Date to (ii) the aggregate Consolidated Interest Expense for the fiscal quarter in which the Transaction Date occurs and to be accrued during the three fiscal quarters immediately subsequent thereto (based upon the pro forma amount of Indebtedness of the Company and its Restricted Subsidiaries reasonably expected by the Company to be outstanding on the Transaction Date and thereafter other than the Timber Notes), assuming for the purposes of this measurement the continuation of market interest rates prevailing on the Trans- action Date and base interest rates in respect of floating interest rate obligations equal to the base interest rates on such obligations in effect as of the Transaction Date; provided, that if the Company or any of its Restricted Subsidiaries is a party to any Interest Rate Protection Agreements which would have the effect of changing the interest rate on any Indebtedness of the Company or any of its Restricted Subsidiaries for such four quarter period (or a portion thereof), the resulting rate shall be used for such four quarter period or portion thereof; and provided, further, that any Consolidat- ed Interest Expense with respect to Indebtedness Incurred or retired by the Company or any of its Restricted Subsidiaries during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Indebtedness was so Incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs; and provided, further, that if, during the four fiscal quarters referred to in clause (i) of this definition, (A) the Company or any of its Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which are the subject of such Asset Sale calculated on a pro forma basis as if such Asset Sale and any related retirement of Indebtedness had occurred on the first day of such period or (B) the Company or any of its Restricted Subsidiaries shall have acquired any material assets out of the ordinary course of business, EBITDA shall be calculated on a pro forma basis as if such asset acquisition and any related financing had occurred on the first day of such period. "CONSOLIDATED INCOME TAX EXPENSE" of the Company means (without duplication), for any period, the aggregate of the income tax expense (net of applicable credits) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP other than income taxes (including credits) with respect to items of net income excluded from the definition of Consolidated Net Income. "CONSOLIDATED INTEREST EXPENSE" of the Company means, for any period (without duplication), (i) the sum of (A) the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, (B) all fees, commissions, discounts and other charges of the Company and its Subsidiaries with respect to letters of credit and bankers' acceptances and the costs (net of benefits) associated with Interest Rate Protection Agreements for such period, determined on a consolidated basis in accordance with GAAP, and (C) dividends declared on Redeemable Stock of the Company or any Restricted Subsidiary held by persons other than the Company or a Wholly Owned Restricted Subsidiary (other than dividends payable in Capital Stock of the Company or pro rata dividends payable to all stockholders of such class or series of Stock payable in Capital Stock of any such Restricted Subsidiary), less (ii) the sum of (x), to the extent included in clause (i) of this definition, any charge in connection with the repurchase or redemption of the Old Securities with respect to premiums paid in excess of the principal amount of the Old Securities so repurchased or redeemed, and (y) the amortization or write-off of deferred financing costs by the Company and its Subsidiaries during such period, determined on a consolidated basis in accordance with GAAP (including, without limitation, the amortization of any unamortized deferred financing costs in connection with any refinancing of the Credit Agreement and/or the repurchase or redemption of the Old Securities); in the case of clauses (i) and (ii) of this definition, without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary, or to Scotia Pacific so long as any Timber Notes are outstanding, during such period. "CONSOLIDATED NET INCOME" of the Company means, for any period, the aggregate net income (or net loss, as the case may be) of the Company and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP ("GAAP Net Income"); provided that (without duplication) there shall be excluded from GAAP Net Income (to the extent otherwise included therein) (i) gains and losses (net of applicable taxes) from Asset Sales or reserves relating thereto (except any gain or loss on the sale of an Unrestricted Subsidiary); (ii) items classified as extraordinary and gains and losses from discontinued operations; (iii) the net income (or loss) of (A) any Unrestricted Subsidiary or (B) any per- son that is not a Subsidiary of the Company or that is accounted for on the equity method of accounting, provided, that in each case the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries (other than Salmon Creek Distributions) during such period shall be added to Consolidated Net Income (to the extent, in the case of clause (A), that the Company elects to include such distributions in the computation of Consolidated Net Income at the time of the computation thereof); (iv) except to the extent includable pursuant to clause (iii) of this definition, the net income (or loss) of any other person accrued or attributable to any period prior to the date it becomes a Subsidiary of the Company or is merged into or consolidated with the Company or any of its Subsidiaries or such other person's property (or a portion thereof) is acquired by the Company or any of its Subsidiaries; (v) the net income (or loss) of any Restricted Subsidiary during such period if the declaration or payment of dividends or similar distributions by such Restricted Subsidiary to the Company of any such net income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or government regulation applicable to such Restricted Subsidiary, provided, that the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such Restricted Subsidiary (other than Salmon Creek Distributions) shall be added to Consolidated Net Income during such period; and (vi) any property or cash transferred or to be transferred in the Transactions; provided, further, that there shall be excluded from Consolidated Net Income, to the extent otherwise included therein, the amount of dividends and distributions made with the net proceeds of any Equity Offering by any Subsidiary of the Company; provided, further, that there shall be included in Consolidated Net Income the fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee) in excess of $62 million of Salmon Creek Distributions received by the Company or any of its Restricted Subsidiaries from Pacific Lumber; provided that, to the extent that any dividends or distributions shall be permitted (and shall be made) by the Company pursuant to Section 4.04(a) as a result of the inclusion of amounts in Consolidated Net Income pursuant to this proviso, (i) such dividends or distributions (to the extent made in cash) shall not exceed 50% of the amount of cash received (including any cash realization of any non-cash proceeds of any Salmon Creek Distribution, but, in each case, only as, when, and to the extent, received by the Company or any of its Restricted Subsidiaries (other than Pacific Lumber and its Restricted Subsidiaries)) by the Company and/or its Restricted Subsidiaries in respect of Salmon Creek Distributions from Pacific Lumber, and (ii) such dividends or distributions (to the extent made in kind with property received by the Company and/or its Restricted Subsidiaries in a Salmon Creek Distribution from Pacific Lumber) shall be valued at fair market value (as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee, except to the extent the fair market value exceeds $10 million, in which case such determination shall be made by an investment banking firm with capital of at least $250 million or a nationally recognized appraiser or other expert selected by the Company whose opinion shall be delivered, and shall be acceptable, to the Trustee). "CREDIT AGREEMENT" means the agreement dated June 23, 1993, between Bank of America, National Trust and Savings Association and Pacific Lumber, together with all related notes, letters of credit, collateral documents and guarantees and any other related agreements and instruments executed and delivered in connection therewith, in each case, as amended, supplemented, restated, restructured, renewed, extended, refinanced or otherwise modified, in whole or in part, from time to time. "DEED OF TRUST" means the Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds, dated March 18, 1993, from Scotia Pacific to the Deed of Trust Trustee named therein, for the benefit of the Collateral Agent named therein, as amended, supplemented or otherwise modified from time to time. "DEFAULT" means any event which is, or after notice or passage of time or both would be, an Event of Default as specified in Section 6.01. "EBITDA" of the Company means, for any period, the sum for such period of Consolidated Net Income plus, to the extent reflected in the income statement for such period from which Consolidated Net Income is determined, without duplication, (i) Consolidated Interest Expense, (ii) Consolidated Income Tax Expense, (iii) depreciation and depletion expense, (iv) amortization expense (including amortization of deferred financing costs), and (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Indebtedness prior to its stated maturity; (A) in the case of clauses (iii), (iv) and (v) of this definition, of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP for such period, but without giving effect to any such items and amounts attributable to any Unrestricted Subsidiary during such period or to Scotia Pacific so long as any Timber Notes are outstanding, and (B) in the case of clauses (iv) and (v) of this definition, excluding the amounts thereof excluded from the definition of "Consolidated Interest Expense" pursu- ant to clause (ii) of such definition. "EQUITY OFFERING" means any sale, public or private, of equity securities of any person. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "EXEMPT DISTRIBUTIONS" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any of the Pledged Shares other than: (i) any liquidating dividend or other liquidating distribution or other similar extraordinary dividend or distribution; (ii) any dividend or other distribution on Pledged Shares that constitute Stock of Pacific Lumber (or its permitted successor pursuant to Section 10.13) if the amount of all dividends and other distributions on the Stock of Pacific Lumber made on or after the Issue Date to and including the date of such dividend or other distribution on such Pledged Shares (exclusive of amounts referred to in clauses (v), (vi) and (vii) below) exceeds the sum of 100% of the consolidated net income of Pacific Lumber plus 100% of the consolidated depletion expense of Pacific Lumber, each determined in accordance with GAAP, accrued on a cumulative basis subsequent to September 30, 1993; (iii) any dividend or other distribution on Pledged Kaiser Shares if the amount of all dividends and other distributions on the common stock of Kaiser made on or after the Issue Date to and including the date of such dividend or other distribution on such Pledged Kaiser Shares (exclusive of amounts referred to in clauses (v), (vi) and (vii) below) made on or after the Issue Date exceeds 100% of the consolidated net income of Kaiser determined in accordance with GAAP, accrued on a cumulative basis subsequent to September 30, 1993; (iv) any dividend or other distribution on Pledged Shares that constitute Stock of Britt made in any fiscal year if the amount of all dividends and other distributions on the Stock of Britt made during such fiscal year to and including the date of such dividend or other distribution on such Pledged Shares (exclusive of amounts referred to in clauses (v), (vi) and (vii) below) exceeds 100% of the consolidated net income, determined in accordance with GAAP, of Britt during the prior fiscal year; (v) any Salmon Creek Distribution and any property or cash transferred or to be transferred in the Transactions; (vi) any dividend or other distribution consisting of proceeds of any Primary Share Sale by a Pledged Company or Kaiser or proceeds of any Pledged Share Sale; and (vii) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with Sections 10.05(c)(2) or 10.13. Notwithstanding the foregoing, any dividend or other distribution made on any Pledged Shares of a Pledged Company and received by the Company or MPI during any fiscal year shall be an Exempt Distribution if such dividend or distribution, together with all other dividends and other distributions previously so made during such fiscal year (exclusive of amounts referred to in clauses (v), (vi) and (vii) above), does not exceed 120% of the interest that has become payable or is to become payable on the Securities during such year. "EXTRAORDINARY DISTRIBUTION" means any and all dividends, cash, instruments and other property and proceeds received, receivable or otherwise distributed on any Pledged Shares other than: (i) an Exempt Distribution; (ii) any Salmon Creek Distribution and any property or cash transferred or to be transferred in the Transactions; (iii) any dividend or other distribution consisting of proceeds of any Primary Share Sale by a Pledged Company or Kaiser or proceeds of any Pledged Share Sale; and (iv) any dividend or other distribution of proceeds of a transaction effected pursuant to and in accordance with Section 10.05(c)(2) or 10.13. "GAAP" means, at any date, generally accepted accounting principles as in effect on December 31, 1992, and used in the preparation of the Company's consolidated balance sheet at such date and the Company's statements of consolidated income and cash flows for the year then ended, but (A) in any event giving effect to Statement of Financial Accounting Standards No. 115 (Accounting for Certain Investments in Debt and Equity Securities) but (B) excluding the effect of any one-time charges related to the implementation of, Statement of Financial Accounting Standards No. 106 (Employers' Accounting for Postretirement Benefits Other than Pensions) and Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes). "HOLDER" OR "SECURITYHOLDER" means the person in whose name a Security is registered on the Registrar's books. "INDEBTEDNESS" of any person means, at any date, any of the following (without duplication): (i) the principal amount of all obligations (unconditional or contingent) of such person for borrowed money (whether or not there is recourse to the whole of the assets of such person or only to a portion thereof) and the principal amount of all obligations (unconditional or contingent) of such person evidenced by debentures, notes or other similar instruments (including, without limitation, reimbursement obligations with respect to letters of credit (except to the extent collateralized by cash or Cash Equivalents), performance bonds (except to the extent collateralized by cash or Cash Equivalents) and bankers' acceptances (except to the extent collateralized by cash or Cash Equivalents)); (ii) all obligations of such person to pay the deferred purchase price of property or services, except (A) accounts payable and other current liabilities arising in the ordinary course of business and (B) compensation, pension obligations and other obligations arising from employee benefits and employee arrangements; (iii) Capital Lease Obligations of such person; (iv) all Indebtedness of others secured by a Lien on any asset of such person whether or not such Indebtedness is assumed or guaranteed by such person; (v) all Indebtedness of others guaranteed by such person; and (vi) all Redeemable Stock, valued at the greater of its voluntary or involuntary maximum fixed repurchase price (or its stated liquidation value in the case of Preferred Stock that is not by its terms redeemable) exclusive of accrued and unpaid dividends; and the amounts thereof shall be the outstanding balance of any such unconditional obligations as described in clauses (i) through (v) (other than clause (iv)), and the maximum liability of any such contingent obligations at such date as described in clauses (i) through (v) (other than with respect to clause (iv)) and, in the case of clause (iv), the lesser of the fair value (as determined by the Board of Directors) at such date of any asset subject to any Lien securing the Indebtedness of others and the principal amount of the Indebtedness secured; provided, that the Indebtedness of any person shall not include (x) obligations of such person arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business, provided, that such obligations are extinguished within two Business Days after their Incurrence and (y) obligations of such person resulting from the endorsement of negotiable instruments in the ordinary course of business. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were purchased on any date on which Indebtedness is required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Redeemable Stock, such fair market value shall be determined in good faith by the board of directors of the issuer of such Redeemable Stock. "INDENTURE" means this Indenture as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. "INTEREST PAYMENT DEFAULT" means a default in the payment of interest when due and payable on any of the Securities which would constitute an Event of Default if such payment were not made within the applicable cure or grace period pursuant to Section 6.01(1). "INTEREST RATE PROTECTION AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, currency swap agreement or other financial agreement or arrangement designed to protect the Company or any Subsidiary of the Company against fluctuations in interest rates or currency exchange rates, as in effect from time to time. "INVESTMENT" means with respect to any person (such person being referred to in this definition as the "Investor") (without duplication), (i) any amount paid or any property transferred, in each case, directly or indirectly, by the Investor for Capital Stock or Redeemable Stock, partnership interests or other securities of, or as a contribution to the capital of any other person, (ii) any direct or indirect loan or advance by the Investor to any other person other than accounts receivable of the Investor relating to the purchase and sale of property or services arising in the ordinary course of busi- ness, and (iii) any direct or indirect guarantee by the Investor of any Indebtedness of any other person. "ISSUE DATE" means August 4, 1993. "KAISER" means Kaiser Aluminum Corporation, a Delaware corporation, and any successor pursuant to a transaction governed by and in accordance with Section 10.05(c)(2). "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking institutions are not required by applicable law to be open in the States of New York, California, Massachusetts and Texas. "LIEN" means, with respect to any asset, any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof) in respect of such asset. "MAXXAM" means MAXXAM Inc., a Delaware corporation, and any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise. "MONEY" or "U.S. LEGAL TENDER" means such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. "MPI" means MAXXAM Properties Inc., a Delaware corporation, and any successor Restricted Subsidiary pursuant to a transaction governed by and in accordance with Section 10.13. "MXM GUARANTY" means the Unconditional Guarantee of Payment and Performance, dated June 17, 1991, to General Electric Capital Corp. by MAXXAM and the Company, as amended by agreement, dated as of June 17, 1992 and December 30, 1992, as amended, supplemented or otherwise modified from time to time in a manner that is not materially adverse to Holders. "NET CASH PROCEEDS" means cash payments received (but if received in a currency other than United States dollars, such payments shall not be deemed received until the earliest time at which such currency is converted into United States dollars) by the Company and/or any of its Restricted Subsidiaries (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, or the cash realization of any non-cash pro- ceeds of any Asset Sale, but, in each case, only as and when, and to the extent, received by the Company or any of its Restricted Subsidiaries) from an Asset Sale, in each case and without duplication, net of (i) fees, expenses and other expenditures in connection with such Asset Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness assumed, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Asset Sale or (B) associated with such assets and due in connection with such Asset Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Asset Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such assets which are the subject of such Asset Sale, (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in connection with or as a result of such Asset Sale, (v) with respect to any Asset Sale by a Restricted Subsidiary of the Company or any Primary Share Sale, the portion of such cash payments required to be paid to persons holding a minority interest in such Restricted Subsidiary and (vi) if such Asset Sale is a Primary Share Sale by any Pledged Company, any of the proceeds of such Primary Share Sale that are distributed by the issuer in such Primary Share Sale to its stockholders; provided, in each such case, such fees, expenses, expenditures and other amounts are not payable to an Affiliate of the Company. "NET PROCEEDS" means any property, assets or other consideration of any kind, whether tangible or intangible, received by the Company and/or any of its Restricted Subsidiaries from any Primary Share Sale by, or from any Pledged Share Sale of any of the Pledged Shares of, any Pledged Company, or received by MAXXAM from any Primary Share Sale by, or from any Pledged Share Sale of any of the Pledged Shares of, Kaiser, in each case and without duplication, net of (i) fees, expenses and other expenditures in connection with such Primary Share Sale or Pledged Share Sale (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (ii) the amounts paid to repurchase or repay any Indebtedness, or the amount of any Indebtedness assumed, in each case which Indebtedness is either (A) secured, directly or indirectly, by Liens on the assets which are the subject of such Primary Share Sale or Pledged Share Sale or (B) associated with such assets and due in connection with such Primary Share Sale or Pledged Share Sale, and other fees, expenses and other expenditures, in each case, incurred in connection with such Primary Share Sale or Pledged Share Sale or the repurchase, repayment or assumption of such Indebtedness (whether or not such fees, expenses or expenditures are then due and payable), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Treasurer or an Assistant Treasurer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such shares which are the subject of such Primary Share Sale or Pledged Share Sale, (iv) all foreign, federal, state and local taxes payable (including taxes reasonably estimated to be payable) in connection with or as a result of such Primary Share Sale or Pledged Share Sale, (v) with respect to any Primary Share Sale by a Pledged Company or by Kaiser, the portion of Net Proceeds required to be paid to persons holding Stock in such Pledged Company or in Kaiser, as the case may be, that is not required to be Pledged Shares and (vi) in the case of a Primary Share Sale that is an Asset Sale, any of the proceeds from such Asset Sale that are applied as de- scribed in clauses (i) and (ii) of the definition of"Asset Sale Offer Amount" (without theretofore having been distributed on any Pledged Shares) within 360 days following the consummation of such Asset Sale; provided, in each such case, such fees, expenses, expenditures and other amounts are not payable to an Affiliate of the Company; and provided, further, that, if other than cash, Net Proceeds shall have as their value for purposes of this Indenture their fair value as reasonably- determined by the Board of Directors. "NOTICE OF ACCELERATION" means a written notice delivered during the continuance of an Event of Default to the Company by the Trustee or by the Holders of at least 25% in aggregate Accreted Value of the Securities then outstanding, stating that an Event of Default has occurred and is continuing and that the Accreted Value of and accrued and unpaid interest, if any, on all of the Securities are due and payable; provided that a Notice of Acceleration shall be deemed to have been delivered and to be effective for all purposes under Article 10 of this Indenture upon the occurrence and during the continuance of an event with respect to the Company specified in Section 6.01(5) or (6). "OFFICER" means the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary of the Company. "OFFICERS' CERTIFICATE" means a certificate signed by two Officers. "OLD SECURITIES" means the 12-3/4% Notes due November 15, 1995, of the Company, issued and outstanding pursuant to the indenture dated as of November 1, 1991, by and between the Company and First Trust National Association, as trustee. "OPINION OF COUNSEL" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee, as the case may be. "PACIFIC LUMBER" means The Pacific Lumber Company, a Delaware corporation, and any successor Restricted Subsidiary pursuant to a transaction governed by and in accordance with Section 10.13. "PACIFIC LUMBER INDENTURE" means the indenture, dated March 23, 1993, between Pacific Lumber and The First National Bank of Boston, as trustee, pursuant to which the Pacific Lumber Senior Notes were issued, as amended, supplemented or otherwise modified, or, in ac- cordance with and subject to the provisions of Section 4.03(c), restated, restructured, renewed or refinanced in whole or in part from time to time. "PACIFIC LUMBER SENIOR NOTES" means the debt securities outstanding pursuant to, and whose terms are governed by, the Pacific Lumber Indenture. "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "PLEDGED COMPANY" means (i) Pacific Lumber, Britt and MPI, in each case until such time as such corporation merges or consolidates into, or transfers all of its assets to, the Company or another Restricted Subsidiary in a transaction pursuant to and in accordance with Section 10.13 and (ii) any such other Restricted Subsidiary into which any Pledged Company merges or consolidates, or to which any Pledged Company transfers all or substantially all of its assets, in a transaction pursuant to and in accordance with Section 10.13, until such time as such other Restricted Subsidiary merges or consolidates into, or transfers all of its assets to, the Company or another Restricted Subsidiary of the Company in a transaction pursuant to and in accordance with Section 10.13. "PLEDGED KAISER SHARES" means, at any time, any shares of Common Stock, par value $.01 per share, of Kaiser ("Kaiser Shares") included in the Collateral at such time, and any securities or other property substituted for Kaiser Shares pursuant to Section 10.05(c) included in the Collateral at such time. "PLEDGED SHARE SALE" means a sale to any person of Pledged Shares other than (i) a sale in connection with a transaction pursuant to and in accordance with Section 10.13, (ii) a sale in connection with a transaction pursuant to and in accordance with Section 10.05(c)(2) or (iii) a sale of Pledged Shares of a Pledged Company by the Company or one of its Subsidiaries to the Company or any of its Subsidiaries, in which the purchaser becomes a Pledgor with respect to such Pledged Shares pursuant to Article 10 hereof. "PLEDGED SHARES" means, at any time, (i) any shares of Stock of Pledged Companies that are included in the Collateral at such time and (ii) any Pledged Kaiser Shares. "PLEDGOR" means: (i) on the Issue Date, (A) MPI, with respect to the Pledged Shares of Pacific Lumber and Britt, (B) the Company, with respect to the Pledged Shares of MPI and (C) MAXXAM, with respect to the Pledged Kaiser Shares; and (ii) at any other time, with respect to any property constituting Collateral at such time, any person who has granted, pursuant to Section 10.01, 5.01(i), 10.02(e) or 10.13, a security interest in such person's right, title and interest in and to any property that at such time constitutes Collateral. "PREFERRED STOCK" as applied to the Capital Stock or Redeemable Stock of any corporation, means Capital Stock or Redeemable Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock or Redeemable Stock, as the case may be, of any other class of such corporation. "PRIMARY SHARE SALE" means (i) any issuance and sale of Stock by a Pledged Company other than to the Company or any of its Subsidiaries (provided, that no issuance of Stock in connection with a transaction pursuant to and in accordance with Section 10.13 shall constitute a Primary Share Sale) and (ii) any issuance and sale of common stock by Kaiser (provided, that no issuance of Stock in connection with a transaction pursuant to and in accordance with Section 10.05(c)(2) shall constitute a Primary Share Sale). "PRO RATA BASIS" means, (i) with respect to a redemption in part of the Securities pursuant to Section 5 of the Securities and Article 3 of this Indenture, that (except as may otherwise result from the selection methods used in accordance with Section 3.02 and except as to Securities, or portions thereof, previously called for redemption) (A) the portion of the Accreted Value (at the redemption date) of each outstanding Series A Security called for redemption divided by the outstanding Accreted Value (at the redemption date) of such Security equals (B) the portion of the Accreted Value of each outstanding Series B Security called for redemption divided by the outstanding Accreted Value thereof; and (ii) as applied to an offer to purchase the Securities pursuant to Section 4.07 or 10.05 hereof, that (except as may otherwise result from adjustments made in accordance with Section 4.07(d)(8) or 10.05(f)(viii), as the case may be, and except as to Securities not tendered into, or tendered into and withdrawn from, such offer) (A) the portion of the Accreted Value (at the purchase date) of each outstanding Series A Security accepted for purchase pursuant to such offer divided by the portion of the outstanding Accreted Value (at the purchase date) of such Security tendered into and not withdrawn from such offer equals (B) the portion of the Accreted Value of each outstanding Series B Security accepted for purchase pursuant to such offer divided by the portion of the outstanding Accreted Value thereof tendered into and not withdrawn from such offer. "PROSPECTUS" means the final prospectus, dated July 28, 1993, filed pursuant to Rule 424(b) of the Securities Act, as part of the Company's registration statement (no. 33-64042) on Form S-2 relating to the offering and sale of the Securities. "PUBLIC EQUITY OFFERING" means an underwritten public offering of common stock of the Company, MPI or Pacific Lumber (or the successor in a transaction with MPI or Pacific Lumber that becomes a Pledged Company pursuant to Section 10.13) pursuant to an effective reg- istration statement filed pursuant to the Securities Act. "REDEEMABLE STOCK" of any person means any equity security of such person that by its terms is required to be redeemed prior to the final Stated Maturity of all principal of the Securities, or is redeemable at the option of the holder thereof at any time prior to the final Stated Maturity of all principal of the Securities and shall also include, in the case of the Company, all Preferred Stock of the Company's Restricted Subsidiaries. "RESTRICTED INVESTMENT" means any Investment in an Affiliate of the Company. "RESTRICTED SUBSIDIARY" means, as of any determination date, each of the Subsidiaries of the Company which is not as of such determination date an Unrestricted Subsidiary of the Company. "SALMON CREEK" means Salmon Creek Corporation, a Delaware corporation, or any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise, which holds the Salmon Creek Property on the date of this Indenture but which may not acquire any other assets (other than assets incidental to the operation, disposition, management and maintenance of the Salmon Creek Property or assets received (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property), except in exchange for or out of the proceeds of the sale or disposition of the Salmon Creek Property. "SALMON CREEK DISTRIBUTION" means a dividend or other distribution identified as a "Salmon Creek Distribution" by the Company in writing to the Trustee at the time of such dividend or other distribution. "SALMON CREEK PROPERTY" means any of the property described on Exhibit B to this Indenture or any assets or Stock, in each case, held by Salmon Creek. "SCOTIA PACIFIC" means Scotia Pacific Holding Company, a Delaware corporation, and any successor corporation, by way of merger, consolidation, purchase of all or substantially all of its assets, or otherwise. "SCOTIA PACIFIC AGREEMENTS" means any agreements between Scotia Pacific and Pacific Lumber or any Subsidiary of Pacific Lumber as the same may be amended after the date hereof in accordance with the terms thereof, including, without limitation, the Master Purchase Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Additional Services Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, the Environmental Indemnification Agreement, dated as of March 23, 1993, between Scotia Pacific and Pacific Lumber, and the Reciprocal Rights Agreement, dated as of March 18, 1993, among Scotia Pacific, Pacific Lumber and Salmon Creek. "SEC" means the Securities and Exchange Commission or any successor regulatory agency thereto. "SECURITIES" means, collectively, the 12 1/4% Senior Secured Discount Notes due 2003 (the "Series A Securities") and the 11 1/4% Senior Secured Notes due 2003 (the "Series B Securities"), issued, authenticated and delivered pursuant to this Indenture, as amended, restated, restructured, renewed, extended, or otherwise modified, in whole or in part, from time to time. "SECURITIES ACT" means the Securities Act of 1933, as amended (or any successor statute thereto), and the rules and regulations promulgated thereunder. "SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the Company which at the time of determination had, or any group of Restricted Subsidiaries which, if merged into each other at the time of determination, would at the time of determination have had, (i) assets which, as of the date of the Company's most recent quarterly consolidated balance sheet, constituted at least 10% of the Company's total assets on a consolidated basis as of such date, (ii) revenues for the 12-month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total revenues on a consolidated basis for such period, or (iii) EBITDA for the 12month period ending on the date of the Company's most recent quarterly consolidated statement of income which constituted at least 10% of the Company's total EBITDA on a consolidated basis for such period (it being understood that for the purposes of clause (iii) of this definition, EBITDA of any Restricted Subsidiary or group of Restricted Subsidiaries of the Company for any period shall be that portion of the Company's total EBITDA attributable to such Restricted Subsidiary or group of Restricted Subsidiaries during such period). "STATED MATURITY", when used with respect to the payment of any principal of, or accrued interest on, any Security, means the date specified in such Security as the fixed date on which such principal of or accrued interest on such Security is due and payable, as the case may be. "STOCK" of any person means, collectively, the Capital Stock and the Redeemable Stock of such person. "SUBSIDIARY" means, with respect to any person, (i) any corporation of which more than 50% of the outstanding Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of the corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries of such person, or by such person and one or more other Subsidiaries of such person, or (ii) any other entity of which more than 50% of the outstanding equity ownership interests are at the time owned, directly or indirectly, by such person, or by one or more other Subsidiaries of such person, or by such person and one or more other Subsidiaries of such person. "TAKING" means any sale, transfer or other disposition of all or any part of the assets of the Company and its Restricted Subsidiaries that occurs by reason of condemnation or eminent domain or other similar proceedings exercised by the United States of America or any State, municipality, agency or other governmental authority thereof. "TAX SHARING AGREEMENTS" means (i) the tax allocation agreement, dated May 21, 1988, by and among MAXXAM, Pacific Lumber and certain other subsidiaries of MAXXAM and the Company, as amended by the tax allocation agreement, dated as of March 23, 1993, by and among MAXXAM, Pacific Lumber, Scotia Pacific and Salmon Creek, and as amended by the tax allocation agreement, dated as of the Issue Date, by and among MAXXAM and the Company, and (ii) the tax allocation agreement, dated as of July 3, 1990, by and among MAXXAM and Britt; each as amended, supplemented or otherwise modified from time to time. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa through 77bbbb) as in effect on the date of this Indenture, except as otherwise expressly provided herein. "TIMBER NOTE INDENTURE" means the Indenture, dated as of March 23, 1993, between Scotia Pacific and The First National Bank of Boston, as trustee, pursuant to which the Timber Notes were issued, as amended, supplemented or otherwise modified from time to time. "TIMBER NOTES" means the 7.95% Timber Collateralized Notes due 2015, issued by Scotia Pacific, as amended, supplemented or otherwise modified, in whole or in part, from time to time in accordance with the terms of the Timber Note Indenture. "TRANSACTIONS" means (i) the transactions described in the Prospectus, under the caption "The Forest Products Group Formation" therein and (ii) the retirement of the Old Securities, described in the Prospectus, under the caption "Use of Proceeds." "TRUST OFFICER" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "TRUSTEE" means the party named as such in this Indenture until a successor replaces it in accordance with the terms of this Indenture and, thereafter, means the successor. "UNIFORM COMMERCIAL CODE" means the New York Uniform Commercial Code as in effect from time to time, except with respect to matters concerning the validity and perfection of security interests of the Trustee in favor of the Holders in the Accounts, in which case such term shall mean the Massachusetts Uniform Commercial Code as in effect from time to time. "UNRESTRICTED INVESTMENTS OUTSTANDING" means, at any time of determination, in respect of any Unrestricted Subsidiary, the difference between (i) the sum of all Unrestricted Investments theretofore made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary after the date of this Indenture, minus (ii) the amount of all dividends and distributions paid to the Company or a Restricted Subsidiary (to the extent that the Company does not elect to include the amount of such dividends and distributions in the computation of Consolidated Net Income pursuant to the parenthetical of clause (iii) of the definition thereof at the time of determination) and all repayments of the principal amount of loans or advances by such Unrestricted Subsidiary to the Company or any of its Restricted Subsidiaries during the period that such person was an Unrestricted Subsidiary and any other reduction of Unrestricted Investments in such Unrestricted Subsidiary during the period that such person was an Unrestricted Subsidiary (the amount of any Unrestricted Investment returned or reduced, if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee); provided, that the amount of Unrestricted Investments Outstanding in respect of any Unrestricted Subsidiary shall at no time be a negative amount. Notwithstanding anything to the contrary contained in this Indenture, the Company or any of its Restricted Subsidiaries shall be permitted to contribute any non-cash proceeds received in respect of a Salmon Creek Distribution to an Unrestricted Subsidiary and such contribution shall not constitute an Unrestricted Investment under the Indenture, provided, that no such non-cash proceeds shall theretofore have been dividended or distributed by the Company as contemplated in clause (ii) of the last proviso to the definition of Consolidated Net Income. "UNRESTRICTED SUBSIDIARY" means (i) each of the Subsidiaries of the Company so designated by a resolution adopted by the Company's Board of Directors and whose creditors have no direct or indirect recourse (including, but not limited to, recourse with respect to the payment of principal or interest on Indebtedness of such Subsidiary) to the Company or a Restricted Subsidiary (except to the extent such recourse arises (A) solely by operation of law and not pursuant to a contractual or other consensual arrangement or (B) pursuant to an Investment or a Restricted Investment permitted by this Indenture), (ii) any joint venture, partnership or other person (other than a Subsidiary of the Company) in which the Company and/or its Subsidiaries have an equity ownership interest equal to or greater than 5% and in which no Affiliate of the Company has a direct or an indirect equity ownership interest in excess of 5% therein other than by virtue of the direct or indirect equity ownership interest in such joint venture, partnership or other person held (in the aggregate) by the Company and/or one or more of its Subsidiaries and (iii) Salmon Creek. The Board of Directors may designate an Unrestricted Subsidiary to be a Restricted Subsidiary, provided, that any such redesigna- tion shall be deemed to be an Incurrence by the Company and its Restricted Subsidiaries of the Indebtedness (if any) of such redesignated Restricted Subsidiary for purposes of Section 4.03 as of the date of such redesignation to the extent that such Indebtedness does not already constitute Indebtedness of the Company or one or more of its Restricted Subsidiaries. Subject to the foregoing, the Board of Directors of the Company also may designate any Restricted Subsidiary (other than Scotia Pacific so long as there are any Timber Notes outstanding) to be an Unrestricted Subsidiary, provided, that (x) the amount of any outstanding Investments by the Company and its Restricted Subsidiaries in such Restricted Subsidiary shall be deemed to be Unrestricted Investments Outstanding at the time of such designation and (y) immediately after giving effect to such designation and to the characterization of the Investments by the Company and its Restricted Subsidiaries in such newly designated Unrestricted Subsidiary, the Company and its remaining Restricted Subsidiaries could make at least $1.00 of additional Restricted Payments or Unrestricted Investments pursuant to Section 4.04. "U.S. LEGAL TENDER" See the definition of "money." "U.S. GOVERNMENTAL OBLIGATIONS" means any evidence of obligations issued directly or fully guaranteed or insured by the United States of America or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "VOTING STOCK" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled to vote in the election of directors. "WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary (i) which is a corporation of which all of the outstanding shares of Capital Stock and Redeemable Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time Capital Stock or Redeemable Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiaries), by the Company (except for director's qualifying shares), or (ii) which is any other entity of which all of the outstanding equity ownership interests are owned at the time, directly or indirectly (through one or more Wholly Owned Restricted Subsidiar- ies), by the Company. SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section ____ ____________ "Accounts" 10.03(a) "Adjustment Period" . . . . . . . . . . . . . . . . . . 4.08 "Aggregate Offer Amount" . . . . . . . . . . . . . . . 1.01 (within the definition of "pro rata basis") "Aggregate Redemption Price" . . . . . . . . . . . . 10.05(g) "Asset Sale Offer" . . . . . . . . . . . . . . . . . . 4.07(c) "Asset Sale Offer Amount" . . . . . . . . . . . . . . . 4.07(b) "Asset Sale Offer Notice" . . . . . . . . . . . . . . . 4.07(d) "Asset Sale Purchase Notice" . . . . . . . . . . . . . 4.07(e) "Asset Sale Purchase Price" . . . . . . . . . . . . . . 4.07(c) "Bankruptcy Law" . . . . . . . . . . . . . . . . . . . 6.01 "Beneficiary" . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Change of Control") "Cash Collateral Account" . . . . . . . . . . . . . . 10.03(a) "Cash Collateral Default Account" . . . . . . . . . . 10.03(a) "Cash Collateral Offer Account" . . . . . . . . . . . 10.03(a) "Cash Collateral Public Equity Offering Account" . . 10.03(a) "Change of Control Offer Notice" . . . . . . . . . . . 4.09(b) "Change of Control Purchase Date" . . . . . . . . . . . 4.09(a) "Change of Control Purchase Price" . . . . . . . . . . 4.09(a) "Collateralized Cash Proceeds Offer" . . . . . . . . 10.05(f) "Collateralized Cash Proceeds Offer Amount" . . . . . 10.05(f) "Collateralized Cash Proceeds Offer Notice" . . . . . 10.05(f) "Collateralized Cash Proceeds Purchase Date" . . . . 10.05(f) "Collateralized Cash Proceeds Purchase Notice" . . . 10.05(f) "Collateralized Cash Proceeds Purchase Price" . . . . 10.05(f) "covenant defeasance option" . . . . . . . . . . . . . 8.01 "Custodian" . . . . . . . . . . . . . . . . . . . . . . 6.01 "Dividend Encumbrances" . . . . . . . . . . . . . . . . 4.17 "Event of Default" . . . . . . . . . . . . . . . . . . 6.01 "GAAP Net Income" . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Consolida- ted Net In- come") "Incur" (and the terms "Incurred" and "Incurrence" have correlative meanings) . . . . . . . . . . . . . . 4.03 "Kaiser Shares" . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Pledged Kaiser Shares") "Kaiser Transaction" . . . . . . . . . . . . . . . . . "legal defeasance option" . . . . . . . . . . . . . . . 8.01 "maximum fixed repurchase price" . . . . . . . . . . . 1.01 (within the definition of "Indebted- ness") "Minimum percentage" . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Change of Control") "Monetization" . . . . . . . . . . . . . . . . . . . . 10.05(b) "Moody's" . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Cash Equivalents") "Non-Cash Amount" . . . . . . . . . . . . . . . . . . . 10.05(f) "Offer Amount" . . . . . . . . . . . . . . . . . . . . 4.07 "Paying Agent" . . . . . . . . . . . . . . . . . . . . 2.03 "PL Asset Sale" . . . . . . . . . . . . . . . . . . . . 4.07(b) "PPI Index" . . . . . . . . . . . . . . . . . . . . . . 4.08 "Repurchase" . . . . . . . . . . . . . . . . . . . . . 4.04(a) "refinance" (and the terms "refinancing" and "refinanced" have correlative meanings) . . . . . . . 4.03(c) "Refinancing Indebtedness" . . . . . . . . . . . . . . 4.03(c) "Registrar" . . . . . . . . . . . . . . . . . . . . . . 2.03 "Restricted Payment" . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Cash Equi- valents") "S&P" . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Cash Equi- valents") "Semiannual Compounding Date" . . . . . . . . . . . . . 1.01 (within the definition of "Accreted Value") "Series A Preferred Stock" . . . . . . . . . . . . . . 10.12(c) "Series A Securities" . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Securi- ties") "Series B Securities" . . . . . . . . . . . . . . . . . 1.01 (within the definition of "Securi- ties") "Trust Moneys" . . . . . . . . . . . . . . . . . . . . 10.03(a) "Unrestricted Investment" . . . . . . . . . . . . . . . 4.04(a)
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. Except as expressly provided herein, all other terms used in this Indenture that are defined by the TIA, or that are, by reference in the TIA, defined in the Securities Act, shall have the meaning assigned to such terms in the TIA and in the Securities Act, as the case may be, as they were in effect as of the date of this Indenture. SECTION 1.04. RULES OF CONSTRUCTION. For purposes of the Securities and this Indenture (except as otherwise expressly provided herein or unless the context otherwise requires): a term has the meaning assigned to it; (1) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (2) "or" is not exclusive; (3) "including" means including, without limitation; (4) words in the singular include the plural and words in the plural include the singular; (5) unsecured indebtedness shall not be deemed to rank subordinate or junior in right or priority of payment to secured indebtedness merely because it is unsecured indebtedness; and (6) the principal amount of any noninterest bearing security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP and accretion of principal on such security shall not be deemed to be the Incurrence of Indebtedness. ARTICLE 2 THE SECURITIES SECTION 2.01. FORM AND DATING. The Series A Securities and the Series B Securities (and the related Trustee's certificates of authentication) shall be substantially in the forms set forth in Exhibits A-l and A-2 hereto, respectively. The Securities may have notations, legends or endorsements lithographed or engraved thereon as the Company may deem appropriate and as not inconsistent with the provisions of this Indenture, or as may be required by law, stock exchange rule or regulation, or usage or agreements to which the Company is a party which are not inconsistent therewith (provided, that any such notation, legend or endorsement is in a form reasonably acceptable to the Trustee and the Company). Each Security shall be dated the date of its authentication. The terms and provisions contained in the forms of Securities, annexed hereto as Exhibits A-1 and A-2, shall constitute, and are hereby expressly made, a part of this Indenture. SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the Securities on behalf of the Company under its corporate seal. The Company's seal shall be impressed, affixed, imprinted or otherwise reproduced on the Securities and may be in facsimile form. The signature of any such officer or officers upon the Securities may be the manual or facsimile signature of the present or any future officer or officers and facsimile signatures may be imprinted or otherwise reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until a duly authorized officer of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate and deliver Series A Securities for original issuance in an aggregate principal amount at maturity of up to $126,720,000 and Series B Securities for original issuance in an aggregate principal amount of up to $100,000,000, in each case upon a written order of the Company, signed by two Officers of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the original issue of Securities is to be authenticated. The aggregate principal amount at maturity of Series A Securities outstanding at any time shall not exceed $126,720,000, and the aggregate principal amount of Series B Securities outstanding at any time shall not exceed $100,000,000, except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. The Securities shall be issued only in registered form, without coupons, and only in denominations of $1,000 principal amount at maturity and any integral multiple thereof. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("REGISTRAR") and an office or agency where Securities may be presented for payment ("PAYING AGENT"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may designate or appoint a Registrar or Paying Agent not a party to this Indenture. If the Company shall so designate or appoint such agent, the Company shall enter into an appropriate agency agreement with such Registrar or Paying Agent. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. Except as provided to the contrary herein, the Company or any Subsidiary or Affiliate of the Company may act as Paying Agent, Registrar or transfer agent. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to 11:00 A.M., New York City time, on each due date of the principal of or interest on any Security, the Company shall deposit with the Paying Agent immediately available funds sufficient to pay such prin- cipal or interest then so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment; provided, however, that any money earned on funds invested by the Trustee or any Paying Agent shall be remitted to the Company. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by it. Upon doing so, the Paying Agent (if other than the Company) shall have no further liability for the money so paid over to the Trustee. SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least seven Business Days before each interest payment date as set forth in the Securities and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.06. TRANSFER AND EXCHANGE. The Securities shall be issued in registered form and shall be transferable only upon the surrender of such Security for registration of transfer at the office or agency to be maintained by the Company. When a Security is pre- sented to the Registrar with a written request to register a transfer, the Registrar shall register the transfer as requested, and deliver a duly executed and authenticated Security or Securities in the name of the transferee, if its requirements are met. When Series A Securities and Series B Securities are presented to the Registrar with a request to exchange them for an equal princi- pal amount of Series A Securities and Series B Securities, as the case may be, in other authorized denominations, the Registrar shall make the exchange as requested, and deliver the duly executed and authenticated Security or Securities which the Holder making the exchange shall be entitled to receive, if the same requirements are met. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in relation thereto. The Company shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption in whole or in part (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or during the 15 day period prior to the date of the mailing of a notice of redemption of Securities selected for redemption or after an interest payment record date and before an interest payment date as set forth in the Securities. Prior to the due presentation for registration of transfer or exchange of any Security, the Company, the Paying Agent or the Registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, and none of the Company, the Trustee, the Paying Agent or the Registrar shall be affected by notice to the contrary. SECTION 2.07. REPLACEMENT SECURITIES. If a mutilated Security (temporary or definitive) is surrendered to the Registrar or if the Holder of a Series A Security or Series B Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Series A Security or Series B Security, as the case may be, if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder shall furnish to the Trustee and the Company an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent and the Registrar from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their respective expenses in replacing a Security. Every replacement Security is an additional obligation of the Company and shall be subject to all the terms and provisions of this Indenture. SECTION 2.08. OUTSTANDING SECURITIES. Securities outstanding at any time are all Securities that have been issued, authenticated and delivered by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company, one of its Subsidiaries or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. To the extent that the Trustee or the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay the Securities (or portions thereof) payable on that date and the Paying Agent is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions-thereof) cease to be outstanding, interest on them ceases to accrue and, in the case of the Series A Securities, any increase in Accreted Value ceases, in each case regardless of whether the Securities have been timely surrendered, and the only remaining right of the Holders thereof shall be to receive payment of the redemption price thereof, plus accrued and unpaid interest thereon to (but not including) such redemption date, if applicable, upon surrender to the Paying Agent of such Securities. SECTION 2.09. TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may execute and the Trustee shall authenticate and deliver temporary Securities (printed, lithographed or typewritten) of any authorized denomination, upon written order of the Company signed by two Officers. Temporary Securities shall be substantially in the form of definitive Securities, but with such omissions, insertions and variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall execute and deliver definitive Securities to the Trustee and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture and shall be subject to the same provisions hereof as definitive Securities authenticated and delivered hereunder. SECTION 2.10. CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee and no one else shall cancel and destroy all Securities surrendered for transfer, exchange, payment or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Trustee to deliver canceled Securities to the Company. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.11. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest (plus interest on such defaulted interest to the extent permitted by applicable law calculated at the same rate as the rate at which the interest that is in default was calculated). The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date, which date shall be at least five Business Days prior to the payment date. The Company shall fix or cause to be fixed any such special record date and payment date, and, at least 15 days before the special record date, the Company shall mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Company may pay defaulted interest in any other lawful manner. SECTION 2.12. CUSIP NUMBERS. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and the Trustee shall use CUSIP numbers in notices of redemption or exchange as a convenience to Holders upon written order of the Company signed by two Officers; provided, that any such notice shall state that neither the Trustee nor the Company makes any representation as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemp- tion or exchange shall not be affected by any defect in or omission of such numbers. ARTICLE 3 REDEMPTION SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date and the aggregate principal amount of Securities to be redeemed. The Company shall give each notice to the Trustee provided for in this Section 3.01 at least 45 days before the redemption date (unless a shorter notice period shall be satisfactory to the Trustee). If less than all the Securities are to be redeemed, the record date relating to such redemption shall be selected by the Company and given to the Trustee. SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed such that the redemption is effected on a pro rata basis. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal amount at maturity of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects for redemption shall be in denominations of $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee in redeeming Securities may use any method it considers fair and equitable to round up or down so that the amount of any Securities redeemed shall be in denominations of $1,000 or integral multiples thereof. If at the time of any such selection, the Trustee is not then the Registrar, the Trustee may direct the Registrar to make the selection in accordance with this Section 3.02. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. NOTICE OF REDEMPTION. At least 15 days (or 30 days if legally required by The Depositary Trust Company) but not more than 60 days before a date fixed for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's last address as it shall appear upon the register of the Secu- rities maintained by the Company, but any defect therein or failure of the addressee to receive such notice shall not affect the validity of the proceedings for the redemption of any of the Securities. Any failure to give such notice to the Holder of any Securities shall not affect the validity of the proceedings for the redemption of any other Security. The notice shall identify the Securities to be redeemed (including CUSIP numbers if used) and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts at maturity of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment, interest on Securities called for redemption ceases to accrue (and, in the case of Series A Securities, any increase in Accreted Value ceases) on and after the redemption date and the only remaining right of the Holders is to receive payment of the redemption price and accrued and unpaid interest thereon to (but not including) the redemption date, if applicable, upon surrender to the Paying Agent of such Securities; and (7) the paragraph of the Securities and the section of this Indenture pursuant to which the Securities are to be redeemed. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by clauses (1) through (3) at least 60 days prior to any such redemption date (unless a shorter notice period shall be satisfactory to the Trustee). SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price thereof stated in the notice. Upon surrender to the Paying Agent, each such Security shall be paid at the applicable redemption price thereof stated in the notice, plus accrued and unpaid interest thereon, if any, to (but not including) the redemption date. Unless the Company defaults in making the redemption payment, interest on the Securities called for redemption ceases to accrue (and, in the case of Series A Securities, any increase in Accreted Value ceases) on and after the redemption date (regardless of whether the Securities have been timely surrendered), and the only remaining right of the Holders thereof shall be to receive payment of the redemption price thereof, plus accrued and unpaid interest thereon to (but not including) such redemption date, if applicable, upon surrender to the Paying Agent of such Securities. If the date fixed for redemption is an interest payment date, the redemption payment shall not include accrued interest which shall be paid in the usual manner otherwise provided for herein. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 11:00 A.M., New York City time, on the redemption date, the Company shall deposit with the Paying Agent (or if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust as provided in Section 2.04) money sufficient to pay the redemption price of, and accrued interest, if any, on, all Securities to be redeemed on that date other than Securities or portions thereof called for redemption on that date which have been delivered by the Company to the Trustee for cancellation. All money earned on funds held in trust by the Trustee or any Paying Agent shall be remitted to the Company. SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a Series A Security or Series B Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof (at the Company's expense) a new Series A Security of Series B Security, as the case may be, equal in principal amount at maturity in authorized denominations to the unredeemed portion of the Security surrendered. SECTION 3.07. CANCELLATION OF REDEEMED SECURITIES. All Securities surrendered to the Trustee, upon redemption pursuant to the provisions of this Article 3, shall be forthwith cancelled by it. SECTION 3.08. NO REPURCHASE RESTRICTIONS. Except as expressly provided in Article 10, nothing contained in this Indenture or in the Securities shall be deemed to prohibit or in any way restrict the Company, any Subsidiary or any Affiliate from purchasing or otherwise acquiring any Security or interest therein at any price or for any consideration whether higher or lower than the redemption price, in a transaction not effected pursuant to this Article 3. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly pay the principal of and accrued interest, if any, on the Securities on the dates and in the manner provided in the Securities and in this Indenture. The principal of Securities and accrued interest, if any, shall be considered paid on the date due to the extent that on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay the principal of the Securities and accrued interest, if any, then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal of the Series A Securities and Series B Securities at the rates specified therefor in the Series A Securities and Series B Securities, respectively, and it shall in each case pay interest on overdue installments of interest to the extent permitted by applicable law calculated at the same rate as the rate at which the interest that is in default was calculated. SECTION 4.02. SEC REPORTS. The Company shall file with the Trustee and provide Securityholders, within 15 days after it files them with the SEC, copies of its annual report and of the final information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations pre- scribe) which the Company or any Subsidiary is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall continue to file with the SEC and provide the Trustee and Securityholders with such annual reports and such information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which are specified in Sections 13 and 15(d) of the Exchange Act. The Company also shall comply with the provisions of TIA Section 314(a). SECTION 4.03. LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or become liable with respect to, contingently or otherwise (collectively, "INCUR"), any Indebtedness (including, without duplication, guarantees of Indebtedness by the Company and/or its Restricted Subsidiaries), except that the Company and/or its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur Indebtedness (including, without duplication, guarantees of Indebtedness by the Company and/or its Restricted Subsidiaries) if, immediately after giving effect thereto and the receipt and application of the proceeds thereof, the Consolidated Cash Flow Coverage Ratio of the Company would exceed 2.0 to 1. (b) Notwithstanding the provisions of Section 4.03(a), the Company and/or its Restricted Subsidiaries (other than, except in the case of clauses (xi) and (xii) of Section 4.03(b), Scotia Pacific so long as there are any Timber Notes outstanding) may Incur (without duplication) the following: (i) Indebtedness in respect of the Securities; (ii) aggregate Indebtedness under the Credit Agreement in an amount not to exceed at any time outstanding $40,000,000; (iii) Indebtedness outstanding on the Issue Date, including the indebtedness outstanding pursuant to the Pacific Lumber Indenture (other than the Timber Notes which are governed by clause (xi) of this Section 4.03(b)); (iv) Indebtedness in connection with one or more letters of credit issued pursuant to (A) self-insurance obligations (other than workmen's compensation obligations), the aggregate face or stated amount of which, together with the aggregate amount of any related reimbursement obligations (without duplication) does not exceed $1,000,000 at any time outstanding, and (B) workmen's compensa- tion obligations; (v) Indebtedness owed by the Company to a Restricted Subsidiary or owed by a Restricted Subsidiary to the Company or to any other Restricted Subsidiary of the Company; (vi) Capital Lease Obligations (other than Capital Lease Obligations permitted by clause (xii) of this Section 4.03(b)) not exceeding in the aggregate $10,000,000 at any time outstanding; (vii) Indebtedness under any Interest Rate Protection Agreement to the extent that such Interest Rate Protection Agreement is related to payment obligations on Indebtedness otherwise permitted under this Section 4.03; (viii) Indebtedness Incurred in connection with Indebtedness the interest on which is exempt from Federal income tax under the Code in an aggregate amount not exceeding $10,000,000 at any time outstanding; (ix) Indebtedness owed to or guaranteed by any governmental agency, instrumentality or other authority Incur red to provide relief from natural disasters or other similar assistance; (x) Indebtedness Incurred after the Issue Date (in addition to (and without duplication of) Indebtedness otherwise permitted by this Section 4.03), in an aggregate principal amount not exceeding $25,000,000 at any one time outstanding in the case of Indebtedness Incurred by Pacific Lumber and its Subsidiaries that are Restricted Subsidiaries and $15,000,000 at any one time outstanding in the case of Indebtedness Incurred by the Company and its Restricted Subsidiaries other than Pacific Lumber and its Subsidiaries that are Restricted Subsidiaries; (xi) Indebtedness of Scotia Pacific under the Timber Notes or the Timber Note Indenture or in respect of the Scotia Pacific Agreements or any other agreement entered into in connection with the Timber Notes, as the same may be amended from time to time in accordance with Section 4.11; and (xii) Capital Lease Obligations of Scotia Pacific. (c) Notwithstanding anything to the contrary in Section 4.03(a) or (b), the Company and its Restricted Subsidiaries (other than Scotia Pacific so long as there are any Timber Notes outstanding) may Incur Indebtedness all of the net proceeds of which (after premiums, reasonable fees, expenses and costs related to the incurrence of such Indebtedness) are applied to renew, extend, restructure, restate, refund or otherwise refinance, in whole or in part (collectively, "REFINANCE") the Indebtedness permitted by paragraphs (a) or (b)(i) and (b)(iii) of this Section 4.03 or any one or more successive refinancings thereof (collectively, "REFINANCING INDEBTEDNESS"), provided, that (i) such Refinancing Indebtedness is in an aggregate amount not exceeding the aggregate amount outstanding of the Indebtedness being so refinanced plus an amount equal to the premiums, reasonable fees and expenses incurred in connection with such refinancing; (ii) with respect to Refinancing Indebtedness which refinances Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities, (A) the final stated maturity date of such Refinancing Indebtedness shall not be earlier than the final stated maturity date of the Indebtedness being so refinanced, (B) in the case of such Refinancing Indebtedness Incurred by the Company, such Refinancing Indebtedness is ranked (pursuant to its terms) subordinate in right and priority of payment to the Securities to the same extent as the Indebtedness being so refinanced, and (C) such Refinancing Indebtedness has an Average Life at the time it is Incurred which is not less than the remaining Average Life of the Indebtedness being so refinanced; and (iii) no Restricted Subsidiary may Incur Refinancing Indebtedness to refinance Indebtedness of the Company pursuant to this clause (c) of Section 4.03 except to the extent that such Refinancing Indebtedness constitutes a guarantee by such Restricted Subsidiary of Indebtedness of the Company (it being understood that such Restricted Subsidiary may incur Indebtedness to refinance Indebtedness of the Company to the extent that the Incurrence of such Indebtedness is otherwise permitted by clauses (a) or (b) of this Section 4.03). (d) Any revocation of the designation of an Unrestricted Subsidiary shall be deemed for purposes of this Section 4.03 to be an Incurrence of Indebtedness by the Company and its Restricted Subsidiaries of the Indebtedness of such Unrestricted Subsidiary as of the time of such revocation to the extent such Indebtedness does not already constitute Indebtedness of the Company or one of its Restricted Subsidiaries. (e) Notwithstanding anything to the contrary in Section 4.03(a), (b) or (c), Britt may not Incur after the Issue Date Indebtedness (other than Indebtedness in respect of the Securities and Indebtedness owed to the Company and Refinancing Indebtedness in respect of the foregoing) in an aggregate principal amount exceeding $5,000,000 at any time outstanding. SECTION 4.04. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to: (i)(x) declare or pay any dividend or make any distribution on the Company's Capital Stock or the Company's Redeemable Stock (other than (A) in either case, dividends or distributions payable in Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness of the Company and (B) in the case of the Company's Redeemable Stock, dividends and distributions in an amount not exceeding (in addition to any dividends or distributions declared or paid in accordance with clause (A) above) the amount stated to be payable on such Redeem able Stock pursuant to the provisions thereof) or (y) purchase, redeem or otherwise acquire or retire for value any Capital Stock or Redeemable Stock of the Com- pany (each of the foregoing in clauses (x) and (y), a "RESTRICTED PAYMENT"), (ii) make any Restricted Investment, (iii) make any Investment in an Unrestricted Subsidiary (an "UNRESTRICTED INVESTMENT"), or (iv) redeem, repurchase, defease or otherwise acquire or retire for value (a "REPURCHASE"), prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, Indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities and which was scheduled to mature on or after the final Stated Maturity of all principal of the Securities (other than acquisitions of such Indebtedness in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such acquisition), if, at the time of such Restricted Payment, Restricted Investment, Unrestricted Investment, or Repurchase: (A) a Default shall have occurred and be continuing; or (B) after giving effect to such Restricted Payment, Unrestricted Investment, Repurchase or Restricted Investment by the Company or any Restricted Subsidiary, the aggregate amount (i) expended for all such Restricted Payments and Repurchases subsequent to the Issue Date, (ii) of all Restricted Investments then outstanding (the amount expended for such Restricted Payments, Repurchases and Restricted Investments subsequent to the Issue Date, the amount of any Restricted Investments outstanding at any time, and the amount of any Restricted Investments returned or reduced, in each case, if other than in cash or a sum certain guaranteed, to be the fair market value as determined in good faith by the Board of Directors, whose determination shall be evidenced by a resolution of the Board of Directors filed with the Trustee), and (iii) of all Unrestricted Investments Outstanding, shall exceed the sum of: (1) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis subsequent to June 30, 1993, (or, in case such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss), and (2) the aggregate net cash proceeds, received by the Company as capital contributions to the Company after June 30, 1993, or from the issue or sale (other than to a Subsidiary of the Company) after June 30, 1993, of Capital Stock (including Capital Stock issued upon the conversion of, or in exchange for, Indebtedness or Redeemable Stock (other than that issued pursuant to clause (ii) of Section 4.04(c) below) and including upon exercise of warrants or options or other rights to purchase such Capital Stock, issued after June 30, 1993), or from the issue or sale, after June 30, 1993, of any Indebtedness (other than that issued pursuant to clause (ii) of Section 4.04(c), below) or, without duplication, other security of the Company convertible or exercisable into such Capital Stock that has been so converted or exercised. (b) Transactions and payments which are permitted by Section 4.08(b) hereof, shall not be considered Restricted Payments or Restricted Investments. (c) The foregoing provisions of Section 4.04(a) shall not be violated by reason of: (i) the payment of any dividend or distribution or the redemption of any securities within 60 days after the date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, if at said date of declaration of such dividend or distribution or the giving of the formal notice of such redemption, such dividend, distribution or redemption would have complied with Section 4.04(a) and so long as no Event of Default exists as of the payment date; (ii) redemptions, repurchases, defeasances, acquisitions or retirements for value, of indebtedness of the Company which ranks (pursuant to its terms) subordinate in right and priority of payment to the Securities from the proceeds of Refinancing Indebtedness permitted by Section 4.03(c); (iii) the acquisition, redemption or retirement of any shares of the Company's Capital Stock or any Indebtedness of the Company in exchange for, or in connection with a substantially concurrent issuance of, Capital Stock of the Company (provided, such Capital Stock is not exchangeable for or convertible into Redeemable Stock or Indebtedness of the Company or any of its Subsidiaries); (iv) the repurchase of the Company's Capital Stock or Redeemable Stock with the proceeds of a substantially concurrent issuance of the Company's Capital Stock that is not convertible or exchangeable into Redeemable Stock or Indebtedness by the Company; (v) the making by Pacific Lumber or its Restricted Subsidiaries of an Unrestricted Investment to the extent the amount of Unrestricted Investments Out- standing made pursuant to this clause (v) does not exceed $25 million, provided that none of the funds used by Pacific Lumber or its Restricted Subsidiaries to make any such Unrestricted Investment is obtained from the Company or any Restricted Subsidiary (other than Pacific Lumber or a Restricted Subsidiary of Pacific Lumber); or (vi) the consummation of the Transactions. No payment or other transfer made pursuant to clauses (ii) through (vi) of this Section 4.04(c) shall reduce the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments or Repurchases pursuant to Section 4.04(a) and the application of proceeds from the issuance of Capital Stock applied pursuant to clause (iii) or (iv) of this Section 4.04(c) shall not reduce the amount available for Restricted Payments pursuant to Section 4.04(a); provided, however, that the proceeds from the issuance of Capital Stock pursuant to clauses (iii) and (iv) of this Section 4.04(c) shall not increase the amount available for Restricted Payments, Restricted Investments, Unrestricted Investments and Repurchases under Section 4.04(a). SECTION 4.05. OWNERSHIP OF CAPITAL STOCK OF SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, (i) any Capital Stock or Redeemable Stock of Scotia Pacific (it being understood that no issue, sale, assignment, transfer or other disposition of any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific) shall be deemed to violate this clause (i), provided, that Pacific Lumber shall thereafter continue to own directly all outstanding Stock of Scotia Pacific), (ii) any Capital Stock or Redeemable Stock of any Pledged Company if immediately thereafter, or as a consequence thereof, the Company and its Subsidiaries that are Pledgors shall beneficially own less than a majority of the Voting Stock and outstanding equity in- terests (on a fully diluted basis) of each Pledged Company (other than in a transaction governed by and in compliance with Section 10.13), (iii) any assets of Scotia Pacific for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary, (iv) any Capital Stock or Redeemable Stock of any Restricted Subsidiary (other than Scotia Pacific or a Pledged Company) (except to the Company or to one or more Restricted Subsidiaries) or any assets of any Restricted Subsidiary (other than Scotia Pacific or a Pledged Company) for consideration consisting in whole or in part of Capital Stock or Redeemable Stock of another person which is not a Wholly Owned Restricted Subsidiary unless, in the case of this clause (iv), immediately after giving effect thereto and the receipt and application of the proceeds therefrom, the Consolidated Cash Flow Coverage Ratio of the Company would be greater than 1.5 to 1; provided, however, that this Section 4.05 shall permit, assuming the Company complies with the provisions of Article 5 and Sections 10.05 and 10.13, in each case to the extent applicable, the disposition in a single transaction or in a series of related transactions of all of the Capital Stock of any Restricted Subsidiary then owned by the Company or its Restricted Subsidiaries for a consideration consisting of cash or other property (other than Capital Stock or Redeemable Stock of another person) which is at least equal to the fair value (as reasonably determined by the Board of Directors of the Company) of such Capital Stock; and provided, further, that any entity resulting from any transaction or disposition permitted by clause (iv) of this Section 4.05 shall be or become a Restricted Subsidiary. SECTION 4.06. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual restriction or encumbrance on the ability of any such Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or Redeemable Stock or any other interest or participation in, or measured by, its profits, in each case, owned by the Company, or pay any Indebtedness owed to the Company or any Restricted Subsidiary of the Company, (ii) make loans or advances to the Company or any Restricted Subsidiary of the Company, or (iii) make any transfer of any of its assets to the Company or a Restricted Subsidiary. (b) The foregoing shall not prohibit encumbrances or restrictions existing under or by reason of: (i) this Indenture or the Pacific Lumber Indenture; (ii) the Credit Agreement; (iii) (A) customary provisions restricting subletting or assignment of any lease of the Company or any Restricted Subsidiary of the Company, or (B) customary restrictions imposed on the transfer of copyrighted or patented materials or provisions in agreements that restrict the assignment of such agreement or any rights thereunder; (iv) any instrument governing Indebtedness or other obligations of a person acquired (whether pursuant to a purchase of stock or assets) by the Company or any Restricted Subsidiary or appli- cable to any assets so acquired at the time such person became a Subsidiary of the Company or such assets were acquired by the Company or a Restricted Subsidiary (excluding instruments entered into by such person in connection with, or in contemplation of, its becoming a Subsidiary of the Company or its assets being acquired by the Company or any Restricted Subsidiary, as the case may be), which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person or the property or assets of the person so acquired (including the Capital Stock or Redeemable Stock thereof) or any entity formed to effect such acquisition, and, in each case, the monetary proceeds thereof; (v) Indebtedness or other obligations existing on the Issue Date; (vi) the subordination (pursuant to its terms) in right and priority of payment to Indebtedness of the Company or any of its Restricted Subsidiaries of any Indebtedness owed by the Company or any Restricted Subsidiary of the Company to the Company or any of its other Restricted Subsidiaries, provided, (A) the Indebtedness is permitted under this Indenture and (B) the Board of Directors has determined in good faith at the time of the creation of such encumbrance or restriction that such encumbrance or restriction would not singly or in the aggregate have a material adverse effect on the holders of the Securities; (vii) restrictions imposed by covenants contained in any refinancing of Indebtedness or other obligations described in clauses (i), (ii), (iv), (v) and (ix) of this Section 4.06(b), provided, that such restrictions are, in the good faith determination of the Board of Directors, on the whole, not materially more restrictive than such restrictions contained in such refinanced Indebtedness; (viii) restrictions imposed by applicable laws or regulations or pursuant to condemnation or eminent domain proceedings; (ix) restrictions on Scotia Pacific and/or any of its Subsidiaries imposed by the Scotia Pacific Agreements, the Deed of Trust, the Timber Note Indenture or any other agreements entered into in connection with the Timber Notes, as the same may be amended in accordance with Section 4.11 of this Indenture; (x) an agreement which has been entered into for the sale or disposition of all or substantially all of the Stock or assets of a Restricted Subsidiary of the Company, provided, however, that such encumbrances or restrictions are limited to the Stock or assets being sold or disposed of; (xi) applicable law and agreements with foreign governments with respect to assets located in their respective jurisdictions; or (xii) customary provisions placing limitations on the payment of dividends on shares of stock contained in the terms of Preferred Stock instruments issued in compliance with this Indenture. (c) The provisions of Section 4.06(a) shall not prohibit (i) Liens not prohibited by Section 4.10 or (ii) restrictions on the sale or other disposition of any property securing Indebtedness, provided, that such Indebtedness is otherwise permitted by this Indenture. SECTION 4.07. LIMITATION ON ASSET SALES. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (except in the case of an Asset Sale which is a Taking) (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair value of the assets subject to such Asset Sale (as reasonably determined by the Board of Directors), including the value of all non-cash consideration, and (ii) at least 75% of the aggregate consideration (excluding indemnities) received therefor by the Company or such Restricted Subsidiary is in the form of money or Cash Equivalents. The amount of any liabilities of the Company or any Restricted Subsidiary of the Company that is actually assumed by the transferee in such Asset Sale shall be deemed to be money for purposes of determining the percentage of money and Cash Equivalent consideration received by the Company and its Restricted Subsidiaries. (b) For the purposes of this Section 4.07, "ASSET SALE OFFER AMOUNT" means the sum of the amount of Net Cash Proceeds from each Asset Sale (excluding the amount of Net Cash Proceeds from such Asset Sales which have been subjected to a prior Asset Sale Offer) by the Company and its Restricted Subsidiaries which, on the 360th day following the consummation of such Asset Sale (or the 540th day following the consummation of an Asset Sale solely by Pacific Lumber and/or any of its Restricted Subsidiaries, other than Scotia Pacific so long as any Timber Notes are outstanding, if such Asset Sale is governed by the terms of the Pacific Lumber Indenture (a "PL Asset Sale")), the Company and its Restricted Subsidiaries have not (i) reinvested, or entered into binding obligations (subject to customary closing and termination provisions) to reinvest, in additional assets to be used in one or more lines of business (including capital ex- penditures) in which the Company and its Restricted Subsidiaries are engaged as of the Issue Date (or reasonably related extensions of such lines), or (ii) applied to make repayments or purchases of the Securities or the Pacific Lumber Senior Notes (or Indebtedness ranking pari passu in right and priority of payment with the Pacific Senior Lumber Notes), provided, that Net Cash Proceeds of any PL Asset Sale, to the extent not applied pursuant to clause (i) or (ii) above, shall be included in the Asset Sale Offer Amount only to the extent permitted to be distributed or paid as a dividend pursuant to Section 4.04(a) of the Pacific Lumber Indenture and applicable law on the earlier of (A) the 450th day following the consummation of such Asset Sale and (B) the consummation of any offer to purchase Pacific Lumber Senior Notes which Pacific Lumber is required to make with such Net Cash Proceeds pursuant to the Pacific Lumber Indenture. (c) Each Holder shall have the right, at the Holder's option, to require the Company to apply the Asset Sale Offer Amount to purchase Securities tendered pursuant to an offer by the Company to purchase Securities at a purchase price (the "ASSET SALE PURCHASE PRICE") equal to 100% of the Accreted Value, as of the scheduled date of purchase (the "ASSET SALE PURCHASE DATE"), of the Securities purchased, plus accrued and unpaid interest, if any, thereon to (but not including) the Asset Sale Purchase Date in accordance with the procedures (including proration in the event of an oversubscription) set forth in this Section 4.07 (an "ASSET SALE OFFER"); provided, that the Company shall not be required to (but may in its discretion) make an Asset Sale Offer, unless the Asset Sale Offer Amount exceeds $25,000,000. No Asset Sale Offer Amount shall be required to be ap plied to purchase Securities pursuant to more than one Asset Sale Offer. Pending application of any Net Cash Proceeds in accordance with this Section 4.07, the Company or a Restricted Subsidiary, as the case may be, may invest such Net Cash Proceeds in Cash Equivalents. (d) Within 30 days following the date on which the Asset Sale Offer Amount exceeds $25,000,000, the Company shall mail a written notice of an Asset Sale Offer to the Trustee, the Paying Agent and each Holder (and to beneficial owners as required by applicable law including, without limitation, the Exchange Act and the Rules and Regulations promulgated pursuant thereto) (the "ASSET SALE OFFER NOTICE"). The Asset Sale Offer Notice shall include a form of Asset Sale Purchase Notice (as described below) to be completed by the Holder and shall contain or state: (1) the Asset Sale Offer Amount, a brief description of the Asset Sale(s) which have generated Net Cash Proceeds and the calculation of the Asset Sale Offer Amount; (2) the date by which the Asset Sale Purchase Notice pursuant to this Section 4.07 must be delivered to the Paying Agent; (3) the Asset Sale Purchase Date (which shall be no earlier than 30 days and not later than 60 days following the date on which such Asset Sale Offer Notice is mailed, subject to compliance with applicable law); (4) the Asset Sale Purchase Price; (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; (7) that the Asset Sale Purchase Price for any Security as to which an Asset Sale Purchase Notice has been duly given and not withdrawn will be paid promptly (subject to proration as described in clause (d)(8) of this Section 4.07) following the later of the Asset Sale Purchase Date and the time of surrender of such Security as described in clause (d)(6) of this Section 4.07; (8) that if Asset Sale Purchase Notices are given with respect to Securities having an aggregate Asset Sale Purchase Price in excess of the Asset Sale Offer Amount pursuant to the Asset Sale Offer, the Company shall purchase Securities on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples thereof shall be acquired); (9) the procedures that the Holder must follow to exercise rights under this Section 4.07 and a brief description of those rights; and (10) the procedures for withdrawing an Asset Sale Purchase Notice. The Trustee and the Paying Agent shall be under no obligation to ascertain the occurrence of an Asset Sale. The Trustee and the Paying Agent may conclusively assume, absent contrary notice from the Company, that no Asset Sale has occurred. (e) To accept the offer to purchase Securities described in Section 4.07(c), a Holder must deliver a written notice of purchase (an "ASSET SALE PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Asset Sale Purchase Date, stating: (1) the name of the Holder, the series, the principal amount at maturity and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the Asset Sale Offer is being accepted with respect to such Securities; (2) the portion of the principal amount at maturity of any Security which the Holder will deliver to be purchased, which portion must be $1,000 principal amount at maturity or an integral multiple thereof; and (3) that such Security or Securities shall be purchased on the Asset Sale Purchase Date pursuant to the terms and conditions specified in the Securities and this Indenture. The delivery of a Security, by hand or by registered mail prior to, on or after the Asset Sale Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a condition to the receipt by the Holder of the Asset Sale Purchase Price therefor; provided, however, that such Asset Sale Purchase Price shall be so paid pursuant to this Section 4.07 only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Asset Sale Purchase Notice; and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which an Asset Sale Purchase Notice has not been received by the Paying Agent prior to the close of business on the third Business Day immediately preceding the Asset Sale Purchase Date. In the event that the Asset Sale Offer described in this Section 4.07 shall be accepted in accordance with the terms hereof with respect to any portion of a Security, the Company shall purchase from the Holder thereof (subject to proration pursuant to Section 4.07(f)), pursuant to this Section 4.07, such portion of such Security if the principal amount at maturity of such portion is $1,000 or an integral multiple of $1,000. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount to that of the unpurchased portion of the Security surrendered. (f) Upon receipt by the Paying Agent of the Asset Sale Purchase Notice as specified in Section 4.07(e), the Holder of the Security (or portion thereof) in respect of which such Asset Sale Purchase Notice was given shall (subject to proration pursuant to this Section 4.07(f) and unless such Asset Sale Purchase Notice is withdrawn as specified in the following paragraph) thereafter be entitled to receive the Asset Sale Purchase Price with respect to such Security (or portion thereof). Such Asset Sale Purchase Price shall be due and payable as of the Asset Sale Purchase Date and shall be paid to such Holder promptly following the later of (i) the Asset Sale Purchase Date (provided the conditions in Section 4.07(e), as applicable, have been satisfied) and (ii) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 4.07(e). An Asset Sale Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the second Business Day preceding the Asset Sale Purchase Date, specifying: (1) the series and the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (2) the principal amount at maturity of the Security or Securities with respect to which such notice of withdrawal is being submitted; and (3) the principal amount at maturity, if any, of such Security or Securities which remains subject to the original Asset Sale Purchase Notice, and which has been or will be delivered for purchase by the Company. If at the close of business on the second Business Day preceding the Asset Sale Purchase Date, the Asset Sale Purchase Price of all Securities for which Asset Sale Purchase Notices have been given and not withdrawn exceeds the Asset Sale Offer Amount, the Paying Agent shall select the Securities to be purchased such that each properly tendering Holder shall receive a portion of the Asset Sale Offer Amount on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 principal amount at maturity or integral multiples thereof shall be purchased). The Paying Agent shall promptly return to the Holder thereof any Securities surrendered which the Company shall not be required to purchase pursuant to this Section 4.07. (g) On or prior to the Asset Sale Purchase Date, the Company shall deposit with the Paying Agent (which, for purposes of this Section 4.07, may not be the Company or a Subsidiary or an Affiliate of either) an amount of money (not exceeding the Asset Sale Offer Amount) in immediately available funds sufficient to pay the aggregate Asset Sale Purchase Price of the Securities (or portions thereof) which are to be purchased on the Asset Sale Purchase Date. If money sufficient to pay the Asset Sale Purchase Price of all Securities (or portions thereof) to be purchased on the Asset Sale Purchase Date is deposited with the Paying Agent as of the Asset Sale Purchase Date, interest shall cease to accrue (and, in the case of a Series A Security, any increase in Accreted Value shall cease), whether or not any such Security is delivered to the Paying Agent, on such Securities (or portions thereof) on and after the Asset Sale Purchase Date, and the Holders thereof shall have no other rights as such, other than the right to receive the Asset Sale Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (h) In connection with any offer to purchase, or any purchase of, Securities under this Section 4.07, the Company shall (i) comply with the Exchange Act, if applicable, (ii) file any required Schedules of the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (i) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by it for the payment of the Asset Sale Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 4.07(g) exceeds the aggregate Asset Sale Purchase Price of the Securities or portions thereof to be purchased on the Asset Sale Purchase Date, then promptly after the Asset Sale Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. (j) Notwithstanding anything to the contrary contained in this Section 4.07, this Section 4.07 shall not prohibit or otherwise apply to (i) a consolidation or merger of the Company or a transfer, conveyance, sale or lease of all or substantially all of the Company's assets, provided that any such transaction complies with the provisions and the terms set forth in Section 5.01 or (ii) any transaction permitted by Section 4.04. SECTION 4.08. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries or Salmon Creek (or any successor to Salmon Creek or any transferee of substantially all of the assets of Salmon Creek so long as such successor or transferee is a Subsidiary of the Company) to, enter into any transaction or transactions with any Affiliate of the Company, unless: (i) the terms thereof are not less favorable to the Company or such Restricted Subsidiary than those that could reasonably be obtained in a comparable transaction at such time with a person who is not an Affiliate of the Company; (ii) such transaction shall have been approved as meeting such standard, in good faith, by a majority of the members of the Board of Directors; and (iii) with respect to any transaction or series of related transactions involving payments and consideration in excess of $10,000,000, the Company shall have obtained and made available to the Trustee an opinion of a nationally recognized investment banking firm stating that the terms of such transaction or series of transactions are fair from a financial point of view to the Company or its Restricted Subsidiary, as the case may be. The Company shall deliver to the Trustee, within 60 days after the end of each fiscal quarter of the Company, an Officers' Certificate which shall briefly describe and specify the aggregate dollar amount of transactions (other than the transactions set forth in Section 4.08(b)) with Affiliates of the Company occurring during such fiscal quarter. (b) The provisions contained in Section 4.08(a) shall not apply to: (i) any transaction permitted by Section 4.04(a) or Section 4.04(c)(i), (v) and (vi) of this Indenture; (ii) the execution and delivery of, the performance of, and the making of any payments required by, the Tax Sharing Agreements; (iii) the execution and delivery of, the performance of, and the making of any payments required by, the Bering Agreement; (iv) the making of payments to MAXXAM for reimbursement for actual services provided thereby to the Company and its Subsidiaries based on actual costs and an allocable share of overhead expenses consistent with prior practices; (v) compensation, indemnification and other benefits paid or made available to officers, directors and employees of the Company or a Restricted Subsidiary for services rendered in such person's capacity as an officer, director, or employee (including reimbursement or advancement of reasonable out-of-pocket expenses and directors' and officers' liability insurance); and (vi) the execution and delivery of, the performance of, and the making of any payments required by, the MXM Guaranty; in the case of clauses (iii) and (iv) of this Section 4.08(b), to the extent the aggregate amount of payments pursuant to such clauses does not exceed $5 million in any calendar year, which amount shall be adjusted for each calendar year, commencing with the calendar year beginning January 1, 1994 (each, an "Adjustment Period"), by multiplying such amount by a fraction, the numerator of which shall be the then most recent Producer Price Index (Lumber and Wood Products Commodity Groups) (Standard Industrial Classification No. 2400), as published by the United States Department of Labor, Bureau of Labor Statistics (the "PPI Index"), in effect on the first day of such Adjustment Period, and the denominator of which shall be the most recent PPI Index published as of January 1, 1993. SECTION 4.09. CHANGE OF CONTROL. (a) Upon the first Change of Control to occur after the date of this Indenture (but not upon any subsequent Change of Control), each Holder shall have the right, at the Holder's option, to require that the Company purchase any or all of such Holder's Securities at a purchase price (the "CHANGE OF CONTROL PURCHASE PRICE") in cash equal to 101% of the Accreted Value of the Securities to be purchased, plus accrued and unpaid interest in each case, if any, thereon to (but not including) the scheduled date of purchase (the "CHANGE OF CONTROL PURCHASE DATE"), in accordance with the procedures set forth in this Section 4.09. (b) Within 30 days following the first occurrence of a Change of Control following the date of this Indenture, the Company shall mail a written notice of Change of Control to the Trustee, the Paying Agent and each Holder (and to beneficial owners as required by applicable law, including without limitation, Rule 13e-4 of the Exchange Act) (the "CHANGE OF CONTROL OFFER NOTICE"). The Change of Control Offer Notice shall include a form of Change of Control Purchase Notice (as described below) to be completed by the Holder and shall contain or state: (1) a brief description of the Change of Control and the date of such Change of Control; (2) the date by which the Change of Control Purchase Notice pursuant to this Section 4.09 must be delivered to the Paying Agent; (3) the Change of Control Purchase Date (which shall be no earlier than 30 days and not later than 60 days following the date on which such Change of Control Offer Notice is mailed, subject to compliance with applicable law); (4) the Change of Control Purchase Price; (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; (7) that the Change of Control Purchase Price for any Security as to which such Change of Control Purchase Notice has been duly given and not withdrawn will be paid promptly following the later of the Change of Control Purchase Date and the time of surrender of such Security as described in clause (b)(6) of this Section 4.09; (8) the procedures that the Holder must follow to exercise rights under this Section 4.09 and a brief description of those rights; and (9) the procedures for withdrawing such Change of Control Purchase Notice. The Trustee and the Paying Agent shall be under no obligation to ascertain the occurrence of a Change of Control. The Trustee and the Paying Agent may conclusively assume, absent contrary notice from the Company, that no Change of Control has occurred. (c) To accept the offer to purchase Securities described in Section 4.09(a), a Holder must deliver a written notice of purchase (a "CHANGE OF CONTROL PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Change of Control Purchase Date, stating: (1) the name of the Holder, the series, the principal amount at maturity and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the offer to purchase is being accepted with respect to such Securities; (2) the portion of the principal amount at maturity of any Security which the Holder will deliver to be purchased, which portion must be $1,000 principal amount at maturity or an integral multiple thereof; and (3) that such Security or Securities shall be purchased on the Change of Control Purchase Date pursuant to the terms and condi- tions specified in the Securities and this Indenture. The delivery of a Security, by hand or by registered mail prior to, on or after the Change of Control Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a condition to the receipt by the Holder of the Change of Control Purchase Price therefor; provided, however, that such Change of Control Purchase Price shall be so paid pursuant to this Section 4.09 only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Purchase Notice; and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which a Change of Control Purchase Notice has not been received by the Paying Agent prior to the close of business on the third Business Day immedi- ately preceding the Change of Control Purchase Date. In the event that the offer to purchase described in Section 4.09(a) shall be accepted in accordance with the terms hereof with respect to any portion of a Security, the Company shall purchase from the Holder thereof, pursuant to this Section 4.09, such portion of such Security if the principal amount at maturity of such portion is $1,000 principal amount at maturity or an integral multiple of $1,000 principal amount at maturity. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount to the unpurchased portion of the Security surrendered. (d) Upon receipt by the Paying Agent of the Change of Control Purchase Notice as specified in Section 4.09(c), the Holder of the Security (or portion thereof) in respect of which such Change of Control Purchase Notice was given shall (unless such Change of Control Purchase Notice is withdrawn as specified in the following paragraph) thereafter be entitled to receive the Change of Control Purchase Price with respect to such Security (or portion thereof). Such Change of Control Purchase Price shall be due and payable as of the Change of Control Purchase Date and shall be paid to such Holder promptly following the later of (i) the Change of Control Purchase Date (provided the conditions in Section 4.09(c), as applicable, have been satisfied) and (ii) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 4.09(c). A Change of Control Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the Business Day next preceding the Change of Control Purchase Date, specifying: (1) the series and the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (2) the principal amount at maturity of the Security or Securities with respect to which such notice of withdrawal is being submitted; and (3) the principal amount at maturity, if any, of such Security or Securities which remains subject to the original Change of Control Purchase Notice, and which has been or will be delivered for purchase by the Company. (e) On or prior to the Change of Control Purchase Date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as Paying Agent, shall segregate and hold in trust) an amount of cash in immediately available funds sufficient to pay the aggregate Change of Control Purchase Price of all the Securities (or portions thereof) which are to be purchased on the Change of Control Purchase Date. If money sufficient to pay the Change of Control Purchase Price of all Securities (or portions thereof) to be purchased on the Change of Con- trol Purchase Date is deposited with the Paying Agent as of the Change of Control Purchase Date, interest shall cease to accrue (and, in the case of a Series A Security, any increase in Accreted Value shall cease), whether or not such Security is delivered to the Paying Agent, on such securities (or portions thereof) on and after the Change of Control Purchase Date, and the Holders thereof shall have no other rights as such, other than the right to receive the Change of Control Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount at maturity to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (f) In connection with any offer to purchase, or any purchase of, Securities pursuant to this Section 4.09, the Company shall (i) comply with the Exchange Act and the applicable Rules and Regulations of the Exchange Act (or any successor provision thereof), if applicable, (ii) file the Schedules required by the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (g) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by it for the payment of the Change of Control Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 4.09(e) exceeds the aggregate Change of Control Purchase Prices of the Securities (or portions thereof) to be purchased on the Change of Control Purchase Date, then promptly after the Change of Control Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. SECTION 4.10. LIMITATION ON LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, incur, assume, suffer to exist, create or otherwise cause to be effective Liens upon any of their respective assets to secure Indebtedness, except for: (i) Liens in existence on the Issue Date; (ii) Liens securing all or any Indebtedness outstanding under the Credit Agreement; (iii) Liens incurred or pledges and deposits in connection with workers' compensation, unemployment insurance and other social security benefits, leases, appeal bonds and other obligations of like nature, incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (iv) Liens imposed by law, including, without limitation, mechanics', carriers', warehouse men's, material men's, suppliers' and vendors' Liens, incurred by the Company or any Restricted Subsidiary in the ordinary course of business; (v) zoning restrictions, easements, licenses, covenants, reservations, restrictions on the use of real property or minor irregularities of title incident thereto, which do not in the aggregate have a material adverse effect on the operation of the business of the Company or its Restricted Subsidiaries taken as a whole; (vi) Liens for ad valorem, income or property taxes or assessments and similar charges either (A) not Delinquent or (B) contested in good faith by appropriate proceedings and as to which the Company has set aside on its books reserves to the extent required by GAAP; (vii) Liens in respect of purchase money Indebtedness incurred to acquire assets or Stock provided that such Liens are limited to the assets or Stock acquired with the proceeds of such Indebtedness (and the proceeds of such assets or Stock); (viii) Liens securing Indebtedness permitted by Section 4.03(c) which refinances secured Indebtedness, so long as such Liens are limited to the collateral which secures the Indebtedness being refinanced and the proceeds of such collateral; (ix) Liens on any assets or the Stock of any Subsidiary of the Company which assets or Stock are acquired by the Company or a Restricted Subsidiary subsequent to the date of this Indenture and which Liens were in existence on or prior to the acquisition of such assets or the Stock of such Subsidiary (to the extent that such Liens were not created in contemplation of such acquisition); provided that such Liens are limited to the assets so acquired or the Stock of such acquired Subsidiary (or the entity organized to effect such acquisition) and the proceeds thereof; (x) Liens securing Indebtedness permitted by clauses (vi), (viii), (ix), or (xii) of Section 4.03(b), provided, in each such case, that such Liens are limited to the assets financed with the proceeds of the Indebtedness incurred pursuant to such provisions (and the proceeds of such assets); (xi) Liens securing Indebtedness under any Interest Rate Protection Agreement permitted by Section 4.03(b)(vii), provided, that such Liens are limited to the collateral which secures the Indebtedness to which such Interest Rate Protection Agreement relates; (xii) Liens imposed pursuant to condemnation or eminent domain or substantially similar proceedings or in connection with compliance with environmental laws or regulations; (xiii) Liens granted pursuant to the Timber Notes, the Timber Note Indenture or the Deed of Trust, in connection with the Timber Notes or in connection with any of the Scotia Pacific Agree- ments, or in connection with any other agreement entered into in connection with the Timber Notes; (xiv) other Liens securing Indebtedness not exceeding $25,000,000 in aggregate principal amount; and (xv) Liens in favor of the Trustee pursuant to this Indenture and Liens in favor of the trustee under and pursuant to the Pacific Lumber Indenture. SECTION 4.11. AMENDMENT OF SCOTIA PACIFIC AGREEMENTS. The Company shall not permit Scotia Pacific to agree to amend the Timber Note Indenture, the Deed of Trust, or any of the Scotia Pacific Agreements, unless such amendment (i) is to cure any ambiguity, omission, defect or inconsistency, or to add to the covenants of Scotia Pacific for the benefit of the Company or the Holders or to surrender any right or power conferred in the Master Purchase Agreement on Scotia Pacific, or (ii) does not materially adversely affect the ability of the Company to pay principal or interest on the Securities when due. SECTION 4.12. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers know of any Default that occurred during such period. If they do, the Officers' Certificate shall describe the Default and its status. Such Officers' Certificates shall comply with TIA Section 314(a)(4). SECTION 4.13. USE OF PROCEEDS. The Company shall use the net proceeds from the offering and sale of the Securities as set forth in the Prospectus under the caption "Use of Proceeds." SECTION 4.14. CORPORATE EXISTENCE. Subject to Article 5, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company. SECTION 4.15. LIMITATION ON STATUS AS INVESTMENT COMPANY. Neither the Company nor any of its Restricted Subsidiaries shall become an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended). SECTION 4.16. LIMITATION ON LIENS ON PLEDGED SHARES. Each Pledgor covenants with respect to any Pledged Shares with respect to which it has granted a Lien pursuant to this Indenture that it will not, and will not permit any Subsidiary thereof to, directly or indirectly, create, incur, assume or permit to exist, will defend such Pledged Shares against, and will take such action as is necessary to remove any Lien or claim on or in respect of such Pledged Shares, except (i) the Liens created by this Indenture, (ii) Liens for taxes or assessments or other governmental charges or levies not yet due or payable under law or being contested in good faith by appropriate proceedings, (iii) Liens arising by operation of law in the ordinary course of business and with respect to amounts not overdue for a period of more than 90 days or being contested in good faith by appro- priate proceedings and (iv) judgment Liens and other similar Liens arising in connection with court proceedings (provided, that the execution or other enforcement thereof is effectively stayed within 60 days following entry of judgment and the claims secured thereby are being actively contested in good faith and by appropriate proceedings). SECTION 4.17. DECLARATION AND PAYMENT OF DIVIDENDS BY PACIFIC LUMBER AND BRITT. Pacific Lumber and Britt shall, to the extent that there exists any consensual restriction or encumbrance on their respective abilities to pay dividends or make any other distributions on their respective Capital Stock ("Dividend Encumbrances"), declare and pay dividends to their stockholders to the maximum extent permitted by the instruments or other agreements containing such Dividend Encumbrances, unless the Board of Directors of Pacific Lumber or Britt determines in good faith (whose determination shall be evi- denced by a resolution of the Board of Directors filed with the Trustee) that the declaration or payment of such dividend would be detrimental to the capital and other operating needs of Pacific Lumber or Britt, as the case may be. ARTICLE 5 SUCCESSOR COMPANY SECTION 5.01. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS. Except as permitted by Section 10.13, the Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to, any person or group of related persons in a single transaction or series of related transactions, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions if such transaction or transactions in the aggregate would result in a transfer of all or substantially all of the assets of the Company and its Restricted Subsidiaries on a consolidated basis to any person other than the Company, unless (except as permitted by Article 10): (i) the resulting, surviving or transferee person (if not the Company) shall be organized and existing under the laws of the United States of America or any State thereof or the District of Co- lumbia and such entity shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture, and such entity and/or each other person that, upon consummation of such transaction or transactions, obtains ownership of any portion of the Collateral (to the extent such Collateral is not released from the Lien of this Indenture in accordance with the terms of this Indenture) shall, if not at the time a Pledgor with respect thereto, grant a security interest (of like tenor to the security interest granted on the Issue Date with respect to such Collateral pursuant to Section 10.01(a) or (b), as applicable) in such Collateral, and shall expressly assume, by supplemental inde- nture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the previ- ous Pledgor with respect to such Collateral set forth in Article 10; (ii) immediately after giving effect to such transaction, no Default shall have happened and be continuing; (iii) except in the case of a merger, or transfer of all or substantially all assets, of a Restricted Subsidiary into or to the Company or into or to another Restricted Subsidiary, immediately after giving effect to such transaction, the Consolidated Cash Flow Coverage Ratio of the Company or the surviving entity shall exceed 2.0 to 1; (iv) the Company shall have delivered to the Trustee an Officers' Certificate to the foregoing effect and an Opinion of Counsel, stating that such consolidation, merger or transfer convey- ance or lease (other than the calculation of the Consolidated Cash Flow Coverage Ratio as to which counsel need not opine) and such supplemental indenture comply with this Indenture; and (v) the Lien of this Indenture on the Collateral in favor of the Trustee for the benefit of Holders of the Securities has not been materially impaired in contravention of the provisions of this Indenture as a result of such transaction or transactions; provided, that any Pledged Company may merge or consolidate with or transfer substantially all of its assets to a Restricted Subsidiary of the Company pursuant to a transaction in compliance with the provisions of Section 10.13. The resulting, surviving or transferee person (if other than the Company which executed this Indenture) shall succeed to, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Company had been named as the Company herein and the Company (except in the event of a lease of all or substantially all of the Company's assets) shall be relieved of its obligations under this Indenture and the Securities. Each person that becomes a Pledgor with respect to any Collateral upon consummation of such transaction or transactions shall succeed to, and may exercise every right and power of, the person who was a Pledgor with respect thereto prior to such consummation with the same effect as if such person had been named as a Pledgor herein, and each person who ceases to be a Pledgor upon such consummation shall be relieved of its obligations in respect of such Collateral. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. An "Event of Default" occurs if: (1) the Company defaults in any payment of interest on any Security when the same becomes due and payable and such default continues for a period of 30 days; (2) the Company defaults in the payment of the Accreted Value of any Security when the same becomes due and payable at its Stated Maturity, upon optional or special redemption, upon declaration or otherwise, including any failure by the Company to redeem or repurchase any of the Securities when required pursuant to Sections 4.07, 4.09 and 10.05(f) of this Indenture or paragraphs 5 or 7 of the Securities; (3) the Company defaults in the performance of, or breaches, any covenant or agreement on the part of the Company contained in this Indenture (other than a covenant or agreement on the part of the Company a default in whose performance or breach is specifically addressed elsewhere in this Section 6.01), and continuance of such default or breach for a period of 60 days after written notice thereof, which must specify the default or breach, demand it be remedied and state that the notice is a "Notice of Default," has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate Accreted Value (at the time of such notice) of the Securities then outstanding; (4) there is a default under any bond, debenture, note or other evidence of Indebtedness of the Company or any Restricted Subsidiary, or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or any Restricted Subsidiary, whether such Indebtedness now exists or is hereafter created, which default in- volves the failure to pay principal on Indebtedness at the final maturity thereof or which has resulted in such Indebtedness becoming or being declared due and payable prior to its scheduled maturity in an aggregate amount in excess of $10,000,000; (5) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case, (B) appoints a Custodian of the Company or any Significant Subsidiary or for all or substantially all of its property, or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary, and in each case the order or decree remains unstayed and in effect for a period of 60 consecutive days; or (7) the entry by a court having jurisdiction in the premises of one or more judgments or orders against the Company or any Restricted Subsidiary for the payment of money in an aggregate amount in excess of $10,000,000 (to the extent not covered by insurance) which remain undischarged or unsatisfied for a period of 60 consecutive days after the judgments or orders become final and the right to appeal them has expired. The term "Bankruptcy Law" means Title 11 of the United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice, in the form of an Officers' Certificate, of any event which with the giving of notice and the lapse of time would become an Event of Default under clauses (4) or (7). Such notice shall specify the status of such event and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 6.01(5) or (6)) occurs and is continuing, either the Trustee by written notice to the Company, or the Holders of at least 25% in aggregate Accreted Value (at the time of such notice) of the Securities then outstanding by written notice to the Company and the Trustee, may declare the then Accreted Value and accrued interest, if any, on all the Securities to be due and payable. If an Event of Default specified in Section 6.01(5) or (6) with respect to the Company occurs and is continuing, the Accreted Value of and interest on all the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Hold- ers of a majority in aggregate Accreted Value (at the time of such notice) of the Securities then outstanding by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of Accreted Value of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. WAIVER OF PAST DEFAULTS. Subject to Sections 6.07 and 9.02, the Holders of a majority in aggregate Accreted Value (at the time of such notice) of outstanding Securities by notice to the Trustee may waive an existing Default and its consequences except (1) a Default or Event of Default in the payment of the Accreted Value of or interest on a Security as specified in clauses (1) and (2) of Section 6.01 or (2) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default or Event of Default is waived, it is deemed cured and ceases, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in aggregate Accreted Value (at the time) of outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification reasonably satisfactory to it against all losses and expenses caused by taking or not taking such action. SECTION 6.06. LIMITATION ON SUITS. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities, unless: (1) the Holders of at least 25% in aggregate Accreted Value of Securities then outstanding give to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate Accreted Value of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense to be incurred in complying with such request; (4) the Trustee does not comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity and such Event of Default has not been cured or waived; and (5) the Holders of a majority in aggregate Accreted Value of the Securities then outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of Accreted Value of and interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder; provided, that no Holder shall have the right to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral created by this Indenture. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment of interest or Accreted Value specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of Accreted Value and interest remaining unpaid (together with interest on such unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other person performing similar functions, and be entitled and empowered to collect and re- ceive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or compo- sition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article 6 or, if a Notice of Acceleration has been delivered to the Company and is in effect and Trust Monies are held in the Accounts, it shall pay out the money (or Trust Monies, as applicable) in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Securityholders for amounts due and unpaid on the Securities for Accreted Value and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for Accreted Value and interest, respectively; and THIRD: to the Company its successors and assigns. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Securityholder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate Accreted Value of the then outstanding Securities. SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Company, the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) The Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. At all times, the Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Trustee deals with similar property for its own account. (b) Except during the continuance of an Event of Default: (1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture which are adverse to the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, that the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall agree in writing with the Company to invest moneys deposited hereunder and the Company shall be entitled to the income thereon. (f) Funds held in trust by the Trustee need not be segregated from other funds except to the extent required by this Indenture and applicable law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 7.02. RIGHTS OF TRUSTEE. Subject to Section 7.01: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any written resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, Security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate or an Opinion of Counsel; (c) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture; provided, however, that the Trustee's conduct does not constitute willful misconduct, negligence or bad faith. (d) The Trustee may consult with counsel, and the advice or Opinion of Counsel with respect to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or Opinion of Counsel. (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Securityholders pursuant to this Indenture, unless such Securityholder shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such requests or direction; (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, Security or other paper or document but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the relevant books, records and premises of the Company, personally or by agent or attorney; (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent or Registrar may do the same with like rights. Notwithstanding the foregoing, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in this Indenture or the Securities other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder, in the manner and to the extent provided in TIA Section 315(b), notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interest of Securityholders. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. As promptly as practicable after each May 15, beginning with the May 15 following the date of this Indenture, and in any event prior to July 15 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 15 of such year that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b)(1) and (2) and (c). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed. The Company agrees to notify the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation relating to the trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it, including reasonable expenses incurred in connection with exercise of any remedy with respect to the Collateral, except any such expense as may arise from the Trustee's negligence, bad faith or wilful misconduct. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any loss, liability or expense (including reasonable attorneys' fees) incurred by it without negligence or bad faith on its part in connection with the administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The failure of the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent the Company is prejudiced thereby. The Company need not pay for any settlement made without its written consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through wilful misconduct, negligence or bad faith. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee in its capacity as Trustee, except that held in trust to pay Accreted Value of or interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of an Event of Default specified in Section 6.01(5) or (6) with respect to the Company, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and the appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying the Company and the Holders in writing. The Holders of a majority in aggregate Accreted Value of the Securities then outstanding may remove the Trustee by so notifying the Trustee and the Company in writing and may appoint a successor Trustee with the Company's consent. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian, receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the suc- cessor Trustee, subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in aggregate Accreted Value of the Securities then outstanding may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates or merges with or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee; provided, that in the case of a transfer of all or substantially all of its corporate trust business to another corporation, the transferee corporation expressly assumes all the Trustee's liabilities under the Indenture and the Securities. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Securities in the name of any predecessor trustee shall only apply to its successors by merger, conversion or consolidation. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times satisfy the requirements of TIA Section 310(a)(1) and (2). In addition, without limiting the foregoing, the Trustee shall at all times be authorized to conduct a corporate trust business in good standing, and be either (a) a bank or trust company having, or (b) a wholly owned subsidiary of a bank or trust company having, a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b). SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE (a) When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancellation or (ii) all outstanding Securities not delivered to the Trustee for cancellation have become due and payable, will become due and payable at their stated maturity within one year or may be called for redemption on a redemption date that is within one year under arrangements satisfactory to the Trustee and the Company irrevo- cably (i.e., without condition or right of withdrawal deposits with the Trustee money or U.S. Governmental Obligations sufficient to pay at maturity all outstanding Securities, including interest thereon (other than Securities replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c) and 8.06, cease to be of further effect. Upon satisfaction of the conditions set forth in this Section 8.01(a) and upon request of the Company, accompanied by an Officers' Certificate and an Opinion of Counsel, and at the expense of the Company, the Trustee shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified herein. (b) Subject to Sections 8.01(c), 8.02 and 8.06, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12 and 5.01(ii) other than with respect to an Event of Default specified in Sections 6.01(1) or 6.01(2) and 5.01(iii) and the operation of Sections 6.01(3), 6.01(4) and 6.01(7) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(3), 6.01(4) and 6.01(7). Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.02. CONDITIONS TO DEFEASANCE. The Company may exercise its legal defeasance option or its covenant defeasance option only if: (i) the Company irrevocably deposits in trust with the Trustee money or U.S. Governmental Obligations sufficient for the payment of principal and interest on the Securities to maturity or redemption, as the case may be; (ii) the Company delivers to the Trustee an Officers' Certificate to the effect that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts (but, in the case of the legal defeasance option only, not more than such amounts) as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (iii) 90 days pass after the deposit is made and during the 90-day period no Default specified in Section 6.01(5) or (6) with respect to the Company occurs which is continuing at the end of the period; (iv) the deposit does not constitute a default under any other agreement binding on the Company other than a default (a) with respect to Indebtedness of the Company which is defeased, redeemed or otherwise satisfied prior to or contemporaneously with such deposit, or (b) which is consented to or waived by the relevant other party or parties to the agreement; (v) the Company delivers to the Trustee an Opinion of Counsel or a ruling received from the Internal Revenue Service to the effect that holders will not recognize income, gain or loss for Federal income tax purposes as a result of the exercise of such rights and will be subject to Federal income tax in the same amount and in the same manner and at the same time as would have been the case otherwise; provided, that the Company is not required to deliver to the Trustee such Opinion of Counsel upon the exercise of the Company's legal defeasance option or covenant defeasance option within one year of Stated Maturity or a date fixed for redemption pursuant to Article 3; and (vi) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.04. REPAYMENT TO COMPANY. Subject to Section 8.01, the Trustee and the Paying Agent shall promptly turn over to the Company any excess money or securities held by them at any time, upon the written request of the Company and upon the receipt by the Trustee of an Officers' Certificate in form reasonably satisfactory to the Trustee, addressing the status of such money or securities. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall promptly pay to the Company any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors, unless applicable law designates another person. SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENTS SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may amend, supplement or otherwise modify this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission defect or inconsistency; (2) to comply with Article 5, Section 10.02(e) or Section 10.13; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (4) to make any change that does not adversely affect the rights of any Securityholder; (5) to add to the covenants of the Company for the benefit of the Securityholders or to surrender any right or power herein conferred upon the Company; or (6) to comply with the TIA. After an amendment, supplement or other modification under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment, supplement or other modification. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement or other modification under this Section 9.01. SECTION 9.02. WITH CONSENT OF HOLDERS. (a) Subject to Section 6.07, the Company and the Trustee may amend, supplement or otherwise modify this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in aggregate Accreted Value of the Securities then outstanding; provided, that (except for changes permitted pursuant to Section 9.01) any change to Article 10 (or the definitions relating thereto) shall require the written consent of the Holders of at least 66 2/3% of the aggregate Accreted Value of Securities then outstanding. Subject to Sections 6.04 and 6.07, the Holders of a majority in aggregate Accreted Value of the Securities then outstanding may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. (b) Notwithstanding anything to the contrary contained in Sections 9.01 or 9.02(a), without the consent of each Securityholder affected, an amendment, supplement, other modification or waiver may not: (1) reduce the amount of Securities whose Holders must consent to an amendment, supplement, other modification or waiver; (2) reduce the rate of or extend the stated maturity of any payment of interest on any Security; (3) reduce the Accreted Value or principal (at maturity or any other time) of or extend the Stated Maturity of any payment of principal of any Security, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; (4) reduce the premium payable upon the redemption of any Security, including upon redemption, or payment of the Asset Sale Purchase Price or Change of Control Purchase Price; or (5) make any Security payable in money other than that stated in the Security. (c) It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (d) After an amendment, supplement, waiver or other modification under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment, supplement, waiver or other modification. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment, supplement, waiver or other modification under this Section. (e) Notwithstanding the foregoing, the provisions of Section 11.16 hereof and this subsection (e) may not be amended without the consent of the parties to the Credit Agreement. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment, supplement or other modification to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to an amendment, supplement or other modification or a waiver under or in connection with this Indenture or the Securities by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, if such consent or waiver may be revoked, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment, supplement, waiver or other modification becomes effective. After an amendment, supplement, waiver or other modification becomes effective, it shall bind every Security- holder, unless it makes a change described in any of clauses (1) through (6) of Section 9.02(b). In that case, the amendment, supplement, waiver or other modification shall bind each Holder of a Security who has consented to it and every subsequent Holder of a Security or a portion of a Security that evidences the same debt as the consenting Holder's Security. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those persons who were Securityholders at such record date (or their duly designated proxies), and only those persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such persons continue to be Holders after such record date. SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment, supplement, waiver or other modification changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment, supplement, waiver or other modification. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any amendment, supplement, waiver or other modification authorized pursuant to this Article 9 if the amendment, supplement, waiver or other modification does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not sign it. In signing such amendment, supplement, waiver or other modification the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stat- ing that such amendment, supplement, waiver or other modification is authorized or permitted by this Indenture. ARTICLE 10 SECURITY SECTION 10.01. GRANTS OF SECURITY INTERESTS. (a) To secure the full and punctual payment of Accreted Value and premium of and interest on the Securities and all other amounts payable pursuant to this Indenture, the Company hereby grants to the Trustee, for the benefit of the Holders and the Trustee, a first priority and (except for Liens permitted under Section 4.16) exclusive security interest in all its right, title and interest in and to the following, subject to the exclu- sion specified in the last sentence of this Section 10.01: (i) all of the outstanding shares of Stock of MPI listed on Exhibit C hereto, all of the outstanding shares of Stock of Pacific Lumber and all of the outstanding shares of Stock of Britt, in each case whether now or hereafter owned or acquired by the Company or any of the Company's Subsidiaries; (ii) all certificates whether now owned or hereafter acquired representing any of the shares referred to in clause (i) of this Section 10.01(a); (iii) all dividends, cash, instruments and other property and proceeds from time to time received, receivable or otherwise distributed on or in exchange for any of the foregoing after the Issue Date, including, without limitation, any stocks, bonds or other securities, options, warrants, or other such rights, cash or other property payable or distributable on any of the shares referred to in clause (i) of this Section 10.01(a) at any time, including, without limitation, any distribution on any such shares upon the dissolution or liquidation, in whole or in part, of the issuer of such shares or the consolidation or merger of such issuer with any other person or persons, or the reorganization of such issuer, or any distribution on any such shares of the capital or paid-in capital surplus or any part thereof of the issuer of such shares, in any form, or any subdivision, combination, reclassification or redemption of any such shares; and (iv) to the extent not included in clauses (i), (ii) and (iii) of this Section 10.01(a), all proceeds (as defined in the Uniform Commercial Code as in effect on the date hereof) of any and all of the foregoing (arising after the Issue Date). (b) To secure the full and punctual payment of Accreted Value and premium of and interest on the Securities and all other amounts payable pursuant to this Indenture, MPI hereby grants to the Trustee, for the benefit of the Holders and the Trustee, a first priority and (except for Liens permitted under Section 4.16) exclusive security interest in all its right, title and interest in and to the following, subject to the exclusion specified in the last sentence of this Section 10.01: (i) all of the outstanding shares of Stock of Pacific Lumber and all of the outstanding shares of Stock of Britt, in each case whether now or hereafter owned or acquired by MPI; (ii) all certificates whether now owned or hereafter acquired representing any of the shares referred to in clause (i) of this Section 10.01(b); (iii) all dividends, cash, instruments and other property and proceeds from time to time received, receivable or otherwise distributed on or in exchange for any of the foregoing after the Issue Date, including, without limitation, any stocks, bonds or other securities, options, warrants, or other such rights, cash or other property payable or distributable on any of the shares referred to in clause (i) of this Section 10.01(b) at any time, including, without limitation, any distribution on any such shares upon the dissolution or liquidation, in whole or in part, of the issuer of such shares or the consolidation or merger of such issuer with any other person or persons, or the reorganization of such issuer, or any distribution on any such shares of the capital or paid-in capital surplus or any part thereof of the issuer of such shares, in any form, or any subdivision, combination, reclassification or redemption of any such shares; and (iv) to the extent not included in clauses (i), (ii) and (iii) of this Section 10.01(b), all proceeds (as defined in the Uniform Commercial Code as in effect on the date hereof) of any and all of the foregoing (arising after the Issue Date). (c) To secure the full and punctual payment of Accreted Value and premium of and interest on the Securities and all other amounts payable pursuant to this Indenture, MAXXAM hereby grants to the Trustee, for the benefit of the Holders and the Trustee, a first priority and (except for Liens permitted under Section 4.16) exclusive security interest in all its right, title and interest in and to the following: (i) the 28,000,000 shares of Common Stock, par value $.01 per share, of Kaiser described on Exhibit C hereto; (ii) all certificates whether now owned or hereafter acquired representing any of the shares referred to in clause (i) of this Section 10.01(c); (iii) all dividends, cash, instruments and other property and proceeds from time to time received, receivable or otherwise distributed on or in exchange for any of the foregoing after the Issue Date, including, without limitation, any stocks, bonds or other securities, options, warrants, or other such rights, cash or other property payable or distributable on any of the shares referred to in clause (i) of this Section 10.01(c) at any time, including, without limitation, any distribution on any such shares upon the dissolution or liquidation, in whole or in part, of the issuer of such shares or the consolidation or merger of such issuer with any other person or persons, or the reorganization of such issuer, or any distribution on any such shares of the capital or paid-in capital surplus or any part thereof of the issuer of such shares, in any form, or any subdivision, combination, reclassification or redemption of any such shares; and (iv) to the extent not included in clauses (i), (ii) and (iii) of this Section 10.01(c), all proceeds (as defined in the Uniform Commercial Code as in effect on the date hereof) of any and all of the foregoing (arising after the Issue Date). Notwithstanding any other provision contained in this Indenture or in the Securities, no security interest has been granted pursuant to this Indenture, and the Trustee has not taken pursuant to this Indenture a security interest, in (x) any Salmon Creek Distribution, (y) any property (identified as such by the Company in writing to the Trustee) or cash transferred or to be transferred in the Transactions (provided, that MAXXAM shall thereupon comply with Section 10.01(c)) or (z) any proceeds identified as such by the Company in writing to the Trustee) of any and all of the foregoing. The Company shall not identify any dividend or distribution as a "Salmon Creek Distribution" except for any dividends and other distributions on Pledged Shares of any Pledged Company of amounts or other consideration received by the Company or any of its Subsidiaries from any person or entity (i) in respect of all or any part of the Stock of Salmon Creek, (ii) in respect of all or any part of the real property constituting the Salmon Creek Property or (iii) otherwise in connection with Salmon Creek or the Salmon Creek Property, except in connection with the harvesting of timber located on the Salmon Creek Property. SECTION 10.02. PLEDGED SHARES. (a) Delivery of Certificates and Instruments. Subject to the terms hereof, the Company agrees (with respect to the Collateral described in Section 10.01(a)), MPI agrees (with respect to the Collateral described in Section 10.01(b)) and MAXXAM agrees (with respect to the Collateral described in Section 10.01(c)) that all certificates or instruments representing or evidencing Pledged Shares or any other Collateral shall be delivered to the Trustee, at such office in New York City, New York as is designated by the Trustee from time to time in a notice addressed to the Company, and shall be in suitable form for transfer by delivery, and shall be accompanied by duly executed and undated instruments of transfer or assignment in blank (with signatures appropriately guaranteed if requested by the Trustee), all in form and substance satisfactory to the Trustee. If an issuer of Pledged Shares is incorporated in a jurisdiction which does not permit the use of certificates to evidence equity ownership or which permits or requires pledges of Capital Stock to be perfected other than by delivery, then the Company or MPI, as applicable (in the case of any Pledged Company), or MAXXAM (in the case of Kaiser) shall, upon delivery to the Company of the Trust- ee's written request, take such action as may be necessary in such jurisdiction and reasonably requested by the Trustee to perfect the Trustee's first priority and (except for Liens permitted under Section 4.16) exclusive security interest in such Stock and other Collateral and give the Trustee the other rights in the Pledged Shares granted under the terms hereof; and the Company agrees to provide to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to it, confirming such pledge. The Trustee shall have the right at any time at which a Notice of Acceleration has been delivered and is in effect to exchange certificates or instruments representing or evidencing the Pledged Shares for certificates or instruments of smaller or larger denominations. (b) Preservation of Corporate Existence of Issuers of Pledged Shares. Subject to Article 5 and Sections 10.05 and 10.13, the Trustee may do whatever in its reasonable judgment may be necessary, and the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company) and MAXXAM (in the case of Kaiser) shall take such action in connection therewith as may reasonably be requested in writing by the Trustee, for the purpose of preserving or extending the corporate existence of such corporations. (c) Change of Registration Upon Notice of Acceleration. Any or all Pledged Shares held by the Trustee for the benefit of the Holders of Securities may, if a Notice of Acceleration has been delivered and is at the time in effect, without notice to the Company, be registered in the name of the Trustee or its nominee. (d) Voting Rights; Dividends; etc. (1) Unless a Notice of Acceleration has been delivered and is at the time in effect, the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company) and MAXXAM (in the case of Kaiser) shall be entitled to exercise any and all voting and other corporate rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms of this Indenture and the Securities; provided, however, that no vote shall be cast or consent, waiver or ratification given or action taken that would be inconsistent with or violate any provision of this Indenture or the Securities. After a Notice of Acceleration has been delivered and so long as it remains in effect, upon written notice from the Trustee to the Company that it has determined that it will exercise such rights, all rights of the Company, MPI and the Company's other Subsidiaries that are Pledgors and MAXXAM, as applicable, to exercise the voting and other consensual corporate rights which it or they would otherwise be entitled to exercise pursuant to this Section 10.02(d)(1) shall cease and all such rights shall become vested in the Trustee, which shall thereupon have the sole right to exercise such voting and other consensual corporate rights during the continued effectiveness of such Notice of Ac- celeration (such rights to include the exercise of any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Shares, including, without limitation, the right to exchange, at the Trustee's discretion, any and all of the Pledged Shares upon the merger, consolidation, reorganization, recapitalization or other readjustment of any issuer of any of such Pledged Shares or upon the exercise by any such issuer or the Trustee of any right, privilege or option pertaining to any of the Pledged Shares and, in connection therewith, to deposit and deliver any and all of the Pledged Shares with any committee, depositary, transfer agent, registrar or other designated agency on such terms and conditions as the Trustee may determine, all without liability except to account for property actually received by it). The Trustee shall have no duty to the Company, MPI or the Company's other Subsidiaries or MAXXAM to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. Upon rescission of such Notice of Acceleration, such voting and consensual corporate rights shall revert to the Company, to MPI and the Company's other Subsidiaries that are Pledgors and to MAXXAM, as applicable. (2) So long as no Event of Default, Collateral Default or Interest Payment Default shall have occurred and be continuing, the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company) and MAXXAM (in the case of Kaiser) shall be entitled to receive and retain any and all Exempt Distributions made on any Pledged Shares. (3) Upon the occurrence and during the continuance of an Event of Default, Collateral Default or Interest Payment Default, all rights of the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company) and of MAXXAM (in the case of Kaiser) to receive and retain Exempt Distributions on Pledged Shares pursuant to Section 10.02(d)(2) shall cease, and the Trustee shall thereupon have the sole right to receive any Exempt Distributions on any Pledged Shares made during the continuance of such Event of Default, Collateral Default or Interest Payment Default; provided, that the Company and its Subsidiaries, and MAXXAM, shall be entitled to receive and retain any Salmon Creek Distributions and any property or cash transferred or to be transferred in the Transactions. All such Exempt Distributions shall be deposited in the Cash Collateral Default Account in accordance with Section 10.03(f). All Exempt Distributions on Pledged Shares received by the Company, MPI or the Company's other Subsidiaries that are Pledgors (in the case of Pledged Shares of any Pledged Company) or by MAXXAM (in the case of Pledged Kaiser Shares) contrary to the provisions of this Section 10.02(d)(3) shall be received in trust for the benefit of the Trustee and the Holders, shall be segregated from other funds of the applicable Pledgor or Pledgors, and shall be forthwith paid over to the Trustee in the same form as received by such Pledgor or Pledgors (duly endorsed to the Trustee, if required), and the Trustee shall deposit such amounts in the Cash Collateral Default Account in accordance with Section 10.03(f). If any such Event of Default, Col- lateral Default or Interest Payment Default shall have been cured or waived and no other Event of Default, Collateral Default or Interest Payment Default shall be continuing, the right of the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of Pledged Shares of any Pledged Company) or of MAXXAM (in the case of Pledged Kaiser Shares) to receive and retain any and all Exempt Distributions on Pledged Shares shall be reinstated. (4) In order to permit the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company) and MAXXAM (in the case of Kaiser) and the Trustee to exercise their respective voting and other corporate rights which they are entitled to exercise pursuant to Section 10.02(d)(1) and Section 10.02(d)(5) and to receive the dividends, distributions and other amounts which they are authorized to receive and retain pursuant to Sections 10.02(d)(2) and 10.02(d)(3), (A) the Trustee shall, upon written notice from the Company, from MPI or any other Subsidiaries of the Company that are Pledgors, or from MAXXAM, as the case may be, from time to time, execute and deliver (or cause to be executed and delivered) to the Company, to MPI or any other such Subsidiary or to MAXXAM, as the case may be, and (B) the Company, MPI and the Company's other Subsidiaries that are Pledgors (in the case of any Pledged Company, to the extent applicable) and MAXXAM (in the case of Kaiser) shall, upon written notice from the Trustee, from time to time execute and deliver (or cause to be executed and delivered) to the Trustee, all such proxies, dividend payment orders and other instruments as the Company, MPI or such other Subsidiaries, MAXXAM or the Trustee, as the case may be, may reasonably request for such purposes as shall be specified in such request. (5) At any time with the consent of the Company, or without the consent of the Company upon the delivery to the Company of a Notice of Acceleration that is at the time in effect, the Trustee may join in any plan of voluntary or involuntary reorganization or readjustment or rearrangement in respect of any Pledged Shares and may accept or authorize the acceptance of new securities issued in exchange therefor under any such plan. Any new securities so issued shall be delivered to the Trustee and pledged hereunder. If the Trustee does not join in such plan of reorganization or readjustment or rearrangement, any money or Cash Equivalents accruing on or apportioned to such Pledged Shares shall be delivered to the Trustee for deposit into the Cash Collateral Account in accordance with Section 10.03(g). (e) Pledged Shares to Constitute Majority of Voting Stock and Equity Interests; Delivery of After-Acquired Shares. The Company shall, and shall cause its Subsidiaries that are Pledgors to, cause the Pledged Shares that are subject to the Lien of this Indenture at all times to include: (i) at least a majority of the Voting Stock and the outstanding equity interests (on a fully diluted basis) of each of Pacific Lumber, Britt and MPI, in each case until such time as such Subsidiary merges or consolidates into, or transfers all of its assets to, either (A) a Restricted Subsidiary or (B) the Company, in either case pursuant to and in accordance with Section 10.13; and (ii) after any transaction described in clause (i)(A) above, at least a majority of the Voting Stock and the outstanding equity interests (on a fully diluted basis) of the Restricted Subsidiary into which such Subsidiary merges or consolidates or to which it transfers all or substantially all of its assets. The Company shall, and shall cause each of its Subsidiaries to, pledge and deposit with the Trustee all outstanding shares of Stock of all Subsidiaries of the Company at the time constituting Pledged Companies that the Company or any of its Subsidiaries acquire at any time after the Issue Date, and to cause all such shares of Stock to be subject to the Lien of this Indenture (other than Palmas Holding Corp., a Delaware corporation, with respect to Stock constituting not more than .07% of the outstanding Stock of MPI). All such shares (except for shares of Stock of MPI owned by Palmas Holding Corp., a Delaware corporation, constituting not more than .07% of the outstanding Stock of MPI) other than those acquired by the Company and (except for shares of Pacific Lumber or Britt) MPI shall be made so subject by the granting by the acquiror thereof of a security interest (substantially the same in form and substance to the security interest granted on the Issue Date pursuant to Section 10.01(a)), and such acquiror shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations with respect to such shares applicable to a Pledgor with respect thereto under this Article 10 and such security interest shall be deemed granted pursuant to this Article 10. SECTION 10.03. COLLATERAL ACCOUNTS. (a) Establishment of Accounts; Deposit of Trust Moneys. (1) The Trustee shall establish from time to time as required by this Section 10.03, and at all times thereafter until the trust created by this Indenture has terminated shall maintain, at its corporate offices in Massachusetts, four (4) accounts: the Cash Collateral Offer Account, the Cash Collateral Public Equity Offering Account, the Cash Collateral Default Account and the Cash Collateral Account (collectively, the "Accounts"). The Accounts shall be entitled the "MAXXAM GROUP INC. Cash Collateral Offer Account, [name of Trustee], as trustee, secured party," "MAXXAM GROUP INC. Cash Collateral Public Equity Offering Account, [name of Trustee], as trustee, secured party," "MAXXAM GROUP INC. Cash Collateral Default Account, [name of Trustee], as trustee, secured party" and "MAXXAM GROUP INC. Cash Collateral Account, [name of Trustee], as trustee, secured party," respectively. (2) All money and Cash Equivalents required to constitute Collateral and to be delivered to the Trustee or received by the Trustee or any agent or nominee of the Trustee in respect thereof, whether pursuant to the terms of this Indenture, the Uniform Commercial Code, other applicable law or otherwise ("Trust moneys"), shall be deposited in the appropriate Account, as specified in this Section 10.03, and the Trustee shall thereafter invest, apply, deposit into another Account or release, as the case may be, Trust Moneys in accordance with the terms of this Indenture. All right, title and interest in and to the Accounts shall vest in the Trustee, who shall have sole dominion and control over the Accounts and only the Trustee shall have any right of withdrawal therefrom. (b) Accounts as Collateral. All Trust Moneys deposited in any of the Accounts shall be held segregated in the Cash Collateral Offer Account, the Cash Collateral Public Equity Offering Account, the Cash Collateral Default Account or the Cash Collateral Account, as the case may be, as provided in this Section 10.03, and shall be held by the Trustee, in trust under this Indenture, as part of the Collateral. (c) Investment of Trust Moneys. The Company shall have the right to direct the Trustee in writing to, and the Trustee shall, except as otherwise required herein, invest any Trust Moneys held in the Accounts in Cash Equivalents and liquidate Cash Equivalents held in Accounts into money. The Trustee shall not be liable or responsible for any loss resulting from such investments and rein vestments or from any dispositions; provided, however, that the Trustee shall be liable for its own negligent action, its own negligent failure to act and its own willful misconduct in complying with this Article 10. The Accounts and all credits thereto and investments therein shall be maintained in such a manner in accordance with applicable law and all items shall be delivered to the Trustee and credited to the Accounts in accordance with applicable law so that the Trustee shall at all times have (except for Liens permitted under Section 4.16) an exclusive and a first priority perfected security interest therein. The Company, MPI and the Company's other Subsidiaries (with respect to any Pledged Company) and MAXXAM (with respect to Kaiser) shall deliver to the Trustee and any bank where any Accounts are maintained all such notices and other documents, and shall otherwise make such filings and take such other actions as may be reasonably requested by the Trustee, to create and maintain (except for Liens permitted under Section 4.16) an exclusive and first priority perfected security interest in the Accounts and all credits thereto and investments therein. Interest and other amounts earned on an Account shall be held as part of the Collateral, shall be credited to the Account in which the principal on which they are earned is deposited and shall be transferred between Accounts together with and in the same manner as the principal on which they are earned. (d) Deposits into Cash Collateral Offer Account. (1) Except as otherwise provided in Section 10.03(e)(1), upon the receipt of any Net Proceeds of a Primary Share Sale by a Pledged Company, or by Kaiser, that were dividended or distributed on Pledged Shares of such Pledged Company, or on Pledged Kaiser Shares, as the case may be, the Pledgor or Pledgors of such Pledged Shares shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all such Net Proceeds so received that are money or Cash Equivalents. (2) Except as otherwise provided in Section 10.03(e)(2), upon the release of any Pledged Shares pursuant to Section 10.05(b)(1) and the receipt of any Net Proceeds of a Pledged Share Sale in respect of such Pledged Shares, the Pledgor or Pledgors of such Pledged Shares shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all such Net Proceeds so received that are money or Cash Equivalents. (3) Upon receipt by the Company or any of its Subsidiaries, or upon receipt by MAXXAM, of an Extraordinary Distribution on any Pledged Shares, the Pledgor or Pledgors that received such Extraordinary Distribution shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account for application pursuant to Section 10.05(f), all amounts so received that are money or Cash Equivalents. (4) Except as otherwise provided in Section 10.03(e)(3), if, following receipt by the Company or any of its Subsidiaries, or following receipt by MAXXAM, of (A) Net Proceeds, other than money or Cash Equivalents, of either (x) a Primary Share Sale by a Pledged Company, or by Kaiser, that were distributed on Pledged Shares of such Pledged Company, or on Pledged Kaiser Shares, as the case may be, or (y) a Pledged Share Sale in respect of any Pledged Shares or of (B) an Extraordinary Dis- tribution on any Pledged Shares in a form other than money or Cash Equivalents, all or any portion of such Net Proceeds or Extraordinary Distributions at the time subject to the Lien of this Indenture are disposed of for money or Cash Equivalents pursuant to Section 10.05(b)(2), the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Offer Account, all money or Cash Equivalents received in consideration of such disposition. (e) Deposits into and Transfers from Cash Collateral Public Equity Offering Account. (1) Upon receipt of any Net Proceeds of a Primary Share Sale by a Pledged Company that were distributed on Pledged Shares of such Pledged Company, if such Primary Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 1997, the Pledgor or Pledgors of such Pledged Shares shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, all such Net Proceeds so received that are money or Cash Equivalents. (2) Upon the release of any Pledged Shares pursuant to Section 10.05(b)(1) and the receipt of any Net Proceeds of a Pledged Share Sale in respect of such Pledged Shares, if such Pledged Share Sale is also a Public Equity Offering and such receipt occurs prior to August 1, 1997, the Pledgor or the Pledgors of such Pledged Shares shall deliver or cause to be delivered to the Trustee for deposit into the Cash Collateral Public Equity Offering Account all such Net Proceeds so received that are money or Cash Equivalents. (3) If, following receipt prior to August l, 1997 by the Company or any of its Subsidiaries of Net Proceeds, other than money or Cash Equivalents, of (A) a Primary Share Sale that is a Public Equity Offering that were distributed on Pledged Shares or (B) a Pledged Share Sale that is a Public Equity Offering in respect of any Pledged Shares, all or any portion of such Net Proceeds at the time subject to the Lien of this Indenture are disposed of for money or Cash Equivalents pursuant to Section 10.05(b)(2), the Company shall deliver or cause to be delivered to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, all money or Cash Equivalents received in consideration of such disposition. (4) In the event the Company elects, pursuant to Section 10.05(g), optionally to redeem Securities with all or any portion of any Net Proceeds described in Sections 10.03(e)(1), (2) or (3), such Net Proceeds (or such portion thereof) shall remain in the Cash Collateral Public Equity Offering Account for application pursuant to Article 3 and Section 10.05(g) hereof and Section 5 of the Securities. If no such election is made within the time period specified in Section 10.05(g), all amounts in such Account shall, upon expiration of the time period for such election (or upon earlier written notice from the Company that no such election will be made), be deposited in the Cash Collateral Offer Account. (f) Deposits into Cash Collateral Default Account. (1) Upon and during the continuance of an Event of Default, Collateral Default or an Interest Payment Default, the Pledgors shall deliver or cause to be delivered to the Trustee for deposit into the Cash Collateral Default Account all Exempt Distributions made on any Pledged Shares during such continuance; provided, that the Company and its Subsidiaries, and MAXXAM, shall be entitled to receive and retain any Salmon Creek Distributions and any property and cash transferred or to be transferred in the Transactions. Any Trust Moneys held in the Cash Collateral Default Account shall be released from the Lien of this Indenture and, as the Company directs in writing, applied by the Trustee to cure any outstanding Interest Payment Defaults in respect of the Securities and to pay the principal due on the Securities at the final maturity thereof. (2) If at any time following the deposit of Trust Moneys into the Cash Collateral Default Account, no Event of Default, Collateral Default or Interest Payment Default is continuing, any amounts in the Cash Collateral Default Account shall be deposited into the Cash Collateral Offer Account for application pursuant to Section 10.05(f). (g) Deposits into Cash Collateral Account. The Trustee shall deposit into the Cash Collateral Account any money or Cash Equivalents (i) eligible for transfer out of the Cash Collateral Offer Account pursuant to Section 10.05(f) upon their eligibility for such transfer, (ii) delivered to the Trustee pursuant to Section 10.02(d)(5) or (iii) constituting Trust Moneys whose disposition by the Trustee upon receipt thereof is not otherwise provided for in this Section 10.03. (h) Application of Trust Moneys to Pay Trustee's Fees or upon a Notice of Acceleration. (1) Notwithstanding any other provision contained in this Article 10, but subject to the Company's continuing primary obligation contained in Section 7.07, the Trustee may at any time apply Trust Moneys in the Cash Collateral Account or in the Cash Collateral Default Account to the payment of due and unpaid fees under Section 7.07 of this Indenture; provided, that funds are drawn, first, from the Cash Collateral Account and, second, and only if there exist no Trust Moneys in the Cash Collateral Account, from the Cash Collateral Default Account. (2) Notwithstanding any other provision contained in this Article 10, if a Notice of Acceleration has been delivered to the Company and is at the time in effect, the Trustee shall apply all Trust Moneys held in the Accounts in accordance with Section 6.10; provided, that, so long as a Notice of Acceleration is not in effect, Trust Moneys shall be invested, applied, deposited in other Accounts or released as otherwise provided in this Article 10. (i) Grant of Security Interest in Accounts. As security for the Company's obligations to pay the Accreted Value, premium of and interest on the Securities and all other amounts and obligations under this Indenture and the Securities when due, each Pledgor hereby grants a security interest to the Trustee, for the benefit of the Holders and the Trustee, in all of its right, title and interest, whether now owned or hereafter acquired, in the Accounts and all sums of money, funds, securities, investments or other property held in or credited to the Accounts, from any source whatsoever, now or hereafter transferred or credited to and comprising the Accounts, including, without limitation, all proceeds derived from the Collateral credited to the Accounts, and any and all interest and dividends or other distribution from any such amounts, and all statements, certificates and instruments in or representing the Accounts. (j) Release and Application of Trust Moneys in Cash Collateral Account. The Company shall be entitled to a release, at any time and from time to time, of any Trust Moneys held in the Cash Collateral Account to be applied, as the Company directs the Trustee in writing, to redeem Securities or to purchase Securities, in the open market or otherwise. SECTION 10.04. FURTHER ASSURANCES; REVISIONS OF EXHIBIT C. The Company (with respect to Pledged Shares of the Pledged Companies) shall, and shall cause its Subsidiaries to, and MPI (with respect to the Pledged Shares of Pacific Lumber and Britt owned by MPI) and MAXXAM (with respect to the Pledged Kaiser Shares) each shall, in each case at any reasonable time and reasonably from time to time, at its expense, execute and deliver all further instruments and documents and take all reasonable further action that the Trustee may reasonably request in order to perfect and protect any Lien granted or purported to be granted with respect to any Collateral or to enable the Trustee to exercise and enforce its rights and remedies hereunder with respect to any Collat- eral. Without limiting the foregoing, the Company, MPI or MAXXAM, as the case may be, shall provide to the Trustee a revised Exhibit C to reflect any changes in the composition of the Pledged Shares pledged by it hereunder, and at such time the Company, MPI or MAXXAM, as the case may be, shall be deemed to make the representations and warranties set forth in clauses (i) through (v) of Sections 10.12(a), (b) or (c), as the case may be, with respect to Exhibit C as so revised. SECTION 10.05. RELEASE AND SUBSTITUTION OF COLLATERAL. (a) General. The Company, MPI and the Company's other Subsidiaries (and in the case of Pledged Kaiser Shares and related Collateral, MAXXAM) shall be entitled from time to time to the release by the Trustee of Pledged Shares and other Collateral from the Lien of this Indenture, and to substitute other property for Collateral, upon satisfaction of the requirements of this Section 10.05 and, to the extent applicable, Sections 5.01 and 10.13. (b) Release of Pledged Shares and of Non-Cash Net Proceeds and Extraordinary Distributions in Connection with a Collateralized Cash Proceeds Offer or Optional Redemption. (1) The Company, MPI and the Company's other Subsidiaries (and, with respect to the Pledged Kaiser Shares, MAXXAM) shall be entitled to a release of Pledged Shares from the Lien of this Indenture in order to effect a Pledged Share Sale; provided, that (i) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is otherwise permitted under this Section 10.05 and (iii) the Company agrees to subject money in an amount equal to the amount of Net Proceeds of such Pledged Share Sale received by the Company and its subsidiaries (or, with respect to the Pledged Kaiser Shares, MAXXAM), including all Trust Moneys in the Accounts to the extent required in this Article 10, to an offer to purchase Securities in accordance with the provisions of Section 10.05(f) or, if such Pledged Share Sale is a Public Equity Offering and the Company shall so elect pursuant to Section 10.05(g) with respect to all or any portion of such Net Proceeds, to effect an optional redemption of Securities pursuant to Article 3 of this Indenture and Section 5 of the Securities. (2) The Company, MPI and the Company's other Subsidiaries (and, with respect to the Pledged Kaiser Shares and related Collateral, MAXXAM) shall be entitled to a release of (A) Net Proceeds, other than money or Cash Equivalents, of either (x) a Primary Share Sale by a Pledged Company, or by Kaiser, that were dis- tributed on Pledged Shares of such Pledged Company, or on Pledged Kaiser Shares, as the case may be, or (y) a Pledged Share Sale in respect of any Pledged Shares or of (B) an Extraordinary Distribution on any Pledged Shares in a form other than money or Cash Equivalents: (i) if all or any portion of such Net Proceeds are disposed of in one or more transactions (a "Monetization") for consideration consisting of money or Cash Equivalents (but which may also include customary indemnities) and the Company delivers or causes to be deliv- ered to the Trustee, for deposit into the Cash Collateral Offer Account or the Cash Collateral Public Equity Offering Account, as applicable, all of the money or Cash Equivalents received in such Monetization, in which case all or such portion of such Net Proceeds shall, simultaneously with such Monetization, be released from the Lien of this Indenture; (ii) if in connection with a Collateralized Cash Proceeds Offer, the Company delivers to the Trustee for deposit into the Cash Collateral Offer Account, pursuant to Section 10.05(f)(ix), money in the amount specified in such section, in which case (a) all of such Net Proceeds or Extraordinary Distribution shall be released from the Lien of this Indenture, simultaneously with such deposit, if the Cash Collateralized Proceeds Purchase Prices for the Series A Securities and the Series B Securities equal or exceed the respective Call Prices therefor plus accrued and unpaid interest, if any, thereon to (but not including) the Collateralized Cash Proceeds Purchase Date and (b) if the preceding clause (a) is not applicable, a portion of such Net Proceeds or Extraordinary Distribution, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company shall, simultaneously with such deposit, be released from the Lien of this Indenture; and (iii) if in connection with an optional redemption using Net Proceeds of a Public Equity Offering that are subject to the Lien of this Indenture, the Company delivers to the Trustee for deposit into the Cash Collateral Public Equity Offering Account, pursuant to Section 10.05(g), money in the amount specified in such section, in which case there shall be released from the Lien of this Indenture, simultaneously with such deposit, a portion of such Net Proceeds, designated by the Company, not greater in value (at the time it became Collateral) than the amount of money so delivered by the Company. (c) Pledged Kaiser Share Release and Substitution. (1) MAXXAM shall be entitled to a release of Pledged Kaiser Shares from the Lien of this Indenture at any time and from time to time if (i) no Event of Default, no Collateral Default and no Interest Payment Default has occurred and is continuing or would result from such release, (ii) an Officers' Certificate is delivered to the Trustee by the Company so stating and stating that such release is permitted under this Section 10.05(c) and (iii) there shall remain as Collateral immediately subsequent to any such release Pledged Kaiser Shares bearing the same proportion (taking account of any subdivision, combination or reclassification of such shares after the Issue Date) to the number of Pledged Kaiser Shares constituting Collateral on the Issue Date as (A) the sum of (x) the aggregate principal amount at maturity of Securities outstanding on the date of such release, plus (y) one-half of the difference obtained by subtracting the aggregate principal amount at maturity of Securities outstanding on the date of such release from the aggregate principal amount at maturity of Securities outstanding on the Issue Date bears, to (B) the aggregate principal amount at maturity of Securities outstanding on the Issue Date. (2) MAXXAM shall be entitled to a release of Pledged Kaiser Shares from the Lien of this Indenture at any time and from time to time in connection with, and MAXXAM may permit Kaiser to effect, a merger or consolidation of Kaiser (or a successor thereto pursuant to this Section 10.05(c)(2)) into, or a sale or transfer of all or substantially all of the assets of Kaiser in any transaction or series of related transactions to, another person, or in connection with any other corporate reorganization of Kaiser (other than a spin-off or other similar distribution of Kaiser Shares to stockholders of MAXXAM) (a "Kaiser Transaction") if (l) no Event of Default, Collateral Default or Interest Payment Default has occurred and is continuing or would result from such release, ( 2) the Trustee receives, as Collateral subject to the Lien of this Indenture, in substitution for such Pledged Kaiser Shares, upon consummation of the Kaiser Transaction, the consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction, (3) all holders of the common stock of Kaiser (or such successor) shall (subject to proration, customary treatment of fractional amounts and other similar adjustments) be entitled to receive substantially the same consideration in respect of their shares of Kaiser common stock pursuant to the terms of such Kaiser Transaction and (4) any non-money or non-Cash Equivalent consideration received in respect of such Pledged Kaiser Shares pursuant to such Kaiser Transaction shall have been registered under the Securities Act to the extent required under the Federal securities laws. (d) Release Upon Defeasance. Notwithstanding anything to the contrary in this Indenture, upon satisfaction by the Company of the conditions set forth in Article 8 to its legal defeasance option, its covenant defeasance option or to the discharge of this Indenture, the Lien of this Indenture on all the Collateral shall terminate and all the Collateral shall be released without any further action on the part of the Trustee or any other Person. (e) Further Assurances by Trustee Upon Release of Collateral. Upon the release of any Collateral pursuant to this Article 10, the Trustee shall execute and deliver an instrument or instruments acknowledging the release of such Collateral from the Lien of this Indenture and the discharge of the Lien on such Collateral created by this Article 10, and shall duly assign, transfer and deliver to the Company, MPI, the Company's other Subsidiaries and/or MAXXAM, as applicable, or such other person as may be entitled thereto (without recourse and without any representation or warranty) such Collateral. (f) Collateralized Cash Proceeds Offer Procedures. (i) Each holder shall have the right, at such Holder's option, to require the Company to apply Trust Moneys in the Cash Collateral Offer Account, together with other money, if required, in an aggregate amount equal to the Collateralized Cash Proceeds Offer Amount, to purchase Securities tendered pursuant to an offer by the Company to purchase, for U.S. Legal Tender pursuant to an unconditional, irrevocable offer, subject to applicable law, Securities at a purchase price (the "COLLATERALIZED CASH PROCEEDS PURCHASE PRICE") equal to not less than (A) in the case of any Series A Security (or portion thereof) tendered, the sum of (1) 101% of the Accreted Value thereof at the scheduled date of purchase (the "COLLATERALIZED CASH PROCEEDS PURCHASE DATE") plus (2) if such date of purchase is after August 1, 1998, accrued and unpaid interest on such Secu- rity to but not including such date of purchase and (B) in the case of any Series B Security (or portion thereof) tendered, the sum of (1) 101% of the principal amount thereof plus (2) accrued and unpaid interest thereon to but not including such date of purchase, in each case in accordance with the procedures (including proration in the event of an oversubscription) set forth in this Section 10.05(f) (a "COLLATERALIZED CASH PROCEEDS OFFER"); provided, that the Company shall not be required to (but may in its discretion) make a Collateralized Cash Proceeds Offer if the sum of (x) the amount of Trust Moneys deposited in the Cash Collateral Offer Account, together with (y) the value, when it became Collateral, of non-money and non-Cash Equivalent Net Proceeds, Extraordinary Distributions and Exempt Distributions then required to constitute Collateral, in each case that have not previously been (and are not being) subjected to an offer pursuant to this Section 10.05(f) or (in the case of Net Pro- ceeds of a Public Equity Offering) applied to an optional redemption pursuant to Section 10.05(q) (the amounts specified in clause (y), above, to the extent not subjected or applied (or being subjected or applied) as aforesaid, being hereafter referred to collectively as the "NON-CASH AMOUNT"), do not in the aggregate exceed $10,000,000. No Net Proceeds, Exempt Distributions or Extraordinary Distributions shall be required to be subjected to more than one Collateralized Cash Proceeds Offer, and no Net Proceeds of a Public Equity Offering that have been applied to an optional redemption (or that are being so applied or that may be so applied pursuant to an election by the Company pursuant to Section 10.05(g) the time for which has not expired) in accordance with Section 10.05(g) shall be required to be subjected to a Collateralized Cash Proceeds Offer. Pending application of any Trust Moneys in the Cash Collateral Offer Account in accordance with this Section 10.05(f), such moneys may be invested in accordance with Section 10.03(c). (ii) Within 30 days following the date on which the Trust Moneys in the Cash Collateral Offer Account, together with the Non-Cash Amount, exceed $10,000,000 (the amount of such Trust Moneys together with the Non-Cash Amount, as of the close of business on the second Business Day prior to the mailing of the Collateralized Cash Proceeds Offer Notice, described below, being hereinafter referred to as the "COLLATERALIZED CASH PROCEEDS OFFER AMOUNT"), or earlier if it shall so elect, the Company shall mail a written notice of a Collateralized Cash Proceeds Offer to the Trustee, the Paying Agent (which for purposes of this Article 10 shall not be the Company or any of its Affiliates or Subsidiaries) and each Holder (and to beneficial owners as required by applicable law including, without limitation, the Exchange Act and the Rules and Regulations promulgated pursuant thereto) (the "COLLATERALIZED CASH PROCEEDS OFFER NOTICE"). The Collateralized Cash Proceeds Offer Notice shall include a form of Collateralized Cash Proceeds Purchase Notice (as described below) to be completed by the Holder, and shall contain or state: (1) the Collateralized Cash Proceeds Offer Amount, a brief description of the transactions which have generated such amount, and the calculation of the Collateralized Cash Proceeds Offer Amount; (2) the date by which the Collateralized Cash Proceeds Purchase Notice pursuant to this Section 10.05(f) must be delivered to the Paying Agent; (3) the Collateralized Cash Proceeds Purchase Date (which shall be no earlier than 30 days and not later than 60 days following the date on which such Collateralized Cash Proceeds Offer Notice is mailed, subject to compliance with applicable law); (4) the applicable Collateralized Cash Proceeds Purchase Price; (5) the name and address of the Trustee and the Paying Agent; (6) that the Securities must be surrendered to the Paying Agent; (7) that the Collateralized Cash Proceeds Price for any Security as to which a Collateralized Cash Proceeds Purchase Notice has been duly given and not withdrawn shall be paid promptly (subject to proration) following the later of the Collateralized Cash Proceeds Purchase Date and the time of surrender of such Security as described in this Section 10.05(f); (8) that if Collateralized Cash Proceeds Purchase Notices are given with respect to Securities having an aggregate Collateralized Cash Proceeds Purchase Price in excess of the Collateralized Cash Proceeds Offer Amount pursuant to the Collateralized Cash Proceeds Offer, the Company shall purchase Securities on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 or integral multiples thereof shall be acquired) (9) the procedures that the Holder must follow to exercise rights under this Section 10.05(f) and a brief description of those rights; and (10) the procedures for withdrawing a Collateralized Cash Proceeds Purchase Notice. (iii) To accept the offer to purchase Securities described in this Section 10.05(f), a Holder must deliver a written notice of purchase (a "COLLATERALIZED CASH PROCEEDS PURCHASE NOTICE") to the Paying Agent at any time prior to the close of business on the third Business Day immediately preceding the Collateralized Cash Proceeds Purchase Date, stating: (1) the name of the Holder, the series, the principal amount at maturity and the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased, and a statement that the Collateralized Cash Proceeds Offer is being accepted with respect to such Securities; (2) the portion of the principal amount at maturity of any Security which the Holder will deliver to be purchased, which portion must be $1,000 principal amount at maturity or an integral multiple thereof; and (3) that such Security or Securities shall be purchased on the Collateralized Cash Proceeds Purchase Date pursuant to the terms and conditions specified in the Securities and this Indenture. (iv) The delivery of a Security, by hand or by registered mail prior to, on or after the Collateralized Cash Proceeds Purchase Date (together with all necessary endorsements), to the Paying Agent shall be a condition to the receipt by the Holder of the Collateralized Cash Proceeds Purchase Price therefor; provided, however, that such Collateralized Cash Proceeds Purchase Price shall be so paid pursuant to this Section 10.05(f) only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Collateralized Cash Proceeds Purchase Notice and provided, further, that the Company shall have no obligation to purchase any Securities with respect to which a Collateralized Cash Proceeds Purchase Notice has not been received by the Paying Agent prior to the close of busi- ness on the third Business Day immediately preceding the Collateralized Cash Proceeds Purchase Date. (v) In the event that the Collateralized Cash Proceeds Offer described in this Section 10.05(f) shall be accepted in accordance with the terms thereof with respect to any portion of a Security, the Company shall purchase from the holder thereof (subject to proration pursuant to clause (viii) of this Section 10.05(f)), pursuant to this Section 10.05(f), such portion of such Security if the principal amount at maturity of such portion is $1,000 or an integral multiple of $1,000. In connection with a Security purchased in part, the Company shall execute and the Trustee shall authenticate for delivery to the Holder thereof, a new Security equal in principal amount at maturity to that of the unpurchased portion of the Security so surrendered. (vi) Upon receipt by the Paying Agent of the Collateralized Cash Proceeds Purchase Notice as specified in this Section 10.05(f), the Holder of the Security (or portion thereof) in respect of which such Collateralized Cash Proceeds Purchase Notice was given shall (subject to proration pursuant to clause (viii) of this Section 10.05(f)) and unless such Collateralized Cash Proceeds Purchase Notice is withdrawn as specified in clause (vii) of this Section 10.05(f)) thereafter be entitled to receive the applicable Collateralized Cash Proceeds Purchase Price with respect to such Security (or portion thereof). Such Collateralized Cash Proceeds Purchase Price shall be due and payable as of the Collateralized Cash Proceeds Purchase Date and shall be paid to such Holder promptly following the later of (A) the Collateralized Cash Proceeds Purchase Date (provided, the conditions in clauses (iii) and (iv) of this Section 10.05(f), as applicable, have been satisfied) and (B) the date of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by such clauses (iii) and (iv). (vii) A Collateralized Cash Proceeds Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the Paying Agent at any time on or prior to the close of business on the second Business Day preceding the Collateralized Cash Proceeds Purchase Date specifying: (1) the series and the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (2) the principal amount at maturity of the Security or Securities with respect to which such notice of withdrawal is being submitted; and (3) the principal amount at maturity, if any, of such Security or Securities which remains subject to the original Collateralized Cash Proceeds Purchase Notice, and which has been or will be delivered for purchase by the Company. (viii) If at the close of business on the second Business Day preceding the Collateralized Cash Proceeds Purchase Date, the Collateralized Cash Proceeds Purchase Price of all Securities for which Collateralized Cash Proceeds Purchase Notices have been given and not withdrawn exceeds the Collateralized Cash Proceeds Offer Amount, the Paying Agent shall select the Securities to be purchased such that each properly tendering Holder shall receive a portion of the Collateralized Cash Proceeds Offer Amount on a pro rata basis (with such adjustments as may be deemed appropriate by the Paying Agent so that only Securities in denominations of $1,000 principal amount at maturity or integral multiples thereof shall be purchased). The Paying Agent shall promptly return to the Holder thereof any Securities surrendered which the Company shall not be required to purchase pursuant to this Section 10.05(f). (ix) Prior to noon, New York time, on the Collateralized Cash Proceeds Purchase Date, the Company shall deliver to the Trustee, for deposit into the Cash Collateral Offer Account, an amount of money equal to the amount, if any, by which (A) the lesser of (x) the aggregate Collateralized Cash Proceeds Purchase Price of all Securities for which Collateralized Cash Proceeds Purchase Notices have been given and not withdrawn and (y) the Collateralized Cash Proceeds Offer Amount exceeds (B) the amount of money on deposit in the Cash Collateral Offer Account. Following such delivery, if any, but in any event on or prior to noon, New York time, on the Collateralized Cash Proceeds Purchase Date, the Trustee shall release from the Lien of this Indenture and deliver to the Pay- ing Agent an amount of money from the Cash Collateral Offer Account equal to the amount specified in clause (A) above. (x) Any Trust Moneys remaining in the Cash Collateral Offer Account following release and delivery by the Trustee pursuant to Section 10.05(f)(ix) shall be (A) deposited in the Cash Collateral Account if the Collateralized Cash Proceeds Purchase Prices for the Series A Securities and the Series B Securities do not, in each case, equal or exceed the respective Call Prices therefor plus accrued and unpaid interest, if any, thereon to (but not including) the Collateralized Cash Proceeds Purchase Date, in which case such Trust Moneys shall remain subject to the Lien of this Indenture, or (B) delivered to the Company, if the preceding clause (A) is not applicable, in which case such moneys shall be released from the Lien of this Indenture without the need for any further action from the Trustee. (xi) If money sufficient to pay the Collateralized Cash Proceeds Purchase Price of all Securities (or portions thereof) to be purchased on the Collateralized Cash Proceeds Purchase Date is deposited with the Paying Agent as of the Collateralized Cash Proceeds Purchase Date, interest shall cease to accrue on (and, in respect of the Series A Securities, any increase in Accreted Value shall cease with respect to) all such Securities (or portions thereof) on and after the Collateralized Cash Proceeds Purchase Date, whether or not any such Security is delivered to the Paying Agent, and the holders thereof shall have no other rights as such, other than the right to receive the applicable Collateralized Cash Proceeds Purchase Price (and, in the case of a Security purchased in part, a new Security equal in principal amount at maturity to the unpurchased portion of the Security surrendered) upon surrender of such Securities. (xii) In connection with any offer to purchase, or any purchase of, Securities under this Section 10.05(f), the Company shall (i) comply with the Exchange Act, if applicable, (ii) file any required Schedules of the Exchange Act, if applicable, and (iii) otherwise comply with all Federal and state securities laws regulating the purchase of the Securities. (xiii) The Paying Agent shall return to the Company any money, together with interest or dividends, if any, thereon held by it for the payment of the Collateralized Cash Proceeds Purchase Price of the Securities that remain unclaimed as provided in Section 8.04 hereof; provided, however, that to the extent that the aggregate amount of money deposited by the Company pursuant to Section 10.05(f)(ix) (together with Trust Moneys at the time in the Cash Collateral Offer Account) exceeds the aggregate Collateralized Cash Proceeds Purchase Price of the Securities or portions thereof to be purchased on the Collateralized Cash Proceeds Purchase Date, then promptly after the Collateralized Cash Proceeds Purchase Date, the Paying Agent shall return any such excess to the Company together with interest or dividends, if any, thereon. (g) Release Upon Election Optionally to Redeem. If the Company or a Subsidiary thereof receives Net Proceeds from a sale of Pledged Shares or from a Primary Share Sale that becomes subject to the Lien of this Indenture, and if such sale constitutes a Public Equity Offering and the Company is entitled at such time to effect an optional redemption in part of Securities pursuant to Article 3 of this Indenture and Section 5 of the Securities with such Net Proceeds, then the Company may elect, by written notice to the Trustee delivered within 30 days after it or such Subsidiary receives such Net Proceeds, to apply all or any portion of such Net Proceeds to such an optional redemption. Following the giving of such written notice, the Company shall, prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, deliver to the Trustee, for deposit into the Cash Collateral Public Equity Offering Account, an amount of money equal to the amount, if any, by which the aggregate redemption price of all Securities called for redemption plus accrued and unpaid interest, if any, to (but not including) the date of redemption (the "AGGREGATE REDEMPTION PRICE")exceeds the amount of money on deposit in the Cash Collateral Public Equity Offering Account. Following such delivery, if any, but in any event on or prior to 11:00 A.M., New York time, on the date set by the Company for such redemption of Securities in accordance with Article 3, the Trustee shall release from the Lien of this Indenture and deliver to the Paying Agent an amount of money from the Cash Collateral Public Equity Offering Account equal to the Aggregate Redemption Price. Pending application of any Trust Moneys in the Cash Collateral Public Equity Offering Account in accordance with this Section 10.05(g), such moneys may be invested in accordance with Section 10.03(c). SECTION 10.06. TRUSTEE APPOINTED ATTORNEY-IN-FACT. (a) The Company hereby appoints the Trustee as its attorney-in-fact, with power of substitution and with full authority in its place and stead and in its name or the Trustee's own name, from time to time, in the Trustee's discretion subject to the provisions of this Article 10, to take any action and to execute any instrument which the Trustee may deem necessary or advisable in order to accomplish the purposes of this Article 10, including to receive, endorse and collect all instruments made payable to it representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. This power, being coupled with an interest, is irrevocable. (b) MPI hereby appoints the Trustee as its attorney-in-fact, with power of substitution and with full authority in its place and stead and in its name or the Trustee's own name, from time to time, in the Trustee's discretion subject to the provision of this Article 10, to take any action and to execute any instrument which the Trustee may deem necessary or advisable in order to accomplish the purposes of this Article 10, including to receive, endorse and collect all instruments made payable to it representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. This power, being coupled with an interest, is irrevocable. (c) MAXXAM hereby appoints the Trustee as its attorney-in-fact, with power of substitution and with full authority in its place and stead and in its name or the Trustee's own name, from time to time, in the Trustee's discretion subject to the provisions of this Article 10, to take any action and to execute any instrument which the Trustee may deem necessary or advisable in order to accomplish the purposes of this Article 10, including to receive, endorse and collect all instruments made payable to it representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. This power, being coupled with an interest, is irrevocable. SECTION 10.07. TRUSTEE MAY PERFORM. If the Company, MPI or MAXXAM fails in any material respect to perform any agreement contained in this Article 10, or fails to take any action required to be taken by it, to perfect or maintain the perfection and priority of the Trustee's Lien on any applicable Collateral, the Trustee may itself perform, or cause performance of, such agreement, and the expenses of the Trustee incurred in connection therewith shall be payable by the Company under Section 7.07. Without limiting the foregoing, the Trustee is authorized to file financing statements without the signature of the grantor of a security interest in any Collateral in order to perfect any Lien on such Collateral. SECTION 10.08. REMEDIES UPON EVENT OF DEFAULT. If any Notice of Acceleration shall have been delivered and is at the time in effect, the Trustee may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies provided a secured party upon the default of a debtor under the Uniform Commercial Code at that time. Without limiting the foregoing, the Trustee may, without notice, except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Trustee's offices or elsewhere, for cash, on credit or for future delivery, upon such terms as the Trustee may determine to be commercially reasonable, and the Trustee or any secur- ityholder may be the purchaser of any or all of the Collateral so sold and thereafter hold the same, absolutely, free from any right or claim of whatsoever kind. Each of the Company and MPI (with respect to the Pledged Shares pledged by it hereunder) and MAXXAM (with respect to the Pledged Kaiser shares) agrees that, to the extent notice of sale shall be required by law, at least 10 days' notice to the Company (with respect to the Pledged Shares of the Pledged Companies) and MAXXAM (with respect to the Pledged Kaiser Shares) of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Trustee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Trustee shall incur no liability to the Company, MAXXAM or MPI as a result of the sale of the Collateral, or any part thereof, at any private sale conducted in a commercially reasonable manner. Each of the Company, MAXXAM and MPI hereby waives any claim against the Trustee arising by reason of the fact that the price at which any Collateral pledged by it hereunder may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Trustee accepts the first offer received and does not offer such Collateral to more than one offeree. The Company, MAXXAM and MPI each recognize that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, the Trustee may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. The Company, MAXXAM and MPI each acknowledge and agree that any such sale may result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions and, notwithstanding such circumstances, each agrees that any such sale of any Collateral pledged by it hereunder shall be deemed to have been made in a commercially reasonable manner. The Trustee shall be under no obligation to delay the sale of any of the Pledged Shares for the period of time necessary to permit the Company, MAXXAM and MPI, as the case may be, to register such securities for public sale under the Securities Act or under applicable state securities laws, even if the Company, MAXXAM or MPI, as the case may be, would agree to do so. If a Notice of Acceleration has been delivered and is at the time in effect, the Trustee may, upon written notice, require the Company, or MPI, as applicable, to use its best efforts to cause to be registered as soon as possible pursuant to the Securities Act and relevant state securities laws the Pledged Shares that are shares of Pledged Companies, including, without limitation, Stock of MPI, Pacific Lumber and Britt, respectively, and to keep such registration effective for at least 360 consecutive days, and to enter into customary arrangements with the Trustee and the holders concerning indemnification and reimbursement of expenses. SECTION 10.09. APPLICATION OF PROCEEDS. If a Notice of Acceleration has been delivered and is at the time in effect, any Trust Moneys held by the Trustee as Collateral, and all proceeds received by the Trustee in respect of any sale of, collection from or other realization upon, all or any part of the Collateral, shall be applied by the Trustee in the manner specified in Section 6.10. SECTION 10.10. CONTINUING LIENS. Except as provided in Article 5 and this Article 10. (a) the Company represents that this Indenture shall create a continuing Lien on the Collateral with respect to which a security interest is granted pursuant to Section 10.01(a) that shall (i) remain in full force and effect until payment in full of the Secu- rities, (ii) be binding upon the Company and its successors and assigns and (iii) enure to the benefit of the Trustee and its successors, transferees and assigns. (b) MPI represents that this Indenture shall create a continuing Lien on the Collateral with respect to which a security interest is granted pursuant to Section 10.01(b) that shall (i) remain in full force and effect until payment in full of the Securities, (ii) be binding upon MPI and its successors and assigns and (iii) enure to the benefit of the Trustee and its successors, transferees and assigns. (c) MAXXAM represents that this Indenture shall create a continuing Lien on the Collateral with respect to which a security interest is granted pursuant to Section 10.01(c) that shall (i) remain in full force and effect until payment in full of the Securities, (ii) be binding upon MAXXAM and its successors and assigns and (iii) enure to the benefit of the Trustee and its successors, transferees and assigns. SECTION 10.11. CERTIFICATES AND OPINIONS. The Company shall comply with (a) TIA Section 314(b) relating to Opinions of Counsel regarding the Lien of this Indenture and (b) TIA Section 314(d) relating to the release and substitution of Collateral from the Lien of this Indenture and Officers' Certificates or other documents regarding fair value of the Collateral, to the extent such provisions are applicable. The release of any collateral, in whole or in part, from the Lien of this Indenture shall be deemed not to impair in contravention of this Indenture, any of the Liens relating to the Collateral, or otherwise contravene the provisions of this Indenture, if and to the extent such Collateral is released pursuant to and in compliance with the terms of this Indenture. Any certificate or opinion required by TIA Section 314(d) may be executed and delivered by an Officer of the Company to the extent permitted by TIA Section 314(d). SECTION 10.12. REPRESENTATIONS AND WARRANTIES. (a) The Company hereby represents and warrants as follows: (i) The Company is the record and beneficial owner of the Pledged Shares described on Exhibit C as being owned by the Company, free and clear of any Lien, except for the Lien created by this Indenture. (ii) The Company has full corporate power, authority and legal right to pledge all the Pledged Shares described on Exhibit C as being owned by the Company and all other Collateral pledged by the Company. (iii) The Pledged Shares described on Exhibit C as being owned by the Company have been duly authorized and are validly issued, fully paid and non-assessable. (iv) The pledge in accordance with the terms of this Indenture of the Pledged Shares described on Exhibit C as being owned by the Company (assuming no failure by the Trustee to perform acts customarily required of a secured party in such circumstances) creates an (except for Liens permitted under Section 4.16) exclusive and a valid and perfected first priority Lien on such Collateral, securing payment of principal and premium of and interest on the Securities by the Company. (v) Exhibit C hereto sets forth a description of all the Pledged Shares owned by the Company as of the Issue Date. (vi) The Pledged Shares that are MPI shares of Stock constitute approximately 99.93% of the outstanding Stock of MPI. (vii) There are no existing options, warrants, calls or similar commitments relating to any authorized and unissued Stock of MPI. (b) MPI hereby represents and warrants as follows: (i) MPI is the record and beneficial owner of the Pledged Shares described on Exhibit C as being owned by MPI, free and clear of any Lien, except for the Lien created by this Indenture. (ii) MPI has full corporate power, authority and legal right to pledge all the Pledged Shares described on Exhibit C as being owned by MPI and all other Collateral pledged by MPI. (iii) The Pledged Shares described on Exhibit C as being owned by MPI have been duly authorized and are validly issued, fully paid and non-assessable. (iv) The pledge in accordance with the terms of this Indenture of the Pledged Shares described on Exhibit C as being owned by MPI (assuming no failure by the Trustee to perform acts customarily required of a secured party in such circumstances) creates an (except for Liens permitted under Section 4.16) exclusive and a valid and perfected first priority Lien on such Collateral, securing payment of principal and premium of and interest on the Securities by the Company. (v) Exhibit C hereto sets forth a description of all the Pledged Shares owned by MPI as of the Issue Date. (vi) The Pledged Shares that are Pacific Lumber and Britt shares of Stock constitute all of the outstanding Stock of such entities. (vii) There are no existing options, warrants, calls or similar commitments relating to any authorized and unissued Stock of Pacific Lumber or Britt. (c) MAXXAM hereby represents and warrants as follows: (i) MAXXAM is the record and beneficial owner of the Pledged Shares described on Exhibit C as being owned by MAXXAM, free and clear of any Lien, except for the Lien created by this Indenture. (ii) MAXXAM has full corporate power, authority and legal right to pledge all the Pledged Shares described on Exhibit C as being owned by MAXXAM and all other Collateral pledged by MAXXAM. (iii) The Pledged Shares described on Exhibit C as being owned by MAXXAM have been duly authorized and are validly issued, fully paid and non-assessable. (iv) The pledge in accordance with the terms of this Indenture of the Pledged Shares described on Exhibit C as being owned by MAXXAM (assuming no failure by the Trustee to perform acts customarily required of a secured party in such circumstances) creates an (except for Liens permitted under Section 4.16) exclusive and a valid and perfected first priority Lien on such Collateral, securing payment of principal and premium of and interest on the Securities by the Company. (v) Exhibit C hereto sets forth a description of all the Pledged Shares owned by MAXXAM as of the Issue Date. (vi) On the Issue Date there are authorized and outstanding 57,331,507 shares and 1,938,295 shares of Common Stock, par value $.01 per share, and Series A Mandatory Conversion Premium Dividend Preferred Stock, par value $.05 per share (the "Series A Preferred Stock"), of Kaiser, respectively, and outstanding options, warrants, calls and/or commitments relating to 21,882,950 shares of Common Stock, par value $.01 per share, of Kaiser (including shares thereof issuable on conversion of the Series A Preferred Stock and 2,500,000 shares thereof issuable pursuant to the Kaiser 1993 Omnibus Stock Incentive Plan). SECTION 10.13. CERTAIN MERGERS, CONSOLIDATIONS, ETC. AMONG THE COMPANY, PLEDGED COMPANIES AND RESTRICTED SUBSIDIARIES. Notwithstanding any other provision of this Indenture, the Company may at any time and from time to time permit any Pledged Company to merge or consolidate into, or sell or transfer all or substantially all its assets in any transaction or series of transactions to, any Restricted Subsidiary if: (i) the Trustee receives, as Collateral subject to the Lien of this Indenture, the consideration distributed to the Company and its Subsidiaries on the Pledged Shares of such Pledged Company in such transaction or transactions; (ii) after giving effect to such transaction or transactions, the Collateral includes at least a majority of the Voting Stock and outstanding equity interests (on a fully dilut- ed basis) of the person surviving such mergeror consolidation or to whom such transfer is made, in a proportion at least equal (treating, for purposes of this clause (ii), shares of Stock of MPI held by Palmas Holding Corp., a Delaware corporation, on the Issue Date as Collateral) to that in which the Voting Stock and outstanding equity interests of such Pledged Company were included in the Collateral immediately prior to such transaction or transactions; (iii) no Default exists or would exist immediately following such transaction or transactions after giving effect thereto on a pro forma basis; and (iv) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that clause (iii) above is satisfied and stating that such transaction or transactions are otherwise permitted by this Section 10.13. Upon satisfaction of the requirements of this Section 10.13, the Trustee shall, if requested, release the Pledged Shares of such Pledged Company from the Lien of this Indenture to the extent necessary to effect any transaction or transactions permitted under this Section 10.13; provided, that any person surviving such merger or consolidation, or to whom such sale or transfer is made, pursuant to the foregoing provisions of this Section 10.13 shall be deemed to be, for all purposes of this Indenture, a Pledged Company, such person shall be a Restricted Subsidiary and any owner of shares of Stock of such person that is either the Company or a Subsidiary of the Company shall grant a security interest (of like tenor to the security interest granted on the Issue Date pursuant to Section 10.01(a)) in such shares of Stock and shall expressly assume, by supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations with respect to such shares applicable to a Pledgor with respect thereto under this Article 10. Notwithstanding any other provision of this Indenture, any Pledged Company may, at any time and from time to time, merge or consolidate into, or transfer all or substantially all its assets in any transaction or series of transactions to, the Company. ARTICLE 11 MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 11.02. NOTICES. Any notice or communication shall be in writing and delivered in person, transmitted by facsimile (confirmed in writing by mail) or mailed by first-class mail addressed as follows: If to the Company: MAXXAM Group, Inc. 5847 San Felipe, Suite 2600 Houston, Texas 77057 Attention: General Counsel Telecopy Number: (713) 267-3702 with copies to: Howard A. Sobel, Esq. c/o Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, New York 10022 and if to the Trustee: Shawmut Bank, N.A. Corporate Trust Department 1 Federal Street Boston, Massachusetts 02211 Attention: Corporate Trust Division Telecopy Number: (617) 292-4289 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registra- tion books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Notwithstanding anything to the contrary in this Section 11.02, notices to the Company or the Trustee shall only be deemed given when received by the Company or the Trustee, as the case may be. SECTION 11.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities and the Trustee shall comply with TIA Sec- tion 312(b). The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee upon the Trustee's request: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with (or will have been complied with upon the execution and delivery of desig- nated instruments); and (ii) an Opinion of Counsel stating that, in the opinion of such counsel, as to legal matters, all such conditions precedent have been complied with (or will have been complied with upon the execution and delivery of designated instruments); except that in the case of any application or request as to which the furnishing of such documents is specifically required by any provisions of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the person making such certificate or rendering such opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such covenant or condition has been complied with. SECTION 11.06. WHEN TREASURY SECURITIES DISREGARDED. In determining whether the Holders of the required Accreted Value of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 11.07. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 11.08. LEGAL HOLIDAYS. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.09. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY, EXCEPT THAT THE LAWS OF THE STATE OF MASSACHUSETTS SHALL GOVERN MATTERS CONCERNING THE VALIDITY AND PERFECTION OF SECURITY INTERESTS OF THE TRUSTEE IN FAVOR OF THE HOLDERS IN TUE ACCOUNTS, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE COMPANY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT THEY MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. SECTION 11.10. NO RECOURSE AGAINST OTHERS. A director, officer, employee or stockholder, as such, of the Company or the Trustee shall not have any liability for any obligations of the Company or the Trustee under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Security holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. SUCCESSORS. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions thereof shall not in any way be affected or impaired thereby. SECTION 11.13. MULTIPLE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. This Indenture may be executed in two or more counterparts, each of which shall be an original, but all of them together constitute the same agreement. SECTION 11.14. TABLE OF CONTENTS; HEADINGS. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify, restrict or otherwise affect the meaning or interpretation of any of the terms or provisions hereof. SECTION 11.15. BENEFITS OF INDENTURE. Nothing in this Indenture or the Securities, express or implied shall give to any person, other than the parties hereto and their successors hereunder, and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 11.16. NO CHALLENGE. (a) The Trustee agrees, and each Holder of a Security by its acceptance thereof agrees, that neither the Trustee nor any such Holder shall take any action to challenge or to contest, in any bankruptcy or insolvency proceeding or otherwise, or vote in any way so as to authorize or participate, directly or indirectly, in any such challenge or contest of, or file any claim in any bankruptcy or insolvency proceeding or otherwise inconsistent with: (i) the validity, priority or enforceability of the Liens and security interests granted to secure payment of the Bank Debt, whether outstanding at the date hereof or hereafter, (ii) the rights of the holders of the Bank Debt, or any agent for such holders, set forth in any security agreement, mortgage or other collateral document with respect to such Liens and security interests, or (iii) the validity or enforceability of any provision of this Section 11.16. For purposes of this Indenture, the Liens and security interests granted in connection with the Bank Debt shall be deemed to have been given in exchange for reasonably equivalent or fair value received by the Company. (b) Except as expressly stated in this Section 11.16, the Trustee and the Holders of the Securities retain their rights to vote their claims and otherwise to act on their own behalf in any proceeding under the Bankruptcy Law. (c) The Trustee acknowledges, on behalf of itself and the Holders of the Securities, that the holders of the Bank Debt have entered or will enter into the Credit Agreement and have extended or will extend credit pursuant thereto in reliance upon this Section 11.16. This Section 11.16 shall inure to the benefit of and be enforceable by the holders of the Bank Debt and any agent for such holders. IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. MAXXAM GROUP INC. Attest: By: By: Bernard L. Birkel John T. La Duc Assistant Secretary Vice President and Chief Financial Officer MAXXAM Inc. hereby confirms its agreements set forth in Article 10 of this Indenture. Attest: By: By: Bernard L. Birkel Anthony R. Pierno Assistant Secretary Senior Vice President and General Counsel MAXXAM Properties Inc. hereby confirms its agreements set forth in Article 10 of this Indenture. Attest: By: By: Bernard L. Birkel Jacques C. Lazard Assistant Secretary Vice President and Controller SHAWMUT BANK, N.A. Attest: By: By: Name: Title: IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. MAXXAM GROUP INC. Attest: By: By: NAME: TITLE: MAXXAM Inc. hereby confirms its agreements set forth in Article 10 of this Indenture. Attest: By: By: MAXXAM Properties Inc. hereby confirms its agreements set forth in Article 10 of this Indenture. Attest: By: By: SHAWMUT BANK, N.A. Attest: By: By: Name: Title: EX-10 3 EXHIBIT 10.4 MAXXAM INC. TAX ALLOCATION AGREEMENT WITH BRITT LUMBER CO., INC. AS OF JULY 3, 1990 This Agreement is made as of July 3, 1990, between MAXXAM Inc. ("Parent"), a Delaware corporation, and Britt Lumber Co., Inc. ("Britt"), a California corporation. WHEREAS, on July 2, 1990, MAXXAM Properties Inc. acquired all of the outstanding common stock of Britt (the "Acquisition"); and WHEREAS, as of July 3, 1990, as a consequence of the Acquisition, Britt became a member of the affiliated group within the meaning of Section 1504(a) of The Internal Revenue Code (the "Code") of which Parent is the common parent corporation (the "Group"); and WHEREAS, Parent and Britt desire to establish a Tax Allocation Method which includes Britt. As used herein, the term "Tax Allocation Method" shall mean a method for allocating the consolidated tax liability of a group among its members and for reimbursing the group's parent for the payment of such liability. NOW, THEREFORE, in consideration of the promises and of the mutual agreements and covenants contained herein, Parent and Britt hereby agree as follows: 1. Britt agrees to be included in, and Parent agrees to file a consolidated Federal income tax return for all taxable years in which Parent and Britt are eligible to file consolidated returns as an affiliated group of corporations as such term is defined in Section 1504 of the Code. 2. All elections relating to the filing of a consolidated Federal income tax return which are required or are available and the computation of the consolidated Federal income tax liability of the Group shall be made by Parent. Britt shall execute such consents and other documents as are necessary in connection therewith. 3. Parent, as the common parent and agent of the Group, shall be responsible for, and shall pay, any consolidated Federal income tax liability of the Group, and has the sole right to any refunds from the Internal Revenue Service. 4. (a) There shall be computed a Federal income tax liability for Britt for any taxable period covered by Section 6 of this Agreement (the "Applicable Period") as if (i) Britt had filed a separate return for such period and all prior Applicable Periods (taking into account all limitations which would be applicable to Britt) and (ii) Britt was never a member of the Group. In calculating such liability the separate returns shall be prepared by taking into account all inter-company transactions, including those eliminated by reason of the consolidated return Treasury Regulations. (b) If the foregoing calculation results in a Federal income tax liability for Britt with respect to the Applicable Period, then, in that event, Britt shall pay such computed income tax liability to Parent in such amounts and at such times as Britt would have been required to pay to the Internal Revenue Service if it were an unaffiliated corporation making separate estimated payments of tax and filing a separate tax return. (c) If the foregoing calculation with respect to the Applicable Period results in a net operating loss that can be carried back to a prior taxable period or periods of Britt with respect to which Britt previously made payments to Parent pursuant to the preceding paragraph (b), then, in that event, Parent shall pay Britt an amount equal to the tax refund to which Britt would have been entitled if it were an unaffiliated corporation that filed separate income tax returns in respect of all the relevant taxable periods. (d) If the foregoing calculation with respect to the Applicable Period results in a net operating loss that cannot be carried back to a prior taxable period or periods of Britt with respect to which Britt previously made payments to Parent pursuant to the preceding paragraph (b), then, in that event, such net operating loss shall be a net operating loss carryover to be used by Britt in computing its Federal income tax liability pursuant to the preceding paragraph (a) for future taxable periods, under the law applicable to net operating loss carryovers in general. (e) Any adjustment other than a net operating loss carry back described in paragraph (c) above, for whatever reason (including, without limitation, audits or amended returns), to any item affecting a calculation of tax liabilities under paragraph (a), (b), (c) or (d) above, shall be given effect by redetermining the amount payable by or due to Britt pursuant to this Agreement as if such adjustment was part of the original determination hereunder and including any interest due to or from the Internal Revenue Service as a result of such adjustment. 5. The foregoing principles shall apply in similar fashion to any consolidated state or other local income tax return which the Group may elect or be required to file. 6. With respect to Britt, this Agreement shall be effective for the Group's 1990 taxable period and all subsequent taxable periods (excluding any period of time in 1990 in which Britt was not a member of the Group) until the date on which (i) Britt ceases to be a member of the Group, (ii) the Group no longer remains in existence within the meaning of Treasury Regulation 1.1502-75(a), or (iii) the Group is no longer eligible to file, or is no longer eligible to join in the filing of, a consolidated return for Federal income tax purposes. Prior to or upon termination of this Agreement, the parties may enter into a new agreement, consistent with the provisions of this Agreement, taking into account, among other things, to the extent applicable, the manner in which Britt ceased to be a member of the Group, the reason that the Group is no longer in existence, or the reason that Parent and Britt can no longer join in the same consolidated return. 7. This Agreement is entered into by the parties solely in recognition of the mutual benefits resulting from filing a Federal (or state or other local) consolidated tax return. The respective amounts of tax liability allocated to Parent and Britt for purposes of computing such corporations' earnings and profits for Federal (or any other) income tax purposes may differ from those determined in accordance with this Agreement. Furthermore, any amount treated for Federal (or state) income tax purposes, on account of such a difference, as a contribution to capital or a distribution with respect to stock, or a combination thereof, as the case may be, shall be treated as a contribution to capital, a distribution with respect to stock, or a combination thereof, solely for Federal (or state) income tax purposes. IN WITNESS WHEREOF, Parent and Britt have executed this Agreement by authorized officers thereof as of the date first above written. MAXXAM Inc. By Britt Lumber Co., Inc. By EX-10 4 EXHIBIT 10.27 UNDERTAKING Effective as of the date hereof, the undersigned does hereby assume (a) any unpaid Federal income tax liabilities of MAXXAM Group Inc. ("MGI"), a Delaware corporation and wholly owned subsidiary of the undersigned, attributable to taxable years of MGI ending on or before May 20, 1988 (plus all penalties and interest thereon) and (b) any liabilities related to those certain loan and installment sale contracts previously assigned to MAXXAM Properties Inc. by Coyne Cylinder Co., as more fully described in Exhibit A attached hereto. Dated: August 4, 1993 MAXXAM INC. By: JACQUES C. LAZARD Jacques C. Lazard Vice President and Corporate Controller EXHIBIT A All terms used but not defined herein have the meaning assigned them under that certain Amended and Restated Loan and Security Agreement dated as of November 15, 1987 (the "Loan Agreement") among MAXXAM Properties Inc. as Borrower, MAXXAM Group Inc. as Guarantor and Bank of America National Trust and Savings Association as Lender. Subject to Lender's security interest therein, all right, title and interest in, to and under the First Loan Contracts and the Second Loan Contracts assigned by Coyne Cylinder Co. ("Coyne") to the predecessor of MAXXAM Properties Inc., MXM Holdings Corporation, pursuant to that certain Assignment and Assumption agreement dated as of September 8, 1987. All right, title and interest in, to and under the installment sale contracts described on Schedule III-A to the Loan Agreement. EX-99 5 EXHIBIT 99 To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related statements of consolidated income and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Note 1 of the Notes to Consolidated Financial Statements, effective January 1, 1993, the Company changed its methods of accounting for postretirement benefits other than pensions, postemployment benefits, and income taxes. ARTHUR ANDERSEN & CO. Houston, Texas February 24, 1994 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------
December 31, -------------------- (In millions of dollars, except share amounts) 1993 1992 ------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 14.7 $ 19.1 Receivables: Trade, less allowance for doubtful receivables of $2.9 in 1993 and $3.0 in 1992 156.1 174.0 Other 78.6 96.0 Inventories 426.9 439.9 Prepaid expenses and other current assets 60.7 37.0 -------- -------- Total current assets 737.0 766.0 Investments in and advances to unconsolidated affiliates 183.2 150.1 Property, plant, and equipment -- net 1,163.7 1,066.8 Deferred income taxes 210.8 Other assets 233.2 189.7 -------- -------- Total $2,527.9 $2,172.6 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 126.3 $ 136.6 Accrued interest 23.6 4.6 Accrued salaries, wages, and related expenses 56.1 84.4 Accrued postretirement benefit obligation -- current portion 47.6 Other accrued liabilities 133.2 121.0 Payable to affiliates 62.4 78.4 Short-term borrowings .5 4.8 Long-term debt -- current portion 8.7 25.9 -------- -------- Total current liabilities 458.4 455.7 Long-term liabilities 501.8 281.7 Accrued postretirement benefit obligation 713.1 Long-term debt 720.2 765.1 Minority interests 105.0 104.9 Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares; Series A Convertible, stated value $.10, issued and outstanding, 1,938,295 and nil in 1993 and 1992 .2 Common stock, par value $.01, authorized 100,000,000 shares; issued and outstanding, 58,095,599 and 57,327,279 shares in 1993 and 1992 .6 .6 Additional capital 425.9 288.5 Retained earnings (accumulated deficit) (375.7) 282.8 Additional minimum pension liability (21.6) (6.7) -------- -------- Total stockholders' equity 29.4 565.2 -------- -------- Total $2,527.9 $2,172.6 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. - 13 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS) --------------------------------------------------------------------------
Year Ended December 31, ---------------------------------- (In millions of dollars, except share amounts) 1993 1992 1991 ------------------------------------------------------------------------------------------------------------ Net sales $1,719.1 $1,909.1 $2,000.8 -------- -------- -------- Costs and expenses: Cost of products sold 1,587.7 1,619.3 1,594.2 Depreciation 97.1 80.3 73.2 Selling, administrative, research and development, and general 121.9 119.6 117.4 Restructuring of operations 35.8 -------- -------- -------- Total costs and expenses 1,842.5 1,819.2 1,784.8 -------- -------- -------- Operating income (loss) (123.4) 89.9 216.0 Other income (expense): Interest and other income -- net (.9) 20.9 20.3 Interest expense (84.2) (78.7) (93.9) -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles (208.5) 32.1 142.4 Credit (provision) for income taxes 86.9 (5.3) (32.4) Minority interests (1.5) .1 (1.6) -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles (123.1) 26.9 108.4 Extraordinary loss on early extinguishment of debt, net of tax benefit of $11.2 (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.3) -------- -------- -------- Net income (loss) $ (652.2) $ 26.9 $ 108.4 ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles $ (2.25) $ .47 $ 2.03 Extraordinary loss (.38) Cumulative effect of changes in accounting principles (8.84) -------- -------- -------- Net income (loss) $ (11.47) $ .47 $ 2.03 ======== ======== ======== Weighted average common and common equivalent shares outstanding (000) 57,423 57,250 53,297 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. - 14 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS --------------------------------------------------------------------------
Year Ended December 31, ------------------------------- (In millions of dollars) 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income (loss) $(652.2) $ 26.9 $ 108.4 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 97.1 80.3 73.2 Amortization of deferred financing costs and discount on long-term debt 11.2 11.5 10.7 Non-cash postretirement benefit expenses other than pensions 19.2 Restructuring of operations 35.8 Minority interests 1.5 (.1) 1.6 Extraordinary loss on early extinguishment of debt -- net 21.8 Cumulative effect of changes in accounting principles -- net 507.3 (Decrease) increase in accrued and deferred income taxes (96.4) 3.5 10.1 Equity in losses of unconsolidated affiliates 3.3 1.9 19.5 Recognition of previously deferred income from a forward alumina sale (.6) (25.7) (42.0) Increase (decrease) in accrued interest 19.2 (.3) (1.9) Incurrence of financing costs (12.7) (5.5) (5.9) Increase in receivables (6.1) (57.8) (2.5) Decrease in inventories 13.0 58.7 25.3 Decrease (increase) in prepaid expenses and other current assets 7.4 7.6 (38.3) Increase (decrease) in accounts payable, payable to affiliates, and accrued liabilities 47.4 (93.9) (29.6) Other 8.0 19.2 6.4 ------- ------- ------- Net cash provided by operating activities 24.2 26.3 135.0 ------- ------- ------- Cash flows from investing activities: Net proceeds from disposition of property and investments 13.1 26.1 8.8 Capital expenditures (67.7) (114.4) (118.1) ------- ------- ------- Net cash used for investing activities (54.6) (88.3) (109.3) ------- ------- ------- Cash flow from financing activities: Repayments of long-term debt, including revolving credit (1,134.5) (221.4) (533.3) Borrowings of long-term debt, including revolving credit 1,068.1 303.8 575.9 Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 Tender premiums and other costs of early extinguishment of debt (27.1) Net short-term (payments) borrowings (4.3) (1.5) 6.7 Borrowing (prepayment) of notes to parent 2.5 (100.2) Dividends paid (6.3) (11.4) (55.7) Capital stock issued 119.3 .6 93.2 Redemption of minority interests' preference stock (4.2) (7.3) (20.4) ------- ------- ------- Net cash provided by (used for) financing activities 26.0 65.3 (33.8) ------- ------- ------- Net increase (decrease) in cash and cash equivalents during the year (4.4) 3.3 (8.1) Cash and cash equivalents at beginning of year 19.1 15.8 23.9 ------- ------- ------- Cash and cash equivalents at end of year $ 14.7 $ 19.1 $ 15.8 ======= ======= ======= Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 53.7 $ 68.1 $ 81.7 Income taxes paid 13.5 1.8 20.9 Tax allocation payments to MAXXAM 28.0 39.1 Supplemental disclosure of non-cash financing activities: Contribution to capital of notes payable to parent together with accrued interest $ 53.9 Exchange of the borrowings from MAXXAM Group Inc. for capital stock $ 15.0
The accompanying notes to consolidated financial statements are an integral part of these statements. - 15 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company") and its majority owned subsidiaries. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated. The Company is a subsidiary of MAXXAM Inc. ("MAXXAM"), and conducts its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). Certain reclassifications of prior-year information were made to conform to the current presentation. Changes in Accounting Principles The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"), as of January 1, 1993. The costs of postretirement benefits other than pensions and postemployment benefits are now accrued over the period employees provide services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the changes in accounting principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to results of operations of $497.7 and $7.3, net of related income taxes of $234.2 and $3.5, respectively. The new accounting standards had no effect on the Company's cash outlays for postretirement or postemployment benefits, nor did these one-time charges affect the Company's compliance with its existing debt covenants. The Company reserves the right, subject to applicable collective bargaining agreements and applicable legal requirements, to amend or terminate these benefits. The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1, 1993. The adoption of SFAS 109 changes the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" ("APB 11"). The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle reduced the Company's results of operations by $2.3. Cash and Cash Equivalents The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. Inventories Substantially all product inventories are stated at last-in, first-out ("LIFO") cost, not in excess of market. Replacement cost is not in excess of LIFO cost. Other inventories, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor, and manufacturing overhead, including depreciation. Inventories consist of the following: - 16 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ----------------------------------------------------------------------
December 31, ---------------- 1993 1992 ----------------------------------------------------------------------- Finished fabricated products $ 83.7 $ 91.2 Primary aluminum and work in process 141.4 128.7 Bauxite and alumina 94.0 107.4 Operating supplies and repair and maintenance parts 107.8 112.6 ------ ------ $426.9 $439.9 ====== ======
The Company recorded pre-tax charges of approximately $19.4 in 1993 and $29.0 in 1992 because of a reduction in the carrying values of its inventories caused principally by prevailing lower prices for alumina, primary aluminum, and fabricated products. The 1992 amount includes a LIFO inventory liquidation of $10.2. Depreciation Depreciation is computed principally by the straight-line method at rates based upon the estimated useful lives of the various classes of assets. The principal estimated useful lives by class of assets are: ----------------------------------------------------------------------- Land improvements 8 to 25 years Buildings 15 to 45 years Machinery and equipment 10 to 22 years Other Income Other income in 1993 includes approximately $10.8 of pre-tax charges related principally to establishing additional litigation and environmental reserves in the fourth quarter. Other income in 1992 includes approximately $14.0 of pre-tax income for non-recurring adjustments to previously recorded liabilities and reserves in the fourth quarter. Included in interest and other income in 1991 is the receipt of a $12.0 fee in the first quarter from the Company s minority partner in consideration for the execution of an expansion agreement for the Alumina Partners of Jamaica ("Alpart") alumina refinery. The agreement provides for a program of expansion and modernization of Alpart at the existing ownership interest of 65% for KACC and 35% for KACC's minority partner. The prior expansion agreement provided for expansion rights of 75% for KACC and 25% for KACC's minority partner. Futures Contracts and Options The Company periodically enters into forward foreign exchange, commodity futures, and commodity and currency option contracts, which are primarily accounted for as hedges of its revenues and costs. The gains and losses on these contracts are reflected in earnings concurrently with the hedged revenues or costs. The cash flows from these contracts are classified in a manner consistent with the underlying nature of the transactions. At December 31, 1993, the net fair market value of the Company's position in these contracts was not material. Deferred Financing Costs Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. Foreign Currency The Company uses the United States dollar as the functional currency for its foreign operations. - 17 - (In millions of dollars, except share amounts) ----------------------------------------------------------------------- Fair Value of Financial Instruments Unless otherwise disclosed, the carrying amount of all financial instruments is a reasonable estimate of fair value. Net Income per Common and Common Equivalent Share Net income per common and common equivalent share is computed based on the weighted average number of common and common equivalent shares outstanding during each period. For the year ended December 31, 1993, common stock equivalents of 19,382,950 attributable to the Series A Convertible Preferred Stock and 584,300 attributable to nonqualified stock options (see Note 9) were excluded from the calculation of weighted average shares because they were antidilutive. Dividends on the Series A Convertible Preferred Stock ($6.3 for the year ended December 31, 1993) are deducted from net income (added to net loss) for the purpose of calculating net income (loss) per common and common equivalent share. 2. Pro Forma Financial Information On February 17, 1994, the Company completed an equity offering of preferred stock (see Note 9), and KACC completed a refinancing which included the issuance of $225.0 of Senior Notes and the signing of the 1994 Credit Agreement (see Note 6). The following unaudited pro forma information reflects the effects of these transactions as if they had occurred on December 31, 1993. ----------------------------------------------------------------------- Current assets $ 843.6 Non-current assets 1,800.1 Current liabilities 454.2 Long-term debt 755.7 Stockholders' equity 113.8 3. Restructuring of Operations In 1993, KACC implemented a restructuring plan for its flat-rolled products operation at its Trentwood plant in response to overcapacity in the aluminum rolling industry, flat demand in the U.S. can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. Additionally, KACC implemented a plan to discontinue its casting operations, which include three facilities located in Ohio. This entire restructuring is expected to be completed by the end of 1995 and will affect approximately 670 employees. The pre-tax charge for this restructuring of $35.8 includes $25.2 for pension, severance, and other termination benefits; $4.7 for a writedown of the casting facilities to net realizable value; $3.3 for estimated 1994 casting operating losses until the date of closure or sale; and $2.6 for various other items. 4. Investments In and Advances To Unconsolidated Affiliates Summary combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in earnings (losses) before income taxes of such operations are treated as a reduction (increase) in cost of products sold. At December 31, 1993 and 1992, KACC's net receivables from these affiliates were not material. - 18 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ------------------------------------------------------------------------ (In millions of dollars, except share amounts) ------------------------------------------------------------------------
Summary of Combined Financial Position December 31, ------------------- 1993 1992 ------------------------------------------------------------------------- Current assets $312.3 $295.0 Property, plant, and equipment -- net 371.1 389.4 Other assets 46.3 49.9 ------ ------ Total assets $729.7 $734.3 ====== ====== Current liabilities $130.4 $132.8 Long-term debt 290.0 275.0 Other liabilities 17.8 20.0 Stockholders' equity 291.5 306.5 ------ ------ Total liabilities and stockholders' equity $729.7 $734.3 ====== ======
Summary of Combined Operations
Year Ended December 31, ------------------------------- 1993 1992 1991 ------------------------------- Net sales $ 510.3 $ 586.6 $ 589.0 Costs and expenses (527.2) (586.7) (630.7) Provision for income taxes 1.9 6.9 9.5 ------- ------- ------- Net income (loss) $ (15.0) $ 6.8 $ (32.2) ======= ======= ======= Company's equity in losses $ (3.3) $ (1.9) $ (19.5) ======= ======= =======
The Company's equity in losses differs from the summary net income (loss) due to various percentage ownerships in the entities and equity method accounting adjustments. At December 31, 1993, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $80.7. The Company is amortizing this amount over a 12-year period, which results in an annual amortization charge of approximately $11.9. The Company and its affiliates have interrelated operations. KACC provides some of its affiliates with services such as financing, management, and engineering. Significant activities with affiliates include the acquisition and processing of bauxite, alumina, and primary aluminum. Purchases from these affiliates were $206.6, $219.4 and $238.7 in the years ended December 31, 1993, 1992, and 1991, respectively. No dividends were received from investees in the three years ended December 31, 1993. See Note 7 for the impact of the adoption of SFAS 109 in 1993. - 19 - (In millions of dollars, except share amounts) ------------------------------------------------------------------------ 5. Property, Plant, and Equipment The major classes of property, plant, and equipment are as follows:
December 31, ---------------------- 1993 1992 ------------------------------------------------------------------------- Land and improvements $ 135.1 $ 123.8 Buildings 194.8 164.1 Machinery and equipment 1,223.0 1,010.7 Construction in progress 64.9 70.3 -------- -------- 1,617.8 1,368.9 Accumulated depreciation 454.1 302.1 -------- -------- Property, plant, and equipment -- net $1,163.7 $1,066.8 ======== ========
See Note 7 for the impact of the adoption of SFAS 109 in 1993. 6. Long-Term Debt Long-term debt and its maturity schedule are as follows:
December 31, 1999 --------------- and 1993 1992 1994 1995 1996 1997 1998 After Total Total --------------------------------------------------------------------------------------------------------------- 1989 Credit Agreement (6.59% at December 31, 1993) Revolving Credit Facility $188.0 $188.0 $290.0 Term Loan 36.6 Pollution Control and Solid Waste Disposal Facilities Obligations (6.00%-7.75%) $ 1.1 $ 1.2 $ 1.2 $ 1.3 $ 1.3 33.1 39.2 40.0 Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0 Alpart Term Loan (8.95%) 6.3 6.2 6.3 6.2 25.0 31.3 12-3/4% Senior Subordinated Notes 400.0 400.0 14-1/4% Senior Subordinated Notes 320.5 Other borrowings (fixed and variable rates) 1.3 3.7 1.5 1.5 7.8 .9 16.7 12.6 ------ ------ ------ ------ ------ ------ ------ ------ Total $ 8.7 $ 11.1 $ 9.0 $ 9.0 $ 9.1 $682.0 728.9 791.0 ====== ====== ====== ====== ====== ====== Less current portion 8.7 25.9 ------ ------ Long-term debt $720.2 $765.1 ====== ======
1994 Credit Agreement On February 17, 1994, the Company and KACC entered into a credit agreement with BankAmerica Business Credit, Inc. (as agent for itself and other lenders), Bank of America National Trust and Savings Association, and certain other lenders (the "1994 Credit Agreement"). The 1994 Credit Agreement replaced the 1989 Credit Agreement (as defined below) and consists of a $250.0 five-year secured, revolving line of credit, scheduled to mature in 1999. The Company is able to borrow under the facility by means of revolving credit advances and letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $250.0 or a borrowing base relating to eligible accounts - 20 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- receivable plus eligible inventory. The Company will record a pre-tax extraordinary loss of approximately $8.3 in the first quarter of 1994, consisting primarily of the write-off of unamortized deferred financing costs related to the 1989 Credit Agreement. As of February 24, 1994, the amount outstanding under the 1994 Credit Agreement was $67.4 of letters of credit. The 1994 Credit Agreement is unconditionally guaranteed by the Company and by all significant subsidiaries of KACC which were guarantors of KACC's obligations under the 1989 Credit Agreement. Loans under the 1994 Credit Agreement bear interest at a rate per annum, at KACC's election, equal to (i) a Reference Rate (as defined) plus 1-1/2% or (ii) LIBO Rate (Reserve Adjusted) plus 3-1/4%. After June 30, 1995, the interest rate margins applicable to borrowings under the 1994 Credit Agreement may be reduced by up to 1-1/2% (non-cumulatively), based upon a financial test, determined quarterly. The 1994 Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on the Company's and KACC's ability to, among other things, incur debt and liens, make investments, pay common stock dividends, undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. The 1994 Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding the Gramercy plant); (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks, and substantially all other personal property of KACC and certain of its subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries, and pledges of a portion of the stock of certain partially owned foreign affiliates. The 1989 Credit Agreement The Company and KACC entered into a credit agreement with a syndicate of commercial banks and other financial institutions. This agreement was composed of a Revolving Credit Facility, a five-year Term Loan, and certain other agreements (as amended, the "1989 Credit Agreement"). The obligations of KACC in respect of the credit facilities were guaranteed by Kaiser, and by a number of wholly owned subsidiaries of KACC. The Revolving Credit Facility under the 1989 Credit Agreement provided for loans not to exceed the lesser of $350.0 or a borrowing base relating to the amount of eligible accounts receivable and eligible inventory of KACC and certain of its subsidiaries. Up to $50.0 of availability under the Revolving Credit Facility could have been used for letters of credit. As of December 31, 1993, $113.6 of borrowing capacity was unused under the Revolving Credit Facility of the 1989 Credit Agreement (of which $12.8 could also have been used for letters of credit). The five-year Term Loan component of the 1989 Credit Agreement, which was originally to be repaid in ten equal semi-annual installments commencing May 31, 1990, was prepaid in June 1993. Senior Notes Concurrent with the offering by the Company of its 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES") on February 17, 1994 (see Note 9), KACC issued $225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the offering of the Senior Notes were used to reduce outstanding borrowings under the Revolving Credit Facility of the 1989 Credit Agreement immediately prior to the effectiveness of the 1994 Credit Agreement and for working capital and general corporate purposes. Senior Subordinated Notes On February 1, 1993, KACC issued $400.0 of 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes"). The net proceeds from the sale of the 12-3/4% Notes were used to retire the 14-1/4% Senior Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay $18.0 of the Term Loan, and to reduce outstanding borrowings under the Revolving Credit - 21 - (In millions of dollars, except share amounts) ----------------------------------------------------------------- Facility. These transactions resulted in a pre-tax extraordinary loss of approximately $33.0 in the first quarter of 1993, consisting primarily of the write-off of unamortized discount and deferred financing costs related to the 14-1/4% Notes and the payment of premiums on the 14-1/4% Notes. The obligations of KACC with respect to the Senior Notes and the 12-3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the Senior Notes and the 12-3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Gramercy Revenue Bonds In December 1992, KACC entered into an installment sale agreement (the "Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate principal amount of its 7-3/4% Bonds due August 1, 2022 (the "Bonds") to finance the construction of certain solid waste disposal facilities at KACC's Gramercy plant. The proceeds from the sale of the Bonds were deposited into a construction fund and may be withdrawn, from time to time, pursuant to the terms of the Sale Agreement and the Bond indenture. At December 31, 1993, $10.8 remained in the construction fund. The Sale Agreement requires KACC to make payments to the Louisiana Parish in installments due on the dates and in the amounts required to permit the Louisiana Parish to satisfy all of its payment obligations under the Bonds. Alpart CARIFA Loan In December 1991, Alpart entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of the loan parallel the bonds' repayment terms. The $38.0 aggregate principal amount of Series A bonds matures on June 1, 2008. The Series A bonds bear interest at a floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of 1%) on $37.5 of the principal amount (2.9% at December 31, 1993) with the remaining $.5 bearing interest at a fixed rate of 6.35%. The $22.0 aggregate principal amount of Series B bonds matures on June 1, 2007, and bears interest at a fixed rate of 8.25%. Proceeds from the sale of the bonds were used by Alpart to refinance interim loans from the partners in Alpart, to pay eligible project costs for the expansion and modernization of its alumina refinery and related port and bauxite mining facilities, and to pay certain costs of issuance. Under the terms of the loan agreement, Alpart must remain a qualified recipient for Caribbean Basin Initiative funds as defined in applicable laws. Alpart has agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. Alpart's obligations under the loan agreement are secured by a $64.2 letter of credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed by the Company s minority partner in Alpart). Capitalized Interest Interest capitalized in 1993, 1992, and 1991 was $3.4, $4.4, and $4.2, respectively. Restricted Net Assets of Subsidiary Certain debt instruments restrict the ability of KACC to transfer assets, make loans and advances, and pay dividends to the Company. The assets of KACC, which are substantially all of the Company's assets, are restricted. - 22 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- Fair Value Disclosure The fair value of the Company's long-term debt was approximately $734.1 and $806.8 at December 31, 1993 and 1992, respectively. For 1993, the fair value of the 12-3/4% Notes was estimated using the market value of such notes, or $401.0. For 1992, the estimated fair value of the 14-1/4% Notes was the amount used to retire the 14-1/4% Notes in February 1993, or $347.8. The fair value of all other long-term debt is based upon discounting the future cash flows using the current rate for debt of similar maturities and terms. 7. Income Taxes The adoption of SFAS 109 as of January 1, 1993, as discussed in Note 1, required the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded in connection with the acquisition by MAXXAM in October 1988. The restatement of the assigned values with respect to certain assets and liabilities recorded as a result of the acquisition and the recomputation of deferred income tax liabilities under SFAS 109 resulted in: (i) an increase of $144.6 in the net carrying value of property, plant, and equipment; (ii) an increase of $47.8 in investments in and advances to unconsolidated affiliates; (iii) an increase of $126.1 in deferred income tax liabilities (a substantial portion of which has been netted against deferred income tax assets on the Consolidated Balance Sheet); (iv) a decrease of $2.5 in other assets; (v) an increase of $56.0 in long-term liabilities; and (vi) an increase of $10.1 in other liabilities. As a result of restating the assets and liabilities, as described above, the loss before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles for the year ended December 31, 1993, was increased by $9.3. Concurrent with the adoption of SFAS 109, the Company implemented changes in its accounting method for postretirement benefits and postemployment benefits pursuant to SFAS 106 and SFAS 112 (see Notes 1 and 8). The pre-tax cumulative effect of changes in accounting principles relating to SFAS 106 and SFAS 112 was a charge of $742.7. These accounting principles changes resulted in the recognition of deferred income tax assets of $237.7, net of valuation allowances. Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles by geographic area is as follows:
Year Ended December 31, ----------------------------- 1993 1992 1991 ------------------------------------------------------------------- Domestic $(232.0) $ (77.6) $ 16.2 Foreign 23.5 109.7 126.2 ------- ------ ------ Total $(208.5) $ 32.1 $142.4
======= ======= ====== - 23 - (In millions of dollars, except share amounts) ---------------------------------------------------------------------- The credit (provision) for income taxes on income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles consists of:
Federal Foreign State Total ---------------------------------------------------------------------------- 1993 Current $ 12.6 $ (7.9) $ (.1) $ 4.6 Deferred 68.5 12.0 1.8 82.3 ------ ------ ------ ------ Total $ 81.1 $ 4.1 $ 1.7 $ 86.9 ====== ====== ====== ====== 1992 Current $ (9.7) $(11.4) $ (.1) $(21.2) Deferred 13.1 3.3 (.5) 15.9 ------ ------ ------ ------ Total $ 3.4 $ (8.1) $ (.6) $ (5.3) ====== ====== ====== ====== 1991 Current $(25.3) $ (8.9) $ (1.1) $(35.3) Deferred 1.9 (1.4) 2.4 2.9 ------ ------ ------ ------- Total $(23.4) $(10.3) $ 1.3 $(32.4) ====== ====== ====== ======
The Omnibus Budget Reconciliation Act of 1993 (the "Act"), enacted on August 10, 1993, retroactively increased the maximum federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. The 1993 federal deferred credit for income taxes of $68.5 includes $29.2 for the benefit of operating loss carryforwards generated in 1993 and includes a $3.4 benefit for increasing net deferred income tax assets (liabilities) as of the date of enactment of the Act due to the increase in the federal statutory income tax rate. The deferred credit for income taxes for the years ended December 31, 1992 and 1991, as computed under APB 11, results from the following timing differences:
Year Ended December 31, -------------------- 1992 1991 ----------------------------------------------------------------------------------------- Undistributed earnings or losses of foreign and unconsolidated affiliates $ 12.3 $ 12.4 Inventory costing differences 5.5 (5.9) Revision of prior years' tax estimates 2.9 8.7 Net federal and foreign tax loss and credit carryforwards utilized and other foreign tax items (.9) Depreciation (5.4) (7.8) Other .6 (3.6) ------ ------ Total $ 15.9 $ 2.9 ====== ======
A reconciliation between the credit (provision) for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles is as follows: - 24 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ----------------------------------------------------------------------
Year Ended December 31, ---------------------------- 1993 1992 1991 -------------------------------------------------------------------------------------------------- Amount of federal income tax based upon the statutory rate $73.0 $(10.9) $(48.4) Percentage depletion 6.4 6.3 6.0 Revision of prior years' tax estimates and other changes in valuation allowances 3.9 2.9 8.7 Increase in net deferred income tax assets due to tax rate change 3.4 Financial reporting/tax basis differences (3.0) 6.4 Losses and expenses for which no federal tax benefit was recognized (3.8) Foreign taxes, net of federal tax benefit (2.6) (.4) .2 Other 2.8 (.2) (1.5) ----- ----- ------ Credit (provision) for income taxes $86.9 $(5.3) $(32.4) ===== ===== ======
As shown in the Statement of Consolidated Income (Loss) for the year ended December 31, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss, net of related current federal income taxes, of $11.2, which approximated the federal statutory rate in effect on the date the transaction occurred. The related deferred income tax benefits recorded by the Company in respect of SFAS 106 and SFAS 112 were recorded at the federal statutory rate in effect on the date the accounting standards were adopted before giving effect to certain valuation allowances. At December 31, 1993 and 1992, the Company recorded charges to equity for additional minimum pension liabilities pursuant to Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS 87"). The Company recorded the charges net of related deferred federal and state income taxes of $8.7 at December 31, 1993, and $3.6 at December 31, 1992, which approximated the federal and state statutory rates. After giving effect to the adoption of SFAS 106, SFAS 109, and SFAS 112, the components of the Company's net deferred income tax assets were as follows:
December 31, January 1, 1993 1993 (date of adoption) --------------------------------------------------------------------------------------------------- Deferred income tax assets: Postretirement benefits other than pensions $ 285.4 $ 270.8 Loss and credit carryforwards 142.6 83.3 Other liabilities 105.2 98.8 Pensions 60.6 45.8 Foreign and state deferred income tax liabilities 33.0 44.4 Property, plant, and equipment 23.1 22.6 Other 10.5 18.6 Valuation allowances (133.5) (103.7) ------- ------- Total deferred income tax assets -- net 526.9 480.6 ------- ------- Deferred income tax liabilities: Property, plant, and equipment (224.4) (218.3) Investments in and advances to unconsolidated affiliates (60.6) (60.9) Inventories (14.8) (18.6) Other (20.3) (28.7) -------- ------- Total deferred income tax liabilities (320.1) (326.5) ------- ------- Net deferred income tax assets $ 206.8 $ 154.1 ======= =======
- 25 - (In millions of dollars, except share amounts) ---------------------------------------------------------------------- The valuation allowances listed above relate primarily to loss and credit carryforwards and postretirement benefits other than pensions. As of December 31, 1993, approximately $82.4 of the net deferred income tax assets listed above relate to the benefit of loss and credit carryforwards, net of valuation allowances. The Company evaluated all appropriate factors to determine the proper valuation allowances for these carryforwards, including any limitations concerning their use and the year the carryforwards expire, as well as the levels of taxable income necessary for utilization. For example, full valuation allowances were provided for certain credit carryforwards that expire in the near term. With regard to future levels of income, the Company believes, based on the cyclical nature of its business, its history of prior operating earnings, and its expectations for future years, that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for which valuation allowances were not provided. The remaining portion of the Company's net deferred income tax assets at December 31, 1993, is approximately $124.4. A principal component of this amount is the tax benefit associated with the accrual for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of this accrual will occur over a 30- to 40-year period. If such deductions create or increase a net operating loss in any one year, the Company has the ability to carry forward such loss for 15 taxable years. For these reasons, the Company believes a long-term view of profitability is appropriate and has concluded that this net deferred income tax asset will more likely than not be realized despite the recent decline in profitability. Certain of the deferred income tax assets and liabilities listed above are included on the Consolidated Balance Sheet in the captions entitled Receivables, Prepaid expenses and other current assets, Other accrued liabilities, and Long-term liabilities. The Company and its subsidiaries were included in the consolidated federal income tax returns of MAXXAM for the period from October 28, 1988, through December 31, 1992. The taxable income and loss and tax credits for the Company and its subsidiaries for the period January 1, 1993, through June 30, 1993, will be included in the 1993 MAXXAM consolidated federal income tax return. As a consequence of the issuance of the Depositary Shares on June 30, 1993, as discussed in Note 9, the Company and its subsidiaries are no longer included in the consolidated federal income tax return of MAXXAM. The Company and its subsidiaries have become members of a new consolidated return group of which the Company is the common parent corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group will file a consolidated federal income tax return for taxable periods beginning on or after July 1, 1993. The tax allocation agreement between the Company and MAXXAM (the "Company Tax Allocation Agreement") and the tax allocation agreement between KACC and MAXXAM (the "KACC Tax Allocation Agreement") (collectively, the "Tax Allocation Agreements"), terminated pursuant to their terms, effective for taxable periods beginning after June 30, 1993. Any unused federal income tax attribute carryforwards under the terms of the Tax Allocation Agreements were eliminated and are not available to offset federal income tax liabilities for taxable periods beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993 consolidated federal income tax return, the tax attribute carryforwards of the MAXXAM consolidated return group as of December 31, 1993, will be apportioned in part to the New Kaiser Tax Group, based upon the provisions of the relevant consolidated return regulations. It is estimated that the benefit of such tax attribute carryforwards apportioned to the New Kaiser Tax Group will approximate or exceed the benefit of tax attribute carryforwards eliminated under the Tax Allocation Agreements. To the extent the New Kaiser Tax Group generates unused tax losses or tax credits for periods beginning on or after July 1, 1993, such amounts will not be available to obtain refunds of amounts paid by the Company or KACC to MAXXAM for periods ending on or before June 30, 1993, pursuant to the Tax Allocation Agreements. - 26 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which became effective as of October 28, 1988. Under the terms of the KACC Tax Allocation Agreement, MAXXAM computed the federal income tax liability for KACC and its subsidiaries (collectively, the "Subgroup") as if the Subgroup were a separate affiliated group of corporations which was never connected with MAXXAM. During 1991, the Company and MAXXAM entered into the Company Tax Allocation Agreement which became effective as of January 1, 1991. Under the terms of the Company Tax Allocation Agreement, MAXXAM computed a tentative federal income tax liability for the Company as if it and its subsidiaries, including KACC and its subsidiaries, were a separate affiliated group of corporations which was never connected with MAXXAM. The federal income tax liability of the Company is the difference between the tentative federal income tax liability and the liability computed under the KACC Tax Allocation Agreement. The provisions of the Tax Allocation Agreements will continue to govern for periods ended prior to July 1, 1993. Therefore, payments or refunds may still be required by or payable to the Company or KACC under the terms of their respective tax allocation agreements for periods ended prior to July 1, 1993, due to the final resolution of audits, amended returns, and related matters with respect to such periods. However, the 1994 Credit Agreement prohibits the payment by KACC to MAXXAM of any amounts due under the KACC Tax Allocation Agreement, except for certain payments that are required as a result of audits and only to the extent of any amounts paid after February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement. As of December 31, 1993, MAXXAM owed the Company approximately $.1 and owed KACC approximately $11.6 under the terms of their respective tax allocation agreements. Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes. The following table presents the Company's tax attributes for federal income tax purposes as of December 31, 1993. The amounts of such attributes may change based upon the final 1993 tax returns. The utilization of certain of these tax attributes are subject to limitations:
Expiring Through ---------------------------------------------------------------------------------------- Regular tax attribute carryforwards: Current year net operating loss $ 83.4 2008 Prior year net operating losses 54.9 2006 General business tax credits 41.6 2006 Foreign tax credits 19.8 1998 Alternative minimum tax credits 15.3 Indefinite Alternative minimum tax attribute carryforwards: Current year net operating loss $ 56.0 2008 Prior year net operating losses 24.0 2002 Foreign tax credits 12.0 1998
8. Employee Benefit and Incentive Plans Retirement Plans Retirement plans are non-contributory for salaried and hourly employees and generally provide for benefits based on a formula which considers length of service and earnings during years of service. The Company's funding policies meet or exceed all regulatory requirements. - 27 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- Employee pension benefit plans funded status and amounts included in the Company's Consolidated Balance Sheets are as follows:
Plans with Accumulated Benefits Exceeding Assets(1) December 31, -------------------- 1993 1992 ---------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested employees $(705.0) $(663.5) Nonvested employees (40.1) (49.6) ------- ------- Accumulated benefit obligation (745.1) (713.1) Additional amounts related to projected salary increases (45.5) (33.7) ------- ------- Projected benefit obligation (790.6) (746.8) Plan assets (principally fixed income obligations and common stocks) at fair value 569.8 572.5 ------- ------- Plan assets less than projected benefit obligation (220.8) (174.3) Unrecognized net losses 75.7 34.7 Unrecognized net obligations 1.6 2.6 Unrecognized prior-service cost 16.9 15.9 Adjustment required to recognize minimum liability (47.7) (25.3) ------- ------- Accrued pension obligation included in the Consolidated Balance Sheets (principally in long-term liabilities) $(174.3) $(146.4) ======= =======
(1) Includes plans with assets exceeding accumulated benefits by approximately $.1 and $.4 in 1993 and 1992, respectively. The Company also recorded $13.7 of additional pension obligation (not included in the amounts above) as part of the restructuring reserve (see Note 3). SFAS No. 87 requires recognition of a minimum pension liability for unfunded plans. At December 31, 1993 and 1992, the Company recorded an after-tax charge to equity of $14.9 and $6.7, respectively, for the excess of the minimum liability over the unrecognized net obligation and prior-service cost. The components of net periodic pension cost are:
Year Ended December 31, ------------------------------ 1993 1992 1991 ---------------------------------------------------------------------------------------- Service cost -- benefits earned during the period $10.8 $ 11.0 $ 9.8 Interest cost on projected benefit obligation 59.2 58.8 59.3 Return on assets: Actual gain (70.3) (26.3) (100.1) Deferred gain (loss) 15.9 (31.2) 49.9 Net amortization and deferral 2.3 2.1 .3 ------ ------ ------ Net periodic pension cost $ 17.9 $ 14.4 $ 19.2 ====== ====== ======
- 47 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- Assumptions used to value obligations at year-end, and to determine the net periodic pension cost in the subsequent year are:
1993 1992 1991 ---------------------------------------------------------------------------------------- Discount rate 7.50% 8.25% 8.25% Expected long-term rate of return on assets 10.00% 10.00% 10.00% Rate of increase in compensation levels 5.00% 5.00% 5.00%
Postretirement Benefits Other Than Pensions Kaiser adopted SFAS 106 to account for postretirement benefits other than pensions effective January 1, 1993 (see Note 1). The Company and its subsidiaries provide postretirement health care and life insurance benefits to retired employees. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company or its subsidiaries. These benefits are provided through contracts with various insurance carriers. The Company has not funded the liability for these benefits. The Company changed certain salaried retiree group insurance benefits effective January 1, 1994, to provide for additional cost-sharing features, such as reducing certain reimbursements and requiring future retiree contributions which will lower salaried retiree medical expenses. The Company's accrued postretirement benefit obligation is composed of the following:
December 31, 1993 ---------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(629.3) Active employees eligible for postretirement benefits (35.1) Active employees not eligible for postretirement benefits (128.3) ------- Accumulated postretirement benefit obligation (792.7) Unrecognized net losses 67.0 Unrecognized prior-service costs (35.0) ------ Accrued postretirement benefit obligation $(760.7) =======
The components of net periodic postretirement benefit cost are:
Year Ended December 31, 1993 --------------------------------------------------------------------------------------- Service cost $ 7.1 Interest cost 58.5 ----- Net periodic postretirement benefit cost $65.6 =====
The 1994 annual assumed rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) are 9.5% and 8.0% for retirees under 65 and over 65, respectively, and are assumed to decrease gradually to 5.25% in 2006 and remain at that level thereafter. The health care cost trend rate has a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated - 48 - (In millions of dollars, except share amounts) ---------------------------------------------------------------------- postretirement benefit obligation as of December 31, 1993, by approximately $96.0 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 by approximately $9.5. The weighted average discount rate used to determine the accumulated postretirement benefit obligation at December 31, 1993, was 7.5%. Postemployment Benefits Kaiser adopted the new accounting standard on postemployment benefits effective January 1, 1993 (see Note 1). The Company provides certain benefits to former or inactive employees after employment but before retirement. Incentive Plans Effective January 1, 1989, the Company and KACC adopted an unfunded Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company, KACC, and their consolidated subsidiaries. All compensation vested as of December 31, 1992, under the LTIP, as amended in 1991 and 1992, has been paid to the participants in cash or common stock of the Company as of December 31, 1993. Under the LTIP, as amended, 764,092 shares were distributed to participants during 1993, which will generally vest at the rate of 25% per year. The Company will record the related expense of $6.5 over the four-year period ending December 31, 1996. Effective January 1, 1990, KACC adopted an unfunded Middle Management Long-Term Incentive Plan. KACC also has a supplemental savings and retirement plan for salaried employees under which the participants contribute a percentage of their base salaries. The Company's expense for the above plans was $5.3, $6.6, and $6.5 for the years ended December 31, 1993, 1992, and 1991, respectively. - 49 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- 9. Stockholders' Equity and Minority Interests Changes in stockholders' equity and minority interests were:
Minority Interests Stockholders Equity ---------------------- ------------------------------------------------- Retained Earnings Additional Redeemable (Accu- Minimum Preference Preferred Common Additional mulated Pension Stock Other Stock Stock Capital Deficit) Liability ------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1991 $ 47.8 $ 75.4 $ .5 $140.9 $214.6 Net income 108.4 Redeemable preference stock: Accretion 7.2 Stock redemption (20.2) Dividends on common stock (55.7) Conversions (3,262 preference shares into cash) (.2) Common stock issued .1 93.1 Capital contribution 53.9 Minority interest in majority-owned subsidiaries (1.1) ------ ----- ------ ------ ------ BALANCE, DECEMBER 31, 1991 34.8 74.1 .6 287.9 267.3 Net income 26.9 Redeemable preference stock: Accretion 5.1 Stock redemption (7.1) Dividends on common stock (11.4) Conversions (2,405 preference shares into cash) (.2) Common stock issued .6 Minority interest in majority-owned subsidiaries (1.8) Additional minimum pension liability $ (6.7) ----- ----- ------ ------ ------ ------ BALANCE, DECEMBER 31, 1992 32.8 72.1 .6 288.5 282.8 (6.7) Net loss (652.2) Redeemable preference stock: Accretion 4.8 Stock redemption (4.0) Conversions (1,967 preference shares into cash) (.2) Common stock issued 3.3 Preferred stock issued $ .2 134.1 Dividend on preferred stock (6.3) Minority interest in majority-owned subsidiaries (.5) Additional minimum pension liability (14.9) ------ ------ ------ ------ ------ ------ ------ BALANCE, DECEMBER 31, 1993 $ 33.6 $ 71.4 $ .2 $ .6 $425.9 $(375.7) $(21.6) ====== ====== ====== ====== ====== ======= ======
- 50 - (In millions of dollars, except share amounts) ---------------------------------------------------------------------- Redeemable Preference Stock In March 1985, KACC entered into a three-year agreement with the United Steelworkers of America ("USWA") whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock" would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbargaining employees which provided for the issuance of "Cumulative (1985 Series B) Preference Stock." Series A Stock and Series B Stock ("Series A and B Stock") each have a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any. For financial reporting purposes, Series A and B Stock were recorded at fair market value when issued, based on independent appraisals, with a corresponding charge to compensation cost. Carrying values have been increased each year to recognize accretion of redemption values and, in certain years, there have been other increases for reasons described below. Issuances and redemptions of Series A and B Stock are shown below.
1993 1992 1991 ------------------------------------------------------------------------------------ Shares: Beginning of year 1,163,221 1,305,550 1,718,051 Issued 1,868 Redeemed (81,673) (142,329) (414,369) --------- --------- --------- End of year 1,081,548 1,163,221 1,305,550 ========= ========= =========
No additional Series A or B Stock will be issued based on compensation earned in 1992 or subsequent years. While held by the plan trustee, Series B Stock is entitled to cumulative annual dividends, when and as declared by the Board of Directors, payable in stock or in cash at the option of KACC on or after March 1, 1991, in respect to years commencing January 1, 1990, based on a formula tied to KACC's income before tax from aluminum operations. When distributed to plan participants (generally upon separation from KACC), the Series A and B stocks are entitled to an annual cash dividend of $5 per share, payable quarterly, when and as declared by the Board of Directors. Redemption fund agreements require KACC to make annual payments by March 31 each year based on a formula tied to consolidated net income until the redemption funds are sufficient to redeem all Series A and B Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March 1992 and 1993, KACC contributed $7.0 and $4.3 for the years 1991 and 1992, respectively, and will contribute $4.3 in March 1994 for 1993. Under the USWA labor contract effective November 1, 1990, KACC was obligated to offer to purchase up to 80 shares of Series A Stock from each active participant in 1991 at a price equal to its redemption value of $50 per share. KACC also agreed to offer to purchase up to an additional 40 shares from each participant in 1994. The employees may elect to receive their shares, accept cash, or place the proceeds into KACC's 401(k) savings plan. Under separate action, KACC also offered to purchase 80 shares of Series B stock from active participants in 1991 and 40 shares in 1994. Under the provisions of these contracts, in February 1994, KACC purchased $4.6 and $.8 of the Series A and B stock, respectively. The Series A and B Stock is distributed in the event of death, retirement, or in other specified circumstances. KACC may also redeem such stock at $50 per share plus accrued dividends, if any. At the option of the plan participant, the trustee shall redeem stock distributed from the plans at redemption value to the extent funds are available in the - 51 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- redemption fund. Under the Tax Reform Act of 1986, at the option of the plan participant, KACC must purchase distributed shares earned after December 31, 1985, at redemption value on a five-year installment basis, with interest at market rates. The obligation of KACC to make such installment payments must be secured. The Series A and B Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates, or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restricts the ability of KACC to redeem or pay dividends on common stock if KACC is in default on any dividends payable on the Series A and B Stock. Preference Stock KACC Cumulative Convertible Preference Stock, $100 par value ("$100 Preference Stock"), restricts acquisition of junior stock and payment of dividends. At December 31, 1993, such provisions were less restrictive as to the payment of cash dividends than the 1989 Credit Agreement provisions. KACC has the option to redeem the $100 Preference Stocks at par value plus accrued dividends. KACC does not intend to issue any additional shares of the $100 Preference Stocks. The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) $100 Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84, $78.38, and $76.46, respectively. KACC records the $100 Preference Stock at their exchange amounts for financial statement presentation and the Company includes such amounts in minority interests. The outstanding shares of KACC preference stock were:
December 31, ------------------- 1993 1992 ------------------------------------------------------------------------------- 4-1/8% 3,921 4,110 4-3/4% (1957 Series) 2,623 3,054 4-3/4% (1959 Series) 13,605 14,607 4-3/4% (1966 Series) 3,890 4,235
Preferred Stock Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares (the "Depositary Shares"), each representing one-tenth of a share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares"). In connection with the issuance of the Depositary Shares, MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a $15.0 promissory note of KACC (the "MAXXAM Note") for an additional 2,132,950 Depositary Shares. The net cash proceeds from the sale of Depositary Shares were approximately $119.3. Kaiser used approximately $37.8 of such net proceeds to make a non-interest bearing loan to KACC evidenced by an intercompany note, which matures on June 29, 1996, and is payable in quarterly installments. The intercompany note is designed to provide sufficient funds to Kaiser to enable it to make dividend payments on the Series A Shares until June 30, 1996, the date on which the outstanding Series A Shares are mandatorily converted into shares of the Company's common stock. Kaiser used approximately $81.5 of such net proceeds and the MAXXAM Note to make a capital contribution to KACC. KACC used approximately $13.7 of the funds it received from Kaiser to prepay the remaining balance of the Term Loan under - 52 - (In millions of dollars, except share amounts) ------------------------------------------------------------------- the 1989 Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the Revolving Credit Facility of the 1989 Credit Agreement. The owners of Depositary Shares are entitled to receive (when, as, and if the Board of Directors declares dividends on the Series A Shares) cumulative preferential cash dividends from the date of issue, accruing at the rate of $.65 per annum for each of the Depositary Shares, payable quarterly in arrears on the last day of each March, June, September and December, commencing September 30, 1993. Holders of Depositary Shares (based on the voting rights of the Series A Shares) have one vote for each Depositary Share held of record, except as required by law, and are entitled to vote with the holders of common stock on all matters submitted to a vote of common stockholders. On June 30, 1996, each of the outstanding Depositary Shares will automatically convert (upon the automatic conversion of the Series A Shares) into (i) one share of common stock, plus (ii) the right to receive an amount in cash equal to the accrued and unpaid dividends payable with respect to such Depositary Share. Automatic conversion of the outstanding Depositary Shares (and the Series A Shares) will occur upon certain mergers or consolidations of the Company (as defined). At any time or from time to time prior to June 30, 1996, the Company may call the outstanding Depositary Shares (by calling the Series A Shares) for redemption, in whole or in part, at a call price per Depositary Share initially equal to $12.46, declining by $.0018 on each day following the date of issue to $10.624 on April 30, 1996, and equal to $10.51 thereafter, payable in shares of common stock having an aggregate Current Market Price (as defined) equal to the applicable call price, plus an amount in cash equal to all accrued and unpaid dividends payable with respect to such Depositary Share. PRIDES Convertible - On February 17, 1994, the Company consummated the public offering of 8,000,000 shares of the PRIDES. The net proceeds from the sale of the shares of PRIDES were approximately $90.6. The Company used such net proceeds to make a non-interest bearing loan to KACC in a principal amount equal to $30.0 (the aggregate dividends scheduled to accrue on the shares of PRIDES from the issuance date until December 31, 1997, the date on which the outstanding PRIDES are mandatorily converted into shares of the Company's common stock), evidenced by an intercompany note, and used the balance of such net proceeds to make a capital contribution to KACC in the amount of approximately $60.6. Holders of shares of PRIDES are entitled to receive (when, as, and if the Board of Directors declares dividends on the PRIDES) cumulative preferential cash dividends at a rate per annum of 8.255% of the per share offering price (equivalent to $.97 per annum for each share of PRIDES), from the date of initial issuance, payable quarterly in arrears on the last day of each March, June, September, and December of each year. Holders of shares of PRIDES have a 4/5 vote for each share held of record and, except as required by law, are entitled to vote together with the holders of common stock and together with the holders of any other classes or series of stock (including the Series A Shares) who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. On December 31, 1997, unless either previously redeemed or converted at the option of the holder, each of the outstanding shares of PRIDES will mandatorily convert into (i) one share of the Company's common stock, subject to adjustment in certain events, and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends thereon (other than previously declared dividends payable to a holder of record on a prior date). Shares of PRIDES are not redeemable prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, the Company may redeem any or all of the outstanding shares of PRIDES. Upon any such redemption, each holder will receive, in exchange for each share of PRIDES, the number of shares of common stock equal to (A) the sum of (i) $11.9925, declining after December 31, 1996, to $11.75 until December 31, 1997, plus, - 53 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- in the event the Company does not elect to pay cash dividends to the redemption date, (ii) all accrued and unpaid dividends thereon divided by (B) the Current Market Price (as defined) on the applicable date of determination, but in no event less than .8333 of a share of common stock, subject to adjustment in certain events. At any time prior to December 31, 1997, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into .8333 of a share of common stock (equivalent to a conversion price of $14.10 per share of common stock), subject to adjustment in certain events. The number of shares of common stock a holder will receive upon redemption, and the value of the shares received upon conversion, will vary depending on the market price of the common stock from time to time. Common Stock On July 18, 1991, the Company issued 7,250,000 shares of its common stock for net proceeds of approximately $93.2. Three-fourths of the net proceeds from the offering were used by the Company to prepay a portion of the promissory notes of the Company (see "Dividends on Common Stock" below) with accrued interest, payable to its parent. The remaining balance of such notes payable to parent that were not prepaid with the net proceeds of the offering, together with accrued interest, were contributed to the stockholders' equity of the Company. The remaining one-fourth of the net proceeds from the offering was used by Kaiser to purchase common stock of KACC. KACC reduced its Term Loan by an amount equal to the proceeds it received from Kaiser. Stock Incentive Plan In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares of Kaiser common stock are reserved for awards or for payment of rights granted under the Plan. Six Company executives have received grants of 764,092 shares under the LTIP for benefits generally earned but not vested as of December 31, 1992 (see Note 8). In 1993, the stockholders approved the award of 584,300 shares as "nonqualified stock options" to members of management other than those participating in the LTIP. These options will generally vest at the rate of 20% per year over the next five years, commencing May 18, 1994. The exercise price of these shares is $7.25 per share, the quoted market price at the date of grant. Dividends on Common Stock On January 31, September 16, and December 16, 1991, the Company declared and paid dividends on common stock of $50.0, $2.9, and $2.8, respectively. The Company paid cash dividends on common stock of $2.9 in each quarter of 1992. As required under the 1989 Credit Agreement, on December 15, 1992, KACC issued a Pay-in-Kind Note (the "PIK Note") to MGI in the principal amount of $2.5, representing the entire amount of the dividend received by MGI in respect of the shares of the Company's common stock which it owned. The PIK Note bears interest, compounded semiannually, at a rate equal to 12% per annum, and is due and payable, together with accrued interest thereon, on June 30, 1995. The indentures governing the Senior Notes and the 12-3/4% Notes restrict, among other things, KACC's ability, and the 1994 Credit Agreement restricts, among other things, Kaiser's and KACC's ability, to incur debt, undertake transactions with affiliates, and pay dividends. Under the most restrictive of these covenants, neither the Company nor KACC is currently permitted to pay dividends on its common stock. At December 31, 1993, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security for debt issued by MGI, consisting of $100.0 aggregate principal amount of 11-1/4% Senior Secured Notes due 2003 and $126.7 aggregate principal amount of 12-1/4% Senior Secured Discount Notes due 2003. - 54 - (In millions of dollars, except share amounts) ---------------------------------------------------------------------- 10. Commitments and Contingencies Commitments The Company has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange contracts, forward sales contracts, letters of credit, and guarantees. Purchase agreements and tolling arrangements include agreements to supply alumina to Anglesey and to purchase aluminum from that company. Similarly, KACC has long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs, and certain other costs of QAL. The aggregate minimum amount of required future principal payments at December 31, 1993, is $73.6, due in 1997. The KACC share of payments, including operating costs and certain other expenses under the agreement, was $86.7, $99.2, and $107.6 for the years ended December 31, 1993, 1992, and 1991, respectively. Minimum rental commitments under operating leases at December 31, 1993, are as follows: years ending December 31, 1994 -- $24.3; 1995 -- $23.2; 1996 -- $22.3; 1997 -- $21.8; 1998 -- $23.4; thereafter -- $243.2. The future minimum rentals receivable under noncancelable subleases was $90.7 at December 31, 1993. Rental expenses were $29.0, $26.2, and $23.3 for the years ended December 31, 1993, 1992, and 1991, respectively. Environmental Contingencies The Company and KACC are subject to a wide variety of environmental laws and regulations and to fines or penalties assessed for alleged breaches of the environmental laws and to claims and litigation based upon such laws. KACC is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based upon the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the years ended December 31, 1993, 1992, and 1991:
1993 1992 1991 ---------------------------------------------------------------------------------- Balance at beginning of period $ 46.4 $ 51.5 $ 57.7 Additional amounts 1.7 4.5 7.8 Less expenditures (7.2) (9.6) (14.0) ------ ------ ------ Balance at end of period $ 40.9 $ 46.4 $ 51.5 ====== ====== ======
These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based upon presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over - 55 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) ---------------------------------------------------------------------- (In millions of dollars, except share amounts) ---------------------------------------------------------------------- the next several years and estimates that expenditures to be charged to the environmental accrual will be approximately $4.0 to $8.0 for the years 1994 through 1998 and an aggregate of approximately $12.8 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals by amounts which cannot presently be estimated. While uncertainties are inherent in the ultimate outcome of these matters and it is impossible to presently determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties should not have a material adverse effect upon the Company's consolidated financial position or results of operations. Asbestos Contingencies KACC is a defendant in a number of lawsuits in which the plaintiffs allege that certain of their injuries were caused by exposure to asbestos during, and as a result of, their employment with KACC or to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 15 years. At year-end 1993, the number of such lawsuits pending was approximately 23,400 (approximately 11,400 of which were received in 1993). The number of such lawsuits instituted against KACC increased substantially in 1993, and management believes the number of such lawsuits will continue at approximately the same rate for the next few years. In connection with such litigation, during 1993, 1992, and 1991, KACC made cash payments for settlement and other related costs of $7.0, $7.1, and $6.1, respectively. Based upon prior experience, the Company estimates annual future cash payments in connection with such litigation of approximately $8.0 to $13.0 for the years 1994 through 1998, and an aggregate of approximately $88.4 thereafter through 2006. Based upon past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2006. The Company does not presently believe there is a reasonable basis for estimating such costs beyond 2006 and, accordingly, no accrual has been recorded for such costs which may be incurred. This accrual was calculated based upon the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, the current state of case law related to asbestos claims, the advice of counsel, and the anticipated effects of inflation and discounting at an estimated risk-free rate (5.25% at December 31, 1993). Accordingly, an accrual of $102.8 for asbestos-related expenditures is included primarily in Long-term liabilities at December 31, 1993. The aggregate amount of the undiscounted liability at December 31, 1993, of $141.5, before considerations for insurance recoveries, reflects an increase of $56.6 from the prior year, resulting primarily from an increase in claims filed during 1993 and the Company's belief that the number of such lawsuits will continue at approximately the same rate for the next few years. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. While claims for recovery from one of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, the Company believes, based upon prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of counsel, that substantial recoveries from the insurance carriers are probable. Accordingly, estimated insurance recoveries of $94.0, determined on the same basis as the asbestos-related cost accrual, are recorded primarily in Other assets as of December 31, 1993. - 56 - (In millions of dollars, except share amounts) ------------------------------------------------------------------- Based upon the factors discussed in the two preceding paragraphs, management currently believes that there is no more than a remote possibility (under generally accepted accounting principles) that the Company's asbestos-related costs net of related insurance recoveries exceed those accrued as of December 31, 1993, and, accordingly, that the resolution of such uncertainties and the incurrence of such net costs should not have a material adverse effect upon the Company's consolidated financial position or results of operations. Other Contingencies The Company is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the ultimate outcome of such matters and it is 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 upon the Company's consolidated financial position or results of operations. 11. Segment and Geographical Area Information Sales and transfers among geographic areas are made on a basis intended to reflect the market value of products. The aggregate foreign currency gain included in determining net income was $4.9, $12.0, and $1.2 for the years ended December 31, 1993, 1992, and 1991, respectively. There were no sales of more than 10% of total revenue to a single customer for the year ended December 31, 1993. Sales to a single customer were $135.3 and $155.9 of bauxite and alumina and $144.9 and $160.9 of aluminum processing for the years ended December 31, 1992, and 1991, respectively. Export sales were less than 10% of total revenue during the years ended December 31, 1993, 1992, and 1991. - 57 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ------------------------------------------------------------------ (In millions of dollars, except share amounts) ------------------------------------------------------------------- Financial information by industry segment at December 31, 1993 and 1992, and for the years ended December 31, 1993, 1992, and 1991, is as follows:
Year Ended Bauxite & Aluminum December 31, Alumina Processing Corporate Total ---------------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers 1993 $ 423.4 $1,295.7 $1,719.1 1992 466.5 1,442.6 1,909.1 1991 550.8 1,450.0 2,000.8 Intersegment sales 1993 $ 129.4 $ 129.4 1992 179.9 179.9 1991 194.6 194.6 Equity in earnings (losses) of 1993 $ (2.5) $ (.8) $ (3.3) unconsolidated affiliates 1992 1.8 (3.7) (1.9) 1991 (4.4) (15.1) (19.5) Operating income (loss) 1993 $ (4.5) $ (46.3) $ (72.6) $ (123.4) 1992 62.6 104.9 (77.6) 89.9 1991 150.0 150.2 (84.2) 216.0 Effect of changes in accounting principles on operating income (loss) SFAS 106 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2) SFAS 109 1993 (7.7) (7.8) .3 (15.2) Depreciation 1993 $ 35.3 $ 59.9 $ 1.9 $ 97.1 1992 29.8 49.0 1.5 80.3 1991 26.4 46.0 .8 73.2 Capital expenditures 1993 $ 35.3 $ 31.2 $ 1.2 $ 67.7 1992 50.8 39.4 24.2 114.4 1991 51.1 64.8 2.2 118.1 Investment in and advances to 1993 $ 151.5 $ 30.7 $ 1.0 $ 183.2 unconsolidated affiliates 1992 136.2 12.5 1.4 150.1 Identifiable assets 1993 $ 734.0 $1,214.9 $ 579.0 $2,527.9 1992 715.7 1,165.9 291.0 2,172.6
- 37 - (In millions of dollars, except share amounts) ------------------------------------------------------------------- Geographical area information relative to operations is summarized as follows:
Year Ended Other December 31, Domestic Caribbean Africa Foreign Eliminations Total ----------------------------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers 1993 $1,230.5 $ 96.5 $207.5 $184.6 $1,719.1 1992 1,359.6 92.9 263.5 193.1 1,909.1 1991 1,383.8 149.6 269.2 198.2 2,000.8 Sales and transfers among 1993 $ 92.3 $ 79.6 $(171.9) geographic areas 1992 111.8 93.5 (205.3) 1991 116.4 112.3 (228.7) Equity in losses of 1993 $ (3.3) $ (3.3) unconsolidated affiliates 1992 (1.9) (1.9) 1991 (19.5) (19.5) Operating income (loss) 1993 $ (159.8) $ (2.0) $ 34.1 $ 4.3 $ (123.4) 1992 (25.3) 18.4 78.8 18.0 89.9 1991 59.7 47.8 72.1 36.4 216.0 Investment in and advances to 1993 $ 1.0 $ 30.5 $151.7 $ 183.2 unconsolidated affiliates 1992 1.4 29.5 119.2 150.1 Identifiable assets 1993 $1,758.0 $360.4 $223.0 $186.5 $2,527.9 1992 1,374.9 358.3 227.5 211.9 2,172.6
- 38 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES FIVE-YEAR FINANCIAL DATA CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------
December 31, ---------------------------------------------------- (In millions of dollars) 1993 1992 1991 1990 1989 --------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 14.7 $ 19.1 $ 15.8 $ 23.9 $ 95.1 Receivables 234.7 270.0 218.8 227.5 262.9 Inventories 426.9 439.9 498.6 523.9 511.1 Prepaid expenses and other current assets 60.7 37.0 84.0 36.1 6.6 Assets held for sale 51.1 -------- -------- -------- -------- -------- Total current assets 737.0 766.0 817.2 811.4 926.8 Investments in and advances to unconsolidated affiliates 183.2 150.1 161.9 184.5 187.8 Property, plant, and equipment -- net 1,163.7 1,066.8 1,014.5 970.3 936.0 Deferred income taxes 210.8 Other assets 233.2 189.7 140.5 152.3 80.3 -------- -------- -------- -------- -------- Total $2,527.9 $2,172.6 $2,134.1 $2,118.5 $2,130.9 ======== ======== ======== ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accruals $ 339.7 $ 351.4 $ 461.6 $ 432.1 $ 526.9 Accrued postretirement benefit obligation -- current portion 47.6 Payable to affiliates 62.4 78.4 87.1 82.4 60.7 Long-term debt -- current portion 8.7 25.9 26.3 32.5 139.0 -------- -------- -------- -------- -------- Total current liabilities 458.4 455.7 575.0 547.0 726.6 Long-term liabilities 501.8 281.7 212.9 310.8 321.1 Accrued postretirement benefit obligation 713.1 Long-term debt 720.2 765.1 681.5 631.5 655.8 Note payable to parent 150.0 Minority interests 105.0 104.9 108.9 123.2 135.1 Stockholders' Equity: Preferred stock .2 Common stock .6 .6 .6 .5 Additional capital 425.9 288.5 287.9 140.9 141.4 Retained earnings (accumulated deficit) (375.7) 282.8 267.3 214.6 150.9 Additional minimum pension liability (21.6) (6.7) -------- -------- -------- -------- -------- Total stockholders' equity 29.4 565.2 555.8 356.0 292.3 -------- -------- -------- -------- -------- Total $2,527.9 $2,172.6 $2,134.1 $2,118.5 $2,130.9 ======== ======== ======== ======== ======= Debt-to-capital ratio(1) 81.3 54.1 51.5 51.1(2) 64.9 (1) Total debt as a ratio of total debt, deferred income taxes, minority interests, and stockholders' equity. (2) Excludes the effect of a $150.0 dividend paid in the form of an intercompany promissory note to parent.
- 60 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES FIVE-YEAR FINANCIAL DATA STATEMENTS OF CONSOLIDATED INCOME (LOSS) --------------------------------------------------------------------------
Year Ended December 31, ---------------------------------------------------- (In millions of dollars, except share amounts) 1993 1992 1991 1990 1989 ----------------------------------------------------------------------------------------------------- Net sales $1,719.1 $1,909.1 $2,000.8 $2,095.0 $2,192.7 -------- -------- -------- -------- -------- Costs and expenses: Cost of products sold 1,587.7 1,619.3 1,594.2 1,525.2 1,545.6 Depreciation 97.1 80.3 73.2 70.5 62.3 Selling, administrative, research and development, and general 121.9 119.6 117.4 123.2 119.7 Restructuring of operations 35.8 --------- -------- -------- -------- -------- Total costs and expenses 1,842.5 1,819.2 1,784.8 1,718.9 1,727.6 --------- -------- -------- -------- -------- Operating income (loss) (123.4) 89.9 216.0 376.1 465.1 Other income (expense): Interest and other income -- net (.9) 20.9 20.3 17.6 53.4 Interest expense (84.2) (78.7) (93.9) (96.6) (207.0) -------- -------- -------- -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of changes in accounting principles (208.5) 32.1 142.4 297.1 311.5 Credit (provision) for income taxes 86.9 (5.3) (32.4) (75.6) (100.1) Minority interests (1.5) .1 (1.6) (7.8) (9.3) -------- -------- -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles (123.1) 26.9 108.4 213.7 202.1 Extraordinary loss on early extinguishment of debt, net of tax benefit of $11.2 (21.8) Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.3) -------- -------- -------- -------- -------- Net income (loss) $ (652.2) $ 26.9 $ 108.4 $ 213.7 $ 202.1 ======== ======== ======== ======== ======== Per common share: Net income (loss) $ (11.47) $ .47 $ 2.03 $ 4.27 $ 4.04 Dividends declared .20 1.10 3.00 - 61 - KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES QUARTERLY FINANCIAL DATA (UNAUDITED) ------------------------------------------------------------------------------------------------------
Quarter Ended ------------------------------------------------------ (In millions of dollars, except share amounts) March 31 June 30 September 30 December 31 ------------------------------------------------------------------------------------------------------- 1993 Net sales $442.6 $432.2 $428.4 $415.9 Operating loss 9.7 14.2 17.5 82.0(1) Net loss 545.7(2) 19.4 21.0 66.1(3) Per common share: Net loss 9.52 .34 .42 1.20 Market price: High 9-7/8 8 8-5/8 10-1/2 Low 7-3/8 6-3/8 6-5/8 6-7/8 Close 7-1/2 7-7/8 7-7/8 9 1992 Net sales $463.7 $490.9 $458.5 $496.0 Operating income 29.5 29.6 26.6 4.2(4) Net income 8.4 12.0 3.9 2.6(5) Per common share: Net income .15 .21 .06 .05 Dividends declared .05 .05 .05 .05 Market price: High 14-3/4 14-1/4 11 9-1/2 Low 10-1/8 10-1/4 7-5/8 6-7/8 Close 13-3/4 10-7/8 7-7/8 8-5/8 (1) Includes pre-tax charges of approximately $35.8 related to the restructuring of operations and $19.4 because of a reduction in the carrying value of inventories. (2) Includes $507.3 after-tax charge for the cumulative effect of changes in accounting principles and $21.8 after-tax charge for extraordinary loss on early extinguishment of debt. (3) Includes a pre-tax charge of approximately $10.8 principally related to establishing of additional litigation and environmental reserves. (4) Includes a pre-tax charge of approximately $29.0 because of a reduction in the carrying value of inventories. (5) Includes approximately $14.0 of pre-tax income for non-recurring adjustments to previously recorded liabilities and reserves.
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